TAM SHAIR LEUNG v. TAM CHEUNG SHIU

CACV 215/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL No. 215 of 2004

(ON APPEAL FROM DCCJ No.3079 OF 2002)

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JUDGMENT

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Hon.  Yuen JA:

1.  This is an appeal from a judgment of HH Judge H.C. Wong given on 4 May 2004, dismissing the Plaintiff’s claim and entering judgment for the Defendant on his counterclaim that the Plaintiff pay him a sum of $45,000 together with interest thereon from the date of service of the counterclaim to date of judgment at half-judgment rate and thereafter at judgment rate until full payment.  The trial judge also made an order that costs be to the Defendant.

2.  Leave to appeal was refused by the trial judge but was given by Hon. Woo, V-P on 8 July 2004.

Background

3.  The Defendant was the majority partner in a business on the mainland.  The business was to comprise of a restaurant (which was to be built) and a fish farm. 

4.  At first, there were, apart from the Defendant, two other partners.  In 1994 or 1995, the Plaintiff also became a partner.  (It is clear that the parties were in a partnership relationship, although the term "shareholders" was used loosely in documents).

5.  On 23 July 1995, all partners resolved in a written Chinese document:

“對新加入股東要明確目標，在未有收成前各股東不能收取資本股息及薪金。”

("It must be clearly indicated to the newly joined shareholders that the objective is that before a profit is made, all shareholders shall not receive capital dividends and salary").  

6.  Between 1995 and 1996, the Plaintiff invested a total of $492,000 in the business.  He installed three members of his family in the running of the business on the mainland, viz. his father, his brother and his niece.  The father and brother were involved in the construction of the restaurant, and the niece kept the accounts.

7.  By 1998 however, the investment turned out to be an unsuccessful one.  The business was failing - the restaurant had never commenced operation and the only income-producing asset of the business was the fish farm which was leased to a tenant.   The Plaintiff’s members of family considered they were entitled to certain wages which they had not received and they turned to harassing and threatening the Defendant.

8.  On 1 April 1999, the Plaintiff and the Defendant signed a document written in Chinese ("the 1/4/99 document").  This provided for the assignment of the Plaintiff’s shares in the business to the Defendant for $492,000, i.e. the same sum invested by the Plaintiff.  The sum was to be paid in 32 monthly instalments of $15,000 each and a final instalment of $12,000.  The first instalment was paid on the same day.

9.  It was the Defendant’s case (and this was supported by evidence from Lo She Hong, a mutual friend of the Plaintiff and the Defendant, who was also a local official) that prior to signing the 1/4/99 document, there was an oral agreement that "required [the Plaintiff’s] relatives not to shout and curse in the village, not to bombard with threats of bodily harm and to settle the matter" (see Mr Lo’s letter dated 4 June 2002).

10.  It was also the Defendant’s case that it was orally agreed that after the sale of the shares, the Plaintiff and his family members would withdraw from the business and hand over the accounts.

11.  On 7 June 1999, there was a meeting of all partners.  They all signed a document entitled "Shareholders Agreement" which included the following resolutions ("the 7/6/99 resolutions"):

“	（2）	确定譚社良家人之工資回報如下：
		(a)	谭本良（工地）（9个月）￥7,200.00
		(b)	谭观响（工地）（4个月）￥3,200
		(c)	谭倩英（会计）￥3,000.00（以一次结算盘帐）
	（3）	因工资问题，希望各股东本著以和為贵，大事化小，各自做功夫，不要将问题揚/挍惡化，有问题于股東间解决，不应将家人及私人问题捲入。
	（4）	参与工作之上述三位谭社良家人之工资待一九九[九]年12月尾收外租鱼塘租後才攤還。
	（5）	谭倩英请於本年七月前将帐目移交關康松。”
"	(2)	Confirmation of the salary returns for family members of [the Plaintiff] as follows:
		(a)	Tan Ben Liang (site) (9 months) ¥7,200.00
		(b)	Tan Guan Xiang (site) (4 months) ¥3,2000.00
		(c)	Tan Qian Ying (accountant) ¥3,000 (for one-off closing of accounts)
	(3)	Regarding the issue of salary, it is hoped that each shareholder will not cause the problem to be worsened, to uphold the harmony and peace amongst all, turn big issues into small ones and each shall do his own work.  Problems should be resolved amongst the shareholders, without bringing in family and personal problems.
	(4)	The salary for the above 3 family members of [the Plaintiff] will be repaid to them after receipt of rental for the Fish Farm at the end of December 1999.
	(5)	Tan Qian Ying is to pass the books of accounts to Guan Kong Song in July this year".

