YOOK TONG ELECTRIC CO LTD v. PIRELLI CAVI E SISTEMI SPA

HCA7882/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 7882 OF 2000

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J U D G M E N T

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1. The defendant is an Italian company which makes electric cables. Goodway Ltd ("Goodway") is a company registered in Hong Kong. It was formerly the defendant's sole agent in Hong Kong and Macau for the distribution of "Pirelli" brand cables and accessories. It is agreed that the terms of the distribution agreement were incorporated in an unsigned document, the Hong Kong and Macau Agency Agreement ("the Agreement") made some time in 1993. The plaintiff terminated the Agreement by a letter dated 5 February 1996 giving six months' notice of termination.

2. The general effect of the Agreement was to appoint Goodway as the plaintiff's sole agent but Goodway did not bring its customers into contractual relationships with the plaintiff. A customer would place its order with Goodway, and the order would be passed on to the plaintiff which would decide which of its subsidiaries would supply the goods, the major one apparently being the British subsidiary, Pirelli Cables Ltd. Goodway would procure the goods from the subsidiary and sell them, on a principal-to-principal basis, to the customer, and would receive a commission on the sale according to rates set out in the Agreement. The plaintiff reserved the right for it, or its subsidiaries to sell directly to certain excepted customers, including the government and the major railway and electrical utility companies in Hong Kong and Macau, but again Goodway was to receive commission on such direct sales.

3. Subsequently, various companies, including the defendant's UK subsidiary Pirelli Cables Ltd and the plaintiff Yook Tong Electric Co. Ltd, obtained judgments against Goodway. The latter went into liquidation in May 1998. It was perceived by the Official Receiver, the liquidator of Goodway, that Goodway had certain claims against the defendant, and by an assignment dated 31 July 2000, the Official Receiver purported to assign to the plaintiff all the rights of action under and all the advantages benefits and interests to be derived from Goodway's claims against the defendant for breaches of various agreements. By its Statement of Claim the plaintiff as assignee brings 33 separate claims against the defendant.

4. The defendant now applies under Order 14A, Rules of the High Court for an order that :

(a) the following question of construction may be determined, namely, whether Clause 11 of the Agreement, as defined in paragraph 12 of the Statement of Claim, properly construed, prevented the assignment by Goodway Ltd to the plaintiff of the 33 claims pleaded in paragraphs 19 to 175 of the Statement of Claim;

(b) if the answer to the said question of construction is in the affirmative, the plaintiff's claim be dismissed with costs; and

(c) the costs of the application be provided for.

5. The relevant clause reads :

"11. Assignment

GL shall not in any way assign any of its rights or obligations under this Agreement to any other company, firm or person without the previous written consent of PCX, such consent not to be unreasonably withheld."

GL is, of course, Goodway Ltd, and PCX refers to Pirelli Cavi SpA, the name by which the defendant was then known.

6. The defendant's case is that the majority (22) of the claims are expressly based on alleged breaches of the Agreement. As such, any purported assignment by Goodway to the plaintiff is caught by Clause 11, because the assignment was made without the consent of the defendant, which was indeed never sought. The defendant relies on the decision of the House of Lords in Linden Gardens Trust Ltd v. Lenesta Sludge Disposals Ltd & Ors [1994] 1 AC 85 as authority for the propositions that if an assignment is made in breach of agreement not to assign, it does not confer power on the assignee, and there is no difference between the assignment of present or future rights. On proper analysis, the remaining claims can be traced to the Agreement event if they are not expressly pleaded as arising from breaches of it and are similarly caught by Clause 11. Further, the defendant relies on Hendry v. Chartsearch Ltd, unreported, English Court of Appeal, 23 July 1998 as authority for the proposition that where there is a clause requiring consent, which is not to be unreasonably withheld, it is fatal to the validity of the assignment that the debtor's consent was not sought, and irrelevant whether the consent could not have been reasonably withheld.

7. The plaintiff's case, in brief, is that on a proper construction of the Agreement, Clause 11 cannot survive the termination of it. The clause is in all material respects identical a clause in the franchise agreement in ANC Ltd v. Clark Goldring & Page Ltd [2001] BPIR 568, which the Court of Appeal held did not survive the termination of that agreement. Further, although the defendant did not consent to the assignment it was aware beforehand that the Official Receiver would execute it, but never objected to or questioned the execution, and is therefore estopped from denying its validity. The plaintiff also argues that even if Clause 11 survives, the 11 claims which are not pleaded as arising directly from the Agreement are not affected by it, and since they must go to trial the court should in the exercise of its discretion under Order 14A decline to make the order applied for. Finally the plaintiff adopts the arguments put forward by the Official Receiver in correspondence with the defendant's solicitors, which I will attempt to paraphrase below.

