MAK KEE LTD. v. SAM WOO BORE PILE FOUNDATION LTD.

HCSA 4/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 4 OF 2002

(On appeal from Small Claims Tribunal Claim No. SCTC 10084 of 2001)

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J U D G M E N T

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1. This appeal arises out of a claim by the Claimant for a total sum of $34,131 under five invoices for goods and materials sold and supplied by the Claimant to the Defendant.

2. At the hearing below, a number of matters were raised by the Defendant. But for the purpose of this appeal, only one defence is relevant, namely, that the five invoices are covered by a full and final settlement between the parties.

3. It is common ground that the parties had an ongoing relationship for the supply of goods and materials. Invoices were issued by the Claimant, some were paid and some were outstanding; and there were some disputes relating to the quality of some of the materials delivered, whether there was any duplication of some of the invoices, and whether some of the goods delivered had since been retrieved by the Claimant so that no payment was due in relation to the retrieved goods.

4. In evidence before the Tribunal was a statement of account dated 17th April 2000 setting out the then outstanding invoices based on the Claimant's record, which was sent to the Defendant for payment purpose. The total amounted to $859,269. This was followed by another statement of account dated 3rd May 2000 which contained some revisions. The total was revised to $940,730. Amongst the invoices listed in the statement, one finds for the first time the appearance of one of the five invoices in question, MO6882 dated 12th April 2000. On 26th May 2000, a third statement of account was prepared by the Claimant and sent to the Defendant. Revisions were again made, and this time the total became $964,051. Besides MO6882, three other invoices comprising the subject claim of the Claimant, i.e. MO7029, MO7033 and MO7042 dated 9th May 2000, 10th May 2000 and 12th May 2000 respectively, also appeared in this statement.

5. This however was not the final document on the outstanding invoices. On 7th June 2000, 17th June 2000 and 21st June 2000, there were three further revised lists of outstanding invoices prepared by the Claimant and sent to the Defendant. Each list differed from the previous one in terms of the invoices said to be outstanding as well as the total outstanding amount. In relation to the outstanding amount, the three lists gave a total of $908,340, $937,197 and $880,997 respectively. But one common feature of the three lists was that none of the five subject invoices was included amongst the invoices said to be outstanding according to the lists. Along with the statements and lists, there were discussions between the parties relating to the outstanding invoices.

6. There is no real dispute that based on the last list, the Defendant prepared and sent to the Claimant a written "Confirmation" bearing a caption "Full and Final Settlement" on 8th July 2000 ("confirmation letter"), to deal with the outstanding indebtedness. It reads as follows:

"Confirmation

Dear Sir,

Re: Full and Final Settlement

We confirm that we are prepared to pay and you are prepared to accept a sum of HKD704,797.60 as full and final settlement of Invoices dated from 6th Dec 1999 to 2nd Mar 2000 (The total amount of the Invoices is HKD880,997.00 and Less 20% discount off).

..."

7. The terms of settlement offered in the confirmation letter were found to be acceptable by the Claimant. It was countersigned by the Claimant; and money was duly paid by the Defendant to the Claimant in accordance with the confirmation letter.

8. Subsequent to this, the Claimant commenced proceedings in the Small Claims Tribunal claiming payment of the five invoices in question, which as I said, were not included in the final list dated 21st June 2000 prepared by the Claimant.

9. At the Tribunal below, the Defendant argued that the claim was barred by the full and final settlement reached by the parties, which, so the Defendant argued, covered the five invoices.

10. There is no serious dispute that the reference in the confirmation letter to a full and final settlement of "Invoices dated from 6th Dec 1999 to 2nd Mar 2000" was intended to be a reference to the invoices contained in last list, the first of which was dated 6th December 1999 and the last 2nd March 2000. In fact, in this last list, there were included some invoices that were dated before 6th December 1999 as well as others dated after 2nd March 2000. Indeed the latest invoice included was dated 25th April 2000. The parties agree that all these invoices that were included in the list were fully and finally settled under the confirmation letter. What they do not agree on is whether any other invoices, including the five subject invoices in question, that were not included in the list, were covered in the full and final settlement.

11. At the Tribunal below, evidence was heard from the parties as to the relevant background as well as their respective understandings of the situation. In resolving the dispute, the learned Adjudicator gave two reasons for rejecting the Defendant's argument based on a full and final settlement. First, she applied the contra proferentem rule against the Defendant as the author of the confirmation letter, and resolved the ambiguity relating to the scope of settlement against the Defendant. Second, she said that based on the confirmation letter itself, the five subject invoices had not been included in the settlement agreement; and she made a finding accordingly. Because of that and because of other findings made by her that are not relevant to this appeal, judgment was entered in favour of the Claimant for the amount claimed.

