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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R U L I N G

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1. This is an action by Shell Hong Kong Limited 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 a Formal 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 products.

3. Clause 9.1 of 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.

4. On 9 August 1991, the 2nd defendant entered into a personal guarantee with the plaintiff to guarantee the credit of the 1st defendant up to a maximum of $300,000. It further provided that the plaintiff was at liberty to treat the 2nd defendant as though he were jointly and severally liable with the 1st defendant instead of merely a surety.

5. Then in 1997, the plaintiff set up a system of franchises for the operation of filling stations. On 21 August 1997, a Franchise Agreement came into being. The document named the Franchisee as the individual, i.e. the 2nd defendant, but it showed a business registration number which was almost the same as that of the 1st defendant. It also named the 2nd defendant as "Nominated Principal". The document was signed by the 2nd defendant and his fellow director in the place provided for company execution but it appears that the common seal of the 1st defendant was not affixed.

6. Later, there was a dispute between the parties. The plaintiff claimed that the 1st defendant failed to pay for the products supplied and franchise fees and purported to terminate the Franchise Agreement. Proceedings were issued against both defendants. The plaintiff claims, inter alia, against both defendants 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.

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 1 August 1991 made between the plaintiff and the 1st defendant was replaced by the Franchise Agreement dated 21 August 1997 made between the plaintiff and the 1st defendant, the 2nd defendant is and was still bound by the Personal Guarantee dated 9 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; and

(3) whether upon the construction of the Franchise Agreement, the 2nd defendant is liable under the Franchise Agreement.

Order 14A, rule 1 provides :

"The Court may upon the application of a party or of its own motion determine any question of law or construction of any document arising in any cause or matter at any stage of the proceedings where it appears to the Court that-

(a) such question is suitable for determination without a full trial of the action; and

(b) such determination will finally determine (subject only to any possible appeal) the entire cause or matter or any claim or issue therein."

8. By order of a master, the matter is before me only for consideration of the preliminary issue, as the master put it, "Can this matter be disposed of by way of Order 14A?" It is not for me to determine the actual questions of law or construction. That seems a little strange to me because in considering the preliminary issue, I have heard argument at least from the 2nd defendant on the substantive questions. But that is the position.

9. The plaintiff pleaded in paragraph 5 of the Amended Statement of Claim that the 2nd defendant was the "Franchisee" and the "Nominated Principal" under the Franchise Agreement and as such was liable as principal. In paragraph 6, it pleaded in the alternative that the 1st defendant was intended to be the Franchisee; that the Franchise Agreement should be rectified on the ground of common mistake; that the 1st defendant was liable under the Franchise Agreement and the 2nd defendant under the Personal Guarantee.

10. In paragraph 11(b) of the Defence and Counterclaim, the defendants pleaded that the Franchise Agreement formed a new agreement between the plaintiff and the 1st defendant, which expressly and/or impliedly replaced and/or rescinded the Operator Agreement which the parties no longer relied on. In paragraph 7 of its Reply and Defence to Counterclaim, the plaintiff specifically admitted paragraph 11(b).

11. The 2nd defendant, therefore, says that the plaintiff has elected to proceed on the basis of the alternative case that the 1st defendant is liable as principal and the 2nd defendant as guarantor. He relies on C.H. Pearce and Son v. Stonechester Ltd and Others, The Times, 17 November 1983 and cited at paragraph 18/7/18 of the Supreme Court Practice.

12. Counsel for the plaintiff argues, but without much conviction, that the plaintiff has not made this election. He says that evidence should be heard about the signing of the Franchise Agreement to explain why the 2nd defendant was named as the Franchisee and why he and his fellow director signed the Franchise Agreement.

13. The pleadings seem to me to be quite conclusive. The plaintiff, having admitted that the Franchise Agreement formed a new agreement between it and the 1st defendant, could not call evidence to show that that was not the case. It must be taken to have elected to proceed on the ground that the 1st defendant is the principal debtor and the 2nd defendant the guarantor.

14. The first and second questions for determination relate to the same issue, namely the liability of the 2nd defendant under the Personal Guarantee following the replacement of the Operator Agreement by the Franchise Agreement. The third question relates to the single issue of whether the 2nd defendant, as Nominated Principal, is liable with the 1st defendant under the Franchise Agreement.

