BOND SPEED LTD v. GOODWELL SAM CHEONG GROCERY CO LTD

HCA 382/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 382 OF 2006

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J U D G M E N T

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Introduction

1.  The plaintiff commenced this action in February 2006 alleging the defendant breached the sole distribution agreement dated 1 September 2003 (“the Agreement”) by operating its own retail business.  The defendant denies the claim.  There is also a counterclaim for the Agreement to be rectified.

2.  It is common ground the dispute depends on how the court construes the true meaning of the relevant terms of the Agreement.  In particular, whether the Agreement has conferred on the plaintiff (as against the defendant) the exclusive right to “retail and direct sale”, or merely “retail by direct sale”.

Background

3.  Although both parties are limited companies, the individuals behind them are in fact blood-related.

4.  The defendant was set up by Mr Lui Chun Cheung (“Lui senior”) (and others) in 1977.  Its main business has been the sale of foodstuff and edible oil.  Most of its customers are airlines, bakeries, hotels, restaurants, fast food chain stores, suppliers of vessel provisions and foodstuff retailers.

5.  Mr WK Lui (“WK Lui”) is Lui senior’s elder son while Mr HK Lui (“HK Lui”) is the younger son.  Madam Lee is WK Lui’s wife.

6.  At the time of trial, Lui senior and HK Lui are the individuals behind the defendant.  Madam Lee is the individual behind the plaintiff.  On record, WK Lui was the director of both companies until:-

(a)     July 2004 when he ceased to be the plaintiff’s director;

(b)    September 2006 when he ceased to be the defendant’s director.

7.  Quite a few of the events leading to this action are undisputed.

8.  The avian influenza saga has prompted the defendant’s management in 2003 to the idea of launching a line of imported health products in Hong Kong.

9.  Madam Lee has worked in the real property and insurance businesses in the 1970’s to 1990’s.  After discussion among the defendant’s directors in early 2003, the defendant agreed that Madam Lee would develop and promote the sale of the said products.  Without going into details about the negotiation, this later led to the execution of the Agreement.

10.  The plaintiff was set up in 1987 and has engaged in various businesses.  Madam Lee decided to use it to carry out the business venture.

11.  The defendant’s board of directors has resolved to locate and rent one or two small shop spaces for use as a showroom and retail shop of health products.  The following reports to the board of directors were referred to at trial:-

(1)     the board meeting held on 24 March 2003:-

“… 公司初步計劃在未來數月內會安排梁君協助及尋找適合地點須有遊客，白領工人及菲傭集中地，開設一至兩間小型店舖作為陳列室兼售賣公司直接入口貨品”;

(2)     the board meeting held on 21 July 2003:-

“… 上次會議上曾提到由梁君協助尋找適合之陳列兼售賣健康食品店舖 … 鑑於爆發非典型肺炎疫潮的影響，須要謹慎選擇地點 … 現在公司是仍然會繼續去找尋”;

(3)     the board meeting held on 3 November 2003:-

“至於在較早前曾到將會開辦公司健康貨品品牌陳列及售賣店鋪，因‘沙士’影響而延遲計劃，現經濟環境好轉及已找到適合地點，並正與業主洽談中”.

The first two board meetings were held before the execution of the Agreement and the third was held afterwards.  WK Lui was present at all 3 meetings.

12.  The defendant commenced to operate a retail shop in about June 2004.

13.  There were several drafts before the Agreement was executed.  The first draft, prepared by HK Lui, was in Chinese.  The wording used in the Chinese draft was:-

“直銷(零售)總分銷商(不包括餐飲業)”.

After it was shown to the plaintiff, the parties agreed to send it to the plaintiff’s solicitors to have it translated into English and for more formal language to be used.  The wording used by the plaintiff’s solicitors for clause 1 was:-

“Sole Distributor (Retail and Direct Sale)”.

The latter draft was then sent to the defendant’s solicitors for approval.  The above wording was changed to:-

“Sole Distributor in Hong Kong in relation to direct sale (retail)”.

Relevant Terms of the Agreement

14.  Naturally, each party understands the meaning of the terms differently.  The relevant ones are quoted below for convenience (all emphases are supplied).

“Recital 3:-

“[The defendant] hereby agrees to appoint [the plaintiff] as its Sole Distributor in Hong Kong in relation to direct sale (retail) of the Products”.

Clause 1:-

“[The defendant] hereby appoints [the plaintiff] as its Sole Distributor in Hong Kong in relation to direct sale (retail) of the Products and [the plaintiff] agrees to act in that capacity to sell the Products and to promote the Products in Hong Kong … For the avoidance of doubt the parties agree that such appointment shall not preclude [the defendant] from the wholesale and distribution of the Product to its existing customers including the catering industry”.

