BOND SPEED LTD v. GOODWELL SAM CHEONG GROCERY CO LTD

CACV 90/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 90 OF 2010

(ON APPEAL FROM HCA NO. 382 OF 2006)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Yeung JA:

1.  I agree with judgment of Kwan JA and have nothing to add.

Hon Yuen JA:

2.  I have had the benefit of reading Kwan JA's judgment and I agree with it.

Hon Kwan JA:

3.  This appeal concerns the construction of a distribution agreement (“the Agreement”) between the parties dated 1 September 2003 in relation to certain health products imported from Italy. Chung J dismissed the plaintiff’s claim. The defendant’s counterclaim for rectification was dismissed as the defendant had asked the court not to consider its counterclaim if its construction of the Agreement was upheld. We have dismissed the appeal with costs to the defendant but declined to give a certificate for two counsel. These are the reasons for judgment.

The background

4.  The relevant background matters, taken largely from the judgment handed down on 26 March 2010, may be stated as follows.

5.  The defendant, Goodwell Sam Cheong Grocery Co. Limited, was set up in 1977 by Lui Chun Cheung (“Lui Senior”) and others in 1977. Its main business has been the sale of foodstuff and edible oil and most of its customers are airlines, bakeries, hotels, restaurants, fast food chain stores, suppliers of vessel provisions and foodstuff retailers.

6.  The plaintiff, Bond Speed Limited, was set up in 1987 and had engaged in various businesses prior to the Agreement. It was operated largely by Lee Man Kuen Anita, who is married to Lui Wai Kiu Alan (“W K Lui”), the elder son of Lui Senior. W K Lui was a director of the plaintiff until July 2004 and a director of the defendant until September 2006.

7.  In 2003, when Hong Kong was going through the SARS crisis, the idea of marketing certain food products imported from Italy as health products in Hong Kong was discussed by various individuals including W K Lui, Madam Lee, Lui Senior, Lui Ho Kiu (the younger son of Lui Senior and another director of the defendant), and Leung Ka Wing Ken (the marketing executive of the defendant). The outcome of the discussions was that the defendant agreed to engage Madam Lee to develop and promote the sale of these products and Madam Lee decided to use the plaintiff to enter into the Agreement with the defendant.

8.  In June 2004, the defendant commenced to operate a retail shop to sell the products. The plaintiff claimed this was in breach of the Agreement.

The Agreement

9.  It is not necessary to refer to the successive drafts in Chinese and English prepared by the parties and their solicitors, as negotiations and previous drafts are not admissible in aid of construction of the Agreement and are admissible only for the claim of rectification, which was dismissed (Jumbo King Ltd. v. Faithful Properties Ltd. (1999) 2 HKCFAR 279 at 296H; Chartbrook Ltd. v. Persimmon Homes Ltd. [2009] 1 AC 1101 at paras. 40 to 42).

10.  The material words in the Agreement to be construed are “Sole Distributor in Hong Kong in relation to direct sale (retail) of the Products”, which appeared in clause 3 of the recitals and clauses 1 and 2 of the Agreement. These provisions in which the relevant words appeared read as follows:

“[The defendant] hereby agrees to appoint [the plaintiff] as its Sole Distributor in Hong Kong in relation to direct sale (retail) of the Products.” [the recitals, clause 3]

“[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 defendant] subject to the terms and conditions of this Agreement. For the avoidance of doubt the parties agree that such appointment shall not preclude [the defendant] from the wholesale and distribution of the Product [sic] to its existing customers including the catering industry.” [the Agreement, clause 1]

“The appointment of [the plaintiff] as the Sole Distributor in relation to direct sale (retail) of the Products in Hong Kong shall become effective and shall be deemed for all purposes to have become effective from 1^st September 2003 for an initial period of five (5) years subject to Clause 12 below.” [the Agreement, clause 2]

The contentions before the Judge

11.  It was the plaintiff’s contention in the court below that by the words “direct sale (retail) of the Products”, the Agreement has conferred on the plaintiff the exclusive right to undertake retail sales in general of the products to the public at large with particular emphasis on direct sales and what the defendant is not precluded from doing is wholesale and distribution of the products to its existing customers including the catering industry. It was argued on behalf of the plaintiff that the words “direct sale (retail) of the Products” should mean “direct sale and retail of the Products”, and that by the addition of the word “(retail)” after “direct sale”, the intention was to expand the scope of rights conferred on the plaintiff to include retail sales in general.

