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

CACV 293/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 293 OF 2003

(ON APPEAL FROM HCA NO. 7882 OF 2000)

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J U D G M E N T

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Hon Rogers VP:

1. This was an appeal from a judgment of Deputy High Court Judge Muttrie given on 17 September 2003. The application before the judge was an application under Order 14A of the Rules of the High Court for the determination as to whether Clause 11 of an agreement prevented the assignment by one of the parties to the agreement to the plaintiff of 33 claims which had been pleaded in the statement of claim. On the basis that an affirmative answer would be given it was sought that the plaintiff's claims be dismissed with costs. The judge below had dismissed the defendant's summons. At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2. The defendant is an Italian company which makes electric cables. It is agreed between the parties that in 1993 the defendant entered into a distribution agreement with Goodway Limited ("the distribution agreement"). The parties are in agreement that the terms of the distribution agreement are contained in an unsigned document. Under that agreement Goodway became the sole agent for the defendant in Hong Kong and Macau. The items covered by the agreement were defined in clause 1 as "the Products". That was defined as meaning "all insulated cables, their conductors and accessories manufactured and offered for sales by PCX (i.e. "the defendant") from time to time under any brand name."

3. It would be convenient at this stage to set out some of the other terms of the distribution agreement. They are as follows:

"Appointment

2. GL is hereby made, constituted and appointed as the sole agent of PCX in the Territory during the Term for the sale of the Products to customers on the terms hereinafter contained.

Promotion

3. GL agrees that during the Term it : -

(i) will not without the previous consent in writing of PCX in any manner whatsoever directly sell or negotiate the sales of or act as agent in the Territory for any compatible products which compete directly with the Products;

(ii) will provide and maintain an adequate and efficient organisation for the sale of the Products throughout the Territory;

(iii) will use its best endeavours to promote and extend the sale of the Products throughout the Territory in conformity with the marketing policies established from time to time by mutual agreement between PCX and GL;

(iv) will at once place at the disposal of PCX all information which it may obtain during the continuance of this Agreement relating to any trends, changes or development in market conditions in the Territory which affect or are likely to affect the sales of the Products therein.

...

Assignment

11. 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.

...

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."

The only other matter to be observed at this stage is that the agreement was to be governed under Hong Kong law.

4. As observed by the judge below the effect of the agreement was that, except in relation to a number of large and, possibly commercially important, entities such as the Hong Kong Government and the Kowloon-Canton Railway Corporation in respect of whom the defendant reserved the right to deal directly but give commission to Goodway, Goodway would itself deal on a principal-to-principal basis with the customers. The distribution agreement was terminated by the defendant by a letter dated 5 February 1996 giving six months' notice of termination. Subsequently a number of judgments were apparently obtained against Goodway. One of those judgment was obtained by the plaintiff in this action. By an assignment dated 31 July 2000, the Official Receiver assigned to the plaintiff:

"all the rights of action under and all the advantages benefits and interests to be derived from the [claims] against the [defendant] including but not limited to the absolute right to bring and institute any action or any other legal proceedings in whatever manner or reply to any defence and or to negotiate settlement terms throughout with absolute right and power at the [plaintiff's] own discretion to compromise and settle at whatever sum at any stage of the proceeding in respect of the [claims] or to do any matter incidental and conducive to the [claim] against the [defendant] which the [plaintiff] might from time to time think fit and appropriate to bring with the intent to recover and receive damages ....".

5. The defendant applied 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 (distribution agreement), 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;"

6. The question then arises as to whether that assignment is valid in view of the terms of clause 11 of the distribution agreement. It might be observed, at once, that there is no dispute that no consent to the assignment was sought from the defendant, hence there is no question of reliance on any argument that the consent might have been unreasonably withheld.

7. The judge referred to the well-known passage in the speech of Lord Hoffman in Jumbo King Ltd v Faithful Properties Ltd [1999] 2 HKCFAR 279 at page 296 D-I where Lord Hoffman set out the approach which should be taken in determining the meaning of provisions of an agreement. But the judge below was clearly influenced by the decision in ANC Ltd v Clark Goldring & Page Ltd [2001] BCC 479. He held that the effect of clause 11 did not survive termination of the contract. He considered that the defendant's need for protection against substitution of another entity in place of the plaintiff as a contracting party ceased to exist once the distribution agreement had come to an end.

8. In coming to his conclusion, the judge distinguished the case of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85. He observed, first of all, that in the Linden Gardens case what was in issue was the validity of a restriction which prohibited an assignment which would have the effect of bringing the assignee into direct contractual relations with the other party to the contract. For my part I do not consider that this is of any relevance because I cannot see that is a point of distinction between the Linden Gardens case and the present. The judge then referred, in paragraph 12 of his judgment, to the fact that clause 11 only prohibited the plaintiff, and not the defendant, from assigning without the defendant's consent. He went on to say:

"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."

This appeal

9. In my view, in approaching the question of construction of the contract and having proper regard to the background, or matrix of, facts, the first thing which is apparent in this case is that although it is correct to say that clause 11 does not prevent the defendant from assigning the rights, in effect nearly all the rights of the defendant under the contract are not assignable. Once it is appreciated that the definition of "Products" in clause 1 was confined to articles which were manufactured and offered for sale by the defendant, whatever brand name was used, and that the plaintiff was appointed the defendant's sole agent in the territory, it can be seen that there would have been no scope for the defendant to have assigned its business or even just its business in the "Products" and hence the defendant's rights under the distribution agreement were virtually unassignable. If the defendant had attempted to assign its rights under the agreement, any goods sold by any other entity would not be "Products" within the meaning of clause 1 of the distribution agreement. Similarly the defendant's rights on and after termination were clearly all personal rights of the defendant and no other party would have any locus to enforce compliance other than on behalf of the defendant itself.