15. Dealing with the question of liability under the Personal Guarantee, it is the 2nd defendant's case that the Personal Guarantee came into being pursuant to clause 9.1 of the Operator Agreement. It merely guaranteed the 1st defendant's liability under the Operator Agreement. Since the Franchise Agreement has superseded the Operator Agreement, the 2nd defendant says that the effect of this was to discharge the 2nd defendant under the Personal Guarantee. Whether it did or not is a pure question of law; its determination would settle the issue of the 2nd defendant's liability as guarantor; and it is therefore suitable for determination under Order 14A.

16. 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 factual matrix known to the parties.

17. The plaintiff's position is that the Personal Guarantee was not given in respect of the Operator Agreement only. It was expressed to be given in respect of credit for the supply of goods only, and not to guarantee the performance by the 1st defendant of any other obligations contained in the Operator Agreement. It was the continuation, by other means, of a long period of credit dealings between the plaintiff and the 2nd defendant. There are issues of fact surrounding the execution of the Personal Guarantee and its ambit which need to be determined on evidence heard at trial.

18. I have referred above to the gist of the relevant terms of the Personal Guarantee. Clause 9.1 of the Operator Agreement provides as follows :

"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."

On the face of it, the provision for termination ties the Personal Guarantee very closely to the Operator Agreement. I also note that while the Standard Terms and Conditions relating to the Franchise Agreement provide for the execution of personal guarantees by directors, where the franchisee is a corporation, there is in fact no fresh guarantee. There is no reference in the Franchise Agreement, or any other document, to the Personal Guarantee. These matters all go to the substantive question of whether there is any continuing liability, but that is not a matter for me to deal with in consideration of the preliminary issue.

19. The plaintiff itself pleads in paragraph 5 of the Reply and Defence to Counterclaim that :

"The Plaintiff avers that the terms of the Personal Guarantee cover all subsequent dealings between the Plaintiff and the 1st Defendant whereby any credit or part credit was extended......"

20. There are no averments of any agreement between the parties, written or oral, which might have extended the terms of the Personal Guarantee. On the basis of this pleading, the plaintiff is relying only on the terms of the Personal Guarantee.

21. It seems to me that the question of whether the 2nd defendant's liability under the Personal Guarantee continued after the replacement and/or rescission of the Operator Agreement by the Franchise Agreement is one which can only be decided on construction of the terms of the various documents. Evidence will not affect that. There are no averments on which evidence could be heard.

22. As to the question of the liability of the 2nd defendant under the Franchise Agreement, given my finding that the plaintiff has elected to proceed on the ground that the 1st defendant is the principal debtor and the 2nd defendant the guarantor, there can be no question of hearing evidence as to what the parties really intended when they executed the Franchise Agreement. What the Agreement means, and who is liable under it, is a pure matter of construction. The answer to the question of who is liable is to be found within the document itself. It can be determined without hearing evidence, i.e. without a full trial. Its determination will dispose of the issue of the 2nd defendant's liability under the Franchise Agreement one way or the other. Actually it seems to impose no liability on the Nominated Principal, but again that is not a matter for me.

23. The plaintiff argues that the use of Order 14A is a matter of discretion. The court should exercise its discretion in favour of letting the matter go to trial because that is the most expeditious way to deal with it, given that the case had already reached the Listing Judge before this summons could be dealt with. I do not think that is appropriate. Obviously, if the decision on the substantive Order 14A summons is in favour of the 2nd defendant, that will effectively take him out of the picture. This may be unfortunate from the plaintiff's point of view because it may not be able to recover anything from the 1st defendant which is a limited company, and no doubt a mere shell; which was why there was a Personal Guarantee in the first place. But it will certainly narrow down the issues to be dealt with at trial and therefore the cost of the trial.

24. The three questions set out in the summons are suitable for determination without a full trial of the action and will finally determine (subject only to any possible appeal) the issues of the liability of the 2nd defendant under the Personal Guarantee of the Franchise Agreement. They are suitable for determination under Order 14A.

25. The summons will be adjourned to a date to be fixed for further hearing under Order 14A with costs reserved.