HBS MARKETING LTD. v. APPLIED ELECTRONICS (OEM) LTD. AND ANOTHER

IN THE COURT OF APPEAL

1994, No. 77
(Civil)

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J U D G M E N T

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Nazareth, J.A. (giving the judgment of the Court):

1. This is an appeal against the Order made by Mayo J made on 29th April 1994, whereby he ordered that the plaintiff's amended statement of claim be struck out and the action dismissed.

2. The matter arose in the following way. By its statement of claim filed on 15th November 1993 and amended on 18th January 1994, the plaintiff (HBS Marketing) claimed that "by agreement evidenced and/or incorporated in writing in a letter of appointment dated 1st June 1992, the 1st defendant agreed to appoint one Harold Sandler trading as HBS Properties to solicit OEM [original equipment manufacturing] and other business customers for the 1st defendant". It averred that it was inter alia a term of the agreement that the 1st defendant would pay HBS Properties commission at the rate of 3% for sales, HK$25,000 to HBS properties per month as advance payment against future commissions; a further HK$25,000 to HBS Properties per month as non-refundable expenses and also, to use the precise words of the pleading that:

"(f) HBS Properties shall be entitled to an option ("Option") to purchase a total of 1.5 million shares of Applied stock at HK$0.80 per share or the closing price at 1st June 1992, such Option shall be exercised in accordance with the following agreed formula:-

Exercise Date

On/after May.1993	500,000 shares
On/after May.1994	500,000 shares
On/after May.1995	500,000 shares."

By paragraph 4 of statement of claim it pleaded that it was a further term of the agreement that the plaintiff, HBS Marketing when established, would act in place of HBS Properties and have all the benefits under the agreement. The relief claimed against the 1st defendant was specific performance of the agreement, further or in the alternative damages in lieu or in addition to specific performance, and other relief. Certain relief was also claimed against the 2nd defendant who was the 1st defendant's managing director.

3. By their defence filed on 1st February 1994, the defendants averred that the plaintiffs' claims fell entirely within the jurisdiction of the Labour Tribunal and that the High Court accordingly had no jurisdiction; it also denied or did not admit virtually all the plaintiff's averments.

4. More specifically, it did not admit the agreement pleaded by the plaintiff, it denied that such contract or any other contract was made, contained in or to be inferred from the document dated 1st June 1992, or that a contract in such terms or any other contract was concluded between the parties. It responded to the averment of the share option by denying, even if an agreement was concluded, that it provided such option, and if there was an option, that it was for shares in the Listed company as opposed to shares in the 2nd defendant. It pleaded also that the agreement or option was void for uncertainty.

5. On 1st March 1994 the defendants took out an inter partes summons seeking the following orders:

"1. An order that the Amended Statement of Claim herein against both the 1st and 2nd Defendants be struck out and the action herein dismissed on the ground that the Labour Tribunal has exclusive jurisdiction over the Plaintiff's claims which are not actionable in any Court of Hong Kong;

2. Additionally and alternatively, the Amended Statement of Claim herein against the 1st Defendant be struck out and the action against the 1st Defendant be dismissed upon the ground that no reasonable cause of action is disclosed against the 1st Defendant and the action constitutes an abuse of the process of the Court and/or is vexatious as against the 1st Defendant;

3. Additionally and alternatively, an order that paragraphs 1, 3(f), 4, 5(b) and (c), 6, 7, 10 and 14 to 19 of the Plaintiff's Amended Statement of Claim herein be struck out upon the ground that the same constitute an abuse of the process of the court and/or is vexatious against the 2nd Defendant."

6. On 22nd April 1994 the plaintiff took out a summons seeking the addition of Harold Sandler as a plaintiff, and for leave to amend its amended statement of claim in the manner appearing on a copy annexed to the summons. Those amendments were fairly extensive and reflected inter alia the discontinuance of the action against the 2nd defendant by consent.

7. The two summonses came before Mayo J on 29th April 1994. He gave his immediate Decision in the following terms:

"I have no doubt that the fax which has been referred to did form part of the negotiations between the parties. As such it offends against the parol evidence rule and is not admissible as evidence. We have to confine ourselves to documents on Bundle p. 44 and 45.

Also I am satisfied that it is clear that this is a contract for personal service. On the authority of Eastern Technical Services Ltd. v. Pickup Unreported being HCA 3558/92 it would appear to me that the Defendant's application for a strike out of the Re-amended Statement of Claim must succeed. I order accordingly. Costs of the action and this application to the Defendants."