10. The next point to note is that the identity of the plaintiff as regards the distribution of the "Products" and the performance of obligations under the distribution agreement was clearly important. Not only did sub-clause 3(ii) mandate that the plaintiff should provide and maintain an adequate and efficient organisation for the sale of the "Products" and, in accordance with sub-clause (iii), use its best endeavours to promote and extend the sale of the "Products" throughout the territory, but importantly sub-clause (iv) provided that the plaintiff was required to place at the disposal of the defendant all information which would have been obtained during the continuance of the distribution agreement which affected, or was likely to affect, the sales of the "Products".

11. Furthermore, the termination provisions in clause 13 of the distribution agreement, specifically sub-clause 2)(i), requiring the return of all samples and technical pamphlets, catalogues and advertising material and information relating to the "Products", was something which, although it had to take immediate effect on termination, could clearly be enforced later if there were any delay. Likewise, the prohibition against the plaintiff ceasing to represent itself as an agent of the defendant after termination under sub-clause 2)(iii) is, again, something that could be enforced at any time.

12. In those circumstances, I would thus differ from the approach of the judge below to the extent that I consider that this is a case where the identity of the contracting party, namely the plaintiff, was important. It was not a complicated building contract, but it was a situation where there were likely to be cross-claims and where those claims were not only of financial importance to the defendant but of importance in relation to its business generally. Not only did this importance exist during the term of the distributorship but it continued after the distributorship had ceased to be in effect because the defendant would wish to be able to enforce any contractual rights which it might have against the plaintiff and have the comfort of knowing that it could offset any rights which the plaintiff might have against it.

13. I would add that, purely as a matter of construction, it would be somewhat surprising if clause 11 did permit the assignment of rights arising out of the distribution agreement after the termination of the agreement but in circumstances where those same rights could not have been assigned before termination. To take a very simple example, if the plaintiff had accrued rights under the agreement which it could enforce by way of litigation, it would not have been able to assign those rights prior to the termination of the distribution agreement. If, however, it is held that the effect of clause 11 does not survive the termination of the agreement, the effect would be that immediately upon termination of the agreement the plaintiff could have assigned those rights, which the day before could not have been assigned. Once it is appreciated that there are rights that survive in favour of the defendant after termination of the agreement the rationale for such a conclusion permitting the assignment of the plaintiff's rights ceases to exist.

Whether the cause of action pleaded in the statement of claim arises from the distribution agreement and the assignment thereof.

14. The next question which arises in this case is the factual question of whether the claims which have been made in this case arise out of the distribution agreement and whether they constitute claims which have been assigned in the circumstances set out above. In my view it is quite clear that claims 1-2, 5-8, 10-14 and 16-26 are pleaded as breaches of the express or implied terms of the distribution agreement. In those circumstances, for the reasons that I have outlined, they would fall within the prohibition against assignment and, therefore, those claims are unsustainable.

15. In respect of claims 3-4 and 27-32 it is said that these claims constitute precisely the same claims that were made as part of the defence and counterclaim in High Court action No. A7809 of 1996, being a defence and counterclaim by Goodway Limited in an action brought by the Pirelli Cables Limited. That, indeed, appears to be so. However, on my reading of those claims as they are framed in this action, they would not inevitably have to be based on the distribution agreement. They may well be but the matter is not so clear that it should be decided on a summary judgment application. In respect of claim 9, paragraphs 65-67 of the statement of claim, and claim 15, paragraphs 86-88 of the statement of claim, it appears to me that the claim for commission must be based on the distribution agreement because otherwise the claims are wholly unintelligible. I would also point out that in respect of claim 27 there is a claim for commission included in paragraph 149. If this were a strike out application that claim might be struck out but since this is a Order 14A application it will remain, but the parties will be bound by the decision in respect of the other items.

16. I would, therefore, hold that in respect of the claims numbered 1-2 and 5-26, clause 11 of the distribution agreement prevented assignment by Goodway Limited to the plaintiff and that those claims should be dismissed and I would make an order nisi of costs in favour of the defendant.

Hon Le Pichon JA:

17. I agree.

Hon Cheung JA:

18. I agree with the judgment of Rogers VP.

19. When a contract comes to an end, the transaction which forms the subject matter of the contract will necessarily come to an end. However, whether other terms of the contract will also come to an end will depend on the construction of these terms.

20. In respect of Clause 11, the fundamental point is that a contracting party is entitled to choose whom it wishes to do business with. If it wishes to enter into a contract with A, subject to the bargaining powers of the parties, it can stipulate in the contract that A cannot assign the rights and obligations under the contract without its consent.

21. One of the purposes of Clause 11 of the distribution agreement is clearly intended to preserve the rights of the defendant to ensure that it would only be dealing with Goodway Limited during the subsistence of the contract.

22. In my view, there is nothing inherently strange if the defendant would also wish to preserve, by Clause 11, the right to deal with someone it knows when faced with a litigation even after the termination of the distribution agreement. After all, an assignee of the rights and obligations of Goodway Limited under the distribution agreement may possess causes of action or remedies in terms of counterclaims and set off against the defendant which otherwise may not be available to Goodway Limited.

23. The identity of an opponent is a real concern to a party in litigation : see the observation of Bingham MR in Yeandle v. Wynn Realisations Ltd (1995) 47 Con LR 1 which was referred to in Hendry v. Chartsearch Ltd [1998] CLR 1,382.

24. With this important consideration, I can see no reason why Clause 11 must necessarily come to an end when the distribution agreement was terminated in August 1996.

Hon Rogers VP:

25. There will therefore be an order as proposed in paragraph 16.