PEPSICO PACIFIC TRADING COMPANY LIMITED v. ARDARA COMPANY LIMITED

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JUDGMENT

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Cons, J.A. delivered the judgment of the Court:

1. On the 24th of January this year the plaintiff issued a writ against the defendant, Ardara Company Ltd., which is a private company and to some extent apparently a family company. The writ is endorsed with the Statement of Claim which consists of only two paragraphs. The first is a claim for $17.7 million odd, the balance due for goods sold and delivered between the 1st of May 1983 and the lst of December 1983, the details being summarized in a schedule attached. The second paragraph alleges an admission by Ardara that the running balance of the account between the plaintiff and Ardara was $15.7 million odd, as at the 31st of October 1983. We do not know why that particular paragraph is included.

2. The pleading would suggest a straightforward story, not uncommon in these troubled times, of a failure to pay for goods simply ordered and accepted. The reality is otherwise. It is unnecessary to go into matters deeply, the true picture is complicated and the exact nature of the details that make it up are subject to argument. A very broad outline will suffice.

3. Pepsi Cola Incorporated is a well-known manufacturer and distributor of soft drinks. It is a company founded in the United States of America and appears to have branches or subsidiaries or affiliated companies in other parts of the world. In 1981 it had no distributor in Hong Kong and it was arranged that Ardara should take up that position. Ardara had no experience in the sale or distribution of soft drinks or foods and so a General Manager was to be provided for them for the first two years. The initial arrangement was for two and a half years, with a possible extentsion for 10 years thereafter. Pepsi set up the plaintiff company in Hong Kong specifically to deal with their part of the arrangements. It has a registered capital of $10,000, of which two $1 shares have been issued, one to a limited company, here, the other to a limited company in America. It has five American directors. Its full name is Pepsico Pacific Trading Company Limited. We shall call it P.P.T. for short. Ardara would seem to have been already set up.

4. Business commenced as from the 1st of June, but after one year Ardara began to realise that the business was not so good as they had thought it would be. Instead of making money, they were. losing it. By April of 1983, when the accounts for 1982 had been made up, they realized that in a fact they were insolvent. They had $12 million worth of liabilities that they were unable to meet.

5. That was not a happy situation for anyone and urgent discussions were held. We deliberately use in this context the passive voice, as we did earlier, because those who spoke and negotiated on Pepsi's side appear to have worn many hats within the overall Pepsi group, and which of the various Pepsi interests was actually committed, and to what in particular, by the agreements subsequently drawn up, is very much a matter for argument.

6. In any event a practical solution was found which would enable Ardara to continue the distributorship until the end of the agreed period, i.e. the end of 1983, or at least until Pepsi found a replacement.

7. The basic provisions that were agreed are as follows

        (1)     The General Manager who had been provided initially for Ardara would be replaced by a Sales and Marketing Manager, who would have complete authority to make decisions in the marketing and operations fields, and also by a Financial Manager, with a similar authority in the financial field. In effect it seems to us that the Ardara directors were required to relinquish all executive control.

8. It was forecast that under that administration Ardara would break even for the rest of the year, but in case that should not happen, it was provided by means of rather complicated provisions, which we need not set out that -

        (2)     If Ardara did make a loss between the 1st of May and the 31st of December, i.e. "the Subsidy Period", they would be compensated accordingly. If, on the other hand, they made a profit, they would have to disgorge that profit.

        (3)     The distributorship could be terminated by 7 days' written notice to Ardara. That provision would, of course, be very useful if and when a new distributor were found.

        (4)     At the end of the distributorship, whether by deliberate termination or by the effluxion of time, Ardara would hand over all tangible assets, such as vehicles, bottles, crates and office furniture, for an agreed price of $10. And,

        (5)     Ardara were to receive compensation towards the losses they had already made by means of subsidies, which would include a little over for their shareholders. The total amount was to be US$1.7 million. Of that amount US$1.23 million was paid immediately. The balance, which had been assessed at US$470,000 by reference to the loss made by Ardara between the 1st of January and the 30th of April, was to be paid at the end of the year. There was a qualification to the payment of subsidies. Some concession has been made as to its true construction, which is otherwise in dispute, but we think it wise to set out that qualification in its own words. It is paragraph 5(c) of the relevant document :

"Notwithstanding anything to the contrary contained in sub-paragraphs (a) and (b) of this Section 5, both the Variable Subsidy and the Fixed Subsidy, to the extent not already paid, shall be payable by PepsiCo to Ardara immediately upon the cessation of Ardara's distributorship for PepsiCo softdrink products, if:

