XCHRX SHELL HONG KONG LTD. v. YEUNG WAI MAN KIU YIP CO. LTD. AND ANOTHER

HCA318/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.318 OF 1999

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J U D G M E N T

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1. This is an action by Shell Hong Kong Ltd against the 1st defendant which is one of its franchisee filling station operators, and the 2nd defendant who is one of the 1st defendant's directors, and, in effect, the 1st defendant's alter ego.

2. The 2nd defendant for many years operated a filling station at Boundary Street / Tung Choi Street in Kowloon, and sold petroleum and chemical products supplied by the plaintiff. In about 1991, the plaintiff required all its dealers to enter into an Operator Agreement to govern their contractual relationship. The 2nd defendant established the 1st defendant and on 1 August 1991, the plaintiff and the 1st defendant entered into an Operator Agreement whereby the 1st defendant was appointed to sell the plaintiff's automotive products. The Operator Agreement was for a period of five years.

3. The Operator Agreement provided that the operator might be required to furnish security to Shell in respect of part or all of any credit period granted to the operator. On 9 August 1991, the 2nd defendant entered into a Personal Guarantee. Its terms are set out below.

4. The Operator Agreement expired on 31 July 1996. No fresh contract was made until 1997 when the plaintiff set up a new system of franchises for the operation of filling stations. On 21 August 1997, a Franchise Agreement came into being. The 1st defendant became the Franchisee and the 2nd defendant was named as "Nominated Principal".

5. Later, there was a dispute between the parties. The plaintiff claimed that the 1st defendant failed to pay fees due under the Franchise Agreement and terminated it. Proceedings were issued against both defendants. The plaintiff claimed, inter alia, injunctive relief against both defendants to remove them from the filling station and for payment of outstanding fees of $909,083.50 and damages, or alternatively against the 1st defendant for the same; and against the 2nd defendant under the Personal Guarantee.

6. The plaintiff is now proceeding under the Franchise Agreement against the 1st defendant only. It does not now claim, though it did originally, that the 2nd defendant is directly liable thereunder. It now only claims against the 2nd defendant as being liable under the Personal Guarantee in respect of that part of its claim which arises from the supply of goods. The figure of $909,083.50 is expressed as being for outstanding fees. Under the Franchise Agreement, various fees such as Franchise Premium, Operating Licence Fees, Franchise Fee and Advertising and Promotion Fee were all payable monthly. How much of the total figure relates to the supply of goods has not been particularised.

7. The 2nd defendant has applied for the determination of the following questions of law or construction under Order 14A, rule 1 of the Rules of the High Court :

"(1) Whether after the Operator Agreement dated 1st August 1991 made between the plaintiff and the 1st defendant was replaced by the Franchise Agreement dated 21st August 1997 made between the Plaintiff and the 1st defendant the 2nd defendant is and was still bound by the Personal Guarantee dated 9th August 1991 made between the plaintiff and the 2nd defendant;

(2) Further and/or alternative to paragraph 1 above, whether upon the Operator Agreement being replaced by the Franchise Agreement, the 2nd defendant was discharged from liability under the Personal Guarantee."

A third question relating to the 2nd defendant's liability under the Franchise Agreement does not now require determination.

8. On the pleadings, the parties agreed that the Franchise Agreement expressly and/or impliedly replaced and/or rescinded the Operator Agreement. The plaintiff sought to amend its Reply and Defence to Counterclaim so as to plead that the Franchise Agreement impliedly replaced by variation the Operator Agreement but this was abandoned in the course of the hearing of the application. The plaintiff was however allowed to amend so as to plead that notwithstanding the rescission of the Operator Agreement the Personal Guarantee remained in effect in that the 2nd defendant consented or by his conduct led the plaintiff to believe that he consented to the Personal Guarantee remaining applicable to the 1st defendant's liabilities under the Franchise Agreement, and is therefore estopped from denying the same.

9. The conduct concerned was the 2nd defendant's having taken part in the execution of the Franchise Agreement :

"... when he knew or ought to have known that his personal guarantee was expressly required under the terms of the Franchise Agreement, and/or that but for the continuation of the Personal Guarantee for the performance under the Franchise Agreement the plaintiff would not have entered into or agreed to continue to supply goods under the Franchise Agreement to the 1st defendant ..."

