UNIVERSAL SOLUTIONS LTD v. CHRISTOPHER GORDON YOUNG

CACV 201/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 201 OF 2011

(ON APPEAL FROM HCA NO. 1517 OF 2010)

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REASONS FOR JUDGMENT

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Hon Tang VP:

Background

1.  In the background to these proceedings is a product, which is said to provide "A semi-permanent Anti-Graffiti barrier from which graffiti could be removed with soap and water" and the intellectual property rights associated with such products (the rights).  The rights were vested in Universal Scientific Solutions Ltd ("USSL").

2.  By an agreement made on 26 January 2007 ("the Jan 2007 SPA"), the Defendant Mr Young agreed to purchase 10,000 shares out of a total issued shares of 10,527 shares in USSL from the Plaintiff, Universal Solutions Limited ("USL").  The purchase was paid for by Mr Young transferring to USL 78,653 shares in USL valued at Australian Dollar (AUD) 1 million.

3.  In Schedule 3 of the Jan 2007 SPA was a draft "Master Licensing Agreement" ("MLA") between USSL and USIL UK PLC (a wholly owned subsidiary of USL), under which USSL would grant an exclusive licence to USIL UK PLC:

"… to market and distribute The Products in the UK and Europe on the terms and conditions set out in this Agreement".

4.  By the Jan 2007 SPA USL agreed "to cause USIL UK PLC" to execute the MLA and Mr Young agreed "to cause USSL to execute" the MLA. 

5.  It is Mr Young's case that he acquired a controlling interest in USSL because it owned the rights and that the successful exploitation of the rights depended on the carrying out of the MLA. The acquisition of USSL has not been a success.  Why that was so is complicated and can be gathered from Mr Young's Draft Defence and Counterclaim ("draft defence") and a Draft Statement of Claim in an intended action by Mr Young (as 1^st Plaintiff) and USSL (as the 2^nd Plaintiff) against USL (as 1^st Defendant), USL's parent company Hydrotech International Limited ("HIL") (as the 2^nd Defendant), Ian George Dallas ("Dallas"), the managing director of USL and HIL until 30 June 2008 (as 3^rd Defendant), and Philip John Scott Gray, a director and chairman of HIL from 29 April 2008 (as 4^th Defendant).

Loan

6.  Under the Jan 2007 SPA, USL also agreed to lend AUD 250,000 "either in a single lump sum or by instalments" (Clause 1.4) to Mr Young against which Mr Young would transfer 19,635 shares in USL "as security for The Loan for a period of 36 months or until such time as the Loan is discharged".  AUD 70,000 was advanced to Mr Young on 7 March 2007.

7.  Mr Young agreed under the Jan 2007 SPA:

"2.6  to repay the loan referred to at Recital D herein within 36 months from the date of commencement of this Agreement if the loan is paid to The Vendor as a single lump sum.  In the event that the loan is paid by installments, each installment shall be repayable within 36 months of the date of payment of each installment.  The term of repayment may be extended at the request of The Purchaser and at the option of The Vendor on such terms as may subsequently be agreed between the parties by way of variation."

8.  Recital D of the Jan 2007 SPA is important and it read:

"D.  The Vendor will advance to The Purchaser by way of a loan the sum of Two Hundred and Fifty Thousand Australian Dollars (AUD250,000) at no interest ('The Loan') repayable from profits accruing to The Purchaser from sales achieved by The Vendor's wholly owned subsidiary USIL UK PLC under the terms of the Licensing Agreement in Schedule 3 hereto.  The Loan shall be secured by the assignment to The Vendor of 19,635 of The Purchaser's shares in The Vendor."

9.  It is not disputed that under the Jan 2007 SPA the loan was only repayable "from profits" and there had been no profit.

This Action

10.  In this action, USL sued Mr Young for repayment of a loan of USD250,000.  The claim is brought under a loan agreement of 9 August 2007 ("the Aug 2007 Loan Agreement")[1].

11.  On 22 September 2011, Deputy Judge L Chan gave summary judgment in favour of USL.  We have allowed the appeal and granted Mr Young unconditional leave to defend.  In fairness to the learned Deputy Judge, I must point out that the submission upon which we allowed the appeal had not been properly developed or raised before the learned Deputy Judge. 

12.  According to Mr Young and it does not seem to be disputed:

"42.  On 23^rd July 2007 Dallas telephoned (Mr Young) asserting that the Loan Agreement did not conform with Australian law, maintaining that it was not permissible for security for the loan to comprise the shares belonging to (Mr Young) in (USL) which by then had been exchanged for shares in HIL and that alternative security would have to be substituted."[2]

13.  It is also not controversial that in November 2006, HIL was incorporated in Australia "with the sole purpose of acquiring (USL) together with USIL UK and 3 other subsidiaries and applying for a listing on ASX"[3], or that HIL was listed on ASX on 16 July 2007[4].

14.  Mr Young said he was told by Mr Ian Dallas that unless he agreed to the substitution of security, it would "not be possible to pay the balance due under the loan"[5] to him.  And that he agreed because he was in great need of money.  Mr Christopher Gordon, a partner in Robertsons was instructed to prepare the amended documentation for Mr Young and USL to execute.  According to Mr Young, since there was perceived to be nothing contentious about the amended loan documents, he agreed that there was no reason why he should instruct separate solicitors.