The first four provisions, as we have set them out, were incorporated into a formal agreement between P.P.T. and Ardara as an amendment to the original Distribution Agreement (the Amendatory Agreement No. 1), while the fifth provision was contained in an agreement (the Marketing Development Agreement) between Ardara and an interest expressed to be PepsiCo, Inc., Hong Kong Branch. This meant that, at least on paper, any variance from the break even point at the end of the Subsidy Period was to be paid by, or perhaps credited to, P.P.T., but the US$470,000 was to come, not from P.P.T., but from Pepsi.

9. On the 30th November, P.P.T. gave notice in accordance with the 7 days provision of the amending agreement. Both that and the original Distribution Agreement contained provisions for termination if Ardara were in default, but there was no suggestion then that Ardara were in any way in default. On the 9th of December Ardara acknowledged the termination in a most courteous and gentlemanly telex to P.P.T.  On the 15th, they wrote submitting their claim for the Subsidy Period in which, far from breaking even, they reported a loss of some HK$14.3 million. Then on the 3rd of January they released their assets as agreed in provision (4) for $10. At that time it seems the assets had a book value of something over one million dollars.

10. No answer was received by Ardara to their claim for $14.3 million until the 18th of December when a letter from P.P.T.'s solicitors was delivered to them by hand. Even then the letter made no express reference to the claim. It was headed "Unpaid Invoices" and in peremptory terms demanded payment of the $17.7 million odd in full within two days or legal proceedings would be instituted. The writ in fact followed only 6 days later, in the terms we indicated at the outset.

11. It is to be noted that the writ gave no credit for the subsidy due under the Distribution Agreement, or for the US$470,000 referred to in the Marketing Development Agreement. It would seem that Pepsi Inc., who, it will be recalled, were expressed by means of their Hong Kong Branch to be the other party to that latter agreement, are resisting payment of that amount in reliance upon Clause 5(c), and in particular para. (ii), that we set out earlier, that is at least unless Ardara should first pay the monies said to be due to P.P.T., something which from their knowledge of Ardara's financial position, cannot be seriously expected. They have rejected a suggestion that they should pay the money direct to P.P.T.

12. On the 11th of February P.P.T. applied for summary judgment. They did not ask for the full amount of $17.7 million, but only some 3.4 million odd. The affidavit in support explained that, for the purposes of the application, they were willing to accept that there might be a triable issue as to whether the subsidy of the $14.3 million could be set off. They were not willing to accept anything of the kind in relation to the US$470,000.

13. Many more affidavits were filed and the hearing came on before Power, J. at the end of March.  On the 14th of May he gave judgment to the plaintiff in the sum of approximately HK$3.3 million, i.e. the $3.4 million reduced by some small considerations which need not trouble us here. It is against that decision that this appeal is brought.

14. It is submitted on behalf of Ardara that there are at least triable issues of law and fact which revolve round three central questions: (i) the true nature of the relationship between P.P.T., PepsiCo Inc. and the other subsidiary or affiliated companies or entities of Pepsi which we have not found necessary to mention in the course of this decision; (ii) the date and basis on which Ardara should pay for the goods supplied during the Subsidy Period; and (iii) the amount Ardara are entitled to claim having regard to the subsidy provisions.

15. We have been taken in detail through the affidavits presented to the judge below. They cover far more of the history than we have included in our simple outline. And we are very much indebted to counsel for their many and careful arguments and submissions. But it would be wrong, in view of the decision to which we have come, to comment upon those arguments and submissions. It is sufficient to say, with every respect to the judge below, that we do not agree that the outcome is so obviously inevitable that Ardara ought to be deprived of any opportunity at all of putting their case in court. We take the view, as the judge himself appears to have acknowledged later that the affidavits do arguably raise difficult questions of law and fact, some of them perhaps still not yet clearly formulated. It is well established that it is not desirable that questions of that kind should be decided upon affidavits alone.

16. This is in itself sufficient to show that this is not a suitable case for Order 14 procedure and we need not consider the interesting arguments that were addressed to us as to whether "there ought for some other reason to be a trial".

17. We therefore allow the appeal and give unconditional leave to defend. It is unnecessary then to deal with the application made, and deferred, at the commencement of this appeal, to amend the Notice of Appeal to include the question of stay of execution.