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

CACV 3749/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 3749 OF 2001

(ON APPEAL FROM HCA NO. 318 OF 1999)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a decision of Deputy Judge Muttrie given on 19 September 2001. The major reason for the apparent delay in the hearing of this appeal is that the appeal was originally heard before two judges. Following that, on appeal to the Court of Final Appeal it was held that the appeal to this Court constituted a Final Appeal and the decision of the two judge court was set aside for that reason. At the conclusion of the hearing of this appeal, this court dismissed the appeal with costs to the plaintiff save insofar as they had been increased by the inclusion of the claim that the 2nd defendant was directly liable under the franchise agreement dated 21 August 1997 ("the franchise agreement"), which is the subject of the action. Reasons were to be given in writing, which we now do.

Background

2. In this action the plaintiff claims against the 1st defendant for breach of the franchise agreement. That agreement related to a petrol filling station at Boundary Street/Tung Choi Street Kowloon. The breaches include the non-payment of fees under the franchise agreement. The claim against the 2nd defendant is based on a personal guarantee executed on 9 August 1991. It is a claim for any sums found due from the 1st defendant in respect of goods supplied by the plaintiff.

3. The 2nd defendant is a director and, it would seem, the leading light of the 1st defendant. The 2nd defendant, and previously his father, had for many years operated the same petrol filling station. After the 1st defendant had been incorporated it entered into an operator agreement, dated 1 August 1991, with the plaintiff ("the operator agreement"). Under that agreement the 1st defendant was appointed to sell the plaintiff's automotive products. The operator agreement was for a period of 5 years. It expired on 31 July 1996.

4. As already referred to, the 2nd defendant gave the plaintiff a personal guarantee dated 9 August 1991 ("the personal guarantee"). There is no dispute that, under the terms of the operator agreement, such a guarantee could be required. For present purposes it is taken that the guarantee was given as part and parcel of the implementation of the operator agreement. The material terms of the guarantee are as follows:

"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 me 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."

5. After the operator agreement expired no new contract was made until 1997. The plaintiff then set up a new system of franchises for the filling stations. On 21 August 1997, the franchise agreement came into being. The 1st defendant became the franchisee and the 2nd defendant was named as "Nominated Principal".

6. 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. Amongst other relief, the plaintiff claimed injunctions against both defendants to remove them from the filling station and payment of outstanding fees of $909,083.50 and damages. The plaintiff claimed against the 2nd defendant under the personal guarantee.

7. The plaintiff has since abandoned any claim against the 2nd defendant under the franchise agreement and is pursuing that claim against the 1st defendant only. It now only claims against the 2nd defendant 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 fees and advertising and promotion fees were all payable monthly. How much of the total figure relates to the supply of goods has not been particularised.

8. The 2nd defendant 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."

9. The 2nd defendant's point has been throughout that the personal guarantee was executed by him in favour of the plaintiff for the purpose of the operator agreement only. It is said that the terms of the franchise agreement were substantially different from those of the operator agreement. Specifically, it is said that the transactions under the franchise agreement did not constitute sales on credit. That argument was based primarily on the existence of clauses in the standard terms and conditions relating to the franchise agreement, which provided that the legal and equitable title to the petrol and other relevant products did not pass to the franchisee until payment had been made. Thus, it is said, that the terms of the guarantee did not cover any liability incurred by the 1st defendant under the franchise agreement.

10. The judge below came to the clear conclusion that the questions raised under Order 14A should be answered in the affirmative. His conclusion was summarised in paragraph 28 of his judgment where he said:

"...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."

11. On appeal to the two judge court, it was held that the resolution of the question as to whether the personal guarantee covered the liabilities of the 1st defendant under the franchise agreement was dependent upon the evidence. The appeal to the Court of Final Appeal, of course, related to procedural matters and did not involve a consideration, apart from a consideration of the history of the case, of the issues on this appeal.