15.  Eventually, the Aug 2007 Loan Agreement was made between USL as Lender, and Mr Young as Borrower, and USSL as Guarantor.  At the same time there were a guarantee, a share mortgage, and a debenture.  These three documents, with the Aug 2007 Loan Agreement, were defined in the latter as "the New Transaction Documents".  The debenture was made by USSL in favour of USL.  The guarantee was by USSL to USL to guarantee the obligation of Mr Young under the Aug 2007 Loan Agreement, and the deed of mortgage was by Mr Young whereby the 10,000 shares in USSL were pledged as security to USL, presumably replacing the 10,527 shares in USSL under the Jan 2007 SPA.

16.  Under "Background" in the Aug 2007 Loan Agreement, it was stated:

"A.  By an agreement reached between the Lender and the Borrower in or about January 2007 which was evidenced in writing by an unexecuted Agreement for the Sale and Purchase of Shares and an Assignment of Shares as Security for a Personal Loan signed by the Borrower and dated 25^th January 2007 (the 'Assignment') the Parties agreed to enter into a transaction between them (the 'Transaction') which contemplated (inter alia) the following:-

(i)  the Lender would sell to the Borrower 10,000 shares (the 'Sale Shares') of the then total issued share capital of 10,527 shares in the Guarantor;

(ii)  the Borrower would pay to the Lender one million Australian dollars (AUD1,000,000) in consideration for the Sale Shares to be satisfied by the transfer by the Borrower to the Lender of 78,653 shares in the Lender (the 'USL Shares');

(iii)  the Lender would make an interest-free loan to the Borrower of the sum of AUD250,000 to be secured by the Assignment in respect of 19,635 shares in the Lender owned by the Borrower;

(iv)  the Sales Shares would be transferred by the Borrower to the Lender upon receipt by the Borrower of the Loan or the first instalment thereof."

B. The Sale Shares were transferred to the Borrower on 7^th March 2007 and the Borrower was paid the first instalment of the Loan of AUD70,000 on 7^th March 2007 at which time the USL Shares were also transferred from the Borrower to the Lender.

C. The Parties have agreed to restate and amend the terms of the Transaction by entering into this Loan Agreement and the New Transaction Documents."

17.  By the Aug 2007 Loan Agreement, USL agreed

"2.1  … to continue to make available to the Borrower upon the terms and subject to the conditions of this Agreement, a loan facility in an aggregate principal amount of Australian Dollars Two Hundred And Fifty Thousand Only (AUD250,000) of which AUD70,000 has already been advanced on 7^th March 2007 …"

and that

"2.2  The Balance shall be made by a single advance of AUD180,000 which shall be drawn on the date of, or as soon as reasonably possible after, execution of the New Transaction Documents by all parties thereto …"

18.  Under Clauses 4.1 and 4.2 of the Aug 2007 Loan Agreement Mr Young agreed to repay the loan on the repayment date unless an event of default had occurred earlier, failing which interest at 14% per annum would be payable.

19.  Clause 13.5 of the Aug 2007 Loan Agreement is important and it provided:

"13.5    The New Transaction Documents supercede any previous agreements between the parties in relation to the Transaction and the matters with which they deal and represent the entire understanding between the parties in relation to those matters.  Save as set out in the New Transaction Document the parties release and forever discharge each other from any and all claims arising from any agreement, fact, matter or circumstance whatsoever occurring prior to the date of this Agreement."

20.  Much of the argument at first instance revolved around the last sentence of Clause 13.5, which was called "the Addition" in the judgment.  Mr Young claimed that when he signed the Aug 2007 Loan Agreement he was not aware that it contained the Addition.  That defence was rejected by the learned Deputy Judge.  We do not have to deal with the Addition. On appeal, counsel have agreed that nothing turned on the Addition.

21.  It will be recalled that under the Jan 2007 SPA, the loan of AUD250,000 was only repayable out of profits.  The Aug 2007 Loan Agreement did not say so expressly.  However, it was not the Plaintiff's case that there was an express or specific agreement between it and Mr Young that repayment should no longer depend on the availability of profit.  The Plaintiff relied on the first sentence of Clause 13.5[6].  Mr Nigel Kat (who appeared for the Plaintiff here and below) submitted that on the proper construction of Clause 13.5, the Jan 2007 SPA had been superseded and with it any agreement that the loan was only repayable out of profits.

22.  Mr Kat correctly submitted that Clause 13.5 should be construed in its factual matrix.  He reminded us of the oft-cited observations of Lightman J in Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd's LR 611 at 614 which explained the purpose of an entire agreement clause.  Mr Kat also relied on AXA Sun Life Services plc v Campbell Martin Ltd & Ors [2011] 1 CLC 312, where the English Court of Appeal was concerned an entire agreement clause, Clause 24, in the following terms:

"This Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof. Without prejudice to any variation as provided in clause 1.1, this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement but this will not affect any obligations in any such prior agreement which are expressed to continue after termination."