12.  This was followed by a separate Chinese document signed by the Plaintiff and the Defendant ("the 7/6/99 document").  The heading was "The following sets out the Supplemental Agreement between Party A and Party B".  This included the following:

“	(3)	关于“万家乐”酒店的帐目，速交回给甲方。（交康松处便可）。
	(4)	关于乙方亲属人工问题：按1999年6月7日在土瓜湾嘉宾酒楼股东协议书决定执行。”
"	(3)	The accounts of ‘Wen Je Le’ Hotel [the restaurant] should be returned to [the Defendant] speedily/immediately (for this purpose, delivery to Guan Kong Song is sufficient.
	(4)	In respect of remuneration to the relatives of [the Plaintiff], it is decided that the shareholders’ resolution at the shareholders’ meeting on 7 June 1999 at Gallant Restaurant, To Kwa Wan shall be put into effect in accordance with the shareholders’ agreement".

13.  On 28 June 1999, the Defendant paid the 2^nd instalment of $15,000 for the shares.

14.  At the end of July 1999 however, the Plaintiff’s niece did not return the accounts, notwithstanding the deadline set out in Resolution (5) of the 7/6/99 resolutions and the requirement set out in Clause (3) of the 7/6/99 document.

15.  The Defendant paid a 3^rd instalment of $15,000 on 18 August 1999.

16.  However, the Defendant’s evidence was that at the end of August 1999, he was again threatened by the Plaintiff’s family members.  The judge accepted the Defendant’s evidence that "he was pushed, bombarded with accusations and harassed by the Plaintiff’s elder brother ..." (Judgment, §20).  Consequently, the Defendant did not make any further payments for the shares.

17.  As for payment of the wages for the Plaintiff’s family members due in December 1999, this was expected to come from rent for the fish farm (clause (4) of the 7/6/99 resolutions).  However (as found by the Zhong Shan People’s Court), the Plaintiff’s elder brother collected and kept the rent. 

18.  In February 2000, there was a meeting at which one of the other partners and Mr Lo experienced what the judge described as "the hostile attitude and the force of such attitude" of the Plaintiff’s family members.  The judge also found that the Plaintiff’s niece had "vigorously refused to hand over the accounting records ...".

19.  Further, the Plaintiff’s elder brother continued to collect and keep the rent for the fish farm for the entire term of the lease, the rents having been paid by the tenant on 1 February 2000, 30 January 2001 and 23 January 2002.  This resulted in the business losing the action it took in 2002 in the Zhong Shan People’s Court against the tenant for non-payment of rent.

20.  On 7 May 2002, the Defendant’s then solicitors wrote a letter before action to the Plaintiff ("the letter before action").  In this letter, the solicitors referred to "the Agreement" which was defined to comprise the 1/4/99 document, the 7/6/99 resolutions and the 7/6/99 document.  There was no reference to any oral terms.  The solicitors asserted that the Plaintiff had "in repudiatory breach of the Agreement, instructed, caused, procured or otherwise allowed your relatives and/or agents and/or persons authorized by [the Plaintiff] to prevent [the Defendant] from entering the site on which the Restaurant is to be built and cause physical bodily harm to and exert threats of the same on [the Defendant].  This clearly indicates [the Plaintiff’s] refusal to sell [his] shares to [the Defendant] and evincing an intention not to be bound by the Agreement".  The solicitors also referred to the receipt by the Plaintiff and/or his agents of rent for the fish farm and demanded its return within 14 days.

Legal proceedings

21.  Before that deadline expired however, the Plaintiff instituted proceedings in the District Court for the balance of the instalments payable by the Defendant for the shares.

22.  The Defendant lodged a defence and also counterclaimed for "rescission and/or avoidance of the alleged agreement", return of the total sum of $45,000 paid to the Plaintiff, alternatively damages, interest and costs.

23.  At the trial, evidence was given by the Plaintiff, the Defendant, one of the other partners Mr Fung and the parties’ mutual friend Mr Lo.

Judge’s findings

24.  The judge found that there was a “collateral agreement between the Plaintiff and the Defendant.  The collateral agreement consisted of the 1 April 1999 agreement (first agreement) and the oral conditions, the 7 June 1999 supplemental agreement (the second agreement), the minutes of meeting of the same date” (Judgment §19). 

25.  The judge found that there had been a repudiatory breach of the agreement as (a) the Defendant continued to be harassed after the agreement, (b) the Plaintiff’s niece had refused to hand over the accounts (Judgment §20) and (c) the Plaintiff’s brother had remained in charge of the fish farm and collected rent (Judgment §22).  She considered that this amounted to a total failure of consideration and consequently that the Defendant was entitled to recover the sum of $45,000 paid to the Plaintiff with interest from the date of the counterclaim and costs.

Appeal

26.  The grounds of appeal can be grouped into four main points:

(1)	that the judge erred in finding that there was a “collateral agreement”;
(2)	that the judge erred in finding that there were oral terms in the agreement;
(3)	that the judge erred in finding that the Plaintiff had been in repudiatory breach of the agreement;
(4)	that the judge erred in ordering rescission, rather than damages.

