SHELL HONG KONG LTD. v. YEUNG WAI MAN KIU YIP CO. LTD. AND 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 318 OF 1999)

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J U D G M E N T

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Hon Mayo VP (giving the judgment of the Court):

1. This is an appeal from a determination made by Deputy High Court Judge Muttrie pursuant to Order 14A of the Rules of the High Court.

2. These two questions of law or construction were referred to him by D2:

"(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."

3. His determinations on these questions were:

(1)	After the Operator Agreement was replaced by the Franchise Agreement, D2 is and was still bound by the Personal Guarantee, and
(2)	Upon the Operator Agreement being replaced by the Franchise Agreement, D2 was not discharged from liability under the Personal Guarantee.

4. D2 appeals from these determinations.

5. D2 has been selling the plaintiff's products since 1978.

6. In August 1991 he formed D1. Shortly after that D2 was required by the plaintiff to enter into an operator agreement and D1 was the party which entered into the agreement.

7. The Operator Agreement governed the relationship between the parties and in particular the way in which the plaintiff would supply its goods to D1.

8. Goods were supplied on credit terms and by virtue of clause 9.1 of the agreement the plaintiff required D1 to furnish security to the plaintiff by way of D2 entering into a personal guarantee.

9. D2 entered into a guarantee, the operative part of which reads:

"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.
4.	Any demand hereunder shall be deemed to have been sufficiently given if sent by registered post to the Buyer's address in Hong Kong and such demand shall be assumed to have reached the addressee in the normal course of post."

10. The Operator Agreement expired on 31 July 1996.

11. The plaintiff thereafter required D1 to enter into an agreement which has been referred to as the Franchise Agreement. However the plaintiff did not require D2 to enter into a further guarantee.

12. On the pleadings it is agreed that the Franchise Agreement "expressly and/or impliedly replaced and/or rescinded the Operator Agreement".

13. The question which had to be determined by the Judge was whether on the true construction of all the relevant documents the Guarantee related to goods generally supplied by the plaintiff to D1 or whether it was confined to goods supplied in accordance with the Operator Agreement.

14. This was how the Judge dealt with the matter after analysing the documents and hearing submissions from the parties:

"27. I think one must start with the clear words of the Personal Guarantee which on its face is not tied to any other contract. It is a standard form of guarantee that any supplier of goods might require. The guarantor simply guarantees the price of goods sold to the principal by one or many contracts for the sale of goods. The Operator Agreement is not on my analysis a contract for the sale of goods. At best, it sets out in advance some terms which will be common to intended contracts for the sale of goods but there is nothing in it whereby one party agrees to sell and the other to buy any goods.

28. It follows that we have all been missing the point, which is that the Personal Guarantee was never intended to guarantee the 1st defendant's performance of part of the Operator Agreement but was rather intended to guarantee its performance of a series of sales contemplated by the Operator Agreement. Therefore, 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."

15. Mr Pow for D2 submitted that this analysis of the position was flawed. He argued that it was necessary as an initial step to ascertain what it was that D2 was guaranteeing.

16. It was not possible to separate the Guarantee from the Operator Agreement. The Guarantee had been made pursuant to a requirement to this effect in clause 9.1 of the Agreement.

17. What was of even greater significance was the nature of the Guarantee.

18. He argued that it was not simply a guarantee of the price of goods sold to the principal as stated by the Judge.

19. The operative words of the Guarantee referred to the "supply of goods on credit or part credit basis" to the principal.

20. This was important as it was clearly envisaged by the Operator Agreement that goods would be supplied on credit.

21. Mr Pow then referred to various clauses in the Franchise Agreement from which it was manifest that the arrangements being made by the parties were that goods were not being supplied on credit. The scheme was that title in the goods would not pass until payment had been effected by D1.

22. In the meantime D1 would hold the goods as a bailee thereof. He would be required to account to the plaintiff essentially as a trustee for the proceeds of sale of the goods.

23. Clause 21 of the Franchise Agreement provided:

"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."

24. Mr Chiu for the plaintiff submitted that it was not open to Mr Pow to argue this point on the basis of the defence which was being run by D2.

25. With respect this contention is not sustainable. In a ruling which was made by the Judge at a preliminary hearing which was held to determine whether the parties could proceed by way of Order 14A he adjudicated upon this and held that D2 could argue this point. There was no appeal from this Ruling and so that is where the matter must rest.

26. Mr Chiu also submitted that it was necessary to have regard to the provisions relating to the payment of goods which were consistent with goods being sold on credit.

27. Clause 26 reads as follows:

"26. PAYMENT TERMS

(a)	The Franchisee will pay Shell in such manner as Shell may from time to time direct for the Products purchased by the Franchisee from Shell for use at or resale from the Premises, the current payment terms being as follows:
	(i) in the case of Motor Fuels, immediately upon delivery to the Franchisee; (ii) in the case of Petroleum Products other than Motor Fuels, within thirty days of the last day of the calendar month in which such Petroleum Products were delivered to the Franchisee; and (iii) in the case of NFR Products and Services, immediately upon delivery to the Franchisee.
(b)	Shell may at any time and from time to time, in its absolute discretion, vary or alter the terms and conditions relating to the making of and/or the time for making or otherwise in relation to the making of any payment in respect of the Products."

28. With respect this cannot be right. The whole point of having a clause such as Clause 21 is to avoid a credit sale situation. If the purchaser of the goods defaults in payment the provisions contained in Clause 21 become operative.

29. However the main point made by Mr Chiu was that it was necessary to have regard to the manner in which business had been conducted by the parties and then have regard to the underlying reality of the position rather than looking to the wording of the relevant documents.

30. In support of this proposition he placed reliance upon a passage from the speech of Lord Hoffmann at p. 913 of Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 WLR 896:

"(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co. Ltd. v Eagle Star Life Assurance Co. Ltd. [1997] A.C. 749.

(5) The 'rule' that words should be given their 'natural and ordinary meaning' reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] A.C. 191, 201:

'if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.'"

31. While this is undoubtedly a correct statement of the law it is difficult to see how it can have any application to the instant case.

32. What is being contended by Mr Pow is that as a matter of law sales conducted pursuant to the Franchise Agreement were not "the supply of goods on credit" and that being the case it was irrelevant what impression the parties may have had.

33. Mr Chiu also submitted that a further good reason why D2 should be held liable under the Guarantee was that he had been a party to the arrangements which had been made when the Franchise Agreement had been concluded. It might also be the case that some form of estoppel might operate against D2 in the circumstances of this case.

34. The problem with all of this is that any contentions of this nature would inevitably be dependent upon evidence being adduced by the parties in support of the cases they were advancing.

35. This being so these issues fall outside the scope of matters which can properly be the subject of an application under Order 14A of the Rules.

36. It is also the case that as this is an interlocutory appeal it would not be desirable for us to express any view or opinion on these matters.

37. Be that as it may one thing which is certain is that the present determinations which have been made by the Judge cannot be allowed to stand in their present form.

38. The appeal must be and is allowed to the extent that the Judge's determinations are set aside. We do not make any order with regard to the other issues which have been raised. We would however make the observation that it was unfortunate that the matter was proceeded with in the way it was as with the benefit of hindsight the issues posed were not suitable for determination under Order 14A.

39. The only remaining matter is costs. We make an order nisi that D2 is to have his costs and these will include the costs of both hearings before Deputy High Court Judge Muttrie.

Remarks: