XCHRX LAI KAM HUNG and Others v. HUI CHI WAI and Others

1995, No.A12885

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. This is an appeal by the 2nd Defendant against the decision of Master Chu dated 20 May 1996 entering summary judgment in the sum of HK$1,595,448.49 against the 1st, 2nd and 3rd Defendants jointly and severally, for an order to set aside the learned Master's Order and for the Plaintiffs' application for summary judgment to be dismissed.

2. On 12 December 1995, the Plaintiffs issued a writ for, inter alia, the balance of the purchase price of HK$1,595,448.49 due under an Agreement dated 6 June 1992 ("the Agreement") entered into between the Plaintiffs as Vendor and the 1st and 2nd Defendants as Purchaser for the sale and purchase of the issued share capital of 12,000 shares in Wui Chuen Property Investment Company Limited ("the Company").

3. Counsel for the Defendant submitted that there are only two issues before the Court :

(1) Whether a letter dated 18 November 1995 written by the solicitors who had previously acted for the Defendants amounted to an admission of indebtedness on behalf of all three Defendants; and

(2) Whether parol evidence is admissible to show that the 2nd Defendant was acting as agent for Goh Seow Keng ("Mr Goh") when he entered into the Agreement.

4. As to the first issue, the letter of 18 November 1995 was written in response to the Plaintiffs' solicitors' "letter of 12 October 1995" addressed to the 1st, 2nd and 3rd Defendants. There are three letters all dated 12 October 1995 from the Plaintiffs' solicitors but none was addressed to all three Defendants : one was addressed to the 1st and 3rd Defendants, another was addressed to the 1st and 2nd Defendants and the third was addressed to the 4th Defendant. The "admission" is that "the outstanding amount payable to [the Plaintiffs] is in the region of HK$1.2 million" and the question is on whose behalf was this admission made. It is unclear as to which of the three letters of 12 October the letter of 18 November was meant to be a response; hence the uncertainty of the person(s) on whose behalf the "admission" of liability of $1.2 million was made. Because of this ambiguity, it is impossible to say that there was a clear admission of liability on behalf of the 2nd Defendant and the point was not really seriously pursued by the Plaintiffs at the hearing.

5. As to the second issue, it is the 2nd Defendant's case that

(i) at all material times he was a director and deputy manager of a company known as Straight Forward Development Limited of which the 1st Defendant was the majority shareholder and director and the boss of the 2nd Defendant;

(ii) the 2nd Defendant was asked by the 1st Defendant to act as nominee and agent for Mr Goh; and

(iii) the fact that he acted as nominee or agent for Mr Goh was made known to the 1st named Plaintiff who negotiated the sale and purchase with the 1st Defendant.

Although the Agreement itself did not specify that the 2nd Defendant was entering into the Agreement as agent for Goh, the 2nd Defendant submitted that parol evidence is admissible to show that Goh was the principal and that if he were acting as agent, he would not be liable to the third party on it.

The evidence

6. The 2nd Defendant adduced evidence to the following effect. In or about May 1992, the 1st Defendant and Mr Goh incorporated a Hong Kong company called Gold Coast Catering International Company Limited ("Gold Coast") to be used to conduct business in Singapore. The 2nd Defendant was aware that the 1st Defendant and Mr Goh had negotiations with Den norske Bank AS ("the Bank") in Singapore for credit facilities. At the same time, the 1st Defendant commenced negotiations with the 1st named Plaintiff, Lai Kam Hung ("Mr Lai") about the possibility of acquiring the share capital of the Company which owned a shop on the ground floor and the whole of the 1st and 2nd floors of Ealing Court, 259A Temple Street, Yaumatei ("the Properties").

7. On 1 June 1992, Gold Coast obtained an offer from the Bank for a working capital line of US$4 million subject to the terms and conditions set out in a letter of that date. One of the terms was that security be provided as follows :

(i) personal continuing guarantees of the 1st Defendant and Mr Goh for US$4 million each;

(ii) first registered legal mortgages over the Properties.

The offer was open until 18 June 1992.

8. The 2nd Defendant was involved in the negotiations conducted by the 1st Defendant with Mr Lai. It is the 2nd Defendant's assertion that Mr Lai was informed by the 1st Defendant that the 2nd Defendant was only working for him and that the true buyers were Mr Goh and the 1st Defendant.

9. On 6 June 1992, as Mr Goh was not in Hong Kong at the time, the 2nd Defendant was told by the 1st Defendant to sign the Agreement in place of Mr Goh as it had to be executed as soon as possible. In the 2nd Defendant's presence, the 1st Defendant told Mr Lai that the 2nd Defendant was only acting as nominee for Mr Goh as the latter was not in Hong Kong. According to the 2nd Defendant, Mr Lai replied that there was no problem for he knew clearly that the 2nd Defendant was only a staff member of the 1st Defendant. It was after this conversation that the 2nd Defendant signed the Agreement at the offices of Messrs. K.C. Ho & Fong, former solicitors for the Defendants.