12. In this appeal, the Defendant challenges both reasons as being errors of law. It argues that it was a wrong approach to adopt the contra proferentem rule to resolve the dispute over the scope of settlement. It also argues that it was wrong for the Tribunal to simply look at the confirmation letter itself to determine the true scope of settlement.

13. It is plain that the defence raised by the Defendant goes directly to the scope of settlement reached by the parties. Prima facie, this must be governed by the terms used by the parties when the settlement was reduced to writing. The confirmation letter must be looked at and construed to find out the invoices that have been settled. However, as I said, the confirmation letter clearly contains a mistake in that the identification of the invoices settled is misleading and incorrect. What ought to have been referred to in the confirmation letter was the final list issued by the Claimant on 21st June 2000 which contained the outstanding invoices. In my judgment, given this slip, it is not only permissible but also essential and correct for one to refer to the list to find out the actual scope of settlement.

14. But the Defendant goes further than that. It maintains in effect that from all the background circumstances of the parties' negotiations, including the various statements and lists, the last list was meant to be a final and exhaustive list up to the date of its issue, i.e. 21st June 2000. In other words, the list was meant to be a final and exhaustive list of everything up to 21st June 2000 that was still outstanding according to the Claimant at the time when the list was issued. By basing the compromise on that list, the parties fully and finally settled all outstanding invoices up to 21st June 2000, or more correctly, based on the same logic, up to the date of the confirmation letter, i.e. 8th July 2000.

15. In the present context of determining the true scope of settlement, is the Defendant entitled to run such an argument of a final and exhaustive list? Mr. Hui, counsel for the Claimant, conceded at the hearing that this can be done. Is that concession correct? What about the general rule that in construing a document, one should not look at the pre-contractual negotiations and pre-contract draft documents, or in short, the parol evidence rule?

16. In my judgment, the concession is correct. This can be looked at from different angles. First, there is a dispute or ambiguity relating to the scope of settlement. This concerns the subject matter of agreement between the parties. As such, this constitutes an exception to the parol evidence rule: Chitty on Contracts (28th ed.) Vol. 1 para. 12-121.

17. Second, there is an ambiguity relating to the confirmation letter's reference to invoices that are being settled. As explained above, one is driven to refer to the list to find out what are the invoices covered. But the list itself contains an ambiguity relating to whether it is meant to be an exhaustive list or not. For that reason, in my judgment, again one is entitled to turn to extrinsic evidence to resolve the ambiguity: C.f. Chitty at para. 12-115 et seq.

18. Third, there is authority under the law of compromise that whilst evidence of the parties' negotiations is normally inadmissible for the purpose of construing their agreement, it may be admissible to explain the meaning to be attached to an ambiguous word or expression; and along with other extrinsic evidence, to show the dispute which the parties, by the agreement, were endeavouring to resolve: Foskett, The Law and Practice of Compromise (5th ed.) para. 5-14 and footnote 20; Dattani v Trio Supermarkets Ltd. [1998] ICR 872, discussed in Foskett at para. 5-15, where the Court of Appeal took into account the object, language, context and background of an out-of-court compromise to determine the true scope of the compromise.

19. The relevant principles are conveniently summarized in Foskett at paras. 6-04, 6-07 and 6-08, which received the Court of Appeal's express approval in Dattani (at pp. 880F to 881H):

" Where a compromise is effected other than by a consent order or judgment, the court will have a variety of materials to examine: first and foremost, of course, will be the agreement itself, whether comprised in some formal document or merely the one or two letters which crystallised (or evidenced) the agreement. Indeed if the agreement was oral, the precise words used on the material occasion must be examined. However, the phraseology of the agreement may not always yield the answer to the question in hand. As observed previously, in the normal course of events the parties' negotiations are inadmissible as an aid to construction of an agreement. However, they are relevant and admissible to assist in resolving any ambiguity of phraseology in the agreement or to identify the disputes it was the common intention of the parties to resolve. It is axiomatic that the analysis of these materials is an objective one, the subjective intentions of each party being irrelevant. An objective analysis of the "factual matrix" that formed the background to the compromise is required to enable the disputes settled to be identified.

...