8. It can readily be seen from the Decision that the judge proceeded first of all upon the basis of the parole evidence rule. Its application arose in the following way. Paragraph 2 of the statement of claim was as follows:

"By agreement ('the Agreement') evidenced and/or incorporated in writing in a letter of appointment dated 1st June 1992, the 1st Defendant agreed to appoint one Mr Harold Sandler trading as HBS Properties ('HBS Properties') to solicit OEM and other business customers for the 1st Defendant."

That letter of appointment was exhibited in its form as a facsimile. The material parts were as follows:

"Subject: Appointment of HBS Properties as Overseas Sales Representatives

Agreement made this 1st day of June, 1992 by and between Applied Electronics (OEM) Limited ("Applied") ... and HBS Properties ("HBS") ... It is mutually agreed:

I.	Term :	The term of the appointment shall be for the period June 1, 1992 to May 31, 1995.
II.	Services:	HBS will act as the Overseas SalesRepresentative for Applied. HBS will procure the full services of Mr Harold Sandler to solicit OEM and other business customers for Applied. This agreement will be in force for as long as Mr Harold Sandler is engaged by HBS and rendering said services. It is further agreed that HBS will work exclusively for Applied with the exception of Yams Electronics, Kenyazi Investments (Israel Far East venture companies) and Core; and at no time will enter into an agreement in written or in fact work for another electronics manufacturer. Should any products be offered to Applied which Applied cannot or wishes not to quote on, HBS can offer to others.
III.	Commissions:	Applied shall pay to HBS for the services rendered pursuant to this agreement as follows: A. 3% commission shall be paid against sales confirmations issued from June 1, 1992 through May 31, 1995. Commissions are payable within 30 days after shipments are made by Applied or any of its subsidiary companies to HBS introduced customers. Commissions shall continue to be paid for 1 year after termination of this agreement for all shipments to customers introduced by HBS. B. It is agreed that on exceptional orders or business brought to Applied by HBS that the commission rate can be negotiable between the parties.

IV. Draw Against Commissions

HK$25,000 shall be remitted monthly to HBS to its bank account (Number to be advised) as an advance payment against future commissions.

V. Expenses

The following non-refundable expenses account to be paid to HBS

a) HK$25,000 monthly.

b) ...

c) ...

VI. Others

An option to purchase a total of 1.5 million shares of Applied stock shall be given to HBS according to the following agreed formula:

Exercise Date

On/after May1993	500,000 shares
On/after May1994	500,000 shares
On/after May1995	500,000 shares

VII. Samples

...

VIII.Trade Shows

IX. ...

It is agreed that this agreement will be transferred to another corporate (sic) HBS Limited now in the process of being formed.

For and on behalf of Applied Electronics (OEM) Limited	For and on behalf of HBS Properties
(signed)	(signed)
Raymond K. Hung	Harold Sandler
Managing Director	Director"

9. The plaintiff's summons sought leave to amend paragraph 2 of the amended statement of claim to read as follows:

"By an agreement made in writing between the 2nd Plaintiff and the Defendant (signed by Raymond Hung) dated 1st June 1992 alternatively as evidenced by, inter alia, a fax dated 26th May 1992 from the Defendant to the 2nd Plaintiff and a document dated 1st June 1992 headed 'Subject: Appointment of HBS Properties as Overseas Sales Representative' ('the Agreement') the Defendant appointed the 2nd Plaintiff as Overseas Sales Representative for the Defendant to solicit OEM and other business customers for the Defendant."

10. The fax of 26th May 1992 referred to was placed before the judge at the hearing. It was signed by Raymond Hung for and on behalf of the 1st defendant and included the following term:

"2. The exercise price at HK$0.80 for the 1.5 million options is agreed by us."

11. It can be seen from the letter of appointment, that it did not set out any price in relation to the share option, and that the fax of the 26th May 1992 ante-dated the letter of appointment. It appears that the point was taken by Mr Barlow who appeared for the defendants below and before us, that the fax of 26th May 1992 could only have been part of the negotiations and therefore as evidence of negotiations could not be received as evidence. For that submission he relied there, as he does before us, upon the speech of Lord Wilberforce in Prenn v Simmonds [1971]1 WLR 1381 at 1383. The judge, we think clear from what has been placed before us, accepted that submission and upon that basis concluded that without the evidence of the fax of 26th May as to the purchase price, the plaintiff could not succeed upon its case on the share option. We are told by Mr Barlow that the summonses were approached below upon the basis that the application for leave to amend would first be dealt with so that if leave were refused, the action would be struck out. However that may be, the share option claim having been disposed of upon the foregoing basis, only the normal employment-type monetary claims remained and the judge felt able to dispose of those upon a jurisdictional basis, the contract in his view being one for personal service and therefore a contract of employment.