10. Bought and Sold Notes and the Instrument of Transfer relating to 4,800 only of the 12,000 shares were transferred as to 2,400 by each of the 2nd and 3rd named Plaintiffs to the 2nd Defendant rather than into the joint names of the 1st and 2nd Defendants who were defined as "the Purchaser" in the Agreement. These Notes and Transfers are dated 20 June 1992. Contemporaneously, a Declaration of Trust in favour of Mr Goh was signed by the 2nd Defendant at the offices of Messrs. K.C. Ho & Fong and on the same day, the 2nd Defendant and Mr Goh entered into a Nominee Shareholding Agreement.

11. On 30 June 1992, the 2nd Defendant signed Bought and Sold Notes and an Instrument of Transfer to transfer the 4,800 shares in the Company to Mr Goh.

The Agreement

12. The Agreement was entered into by the Plaintiffs as Vendor and the 1st and 2nd Defendants as Purchaser of the issued share capital of the Company. The Company is a private company limited by shares with an authorised capital of HK$1.2 million divided into 12,000 shares of $100 each. Mr Lai was the registered holder of 7,200 shares, the 2nd and 3rd named Plaintiffs each being the registered holder of 2,400 shares in the Company. Under the Agreement, the 1st and 2nd Defendants (collectively "the Purchaser") agreed to acquire, inter alia, the entire issued share capital for $33 million less the outstanding mortgage. Clause 2 of the Agreement provided that completion of the sale and purchase of the said shares should take place upon the signing of the Agreement. Under Clause 4, on completion, the Vendor was obligated to deliver, inter alia, duly executed contract notes and Instruments of Transfer of the shares in favour of the Purchaser and/or its nominee(s) together with valid share certificates. The Agreement also provided, by Clause 11A, that upon the signing of the Agreement, the Purchaser shall procure the 1st Defendant and 3rd Defendant who was the 1st Defendant's wife to execute a guarantee in favour of the Vendor to guarantee jointly and severally the Purchaser's full performance of the terms and conditions to be performed by the Purchaser. Clause 7(i) of the Agreement contained a warranty from the Vendor that the company was the sole registered and beneficial owner of the Properties and other than the existing tenancy and an outstanding mortgage which was to be discharged by the Vendor, was free from incumbrances.

Agency

(a) Disclosed principal

13. It is common ground that there is nothing in the Agreement itself to indicate that the 2nd Defendant was acting in any nominee capacity. Nevertheless, counsel for the 2nd Defendant submitted that the present case was one concerning a disclosed principal rather than an undisclosed principal because Mr Lai knew that the 2nd Defendant was entering into the Agreement in a nominee capacity. The only evidence to support this is the assertion of the 2nd Defendant that Mr Lai was informed to that effect by the 1st Defendant during the negotiations and subsequently, more particularly, on the day of, but prior to, the signing of the Agreement which conversation between the 1st Defendant and Mr Lai took place in his presence. There is no independent evidence to corroborate the 2nd Defendant's allegation of agency from either the 1st Defendant and/or Mr Goh and that allegation is denied by the Plaintiffs.

14. In the absence of independent supporting evidence as to the disclosure of agency, it is necessary to consider whether the existence of an agency is credible on the basis of the evidence adduced. The following factors appear to militate against the existence of an agency : first, this was a large commercial transaction in which the consideration was $33 million. It was a legally drawn document and the 2nd Defendant was legally represented. Yet, the Agreement was inexplicably silent as to his representative capacity. Further, no explanation has been proffered as to why, if the 2nd Defendant was in truth an agent only, the transfer of the shares to the beneficiary (Mr Goh) only 10 days after the transfer of the shares to the 2nd Defendant should have been done by way of Bought and Sold Notes which attracted another lot of ad valorem duty.

15. However, there are factors that lend credence to the existence of an agency : first, had the 2nd Defendant contracted as principal, there would have been no reason to delay the execution of the Bought and Sold Notes for a period of two weeks after the Agreement. Second, the fact that the 2nd Defendant was not required to provide a guarantee is consistent with his being an agent only. Third, Mr Goh signed the Nominee Shareholder Agreement which was executed contemporaneously with the Instrument of Transfer and Bought and Sold Notes. Fourth, the Company appears to have been acquired for the purpose of being able to pledge the properties that it owned to secure banking facilities in a transaction in which the 2nd Defendant did not have any ostensible interest.

16. Whilst this does not appear to be a clear case and the existence of an agency may be somewhat marginal, it cannot be said that the 2nd Defendant's assertion of agency is unbelievable or not credible on any view.