8. The reasons given by Miss Wong of the Official Receiver's office for the assignment, as given in a letter dated 5 August 2002 to the defendant's solicitors, were that :

(a) the factual matrix in this case was very different from that in Linden Gardens. The liquidator of Goodway was not assigning the right to future performance, the fruits of the contract, and unaccrued causes of action;

(b) there were very good reasons of public policy not to give effect to Clause 11. The liquidator had insufficient funds to sue the defendant. Giving effect to Clause 11 would stifle the liquidator's legitimate claims, to the benefit of the defendant and the detriment of Goodway's creditors;

(c) there was no legitimate commercial purpose to ensure that either Goodway or the defendant was not brought into direct contractual relations with a third party; and

(d) Linden Gardens was not an authority for the proposition that where there is a non-assignment prohibition, a cause of action can never be assigned, particularly when one party thereto is in compulsory liquidation.

Miss Wong also relied on Farmer v. Moseley (Holdings) Ltd [2002] BPIR 437 in which it was held that an assignment by a liquidator of the fruits of an action was a valid exercise of a liquidator's power to sell the company's property. She also took the view that while she had not sought the defendant's consent to the assignment, the defendant had never raised the issue of Clause 11, had suggested a compromise but had not followed it up, and had had the urgency of the assignment explained to it. Its solicitors, in their capacity as solicitors for Pirelli Cable Ltd had sat on the Committee of Inspection. Therefore the defendant should be estopped from claiming to have no knowledge of the background and circumstances surrounding the assignment.

9. Miss Wong, in a letter to the defendant's solicitors dated 8 August 2002, gave the supplementary views that :

(a) the Official receiver did not assign the whole contractual rights of Goodway under the agreement but rather a claim arising out of a commercial dispute; and

(b) the assignment was of "future property" not caught by Clause 11.

In support of (a) she cited Trendtex Trading Corporation v. Credit Suisse [1982] AC 679, and in support of (b) she cited European Asian Bank v. Wong Ping-ching & Ors [1986] HKLR 1198.

10. Mr Ishmael, for the plaintiff, has referred me to a passage by Lord Hoffman in Jumbo King Ltd v. Faithful Properties Ltd [1999] 2 HKCFAR 279 :

"The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean. And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole, the factual and legal background against which it is concluded and the practical objects which it was intended to achieve. Quite often this exercise will lead to the conclusion that although there is not reasonable doubt about what the parties meant they have not expressed themselves very well. Their language may sometimes be careless and they may have said things which, if taken literally, mean something different from what they obviously intended. In ordinary life people often express themselves infelicitously without leaving any doubt about what they mean. Of course in serious utterances such as legal documents, in which people may be supposed to have chosen their words with care, one does not readily accept that they have used the wrong words. If the ordinary meaning of the words makes sense in relation to the rest of the document and the factual background, then the court will give effect to that language, even though the consequences may appear hard for one side or the other. The court is not privy to the negotiation of the agreement - evidence of such negotiations is inadmissible - and has no way of knowing whether a clause which appears to have an onerous effect was a quid pro quo for some other concession. Or one of the parties may simply have made a bad bargain. The only escape from the language is an action for rectification, in which the previous negotiations can be examined. But the overriding objective in construction is to give effect to what a reasonable person rather than a pedantic lawyer would have understood the parties to mean. Therefore, if in spite of linguistic problems the meaning is clear, it is that meaning which must prevail."

This is of course in line with the well-known passage by the same judge in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] WLR 896 at 912. The effect of this common-sense approach is, of course that each contract has to be construed in the light of its own wording and its own factual matrix. As Lord Browne-Wilkinson said in Linden Gardens, "the question in each case must turn on the terms of the contract in question", so the decisions of the courts in other cases are often of little assistance.

11. Linden Gardens was concerned with a building contract between the leasehold owner of a building and a builder to remove asbestos from the building. The contract was in a standard form and Clause 17(1) provided : "The employer shall not without the written consent of the contractor assign this contract." The owner assigned its leasehold interest to the plaintiff and then, having raised its action for breach of contract against the subcontractor (Lenesta Sludge Disposals Ltd) assigned all its rights of action to the plaintiff, without the consent of the contractor. Any breach of contract by the contractor had occurred before the original owner parted with its interest in the premises. The Court of Appeal drew a distinction between the assignment of the right to require future performance of a contract and an assignment of the benefits arising under the contract, such as the right to enforce accrued rights of action, and found that the clause did not prohibit the assignment of the latter. The House of Lords held that in that case no such distinction could be drawn. Lord Browne-Wilkinson, who gave the main judgment, found it impossible, in the context of a complicated building contract, to construe Clause 17 as prohibiting only the assignment of right to future performance, leaving each part free to assign the fruits of the contract. His Lordship said that : "building contracts are pregnant with disputes" and went on to consider the confusion that could arise particularly because of possible cross-claims. He went on to find that the parties could not have contemplated a position in which the right to future performance and the right to benefits accrued under the contract should become vested in two separate people. However he emphasised that he was considering only the validity of a restriction which prohibits assignments which have the effect of bringing the assignee into direct contractual relations with the other party to the contract.