12. Miss Gladys Li QC, who appears for the plaintiffs/appellants with Mr Andrew Mak (who alone represented them below), submits, rightly, as will be seen, that the parol evidence rule does not apply where rectification is sought. Indeed, she goes further and submits that since there was no finding nor was it demonstrated that the fax of the 1st June 1992 itself or in conjunction with that of 26th May 1992, was intended to express the entire agreement, extrinsic evidence of additional terms was admissible. She relied upon the following passages at paragraphs 847 and 848 of the same edition of Chitty:

'However, the parole evidence rule is and has long been subject to a number of exceptions. In particular, since the nineteenth century, the courts have been prepared to admit extrinsic evidence of terms additional to those contained in the written document if it is shown that the document was not intended to express the entire agreement between the parties. So, for example, if the parties intend their contracts to be partly oral and partly in writing, extrinsic evidence is admissible to prove the oral part of the agreement. In Gillespie Bros & Co v Cheney, Eggar & Co, Lord Russell CJ stated '... Although when the parties arrive at a definite written contract the implication of presumption is very strong that such contract is intended to contain all the terms of their bargain, it is a presumption only, and it is open to either of the parties to allege that there was, in addition to what appears in the written agreement, an antecedent express stipulation not intended by the parties to be excluded, but intended to continue in force with the express written agreement.' It cannot therefore be asserted that, in modern times, the mere production of a written agreement, however complete it may look, will as a matter of law render inadmissible evidence of other terms not included expressly or by reference in the document. 'The court is entitled to look at and should look at all the evidence from start to finish in order to see what the bargain was that was struck between the parties.

Scope of the rule. It follows that the scope of the parole evidence rule is much narrower than at first sight appears. It has no application until it is first determined that the terms of the parties' agreement are wholly contained in the written document. The rule 'only applies where the parties to an agreement reduce it to writing, and agree or intend that the writing shall be their agreement.' Whether the parties did so agree or intend is a matter to be decided by the court upon consideration of all the evidence relevant to this issue. It is therefore always open to a party to adduce extrinsic evidence to prove that the document is not a complete record of the contract. If, on that evidence, the court finds that the terms additional to those in the document were agreed and intended by the parties to form part of the contract, then the court will have found that the contract consists partly of the terms contained in the document and partly of the terms agreed outside of it. The parol evidence will not apply. If, on the other hand, the court finds that the document is a complete record of the contract, then it will reject the evidence of additional terms."

Nothing urged upon us by Mr Barlow leads us to doubt the foregoing passage from Chitty as an accurate statement of the law, which we accept.

13. However, Mr Barlow's main submission is that in their pleadings, including those for which leave was sought, the plaintiffs specify written documents, i.e. the two faxes, as the agreement they rely upon and do not, for example, plead a contract that is partly written and partly oral as in Gillespie Bros & Co v Cheney, Eggar & Co or even Evans (J) Ltd v Andrea Merzario Ltd [1976]1 WLR 1078.

14. It does not seem to us that such a submission can succeed in this case, having regard to the precise terms of the plaintiff's pleading. Paragraph 2 of the amended statement of claim reads:

"By agreement ('Agreement') evidenced and/or incorporated in writing in a letter of appointment dated 1st June 1992, the 1st Defendant agreed to ..."

By the re-amendment sought it would have read:

"By an agreement made in writing between the 2nd Plaintiff and the Defendant (signed by Raymond Hung) dated 1st June 1992 alternatively as evidenced by, inter alia, a fax dated 26th May 1992 from the Defendant to the 2nd Plaintiff and a document dated 1st June 1992 headed 'Subject: Appointment of HBS Properties as Overseas Sales Representative' ('the Agreement'), the Defendant appointed ..."

