WELLCHERRY LTD. v. GENTLETEEM LTD.

HCA16429/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.16429 OF 1998

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J U D G M E N T

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The appeal

1. The plaintiff obtained summary judgment with damages to be assessed from the Master. The defendant now appeals.

The plaintiff's case

2. The plaintiff's case is a straightforward one. The parties had entered into an agreement for the letting of the plaintiff's premises to the defendant. The premises was intended to be used as a restaurant operated by the defendant. The defendant failed to comply with the terms of the agreement by refusing to sign the formal tenancy agreement and paying the deposit. The plaintiff accepted the repudiation by the defendant.

The defence

3. There is no dispute on the terms of the agreement. The defence is that the agreement was invalid because Mr Shum of the defendant who signed the agreement was tricked into signing the agreement. Duress and undue influence was used by representatives of the plaintiff in forcing him to sign the agreement. It was said that Mr Shum had no authority to act for the defendant and the defendant did not ratify his act.

Test in Order 14

4. The test in Order 14 application is whether the defence is credible, if yes, the defendant is given leave to defend. If not, judgment should be given to the plaintiff : Ng Shou Chun v. Hung Chun San [1994] 1 HKC 155.

Duress

5. In my view, the defendant has not made out a case of duress which merits a trial. No particulars of duress was pleaded in the defence apart from the fact that the plaintiff's representatives would not allow Mr Shum to leave without signing the agreement. This is repeated in the first affirmation filed by the defendant in opposing the Order 14 application.

6. In the second affirmation of the defendant, the duress was described in the most vague terms, namely, Mr Shum was surrounded by the representatives of the plaintiff who insisted that he should sign the agreement and would not allow him to leave unless he signed it. One of them said if Mr Shum would not sign the agreement, he would be dismissed by his employer. One of them put his hands around Mr Shum's shoulder in the discussion.

7. The agreement was signed by Mr Shum in a public place, namely the Convention and Exhibition Centre, after a banquet at night. The representatives of the plaintiff were invited by Mr Shum to attend the banquet. Negotiation for the agreement had been conducted for two months prior to the signing. There were amendments to the agreement. Mr Shum was advised throughout by a legal executive of a firm of solicitors on the agreement. This legal executive was present when the so-called duress was exercised on Mr Shum. In his second affirmation, Mr Shum described the behaviour of the Plaintiff's representatives as "extraordinarily 'friendly'" or "pretended to be extremely 'friendly'". But what had not been mentioned was that Mr Shum considered himself to be threatened by the acts of the plaintiff's representatives. Taking the defendant's case at the highest, one may ask where is the violence, or threats of violence, or imprisonment, or threats of imprisonment that are necessary to constitute duress : Chitty on Contract (28th Ed.) Vol 1, para.7-008. Mr Shum might be prevented from leaving but clearly this fell short of being imprisoned or threatened with imprisonment.

Undue influence

8. The defendant further relies on undue influence. There is clearly no special relationship between Mr Shum and the representatives of the plaintiff in the nature of a personal or fiduciary relationship. Where there is no special relationship, undue influence comes into place where there is coercion, domination or pressure. Coercion in this context is in the form of illegitimate pressure : Chitty, paras.7-041 and 7-046.

9. The defendant in this case is relying on actual undue influence. This is described as a species of fraud : CIBC Mortgages Ltd. v. Pitt [1994] 1 AC 200. The burden is on the defendant to prove actual undue influence and it is a heavy burden indeed. There may well be pressure on Mr Shum, but the type which appears to be necessary to found a case of undue influence is one that is illegitimate in nature : Chitty, para.7-046. On the evidence disclosed, how can it possibly be said that what had happened is remotely resembling fraud or constituting illegitimate pressure on Mr Shum.

Contemporary documents

10. The defence of duress and undue influence is in any event incredible. One can test this with reference to the contemporary documents. The agreement was signed by Mr Shum on 6 August 1998. Then on 11 August 1998, Mr Shum wrote to the plaintiff stating, among other things, that the agreement was, as mentioned by him on 6 August 1998, to be subject to the approval of the board of directors of the defendant and he requested a copy of the agreement for its consideration.

11. Mr Shum is, of course, not a lawyer and one would not expect him to raise in the letter the legal niceties or the effect of being forced to sign the agreement. However, in my view, it is not too difficult for someone who had been subject to duress or undue influence to express in strong terms that he was forced to sign such an agreement. The tone of the letter is totally inconsistent with someone who had gone though such an unpleasant experience.

12. On 29 August 1998, Mr Shum wrote another letter to the plaintiff and its solicitors. In this letter Mr Shum stated that he was still in a position to represent the defendant. Regarding the agreement, he stated that the defendant had the following problems :

1. Pedestrian flow and the time it took to search for the plan.

2. Problem concerning a connecting staircase in the premises, and that decoration work could not be completed during the rent-free period.