12.  On behalf of the defendant, it was submitted that the words “direct sale (retail) of the Products” should mean “retail by direct sale”, that the word “(retail)” was to qualify, not to expand the scope of, the words “direct sale”, and that the plaintiff was not granted sole distributorship rights for general retail sales to the public at large under the Agreement.

13.  In the court below, the defendant submitted that the common understanding of the words “direct sale” is selling products direct to customers away from a fixed retail location, citing from the definition of “direct selling” or “direct sales” in various dictionaries (Wikipedia, www.internetmarketingdefinitions.com, www.yourdictionary.com, and The Financial Times Lexicon). The plaintiff took no issue with this meaning. Its counsel submitted that “direct sale” is a form of retail sale, and, as mentioned earlier, the reference to “(retail)” after the words “direct sale” was to expand the scope of rights to include retail sales in general. The defendant argued to the contrary that the sole distributorship rights conferred on the plaintiff covered only retail business which qualifies as “direct sale” as commonly understood.

The judgment

14.   Chung J rejected the plaintiff’s contentions. Having directed himself on the relevant principles in construing the true meaning of contractual terms in Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896 at 912H to 913E and in Jumbo King Ltd., supra. at 296D to I, he referred to the undisputed matrix of facts being that (a) the Agreement was shown to and revised by legally trained draftsmen; and (b) the individuals behind the parties are mature and experienced in commercial transactions of various kind.  

15.  In addition, the Judge made a finding of fact that prior to the Agreement, W K Lui had informed his wife Madam Lee of the defendant’s intention to start operating a retail shop to sell health products. This finding was made on two grounds.

16.  Firstly, the Judge rejected the testimony to the contrary of W K Lui and Madam Lee. He took into account that Madam Lee had been negotiating for a direct sale relationship with the defendant, that W K Lui was admittedly involved at one stage at least, and that the possibility of the defendant also entering the retail market must be a matter of importance to the plaintiff’s business plan at that time of direct sale of the products. Secondly, he accepted the defendant’s submission that the knowledge of W K Lui should be imputed to the plaintiff for two reasons, namely that W K Lui was one of the plaintiff’s directors at the material time albeit a nominal director according to Madam Lee, but more importantly, it was averred in the plaintiff’s pleading that W K Lui was its agent in discussing with Lui Senior and other directors of the defendant in mid 2003 to launch a sales campaign in Hong Kong for marketing products which became the products covered by the Agreement, even though this averment was retracted in his witness statement claiming that his role was consultative and advisory only.

17.  The Judge accepted the common ground of the parties that the dictionary meaning of “direct sale” is a sale to purchasers directly without going through conventional retail outlets. He took the dictionary meaning to be the ordinary and natural meaning, there being no basis to think that the two meanings should differ in this instance. He considered and rejected the arguments advanced by the plaintiff that the dictionary meaning is not the true meaning here for the reasons given in paragraphs 26 to 32 of the judgment. In summary, he held that 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, that the last sentence in clause 1 is not a “reservation of rights” provision but its effect is to avoid any doubt as regards the defendant’s right to undertake wholesale and distributorship businesses of the products to its existing customers, and there is nothing in the matrix of facts to affect the dictionary meaning of “direct sale (retail)”.

The arguments on appeal

18.  Mr Leo Remedios, who appeared on appeal for the plaintiff but not below, took two main points. Firstly, he argued that the Judge was in error in holding that the knowledge of W K Lui of the defendant’s intention to start operating a retail shop to sell the products should be imputed to the plaintiff, as W K Lui was not under a duty to communicate the information he had acquired as a director of the defendant to the plaintiff, nor was he under a duty to the plaintiff to receive such information, citing among other cases In re Hampshire Land Company [1896] 2 Ch 743 at 748. Secondly, he took a somewhat different approach to the dictionary meaning of “direct sale”. Citing from other dictionaries, he submitted that these words could mean selling to a customer without going through a dealer or middleman and that the proper meaning of the words “direct sale (retail)” in the Agreement would include “all types of retail sale”.