This involves no new question of fact, and simply goes to the legal question whether or not the 2nd defendant remains liable under the Personal Guarantee for that part of the 1st defendant's debt which relates to the supply of goods.

10. The Personal Guarantee provides :

"IN CONSIDERATION of your having at my request agreed to supply goods on credit or part credit basis to Yeung Wai Man Kiu Yip Co. Ltd.... 'the said Buyer' I HEREBY AGREE with you as follows:-

1. To be answerable and responsible to you for the due payment by the said buyer for all goods as you may from time to time supply to the said Buyer and in the event of the said Buyer failing to pay any amount due to you following a demand in writing by you to the said Buyer, I will pay the amount due to you by the said Buyer notwithstanding I shall not have any notice of any neglect or omission on the part of the Buyer to pay for such goods according to the terms agreed on by you and the Buyer, and it will not be necessary for you to join the name of the said Buyer in any proceedings which you may take against pursuant to this agreement.

2. That this Agreement shall be a continuing guarantee to you for all debts whatsoever and whensoever contracted by the said Buyer subject to the limitation that my liability under this guarantee shall not at any one time exceed the sum of HK$300,000.00 (Hong Kong Dollars Three Hundred Thousand Only).

3. That you are to be at liberty without notice to me at any time and without in any way discharging me from my liability hereunder to grant time and indulgence to the said Buyer and to accept payment from the said Buyer in cash or by means of negotiable instruments and to treat me in all respects as though I were jointly and severally liable with the said Buyer to you instead of being merely surety for the said Buyer.

4. Any demand hereunder shall be deemed to have been sufficiently given if sent by registered post to the Buyer's address in Hong Kong and such demand shall be assumed to have reached the addressee in the normal course of post."

11. Looked at on its own, this is a personal guarantee by the 2nd defendant of the 1st defendant's indebtedness to the plaintiff for all goods which the plaintiff might from time to time supply. There is no restriction as to the type of goods and there is no time limit. There is certainly no reference to any other agreement. The guarantor promises simply to guarantee payment by the 1st defendant for goods which the plaintiff may sell to it in the future. It is a guarantee to pay the price of goods sold.

12. The 2nd defendant's position is that the Personal Guarantee was entered into in order to guarantee the 1st defendant's debts under the Operator Agreement and under that agreement alone. The parties had just entered into the Operator Agreement and they could not have contemplated any other contractual arrangements under which the 1st defendant might become liable to the plaintiff. The Operator Agreement provided that the plaintiff could require security; and the Personal Guarantee is the security it required. The Personal Guarantee being a guarantee of liability under the Operator Agreement is discharged by the rescission thereof. The plaintiff's position is that the Personal Guarantee was a continuing guarantee intended to cover all transactions (at any rate for the supply of goods) between the plaintiff and the 1st defendant, whether under the Operator Agreement or otherwise.

13. It is necessary to try to establish what the intentions of the parties were. The 2nd defendant relies on Prenn v. Simmonds [1971] 1 WLR 1381 for authority that : in construing a written agreement evidence of negotiations or of the parties' intentions ought not to be received by the court. The court only needs to look at the objective matrix of fact known to the parties.

14. The plaintiff refers to the passage by Lord Hoffmann in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896 at 912 which sets out in greater detail the principles of interpretation to be applied. I do not think it necessary to reproduce the passage here. Suffice it that the emphasis is now on business commonsense; and where detailed analysis produces an interpretation which goes against business commonsense, it is business commonsense which must prevail. One must, however, still start with the words of the agreement itself.

15. The Operator Agreement commences with a recital which includes :

"WHEREAS Shell desires to appoint the Operator to sell Shell's automotive products (hereinafter referred to as 'Shell Products') at the Station and to operate the Station, and

WHEREAS the Operator desires to accept such appointment."

