LAM TUN MING AND ANOTHER v. HU CHUN LEUNG

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JUDGMENT OF THE COURT

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Macdougall, J.A.:

1. This is an appeal from an order of Hooper J. of the 19 July 1991 in which he allowed an appeal against an order of Master Jones in Order 14 proceedings and granted the respondent unconditional leave to defend. The history of the matter is as follows.

2. The appellants issued a writ of summons against the respondent on the 30th January 1991 claiming the sum of $250,000.00 and interest thereon in respect of two share transactions. The substance of the appellants' claim was that on the 14 August 1990 the 1st appellant sold and transferred 150,000 shares in Irawan Limited ("the company") for $150,000.00, that on the same day the 2nd appellant sold and transferred 100,000 shares in the company to the respondent for $100,000.00, that the respondent had failed to pay the appellants and that the total amount is still due and owing. On the 22 February the respondent filed a defence and counterclaim in which it was alleged that although he had signed Sold and Bought Notes and an Instrument of Transfer concerning the two lots of shares he was under no obligation to pay the appellants the $250,000.00.

3. His pleaded case was that in or about June 1990 he and the appellants had come to an agreement for the sale and purchase of part of the shares in the company subject to two conditions, first, that a balance sheet for the company be drawn up in order that the price of the shares could be ascertained, and second, that a proper agreement embodying the rights and liabilities of each party should be prepared and signed by them. However in August 1990, despite the fact that the two conditions had not be complied with, the respondent, relying on the 1st appellant's representations that the Sold and Bought Notes and Instrument of Transfer were required for filing with the Inland Revenue Department and that the appellants would not demand payment until the two conditions had been fulfilled, signed these documents at the request of the 1st appellant.

4. In his affirmation in response to the Order 14 proceedings the respondent deposed that in April or May 1990 he negotiated with the 1st appellant with a view to buying some shares in the company. The 1st appellant represented to him that the only shareholders were himself and his wife, and invited the respondent to buy shares from both of them so as to bring about a situation whereby the 1st appellant and the respondent would each hold 50% of the company's shares. According to the respondent this representation was untrue because there was one other shareholder in the company. This shareholder held 20% of the shares. Having been misled by this misrepresentation the respondent agreed to buy some shares in or around June 1990. However no agreement was reached on the unit price of the shares. The respondent agreed to buy and the 1st appellant agreed to sell the shares subject to the two conditions pleaded in the defence. In this regard the respondent required audited management accounts revealing the assets, liabilities and profit and loss of the company from the 1 April to 31 July 1990.

5. Moreover, the respondent deposed that the first appellant's present solicitors, who were then acting for both parties in relation to the shares transaction, had prepared a draft agreement, a copy of which was exhibited to his affirmation, relating to the parties respective rights and duties in respect of the transaction. Clause l of the draft provided that the first appellant "will procure the company to produce as soon as possible an internal audit report and (sic) the stocks and other current assets and liabilities of the company on the 31 July 1990 and the profit and loss of the company for the period from 1 April 1990 to 31 July 1990". The respondent also exhibited a copy of the solicitors invoice for his share of the professional fees. In it reference is made to "our professional charges for perusal of documents and drafting the agreement in respect of Irawan Limited (your half share)".

6. According to the respondent the agreement was never signed because the 1st appellant was unable to produce audited accounts of the company showing its financial position for the relevant period. Then, in or about the end of July or early August 1990, the 1st appellant requested the respondent to assist him by agreeing to become a director of the company, explaining that his wife had resigned, leaving him as the sole director. The respondent agreed to do so. The 1st appellant then filed a notice of change of director in the Companies Registry, and on the same day asked the respondent to sign the Report of the Directors which he had already told him had been prepared by the company's auditor. At about same time the 1st appellant requested the respondent to sign the Bought Notes and Instruments of Transfer, telling him that he required the documents for filing with the Inland Revenue Department and assuring him that he would not be liable to pay anything until the financial statement of the company for the relevant period had been prepared and the share price ascertained.