12. In my view the issues in this case lie in a narrow compass and are not dependent upon any further evidence. Looking at the wording of the guarantee and the question that falls to be considered, the first point that must be made is that the franchise agreement nowhere suggests that the personal guarantee given by the 2nd defendant has been discharged. The question then has to be determined as to whether, in the terms of the guarantee, there has been supply to the 1st defendant of goods on credit or part credit basis. If there has been such supply, the 2nd defendant is "answerable and responsible to the plaintiff for the due payment by the 1st defendant for all goods as the plaintiff may from time to time and supply..."

13. It appears to me that a consideration of the franchise agreement can leave no doubt that there has been a supply of goods to the 1st defendant. Clause 10 of the franchise agreement is headed "Exclusive Purchase and Delivery Shortages". It required the 1st defendant to purchase all the petrol and petroleum products which were to be used at or resold at the filling station from the plaintiff. Clause 11 of the franchise agreement is even more specific. That was headed "Purchase and Sale Price". That provided that the plaintiff would sell petrol and other petroleum products to the 1st defendant at prices which would be notified by the plaintiff to the 1st defendant from time to time the 1st defendant was required to sell those products at the prices which the plaintiff would notify.

14. The Standard Terms and Conditions, which were Annex B to the franchise agreement, were even more specific. Clause 17 was headed "Sale and Purchase Requirements". That commenced in subclause (a) with the words "Shell agrees, subject to availability, to sell the Franchisee at the Premises and the Franchisee agrees so to purchase from Shell all quantities of the Products which are required for the purpose of conducting the Subject Business..." The payment terms are dealt with in clause 26 which provides that the 1st defendant would pay for "Motor Fuels" immediately upon delivery and for other "Petroleum Products" within 30 days.

15. It is in that context, therefore, of a contract which provides for sale and purchase of motor fuel where the payment terms are that payment should be made immediately upon delivery, and other petroleum products, where the payment terms are that payment should be made within 30 days of delivery, that clause 21 of the franchise agreement should be read. That clause is headed "Reservation of Title and Passing of Risk". The relevant parts of that clause reads as follows:

"21. RESERVATION OF TITLE AND PASSING OF RISK

	(a)	The Franchisee agrees that legal and equitable title to and interest of the Products (or any of them) shall only pass to the Franchisee when the Franchisee has paid Shell the full purchase price thereof together with any other sums that may be due to Shell under or in connection therewith.
	(b)	Until payment in full is made by the Franchisee, the Franchisee shall hold the Products only as bailee and trustee for Shell and accordingly if the Franchisee sells the Products before payment in full to Shell has been made, the Franchisee shall hold any proceeds of sale upon trust for Shell without prejudice to Shell's rights to claim any damages or loss of profits from the Franchisee.
	(c)	In the event that the Franchisee shall at any time mix Products for which Shell has not been paid with Products for which Shell has been paid, then Shell shall have the right to seize and retake possession of any and all Products in the possession of the Franchisee which, in the opinion of Shell, are approximately equivalent to the quantity of the Products in respect of which Shell has not been paid, and such part of the quantity so seized or repossessed by Shell as the Franchisee shall have title to shall be deemed to have been exchanged between Shell and the Franchise for the Products in respect of which Shell has not been paid and to belong to Shell and shall be held on trust for Shell with effect from the date of such mixing."

16. That clause does not in any way, prevent the supply of petrol and other petroleum products to the filling station being a supply of goods to the 1st defendant. Nor does it prevent the supply being on credit. In my view, it is indisputable that there was a supply of goods. That supply was on the basis of either immediate payment for the goods, in respect of what was probably the bulk, or on the basis of 30 days credit. In either situation there was an obligation on the 1st defendant to make payment. I see no basis for saying that the 2nd defendant was no longer bound by the guarantee signed on 9 August 1991, nor that he had been discharged from liability by reason of the execution of the franchise agreement. For these reasons I considered that the appeal fell to be dismissed.

Hon Le Pichon JA:

17. I agree.

Hon Yeung JA:

18. I agree entirely with the reasons of Rogers VP. I have nothing to add.