15. In our judgment the original version avers no more than the agreement was evidenced and/or incorporated in the letter of appointment. It went on in the immediate succeeding paragraph 3 to set out the terms of the agreement which expressly referred in the context of the option to the shares of the Listed company at the price of HK$0.80 per share, neither of which matters quite plainly were provided for in the letter of appointment. It does not seem to us that it follows from those words or their context that the plaintiffs were confining themselves to one or both the faxes. However that may be, the judge

had also to take into account the re-amended version for which leave was sought and that version plainly pleaded as an alternative the agreement being evidenced by other material. Moreover the two faxes were not instruments drafted by solicitors, or instruments under seal which might more readily have been presumed to embody the entire agreement.

16. Mr Barlow also seeks to deny the plaintiff the use of its claim for rectification as the basis of an exception to the parole evidence rule by challenging the supporting pleading, as being fundamentally flawed. To effectively plead rectification, he submits, there must be reliance upon a parallel agreement. The principle he seeks to rely upon is, we think, not in dispute and was very clearly expressed by Cozens-Hardy, MR at p.88 of Lovell and Christmas v Wall (1911)104 LT 85 in the following way:

"The essence of rectification is to bring the document which was expressed and intended to be in pursuance of a prior agreement into harmony with that prior agreement. Indeed, it must be regarded as a branch of the doctrine of specific performance. It presupposes a prior contract, and it requires proof that, by common mistake, the final completed instrument as executed fails to give prior effect to the prior contract."

The basis of the claim for rectification is sought to be pleaded as paragraph 4A in the re-amended statement of claim in the following way:

"If contrary to the Plaintiff's case, it is held that the Agreement as drawn up and/or evidenced does not purport to entitle the 2nd Plaintiff to an option to purchase 1.5 million shares in the Listed Company at an exercise price of HK$0.80 per share as pleaded in paragraph 3(f) above, the Plaintiffs will contend that it was at all material times the true intention of the parties that the 2nd Plaintiff should be entitled to an option as so pleaded and that the Agreement as drawn up and/or evidenced does reflect not the true intention of the parties thereto and that the parties thereto entered into the Agreement under a common mistake in the belief that the Agreement embodied and/or contained the term pleaded in paragraph 3(f) above and that the Agreement should be rectified as pleaded in paragraph 3(f) above."

17. Mr Barlow submitted in effect that it does not plead a completed document that fails to give effect to a prior agreement. He complains that what is pleaded is that it does not give effect to "true intentions". We find no merit in that submission. Although the manner, place and time that the agreement was reached are not pleaded (and as to the necessity for which, we make no observation) the agreement itself, i.e. its terms, are clearly pleaded in paragraph 3, as we have already indicated. It seems to us sufficiently clear that by "true intention" what is meant is the true common intention, i.e. the agreement reached, and that the pleading is sufficient to support a claim for rectification. In that regard, we would add that "intention" can be seen to sometimes be used in that sense in relevant authorities, e.g. paragraphs 376 and 378 of Chitty. Also the following helpful passage appears in the explanatory notes on claims for rectification, preceding Form 507 at p.785 of the 35th edition of Bullen and Leake and Jacobs Precedents of Pleadings:

"The pleading should state with clarity what the actual agreement concluded between the parties was or the true intentions of the parties at the time of the execution of the written agreement or other document, and in what respect this agreement or document does not embody or accord with such actual agreement or the true intentions of the parties ..."

18. To return to the parole evidence rule, it is subject to a well- established exception where it is sought to rectify a document (see e.g. paragraph 377 of Chitty). In Lovell's case immediately after the passage quoted above, Cozens-Hardy MR added this:

"For this purpose evidence of what took place prior to the execution of the completed document is obviously admissible and indeed essential".

In Evans (J) Ltd v Andrea Merzario Ltd Lord Denning MR at p.1082 A said this:

"The cases are numerous in which oral promises had been held binding in spite of written exempting conditions."

19. Furthermore, there is no finding that the faxes were a complete record of the agreement, a matter that would have to be determined on the evidence, which leaves it open to a party to adduce relevant evidence. In this respect, the decision of the judge that the fax offended against the parol evidence rule and was not admissible, clearly was premature. On either view the exclusion of the fax of 26th May 1992 upon the basis of the parol evidence rule was wrong. It follows therefore that the share option claim was not properly disposed of and remained at the very least rather more of an obstacle than the judge may have supposed, in that the Labour Tribunal may rather more readily decline jurisdiction in what it would probably regard as a claim of an unusual nature.