23.  The English Court of Appeal held that Clause 24 did not exclude or supersede misrepresentations as to matters that were not the subject of the terms of the agreement, because it was not sufficiently clear for that purpose.  Nor did it exclude implied terms which were intrinsic to the agreement.  The agreement might have included, but did not include, an express specific exclusion of such implied term.  However, it did exclude collateral warranties. 

24.  AXA shows quite clearly that the effect of any such provision is a matter of construction.  Rix LJ said, after examining various authorities containing such provisions,

"94.  … No doubt all such cases are only authority for each clause’s particular wording: …"

25.  Under the Jan 2007 SPA, Mr Young's personal liability to repay the loan depended on the availability of profits.  The issue here is whether Clause 13.5 would preclude Mr Young from contending that his liability to repay under the Aug 2007 Loan Agreement also depended on the availability of profits.  The answer depends on the construction of Clause 13.5 in its factual matrix.  It is difficult to decide on an application for summary judgment what constitutes the factual matrix against which Clause 13.5 should be construed.  I will not go into any detail, I say only that the background facts are unclear and will require careful unravelling at trial.

26.  The parties do not dispute that under the Jan 2007 SPA, the loan would only be repayable from profits accruing to Mr Young.  That was recorded in Recital D.  However, that was not expressly made a term of the Jan 2007 SPA. 

27.  Para 2.6 of the Jan 2007 SPA, on its own contained an unconditional obligation on the part of Mr Young to repay the loan. However, Recital D stated that the loan was

"… repayable from profits accruing to The Purchaser …".

28.  It is not clear what was the basis of this aspect of Recital D.  Also, the reference to profits accruing to Mr Young "from sales achieved by … USIL UK PLC under the terms of the Licensing Agreement in Schedule 3 hereto" is puzzling, since such profits would accrue to USSL.  Nor is it clear what Mr Young's personal liability would be if he were to sell the share in USSL, so that no profit would "accrue" to him.  Nor is the position clear if such profits were insufficient to pay the loan.

29.  Mr Robin McLeish (counsel for Mr Young on appeal) also relied on a possible claim for rectification of Clause 13.5.  He submitted Mr Young's case showed that he had no reason to agree to give up the protection of Recital D, he never intended to do so, and if Clause 13.5, properly construed, had the effect contended for by USL, Mr Young was entitled to rectification.  Nor was there any consideration to Mr Young for giving up the protection of Recital D. The only consideration suggested on behalf of USL is that in respect of the first loan of AUD 70,000 made on 7 March 2007, it would be repayable 6 months later than as provided for under the Jan 2007 SPA.  Hardly, an inducement to Mr Young to give up the protection of Recital D.

30.  I believe rectification is arguable.

31.  Mr McLeish submitted that there is yet another twist to the story.  It appears that in late August of 2007, Mr Young was asked by Dallas on an urgent basis to sign various documents because otherwise HIL's shares would be suspended from trading.  These documents included a new version of the Jan 2007 SPA which, provided, inter alia, that Mr Young should be liable for the payment of stamp duty payable on the SPA, whereas the Jan 2007 SPA provided that they should be paid by USL.  Mr Young has called this "the Purported Contract" in the draft defence. 

32.  On 10 December 2008, a statutory demand was served on Mr Young relying on the Purported Contract and alleged that Mr Young owed USL the sum of HK$124,355 in respect of stamp duty and penalties.  On 24 December 2008, Mr Young applied to the High Court to set aside the statutory demand and stay the bankruptcy proceedings which proceedings had been stayed since.

33.  The Plaintiff has not explained why it felt able in late August 2007 after the signing of the Aug 2007 Loan Agreement which had supposedly suspended the Jan 2007 SPA to procure Mr Young to sign the Purported Contract, and to rely on it to make a statutory demand.

34.  Mr Kat submitted that although such conduct on the part of the USL might be inconsistent with Clause 13.5 of the Aug 2007 Loan Agreement, it is inadmissible as an aid to the construction of Clause 13.5.  He referred us to Marble Holdings Ltd v Yatin Development Ltd (2008) 11 HKCFAR 222, where Mortimer NPJ said in the judgment (which had the agreement of the other members of the court) that "Also, post-agreement conduct and statements of the parties are not generally relevant" to the interpretation of contracts.

35.  Even so, such conduct on the part of USL confirms my view that this is not a suitable case for summary judgment.  The matrix of facts is unclear, indeed "murky".

36.  For the above reasons, Mr Young was given unconditional leave to defend, and his appeal allowed.

37.  As I have said, the arguments before the learned Deputy Judge proceeded on different lines.  On those arguments, the learned Deputy Judge had properly held that there was no triable issue.  That being the case, although I have allowed the appeal and given the Defendant unconditional leave of defend, I would make a costs order nisi that the costs of the application before the learned Deputy Judge should be in the cause of the action.  So far as the costs of the appeal are concerned, I would make an order nisi that they should be the Defendant's costs in the cause.

Hon Kwan JA:

38.  I agree with the Reasons for Judgment of the Vice-President.

Hon Fok JA:

39.  I agree with the Reasons for Judgment of Tang VP and the costs orders he proposes.