Clause 4:-

“During the continuance of this Agreement, [the plaintiff] shall not whether for its own account or through any subsidiary company, … sell or otherwise deal with any goods of the same or similar nature or type as the Products or any goods which in the opinion of [the defendant] otherwise compete with the Products in Hong Kong without obtaining the prior written consent from [the defendant]”.

Clause 5:-

“If during the continuance of this Agreement, [the plaintiff] gives up its right to sell any items of the Products, [the defendant] shall have the right to appoint another distributor to sell [those] items of goods for [the defendant]”.

Clause 6:-

“The parties agree that when [the defendant] imports a new product from the Italian manufacturer(s) and/or the Exporter into Hong Kong after the signing of this Agreement, if the Italian [manufacturer(s) and/or the Exporter have directly or indirectly appointed another distributor in Hong Kong to sell that new product for the Italian manufacturer, the Exporter or [the defendant], [the plaintiff] shall have no right to sell that new product nor to make any claim against [the defendant] in respect of this new product”.

Clause 10:-

“[The plaintiff] acknowledges and confirms that it has no proprietary rights whatsoever in the trademarks and copyright in the Products and accordingly [the plaintiff] shall under no circumstances copy or otherwise deal with the trademarks, save and except for the sole purpose of advertising the Products for sale in Hong Kong and selling the same during the continuance of this Agreement””.

15.  The phrase “the Products” is defined as:-

“橄欖油，葡萄籽油，醋類產品，穀類食品及其他可作零售之健康食品”.

Relevant Matrix of Facts

16.  The proper approach in construing the true meaning of contractual terms has been stated in two authorities: Investors Compensation Scheme Ltd. v. West Bromwich Building Society and Others [1998] 1 WLR 896 and Jumbo King Ltd. v. Faithful Properties Ltd. and Others (1999) 2 HKCFAR 279.

17.  The House of Lords said in Investors Compensation Scheme:-

“The principles may be summarised as follows:

(1)     Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)     The background was famously referred to by Lord Wilberforce as the ‘matrix of fact,’ but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)     The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4)     The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd. [1977] A.C. 749.

(5)     The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. [1985] 1 A.C. 191, 201:  ‘if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.’ (emphasis supplied) (p. 912).

18.  The Hong Kong Court of Final Appeal said in Jumbo King:-

“The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it was concluded and the practical objects which it was intended to achieve. … [The contracting parties’] language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. … Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain” (emphasis supplied) (para. 59).

19.  The relevant “matrix of facts” is largely undisputed:-

(a)     the Agreement was shown to and revised by legally-trained draftsmen;

(b)    the individuals behind the parties are mature and experienced in commercial transactions of various kind.

But several matters are disputed:-

(1)     whether WK Lui informed Madam Lee of the defendant’s intention to start operating a retail shop to sell (in effect) the Products;

(2)     whether the defendant’s own sale of the Products has been profitable;

(3)     whether the defendant has been running a substantial retail business (concurrent with its main line of business) even before the execution of the Agreement.

20.  As regards para. 19(1) above, WK Lui testified to the effect he never told Madam Lee about the defendant’s decision to locate and rent a shop space for the retail of health products (though he admits telling her about a shop space for use as a showroom).  He explained he never discussed the defendant’s business with her.

21.  I do not believe this part of his testimony (nor do I believe Madam Lee’s testimony to similar effect).  His explanation may be credible if the relationship between the couple had been purely marital and not business-related.  But in this action, Madam Lee has already been negotiating for a direct sale distributorship with the defendant (and at least at one stage, WK Lui was admittedly involved).  The possibility of the defendant also entering the retail market must be a matter of importance to the plaintiff’s (then) business plan of direct sale of the Products.

22.  Secondly, I agree with the defendant WK Lui’s knowledge should be imputed to the plaintiff for two reasons:-

(a)     he was at the material time one of the plaintiff’s directors (albeit a “nominal” director, according to Madam Lee’s testimony);

(b)    more importantly, the plaintiff’s pleading expressly avers that he was the plaintiff’s agent in discussing with the defendant in mid-2003 to launch a sale campaign in Hong Kong for marketing products which became the Products: para. 5, amended statement of claim (he retracted from such position in his witness statement and claimed therein his role was consultative and advisory only).

23.  As regards 19(2) and (3) above, I find that there is at best insufficient and ambiguous evidence, although I am inclined to think the defendant’s retail business at around the time of the Agreement was minimal.  But this has to be balanced against the defendant’s intention to expand into that area (as shown in the reports to the board of directors quoted in para. 11 above).