7. The respondent made specific reference in his affirmation to two clauses in the draft agreement:

8. The 1st appellant asserted in his affirmation that there were never any conditions attached to the sale of the shares. Moreover, he denied that he had made the representations alleged by the respondent. According to him, the respondent had agreed to pay the purchase price for the shares to him and the 2nd appellant by the time the documents were executed but that he failed to do so, notwithstanding repeated requests from the 1st appellant.

9. Mr. K.F. Ng, who appeared for the first appellant both in this court and before the judge, submitted to the judge that the draft agreement was inadmissible, and cited National Bank of Australasia v. Falkingham & Sons [1902] AC 585. He also contended that the parol evidence was not admissible to contradict the written agreement of the parties, that the respondent's affirmation did not make sense and that even if there were two conditions as alleged by the respondent they were so vague as to be meaningless and were therefore unenforceable. He relied also on Bhagwandas Kewaleram Murjani & Others v. Bank of India (1990) 1 HKLR 586 where this court held, inter alia, that the were assertion of the facts in the affidavit does not necessarily give leave to defend.

10. In his reserved judgment the judge expressed the view that evidence of the draft agreement was admissible where the conduct of the parties in the transactions concerned was called into question for the purpose of relying on an equitable defence. He found that on a consideration of the evidence he was unable to say that there was obviously no truth in the respondent's contentions. Furthermore, he observed that, since the master had already rejected an application by the appellants to strike out the respondent's counterclaim on the strength of the appellants' evidence, the credibility of the 1st appellant was very much in issue. He also referred to the fact that the appellants had made no attempt to explain how the draft agreement had come into existence nor had they given any explanation why they had signed the Instrument of Transfer stating that the consideration of $150,000.00 had been "paid to me" when plainly it had not.

11. In this court Mr. Ng advanced, in essence, the same arguments that he had addressed to and had been rejected by the judge. The law is admirably stated in paragraph 848 of the 26th edition of Chitty on Contracts:

12. Indeed, Mr. Ng accepted that if the respondent's version of the matter was believed he would have a defence to the action. In the final analysis his submission was that the defence that had been put forward by the respondent was totally unbelievable.

13. In my opinion the judge properly considered the extrinsic evidence as to the existence of a collateral agreement outside the written agreement. Having done so, he was clearly entitled to, and properly did, form the view that it could not be said that there was obviously no truth in the respondent's account of the matter. I would dismiss the appeal.

Cons, V.-P.:

14. I have to acknowledge the skill and ability with which Mr. Ng presented the plaintiff's case on this appeal in particular with relation to the parol evidence rule. Nevertheless, I am of the view that the story put forward by the defendant, if believed, would enable him to maintain a successful defence against the claim, albeit in that circumstance he would have to re-transfer the shares apparently in his possession to the plaintiff. It is suggested by Mr. Ng that the story put' forward is inherently  unbelievable. The judge below was not so persuaded and neither am I, I too would dismiss the appeal.

Clough, J.A.:

15. I too would dismiss this appeal for the reasons have already been given in the judgments which have been delivered by my lords. I only wish to add one comment. It seems to me that the defence which has been advanced, and which has been outlined in the judgment given by my Lord Macdougall and is referred to in the judgment of the judge below, is one which arguably can also be advanced on a wider basis than additional conditions of contract excluding the parol evidence rule, i.e. on the further basis that it would be inequitable to permit the plaintiffs to rely on the strict terms of the contract if the court is satisfied that the assurances which the defendant relies upon were made.

16. The case has not been cited and so I will confine myself to a reference to part of the headnote in Brikom Investments Ltd. v. Carr [1979] QBD 467 (C.A.) where it was held by the majority of the court of appeal (in the context of landlord and tenant) that:

17. Whatever the jurisprudential analysis may be of the proposed defence in the present situation, I concur in the views expressed by the other members of the court that the appeal should be dismissed. I only seek to emphasise that in my opinion the legal basis for the defence advanced arguably could be put on a wide footing.