17. Assuming in the 2nd Defendant's favour that the case is one of a disclosed principal, does that constitute a complete defence? Contrary to the submission of counsel for the 2nd Defendant, it does not necessarily follow that in those circumstances, the agent cannot be liable. "It is not the law that, if a principal is liable, his agent cannot be. The true principal of the law is that a person is liable for his engagements (as for his torts) even though he is acting for another, unless he can show that by the law of agency he is to be held to have expressly or impliedly negatived his personal liability." See per Lord Scarman in Kai Yung v. Hong Kong Banking Corporation [1981] AC 787 at 795D. Whether or not personal liability has been incurred on the contract depends on the intention of the parties to be deduced from the nature and circumstances of the particular contract and the surrounding circumstances. On the face of the Agreement, the 2nd Defendant faces a formidable task if he wishes to establish that he has no personal liability. As the question whether an agent incurred personal liability is one of construction, the 2nd Defendant should be given leave to defend. Nevertheless, given the apparent difficulties in the way of the 2nd Defendant in negativing personal liability and in that sense the defence is shadowy, it would not be appropriate to grant unconditional leave. Rather, it should be made conditional on the 2nd Defendant making a payment into court.

(b) Undisclosed principal

18. If, as was submitted by counsel for the Plaintiffs, there is insufficient evidence for the court to reach the conclusion for O.14 purposes that the principal was disclosed, so that all one had to go by was the Agreement, the question would arise whether evidence is admissible that the 2nd Defendant was acting for an undisclosed principal. The 2nd Defendant relied, inter alia, on the following passage in Chitty on Contracts, 27th Edn, para.31-061 :

"Where an agent makes a contract in writing in his own name, parol evidence is generally admissible to show that another person was the real principal, so that that principal can sue, as stated above, its effect is to add a party rather than to vary the contract."

19. Of course, in the present case, the effect of admitting parol evidence is not to add a party : it would be to delete the 2nd Defendant as a party and to substitute Mr Goh in his stead. The authority cited in support of the statement in Chitty set out above, namely Fred Drughorn Limited v. Rederiaktiebolaget Transatlantic [1919] AC 203 concerned a case where the undisclosed principal sought to intervene and evidence was held admissible that he was the principal. Here the situation is wholly different and I do not think that the Drughorn principle is applicable.

20. The 2nd Defendant also relied on para.12-099 in Chitty, op. cit. :

"Extrinsic evidence may also be adduced to show that one or both of the contracting parties to an agreement were agents for other persons and acted as such in making the contract so as to give the benefit or burden of the contract to their undisclosed principals. Such evidence relates to the factum of the written instrument."

It is to be noted that this statement is not unqualified : later in the paragraph cited above, it is stated it is "a moot point whether evidence can be given which is inconsistent with the written agreement." Humble v. Hunter (1848) 12 QB 310 is authority against the admissibility of parol evidence if it should be inconsistent with the written contract and counsel for the Plaintiffs placed much reliance on it. However, that case has often been distinguished and has also been judicially questioned : see, for example, the Drughorn case at p.209 and Bowstead and Reynolds on Agency 16th Edn. at 8-079. The principle in Humble v. Hunter has been held to be confined to cases where a person is described in a written contract as "owner" or "proprietor" of property and where it is a term of the contract that he should contract as "owner" or "proprietor" of that property : see Murphy v. Rae [1967] NZLR 103 at 109. In that case, the description "vendor" was held not to be sufficient to bring it within the principle of Humble v. Hunter.

21. Accepting that Humble v. Hunter is good law, the present case is still not one which, on the authorities, falls squarely within it. Put differently, it cannot be said that it is inarguable that extrinsic evidence is not admissible given the many seemingly conflicting decisions. To the extent that the law remains unclear or unsettled on this point, the 2nd Defendant should not be deprived of the opportunity of having it determined at trial. Nevertheless, it does not follow that the admission of extrinsic evidence would necessarily absolve the 2nd Defendant from personal liability, because it then becomes a question of construction. As noted above, I cannot ignore the strong likelihood of the 2nd Defendant being found to have incurred personal liability. So, by either route (i.e. whether the principal is disclosed or undisclosed) the same conclusion is reached.

Order

22. In the result, I will grant leave to defend conditional upon the 2nd Defendant making a payment into Court within 21 days of this order. As there is no evidence before me regarding the financial circumstances of the 2nd Defendant, I will make an order nisi that the sum be the amount for which summary judgment has been entered, namely $1,595,448.49 with liberty to the 2nd Defendant to apply within 21 days to vary the amount.

23. The appeal is allowed and I make an order nisi that the costs, both of this appeal and of the hearing before the learned Master, be costs in the cause.