16. Clause 1 makes the appointment and Clause 2 provides for the duration thereof. Clause 3 provides for exclusivity of the products to be sold in that all Shell Products to be sold at the filling station are to purchased directly from Shell. In particular, Clause 3.2 provides :

"The Operator shall not use sell purchase or offer for sale nor exhibit display or advertise at the Station any petroleum product or non-petroleum product not supplied or authorised by Shell."

17. Clause 4 provides that Shell may fix both the wholesale and the retail prices of the Shell Products and the Operator undertakes to sell at the fixed retail prices.

18. Clause 6 provides that title to, and risk of loss or damage to Shell products shall pass to the Operator on delivery. Specifically, in respect of those products which are to be kept in tanks, title and risk pass on their entering the piping installation at the Station; and in respect of other Shell products title and risk pass on their being unloaded from the delivery vehicle.

19. As to payment, Clause 10.1, which contains the Operator's undertakings, contains the following provision that the Operator will :

"(iv) promptly pay or remit to Shell without any deduction or set-off all moneys payable by him to Shell in the manner and time as specify (sic) by Shell from time to time; ..."

As to credit, Clause 14.5 provides :

"Shell shall have the right to grant to the Operator a credit period for payment of Shell Products delivered, but Shell may in its absolute discretion and at any time vary the terms of any such credit period granted. Shell shall be entitled to terminate this Agreement summarily if the Operator fails to adhere to such variation."

As to security, Clause 9.1 provides :

"... the Operator may be required to furnish security to Shell in respect of part or all of any credit period granted to the Operator. The amount of security may be varied by Shell by giving at least one month's written notice to the Operator and the Operator shall procure and furnish such security to Shell within the notice period, failing which Shell shall be entitled to terminate this Agreement without further notice."

20. There are many other provisions relating to the appointment of the Operator as licensee and to his duties as such and as operator of the filling station. It is not necessary to refer to these. The clauses referred to are those which relate directly or indirectly to the supply of goods. It will be seen from these clauses that what is in contemplation is that the plaintiff will sell and the 1st defendant will purchase the plaintiff's automotive products, of which title will pass on delivery. There is nothing to suggest that the 1st defendant will purchase from the plaintiff anything other than automotive products although is not ruled out; see Clause 3.2, above.

21. It will also be seen that the 1st defendant is to pay for the products as the plaintiff requires, save that the plaintiff may allow credit. This is discretionary on the plaintiff's part as is the requirement by the plaintiff of security for such credit but non-adherence on the 1st defendant's part to the credit or the security arrangement entitles the plaintiff to terminate the agreement summarily.

22. I note at this point that although the Operator Agreement provides that the Operator is to purchase Shell products from Shell, there is no provision for any actual sale. There is an agreement that the plaintiff will in future sell goods and that the 1st defendant will buy them. There are agreements that the purchaser will pay on demand and that that the seller may give credit. There is an agreement as to when title to the goods sold will pass. That is all.

23. Section 3 of the Sale of Goods Ordinance, Cap.26 provides :

"(1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. There may be a contract of sale between one part owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale; but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred."

24. In the Operator Agreement, there is no specification of the goods, the price of them, or the date of delivery. There is not even an agreement for a continuing supply of so many litres of fuel per month. Presumably, there would be a new contract of sale of goods every time the 1st defendant bought a consignment of products. That is what happened under the Franchise Agreement; Clause 20(d) of the Standard Terms and Conditions so provides.

25. The 2nd defendant's argument is that the natural and ordinary meaning of the two documents, read together is that the Personal Guarantee is only intended to guarantee the 1st defendant's liability for debts for the supply of goods on credit under the Operator Agreement. The parties could not have contemplated that the plaintiff would give credit to the 1st defendant other than pursuant to the contractual relationship between them under the Operator Agreement.

26. The plaintiff says that the Personal Guarantee goes much further. It bears on the face of it to be a continuing guarantee for all debts whatsoever and whensoever contracted for the supply of goods. The plaintiff had been dealing with the 2nd defendant's father, and the 2nd defendant himself, since 1937. The plaintiff must have trusted the latter because there had been a long course of dealing on a credit basis. The Personal Guarantee only came into being because the 2nd defendant wanted to substitute the 1st defendant for himself, in a continuing relationship between himself and the plaintiff. The plaintiff could not trust the 1st defendant; it was an empty shell. Business commonsense would require the 2nd defendant to guarantee the 1st defendant's performance. This would not necessarily just be its performance under the Operator Agreement but that under any later agreement which might come into being.