(1) - “Collateral agreement”

27.  The first point taken on appeal by counsel for the Plaintiff was that no collateral agreement had been pleaded by the Defendant.  That is true.  However, in my view, the reference by the judge to a collateral agreement was simply a misnomer. 

28.  For there to be a collateral agreement, there must be a main agreement to which it is collateral.  A collateral agreement has an independent existence from the main agreement (Heilbut Symons & Co v Buckleton [1913] AC 30).

29.  In §19 of the trial judgment (reproduced in §24 above), the judge had set out what she called the “collateral agreement” - it encompassed the 1/4/99 document, oral conditions, the 7/6/99 resolutions and the 7/6/99 document.  If all these comprised the collateral agreement, it is difficult to see what then was the main agreement.  The judge did not say what the main agreement was, and made no reference to one, throughout the judgment. 

30.  In my view therefore, the only reasonable conclusion is that when the judge referred to the documents and the oral conditions as being one “collateral” agreement, she must have meant that they had all been incorporated into a single “composite” agreement.  In analysing factual situations involving oral terms as well as written documents, the line between a collateral agreement and a composite agreement is often a fine one.  In both cases, the parol evidence rule is avoided and in some cases, the same result is reached whichever analysis one adopts (as in Bank of China (Hong Kong) Ltd v Fung Chin Kan & another [2003] 1 HKLRD 181).

(2) - Oral terms

31.  The second point raised on appeal was that the judge was wrong in finding that there were oral terms in the agreement. 

32.  Counsel for the Plaintiff readily understood the difficulty of upsetting a trial judge’s findings of fact, but he suggested that this court could interfere because the judge had failed to take into account what he submitted was a piece of  documentary or incontrovertible evidence, viz. the letter before action described in §20 above, in which the Defendant’s then solicitors had failed to include oral terms in their definition of “the Agreement” between the parties.

33.  It is correct that the judge did not expressly refer to this letter in her judgment, even though it featured in the opening and closing submissions of the Plaintiff’s counsel.  However, the focus put on the letter before action in the closing submission on behalf of the Plaintiff was that it was “binding” on the Defendant.  It is obvious that a letter before action is not binding on a party in the way that a pleading is binding.  Therefore it was not surprising that the judge did not deal with this submission in her judgment.

34.  The omission of the oral terms in the letter before action was, no more and no less, one piece of evidence in a case where there were other pieces of evidence the other way.  Although it would have been preferable for the judge to have expressly dealt with the point in her judgment, I do not think it is of sufficient significance to justify an appellate court’s interference with a finding of fact by the trial judge.  The judge was entitled to find the existence of oral terms on the basis of the evidence before the court, which included not only the evidence of the Defendant, but also the evidence of the mutual friend Mr Lo (Judgment §12).

35.  As Lord Hoffman said in Biogen Inc v Medeva PLC [1997] RPC 1 at 45 and repeated in Piglowska v Piglowski [1999] 1 WLR 1360 at 1372 (and as quoted by the Court of Final Appeal in Ting Kwok keung v Tam Dick Yuen and others [2002] 3 HKLRD 1, §41):

“The need for appellate caution in reversing the trial judge’s evaluation of the facts is based upon much more solid grounds than professional courtesy.  It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence.  His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance ... of which time and language do not permit exact expression, but which may play an important part in the judge’s overall evaluation”.

36.  In any event, when one considers the matters set out in the 1/4/99 document, the 7/6/99 resolutions and the 7/6/99 document, the only oral term that had not been expressly referred to in those documents was the term that the Plaintiff’s relatives would withdraw from the business.

37.  First, the term that the Plaintiff’s relatives would cease harassing the Defendant was alluded to in Resolution (3) of the 7/6/99 resolutions, albeit in understated language of courtesy.  It was submitted before this court that since the reference in Resolution (3) was to “all shareholders”, the Plaintiff had not been singled out for mention.  However there was no evidence that any of the other partners (or their family members) had been involved in disruptive behaviour, so it was obvious who was the focus of the resolution. 

38.  Secondly, the term that the Plaintiff’s niece would hand over the accounts was expressly referred to in Resolution (5) of the 7/6/99 resolutions and clause (3) of the 7/6/99 document.  The deadline for doing so was set at the end of July 1999 in the former document and as “速 (speedily/immediately)” in the latter document. 

39.  Therefore, the only oral term that had not been reduced into writing was the withdrawal of the Plaintiff’s relatives from the business.  The judge accepted the Defendant’s evidence of this oral term, a finding of fact that was not at all surprising when one takes into account the fact that the relatives had been installed in the business only as a consequence of the Plaintiff’s investment, the Plaintiff himself had withdrawn from the business soon after the agreement for the sale of his shares, and the less than cordial relationship between the Plaintiff’s relatives and the other partners, in view of the dispute over their wages and Resolution (3) of the 7/6/99 resolutions. 