3. Financial difficulties.

Again, no question of violence or threats of violence was mentioned at all. Instead the letter asked for a further meeting to clarify the matter. Again, there is no indication that Mr Shum signed the letter because of undue influence.

Authority of Mr Shum

13. The real defence raised in this case is on the lack of authority of Mr Shum to bind the defendant. The second affirmation of Mr Shum was filed after the Order 14 hearing and of which the plaintiff had not filed any evidence in response. In it, Mr Shum stated that throughout the negotiation of the tenancy agreement, he had informed the plaintiff's representatives that he was only one of the three directors of the defendant. He had the authority to negotiate with the plaintiff but everything was subject to the final approval of the board of directors of the defendant. He described the circumstances in which he signed the agreement. He denied that he invited the representatives of the plaintiff to the dinner for the purpose of signing the agreement. He did not intend to sign the agreement and the request of the representatives of the plaintiff to sign the agreement took him by surprise. He told them that he had authority to negotiate but had no authority to sign. He was not aware of the signing of the agreement that day and had not informed the board of directors of the defendant beforehand. He had to fully consider the terms of the agreement and obtain the approval from the board of directors of the defendant. He did not have the company chop and the cheque for the payment of the deposit.

14. The response from the representatives of the plaintiff was that all these things were flexible and could be made good later. They further said that the agreement was, in any event, a provisional agreement only. If the defendant really intended to have a tenancy, a formal agreement had to be signed anyway, and there would be no harm signing at that time. Immediately after the signing of the agreement, Mr Shum told the representatives that everything would be subject to the approval of the board of directors. At that time, the plaintiff's directors had not yet countersigned on the agreement.

15. Mr Siu, Counsel for the defendant, referred to Bowstead & Reynolds on Agency, 16th ed., para.8-081 :

"No act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that in doing the act, the agent is exceeding his authorities."

He submitted that the plaintiff had knowledge that Mr Shum did not have the authority to bind the defendant. There was no ratification by the defendant.

Plaintiff's argument

16. Mr Chan, Counsel for the plaintiff, submitted that Mr Shum's story that he had no authority to act on behalf of the defendant is unbelievable. The agreement is not a document that would require the corporate seal of the defendant : section 32(1)(b) of the Companies Ordinance. Mr Shum was the only one who actually initiated the discussion on the letting of the premises. He was described as the managing director of the defendant in his written proposal of 30 June 1998 to the plaintiff on matters regarding the letting of the premises. He was the only one from the defendant who negotiated with the plaintiff before and after the agreement was signed. Mr Shum is one of the three directors of the defendant. He has substantial shareholdings in the defendant. Throughout these proceedings, he was the only one who acted on behalf of the defendant, none of the other directors had come forward to say that Mr Shum had no authority to act on their behalf.

Triable issue

17. There is much force in Mr Chan's submission. However, ultimately the issue is whether the parties agreed that the agreement was signed by Mr Shum on the basis that the approval of the board of directors of the defendant would have to be obtained. Although Mr Shum in his second affirmation did not expressly say the representatives of the plaintiff had so agreed, it is clear from his affirmation that the matter was to proceed on that basis. This is a matter that cannot be resolved by affidavit evidence only. Based on what Mr Shum said, there clearly was much pressure exerted on him to sign the agreement. In my view, the defendant had raised a triable issue on the matter. Certainly what Mr Shum said can be supported by his letter of 11 August 1998, where he had set out in gist the basis in which the agreement was signed on 6 August 1998. Despite the use of the words in Chinese in the letter such as "examination and perusal" and not "approval" by the directors, it is apparent from the letter that the message conveyed was that the approval of the directors was required.

18. In his letter of 29 August 1998, Mr Shum stated that he still had the authority to represent the defendant. I think one must consider this statement in the context in which it was written. At that stage, it is apparent from the letter that Mr Shum was trying to resolve the problem concerning the agreement. On 2 September 1999, Mr Shum offered to pay half of the deposit by monthly instalments. In my view, it is arguable whether the offer was made in the process of negotiation and was, therefore, within the ambit of 'without prejudice' discussions and should not be looked at : Chun Lee Engineering Co. Ltd. v. Hopewell Construction Co. Ltd. [1990] 1 HKLR 242.

19. The question of ratification by the defendant is not a matter that can be resolved at this stage.

Conclusion

20. The appeal is accordingly allowed. The judgment is set aside and the defendant is given unconditional leave to defend. The defendant is required to file the defence within 14 days and the plaintiff to serve and file the reply within 14 days thereafter.

Costs

21. The outcome of the appeal is based entirely on the second affirmation of the defendant which was not available before the Master. The costs order of the Master is varied to the extent that the plaintiff is to have the costs of and occasioned by the Order 14 application before the Master, with a certificate for Counsel. The costs of the appeal be in the cause of the action.