12. This case is rather different from Linden Gardens. Here only one party is prohibited from assigning without the other's consent. It is not a complicated building contract, in which there are likely to be cross-claims. The contract is long finished and the defendant is not likely to be brought into direct contractual relations with the assignee.

13. ANC Ltd v. Clark Goldring & Page Ltd was a case of a franchise agreement in respect of a parcel collection and delivery service. There was a restriction imposed by Clause 16.2 thereof which provided that the agreement was personal to the franchisee and that neither it, nor the beneficial rights of the franchisee could be assigned without the prior written consent of the franchisor, which was not to be unreasonably withheld. The agreement provided that its terms should continue after termination only if that were provided expressly or by implication. There was no express provision for the continuation of Clause 16.2 after termination. After the franchise had been terminated, the franchisee, one Rapid Services Ltd, went into creditors' voluntary liquidation and the liquidator assigned its rights of action against the franchisor, ANC Ltd. It was argued for the assignee that the prohibition was intended to protect the franchisor, but that once the agreement had come to an end, a prohibition of outstanding rights was unnecessary an served no useful purpose. The Court of Appeal accepted this argument, and held that the prohibition did not survive termination, there being no express provision for that, and that the implication of such a provision would have been contrary to the commercial purpose of the clause.

14. The plaintiff argues that the situation here is in all material respects identical to the above. It is further argued that since the only provision for any survival beyond termination lies in Clause 12 which prohibits Goodway from disclosing business information to third parties for three years thereafter, the parties must have intended that this be the only provision which should survive termination. In any event it would be commercially absurd for Goodway now, nearly four years after termination, to be allowed to disclose business information, but prohibited from assigning its rights against the defendant.

15. Mr Shieh SC, for the defendant, argues that the situation here is not the same, because in ANC Ltd it is obvious that the prohibition could only cover the position where the contract was ongoing; it was intended to protect the franchisor against some assignee taking over the franchise. I note that the clause specifically provided that where consent was given the assignee had execute a written undertaking to be bound by the franchise agreement. But I find it difficult to see what difference there is here. Obviously any principal needs to be protected against the agent putting in a substitute during the terms of the agency; but in any event as Lord Browne-Wilkinson pointed out in Linden Gardens, the burden of a contract can never be assigned without the consent of the other party in which event such consent will give rise to a novation. However once the contract is at an end the need for protection against putting in a substitute must end with it.

16. There are specific provisions for termination in the instant contract. Clause 13 provides :

"Termination

13. 1) Without prejudice to any rights previously accrued hereunder and subject to a minimum of 2 years either party shall have the right to terminate this Agreement;

(i) by six months notice in writing given at any time but to expire at - the end of the 2-year minimum term; or

(ii) forthwith by notice in writing in the event that the other party shall commit a serious or persistent breach of any of its terms or shall go into liquidation or receivership (or their equivalent in the Territory).

2) Upon termination of this Agreement howsoever occurring :

(i) GL shall immediately return to PCX all samples, technical pamphlets, catalogues or other advertising material or information relating to the Products or the business of PCX;

(ii) GL shall immediately cease to represent itself as an agent for PCX or as having any relationship with PCX;

(iii) PCX shall pay to GL all commission due under this agreement.

3) GL shall not be entitled to any compensation by reason of termination of this Agreement. GL irrevocably waives any right to compensation which it might otherwise have under any applicable law in the Territory or elsewhere."

17. Clearly the parties intended that on termination, there should be a clean break. The only remaining obligation was the non-disclosure obligation provided for in Clause 12. That is an obligation which could not in any event be assigned. It seems to me that the proper construction, looking at the agreement as a whole and from the standpoint of the reasonable man, is that when it is over, it is over. Nothing survives, except the specific provision in Clause 12.

18. There is therefore nothing to prevent the Official Receiver assigning Goodway's rights of action against the defendant to the plaintiff. It is not therefore necessary to consider the other points raised by the plaintiff.

19. It follows that the defendant's summons must be and is dismissed with costs (nisi) to the plaintiff, to be taxed if not agreed.