Not infrequently the analysis of the appropriate materials will disclose that the parties expressly or by necessary implication compromised certain matters of dispute but not others. In some cases it will be clear that certain matters were expressly or by implication not made part of the compromise. However, there may be cases where, on any objective view, the parties could and should have dealt with a particular matter but neglected to do so. To what extent will they be permitted by the court to litigate that matter on some future occasion?

It is submitted that there is, in principle, a distinction between a compromise of a dispute achieved before the commencement of proceedings and one achieved thereafter. In the former case (which will be governed solely by the law of contract), unless the court can imply a term that the particular matter was compromised, the agreement as construed must stand: the court will not re-write the parties' bargain. It may be quite possible for the agreement to be effective without the matter in question having been embraced within it."

20. This being the case, the Tribunal below was perfectly right in admitting evidence from the parties relating to the background negotiations and discussions between the parties which led to the preparation of the various statements and lists and eventually the signing of the confirmation letter. All this would have to be examined in order to find out the true scope of settlement between the parties.

21. But having heard such evidence, the Tribunal did not decide the dispute based on the evidence and material before it. Instead, the learned Adjudicator relied on the contra proferentem rule to reject the Defendant's case on the scope of settlement.

22. For my part, I accept that the contra proferentem rule has a role to play in the construction of agreements in general and the construction of compromise agreements in particular, despite certain doubts which have been cast upon it from time to time: See Lewison, The Interpretation of Contracts (2nd ed.) 168 to 174; Chitty at para. 12-081 et seq.; Foskett at paras. 5-34 & 5-35.

23. Expressed shortly, the rule, which is applicable to the resolution of an ambiguity in an agreement that cannot be resolved by other principles of construction, is that the ambiguity is resolved against the party responsible for putting it forward or benefiting from its inclusion in the agreement. But as emphasised by the textbook authors, this is usually a rule of late if not last resort. The rule can only come into play if the court finds itself unable to reach a sure conclusion on the construction of the provision in question; and the rule is not a factor which may be taken into account in reaching that conclusion. See St. Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No. 2) [1975] 1 WLR 468; The Olympic Brillance [1982] 2 Lloyds Rep 205; Macey v Qazi, The Independent, January 13, 1987, all discussed in Lewison at p. 170.

24. Moreover, as has been pointed out by Lewison at pp. 170 to 171, it is sometimes difficult to decide who the proferens is in any particular case. Sometimes the word "proferens" is used to mean the person who drafted the contract, and thus put it forward. Sometimes it is used to mean the person for whose benefit the particular term being construed was inserted. The learned author takes the view that there is little justification for the allocation of the label "proferens" merely on the basis of who drafted the contract for in most cases the drafting is either a matter of mutual endeavour, or in the case of a standard form contract, is the responsibility of neither party.

25. In the present case, there is no dispute that the confirmation letter was drafted by the Defendant. But in my judgment, this provides insufficient justification for allocating the risk of any ambiguity in the drafting to the Defendant. Whilst on the one hand the Defendant drafted the letter, on the other the Claimant signed it without making any alteration. In a sense, both parties were responsible for the resulting ambiguity in their agreement. If a party who drafts something should be careful with the words he uses, equally, so it seems to me, the party who chooses to sign something prepared by his counterpart should pay careful attention to the wording chosen by the other side before he writes his signature on the document.

26. The confirmation letter did not represent a one-sided bargain or contract. It represented a full and final settlement benefiting both parties. It was as important to the Claimant as to the Defendant. The mere fact that one party saw it fit to pick up a pen to reduce what had been orally agreed between the parties to writing for the other party's signature or, as the case may be, to write out an offer for the other side's acceptance cannot be sufficient justification for making that first-mentioned party responsible for any and every ambiguity arising from what he has written. Otherwise, the law would be punishing the diligent and encouraging passiveness. As I said to counsel during submission, if the law were as that suggested on behalf of the Claimant, no counsel in a court settlement situation would and indeed should volunteer to draft any consent order for the other side's agreement and signature, lest his client might be held responsible for any ambiguity in the consent order that might be subsequently discovered. That cannot possibly be correct, at least in the context of a compromise or settlement.

27. And in the context of a compromise or settlement, leaving aside very specific terms that were inserted clearly for the benefit or protection of one party only, generally the terms of compromise or settlement would be for the benefit of both parties either directly or indirectly, and it would be difficult to identify the proferens, meaning the person for whose benefit the particular term being construed was inserted. In that case, there is no scope for the application of the contra proferentem rule.