Construing the Relevant Terms

24.  The plaintiff expressly admits that the dictionary meaning of the phrase “direct sale (retail)” is in the defence favour: para. 33, plaintiff’s written closing submissions.  It appears to be common ground the dictionary meaning of this phrase is a sale to purchasers directly without going through conventional retail outlets.  The dictionary meaning is sometimes taken to be the ordinary and natural meaning.  There is no basis to think the two meanings should differ in this instance.

25.  For the reasons summarized (and discussed) below, the plaintiff argues, however, that the dictionary meaning is not the true meaning of this phrase.

26.  First, it is argued “direct sale” already connotes a sale to the consumers; in other words, it already means retail sale (but without involving retail outlets).  The addition of the word “retail” therefore shows that the parties intended to expand the scope of activities to also cover other modes of retail, including conventional retail sales.

27.  I disagree.  As the defendant points out, its main line of business has been wholesale.  If the phrase had merely been “direct sale”, there could be doubt as regards whether wholesale activities are also prohibited.  The last sentence in clause 1 of the Agreement (which avoids any doubt as regards the defendant’s right to carry on wholesale and distributorship businesses) shows that the defendant took pains to make sure its main line of business will not be affected by the Agreement.

28.  Secondly, it is argued that the defendant is attempting to re-write the Agreement when it contends the phrase “direct sale” is qualified by adding to it “(retail)” at the end.  I do not consider this to be an attempt to re-write.  On the contrary, adding “(retail)” to “direct sale” is intended to put it beyond doubt that the direct sale in question should not cover anything other than retail.

29.  Thirdly, it is argued the last sentence of clause 1 (which avoids any doubt as the defendant’s business rights) is a “reservation of rights” provision.  Its effect is to confer on the defendant the only types of business which it is entitled to carry on, namely, wholesale and distributorship.  By reason of the matters set out in para. 27 and 28 above, I also disagree with this argument.

30.  Fourthly, it is argued the use of the words “to sell”, “sale” and “selling” in clauses 4 to 7 and 10 (the dictionary meaning of which is selling activities in general) shows the parties intended the plaintiff’s scope of activities to be retail without restriction.  As the defendant correctly points out, if such an argument (based on these generic terms) is taken to its logical extreme, even wholesale sales can be included.  However, the Agreement should be read in its entirety in order to ascertain the true meaning of these terms.  I conclude these terms are only intended to be a short-hand reference to “direct sale (retail)” which phrase appears in recital 3 and clause 1 (quoted above).

31.  Fifthly, it was at one stage argued that the dictionary meaning of “direct sale (retail)” would render the Agreement unworkable.  The plaintiff correctly retracts that argument and contends that the dictionary meaning will render the Agreement commercially less attractive to it.  But as has been pointed out in Jumbo King (see para. 18 above), this is not a factor which the court should consider.

32.  I do not find anything in the matrix of facts (under the heading “Relevant Matrix of Facts”) to affect the dictionary meaning.  Rather, the matrix of facts shows that the parties were mature and experienced business people who have had ample opportunity to consider their respective positions.  They knew about the solemnity of a commercial contract and were sufficiently careful to engage lawyers to draft the Agreement.  There is therefore good reason to give effect to their intention as shown by the language of the Agreement.

Quantum of Loss

33.  Having concluded in the defendant’s favour as regards the construction of the terms in the Agreement, it is strictly unnecessary to deal with this aspect.  I shall do so for completeness.

34.  In brief, I agree with the defendant the evidence adduced is far from adequate.  There is thus no need to consider if the lack of particulars of loss in the plaintiff’s pleading should constitute a bar to the plaintiff’s claim.

Conclusion

35.  The plaintiff’s claim is dismissed.

36.  By reason of the matters set out in para. 38 below, no order is made on the counterclaim.

Other Matters

37.  The plaintiff’s claim was also based on an alleged collateral agreement.  At the beginning of trial, the plaintiff indicated that it would not pursue this part of its case.  It follows the evidence adduced at trial was not intended for such purpose.

38.  The defendant invites the court not to consider its counterclaim for the rectification of the Agreement if the plaintiff’s claim is dismissed.

Costs Order

39.  The parties agree costs should follow the event.  There will accordingly be a costs order that the costs of this action (including any reserved costs) be paid by the plaintiff to the defendant to be taxed if not agreed.

40.  The plaintiff has at one stage wished to adduce expert evidence on the quantum of loss.  This was later abandoned.  For the avoidance of doubt, I agree with the defendant any costs incurred by it for considering the plaintiff’s expert evidence should be included as the costs of this action.

41.  Although senior counsel’s court attendance has greatly assisted the court, this has to be balanced against factors including the nature of the issues raised in this action, the likely quantum of loss and the seniority and experience of junior counsel for the defence.  At the end, I do not find this action to justify court attendance by 2 counsel.