20. However that may be, we turn then to the second reason relied upon by the judge, i.e. that as this was "a contract for personal service" the Labour Tribunal had exclusive jurisdiction. That view must rest upon the definition of "contract of employment" in s.2 of the Labour Tribunal Ordinance, the exclusive jurisdiction of the Labour Tribunal over claims specified in the Schedule to that Ordinance, and paragraph (a) of that Schedule, i.e. "a claim for a sum of money which arises from - (a) the breach of a term ... of a contract of employment".

21. The text of the letter of appointment has been set out earlier in this judgment. It is not necessary, and would be inappropriate given our conclusion, to say more than that it is not "plain and obvious" nor "clear beyond doubt" (see paragraph 18/19/3 of the Supreme Court Practice 1993 Vol.1 p.332 which sets out the well-known criteria for strike-out) that the contract is one of employment as opposed to one for services.

22. As to Eastern Technical Services Ltd v Pickup, that is an earlier decision of the judge declining to second guess the decision of the Labour Tribunal which may or may not have declined the jurisdiction under s.11 of the Labour Tribunal Ordinance over what seemed a claim under a contract of employment. That stance is entirely understandably in those circumstances. Here, it is a question of whether the letter of appointment was so clearly a contract of employment as opposed to one for services that the judge could simply upon that view, as appears to have been the case, have struck out the statement of claim and dismissed the action. In our view, he was wrong and misdirected himself in proceeding upon the basis that it was plain and obvious and clear beyond doubt that it was a contract of employment. That being the fundamental basis of his decision or exercise of discretion, it vitiated the latter. We have no doubt that the proper course should be for the question of whether the contract is a contract of employment to be determined by the court as a preliminary issue. If it were held not to be a contract of employment, then the court would proceed to determine the entire action; alternatively the action would go to the Labour Tribunal.

23. It remains to refer briefly to an additional matter Mr Barlow has raised upon the strength of the respondent's notice. It can be seen from the fax of 1st June 1992, that the share option relates to the shares of Applied Electronics, whereas the statement of claim, even in the re-amended form for which leave is sought, avers the shares to be those of the parent Listed company whose shares, it is said, are far more valuable. That, Mr Barlow submits, is so obviously contradicted by the fax of 1st June 1992 as to render the pleading manifestly untrue on its face and an abuse of the process. He relies upon Lonhro Plc v Fayed(No.2) [1992]1 WLR 1 where such a pleading was struck out because the evidence showed the plaintiff's claim had no foundation in fact and had not been made in good faith with a genuine belief in its merits. However, it can be seen here that from the outset, so far as the plaintiff's pleadings are concerned, the share option claim was pleaded by reference to the Listed company shares. Furthermore, it was not until a very late stage of the proceedings that the plaintiffs were alerted to what was the factual substance of the defendants' defence in the present context. That in our view may well explain the failure of the plaintiffs to present evidence of the shares being those of the Listed company. Since the consequence of striking-out would be to drive the plaintiffs from the judgment seat without an opportunity to present such evidence as it may have, it seems to us the court should be slow to conclude that there was an abuse of process. We therefore do not think that the judge's decision can be supported upon the basis that the statement of claim was upon this alternative basis an abuse of the process or demurrable.

24. It follows therefore that the appeal must be allowed.

25. That brings us to Mr Barlow's ancillary submission that this Court should not address a draft amendment which was not raised at first instance. In that respect the application made to the judge was for Harold Sandler to be added as a plaintiff. However, we are asked by the plaintiff to add not only Harold Sandler but also his wife Beatrice Sandler. It had apparently been earlier overlooked that HBS Properties was a firm of which both partners had to be made parties to the action. We did not understand Mr Barlow to submit that this Court is not empowered to grant leave for the amendment. 0.59 r.10 provides in plain terms that in relation to an appeal this Court shall have all the powers and duties as to amendment and otherwise as the High Court. Having arrived at the conclusion that the appeal must be allowed and leave granted for Mr Sandler to be added as a plaintiff, we have no doubt both that this Court has the power to grant leave for Mrs Sandler to be so added and that this should be done. It would be absurd in the particular circumstances for this Court not to do so, and in effect leave the matter to be raised anew in the High Court.

26. For the reasons we have endeavoured to give, we would allow the appeal, set aside the order of the judge and make an order nisi in terms of that sought in the plaintiff's notice of appeal to this Court.