28. In the context of the present appeal, the scope of settlement is an important part of the settlement agreement. It is quite meaningless to say which party benefited from the inclusion of the term or terms in the settlement agreement defining the scope of settlement. It was in the interest of both parties that the scope was defined and defined well without ambiguity. I see little scope for the application of the contra proferentem rule in relation to such an ambiguity.

29. Everything I said above was said in the context of a settlement or compromise situation. It may not necessarily apply to other contexts or types of contract. Moreover, what I said was said in relation to an ambiguity about the scope of settlement. It may have no relevance at all to other types of ambiguity, such as an ambiguity relating to the scope of application of an exemption clause in a contract.

30. In short, in the context of the present case, I do not agree that the contra proferentem rule is applicable at all.

31. There is indeed a further reason for saying that the rule should not have been relied on in the way that it was relied on at the hearing below. As mentioned before, the rule has no application unless the ambiguity cannot be removed by other means. In other words, it is a rule of late if not last resort. As I said, faced with the type of ambiguity present in the instant case, what a court or tribunal should do is to examine the extrinsic evidence and the objective background circumstances to see if the ambiguity can be resolved.

32. Of course, one is not concerned with the subjective beliefs and interpretations of the parties. One's task is to find out the background circumstances leading to the settlement agreement, and then to see if one can conclude, on an objective basis, what was intended to be within or without the scope of settlement. See Foskett at para. 6-04 already extracted above; Investors Compensation Scheme Ltd. v West Bromwich Building Society [1998] 1 WLR 896, 912-913. It is only when the court or tribunal has done that, and has come to the conclusion that the ambiguity cannot be resolved that way, that the court or tribunal should pray in aid the contra proferentem rule, if the rule can be applied at all on the facts of the case.

33. Further, if after all this has been done and the true scope of settlement determined, it is found by the court or tribunal that, on any objective view, the parties could and should have dealt with a particular matter but neglected to do so, then where the settlement was achieved before the commencement of proceedings, the court or tribunal must go on to see if it can imply a term as a matter of contract law to the settlement agreement that the particular matter was compromised. If the answer is yes, the particular matter in question must be taken to have been settled and neither party may litigate that matter in any proceedings; but if the answer is no, the settlement agreement as construed must stand: the court or tribunal will not re-write the parties' bargain, and both parties are at liberty to litigate the matter. See Foskett at paras. 6-07 and 6-08 already extracted above. Of course, one might say that this is just another way of saying that in construing an agreement, one must not only focus on what has been written down as the terms of the agreement but also look out for any implied terms. But the way Foskett treats the subject does have the advantage of highlighting that the scope of settlement is not necessarily confined to that which is expressly set out in the settlement agreement and may, in some cases, embrace something else that is by implication included in the settlement as well.

34. The above course was not followed below. Although evidence of the relevant background circumstances was admitted at the hearing, there was apparently no attempt to resolve the ambiguity about the scope of settlement by reference to the extrinsic evidence. That being the case, the purported application of the contra proferentem rule, even if applicable on the facts, was premature. The further task of determining whether any term could be implied as a matter of contract law to the settlement agreement to cover the five subject invoices, assuming that as a matter of proper construction they were not covered under the settlement agreement, was not performed.

35. From what I have said above, it should also be clear that the Tribunal's task in the present case was not as simple as merely examining the wording of the confirmation letter itself to determine whether the five invoices were covered by the settlement, which, as I said, was the second reason given by the learned Adjudicator for rejecting the Defendant's argument. Given the ambiguity relating to the scope of settlement, by definition, the matter cannot be resolved by merely looking at the confirmation letter itself, but by examining as well the whole of the surrounding circumstances leading to the signing of the confirmation letter. And even then, the Tribunal would still have to consider the question of any implied term covering the settlement of the five subject invoices.

36. Neither party suggests that this Court can or should, on the material before it and the findings that have been made at the Tribunal below, resolve the outstanding matters identified in this judgment. I agree. For all these reasons, I agree that this appeal should be allowed to the extent that the award made below in favour of the Claimant should be set aside and the matter remitted to the Tribunal for further adjudication along the lines indicated in this judgment. Where necessary, further evidence should be taken and findings made relating to the relevant background. I would leave all this to the learned Adjudicator. I make an order accordingly.

37. As regards the costs of this appeal, the Claimant defended the award and resisted the appeal. It failed. Costs should follow the event. I make an order that the Claimant pay to the Defendant the costs of this appeal to be taxed if not agreed.