27. I think one must start with the clear words of the Personal Guarantee which on its face is not tied to any other contract. It is a standard form of guarantee that any supplier of goods might require. The guarantor simply guarantees the price of goods sold to the principal by one or many contracts for the sale of goods. The Operator Agreement is not on my analysis a contract for the sale of goods. At best, it sets out in advance some terms which will be common to intended contracts for the sale of goods but there is nothing in it whereby one party agrees to sell and the other to buy any goods.

28. It follows that we have all been missing the point, which is that the Personal Guarantee was never intended to guarantee the 1st defendant's performance of part of the Operator Agreement but was rather intended to guarantee its performance of a series of sales contemplated by the Operator Agreement. Therefore, the continuation of the Operator Agreement or its replacement by the Franchise Agreement is irrelevant. So long as the plaintiff sells goods to the 1st defendant, the 2nd defendant guarantees payment for them, up to the agreed limit. The Personal Guarantee must necessarily continue to bind the 2nd defendant even after the replacement of the Operator Agreement by the Franchise Agreement, because it never guaranteed the performance of any part of that contract in the first place.

29. Counsel for the plaintiff referred to the principle that where the principal and creditor without the guarantor's consent agree to alter the nature of the principal obligation the guarantor is discharged. Holme v. Brunskill (1878) 3 QBD 495. There is an exception to this rule, where the guarantor consents to the variation or where he knows of it and is taken to have consented. Counsel relies on various cases in support of this, the latest being Credit Suisse v. Borough Council of Allerdale [1995] l Lloyd's Rep.255.

30. I do not see that it is necessary to consider this point because on my analysis, there is no question of the Operator Agreement being a principal contract whose performance was guaranteed by the Personal Guarantee and therefore no question can arise of the variation of the principal contract serving to discharge the guarantor.

31. I do not think it necessary to consider the estoppel point either, because it follows from my analysis that since the Personal Guarantee was never intended to guarantee performance of the Operator Agreement, it matters not whether the 2nd defendant by his conduct led the plaintiff to believe that he consented to the Personal Guarantee remaining applicable. It always was applicable to the actual sale contracts.

32. However, if I am wrong and it is necessary to consider this point, the following is relevant. Clause 43(d) of the Standard Terms and Conditions attached to the Franchise Agreement provides :

"The Franchisee agrees to provide such security (whether in the form of cash payments or otherwise) to Shell with respect to the Franchisee's obligations under the Agreement as Shell may from time to time require (in each case not later than one month after any request for such security is made by Shell)."

Clause 48 further provides :

"(b) If the Franchisee is a corporation......the Franchisee will ensure that each of the Directors of the corporation executes a personal guarantee in a from acceptable to Shell......"

33. It is argued for the plaintiff that the fact that it did not require further security indicates that it understood that the existing Personal Guarantee was still in force. The fact that the 2nd defendant, as director of the Franchisee, did not comply with the Franchisee's duty to execute a personal guarantee indicates that he also understood this.

34. It seems to me that this must be right. The parties' actions indicate that they did indeed both consider that the Personal Guarantee was still subsisting. If it is not necessary to consider this point as it relates to the rather abstruse variation argument, it is relevant to the newly pleaded estoppel point. The 2nd defendant must, by his conduct, have led the plaintiff to believe that he consented to the Personal Guarantee remaining applicable and so, if estoppel is needed, would be estopped now from denying its applicability.

35. For all these reasons, I find that :

(1) After the Operator Agreement was replaced by the Franchise Agreement, the 2nd defendant is and was still bound by the Personal Guarantee; and

(2) Upon the Operator Agreement being replaced by the Franchise Agreement, the 2nd defendant was not discharged from liability under the Personal Guarantee.

36. Costs of the 2nd defendant's summons dated 25 October 2000 including costs reserved by order of Master Kwan dated 13 November 2000 and by my order that 27 December 2000 be nisi to the plaintiff in any event.