(3) - Whether repudiatory breach

40.  The third point taken on appeal was that the judge had erred in finding repudiatory breach of the agreement.  I think, in light of the judge’s final finding of total failure of consideration, that it might have been more precise for her to have couched her findings in the language of non-performance of bargain, rather than repudiatory breach of contract. 

41.  Although I do not think there is any difference of substance in this case, there is a difference in legal theory.  "The claim of a party who has paid money under a contract to recover it on the ground that the consideration for which he paid it has wholly failed is not based on any provision in the contract, but arises because in the circumstances, the law gives a remedy in quasi-contract to the party who has not got what he bargained for.  Although, in the formation of a contract, a promise to do a thing may be the consideration, in dealing with the law of failure of consideration and the right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but its performance" (Fibrosa Spoolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 H.L, 47-8).

42.  Returning to this case, it was first submitted on behalf of the Plaintiff that he had performed the agreement by handing over the accounts, although his performance was delayed.  It was submitted that the time for handing over the accounts had been varied from “the end of July” in the 7/6/99 resolutions to “speedily/immediately” in the 7/6/99 document. 

43.  I am afraid I do not understand that submission.  In my view, insofar as the requirement for handing over the accounts “speedily/immediately” in the 7/6/99 document superceded the deadline of "the end of July" in the 7/6/99 resolutions, that was a requirement that the accounts should be handed over earlier, rather than later, than the end of July.

44.  The full accounts were not handed over until the process of discovery after legal proceedings commenced.  Counsel for the Plaintiff sought to make a point out of the fact that the Defendant accepted the accounts, but I do not see what mileage can be made out of that.  The Defendant had already indicated that he considered the agreement discharged and in any event, the Plaintiff had no right to keep the accounts which in law belonged to the partnership.

45.  Nor is there anything in the Plaintiff’s point that the Defendant had not inspected the accounts himself when he received them through another person.  Not every businessman is conversant with reading or understanding accounts, but that does not mean that they do not regard them as important.

46.  Secondly, counsel for the Plaintiff submitted that there was no evidence that the Plaintiff had procured his relatives to harass the Defendant.  However that was not the point.  The judge had found that the Plaintiff’s shares were in truth valueless, a finding that was reinforced by the fact that the 23/7/95 resolution (reproduced in §5 above) on its true construction prohibited any partner from making any drawings of capital, dividends or salaries before any profit was made.  Thus the only reason why the Defendant had agreed to take the Plaintiff’s shares off him was to buy himself some peace - in what (in another area of the law) would be called a “clean break”.

47.  It was therefore for the Plaintiff to see to it that his relatives would stop harassing the Defendant (if it was thought that he was not in a position to do so, one would have expected him to have recorded his objection to the making of Resolution (3) in the 7/6/99 resolutions).  The Plaintiff obviously failed to stop his relatives harassing the Defendant, as the judge found that the Defendant had been harassed in August 1999 when he was “pushed, bombarded with accusations, and harassed ...” (Judgment §20). 

48.  Lastly, there was the failure on the part of the Plaintiff’s relatives to withdraw from the business.  Counsel for the Plaintiff submitted that no time limit had been expressly stipulated.  If so, the law implies a reasonable time.  The agreement was made in 1999.  Yet as late as 2002, the Plaintiff’s elder brother was still collecting and keeping the rent from the fish farm, the only income of the business.  It was clear beyond argument that the Plaintiff’s relatives had failed to withdraw from the business well beyond a reasonable time. 

(4) - Remedy

49.  Finally, counsel for the Plaintiff submitted that damages, not rescission, was the correct remedy.  The judge had found that notwithstanding the restraint on withdrawal of capital in the 23/7/95 resolution and the failure of the business, the Defendant had bought the Plaintiff’s shares in order to get peace from the Plaintiff and his relatives and to regain control of the business from them. 

50.  This however the Defendant did not get.  He continued to be harassed, he did not receive the accounts sought until he commenced litigation many years later, and the only income of the business was collected and kept by the Plaintiff’s relatives.  The judge was entitled to find on this evidence that there was a total failure of consideration, the remedy for which was rescission.  It was not suggested that the Defendant had received any benefit under the agreement which rendered this remedy inapplicable or inappropriate.

Order

51.  By reason of the matters discussed above, I would dismiss the appeal and give an order nisi that the costs of the appeal be to the Defendant to be taxed if not agreed. 

Hon Yam J:

52.  I agree.

Hon Chu J :

53.  I agree with the judgment of Hon Yuen JA and have nothing to add.