19.  Mr Patrick Fung, SC and Mr Bernard Man with him adopted their submissions for the defendant in the court below.

20.  I propose to deal with the first main point of Mr Remedios shortly. The Judge’s finding that the plaintiff had known before the execution of the Agreement of the defendant’s intention to operate a retail shop to sell the products was not just a matter of imputing knowledge to the plaintiff on the basis of the common directorship of W K Lui in the two companies or that W K Lui was the plaintiff’s agent in the context of the formation or execution of the contract. The Judge is entitled to and did disbelieve the evidence of W K Lui and Madam Lee that the husband did not tell the wife about the defendant’s plans to set up a retail outlet for health products. As pointed out by the defendant’s counsel, there is ample evidence to support the Judge’s finding. W K Lui had known of the defendant’s plans to locate and rent one or two small shop spaces for use as a showroom and retail shop of health products, which was discussed in two board meetings of the defendant attended by him prior to the Agreement. Contrary to his repeated assertions he did not discuss the defendant’s affairs with his wife, he admitted he had told her clearly that the defendant had no intention to lay a finger in the pie of retail markets. There is no or no sufficient basis to challenge the finding of fact made by the Judge. It is not necessary to deal with the elaborate arguments of Mr Remedios on imputation of knowledge in his supplemental submissions.

The proper construction of the Agreement

21.  This leaves the point on the construction of the relevant words in the Agreement.

22.  Mr Remedios referred to the meanings of “direct selling” in other dictionaries (Black’s Law Dictionary (Deluxe 9^th edition) and Merriam-Webster Dictionary) and submitted that the definitions in these other dictionaries, which were not cited to the Judge, would have such a wide meaning (selling products directly to a customer otherwise than through a middleman or agent or distributor) that the words “direct sale (retail)” in the Agreement should be construed to mean as including all types of retail sale. This is different from the argument advanced by the plaintiff in the court below that direct sale is a form of retail sale and that the proper construction of the words “direct sale (retail)” in the Agreement should be “direct sale and retail” of the products.

23.  If the words “direct sale (retail)” in the Agreement were to have the construction contended for by Mr Remedios as including all types of retail sale, this would give no meaning to the term of “direct sale” in the phrase. This would go against the principle of construction that in construing a contract, all parts of it must be given effect where possible, and no part of it should be treated as inoperative or surplus (The Interpretation of Contracts by Lewison, 4^th edition, para. 7.03).

24.  I see nothing to impugn the reasoning of the Judge in paragraphs 26 to 32 of the judgment that adding “(retail)” to “direct sale” is intended to make clear that the direct sale to be handled by the plaintiff should not cover anything other than retail, and that the defendant’s right to undertake wholesale and distributorship businesses of the products to its existing customers including the catering industry would not be affected. In other words, the relevant phrase “direct sale (retail)” should be construed to mean “retail by direct sale”.

25.  I agree also with the defendant’s submission that the relevant factual matrix found by the Judge (that prior to the Agreement the defendant had intended to set up a retail outlet) would militate strongly against the construction that the plaintiff would have the exclusive right to undertake retail sales in general. 

26.  As for the arguments of Mr Remedios based on various dictionary meanings of “direct”, “sale”, “sell” and “retail”, I do not think the meanings of these separate words would assist in the construction of the relevant phrase.

27.  The authority cited by Mr Remedios on the true meaning of “sole distributor” (Distribution Ltd. v Amann & Sohne GmbH & Co. KG, HCA 1459/2006, Sakhrani J, 30 April 2009) likewise does not assist. The distribution agreement in that case was very different, so was the factual matrix.

28.  As the plaintiff has failed to establish any breach of contract, there is no need to consider the submissions made to us whether the plaintiff is entitled to an account of profits as a remedy for breach.

29.  For the above reasons, the plaintiff’s appeal is dismissed with costs to the defendant.