MICHAEL SOFAER v. ARRAL PACIFIC MANAGEMENT LTD AND OTHERS

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMMERCIAL LIST

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JUDGMENT

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1. This is an application by the plaintiff to reamend his points of claim.

2. The plaintiff is managing director of the 2nd defendant which was formerly known as Arral Associates Ltd. He holds 25% of the shares. The 1st defendant holds 75% of the shares. The 3rd defendant is a wholly owned subsidiary of the 2nd defendant and provided it with administrative services. There are common directorships between the three defendants.

3. The 2nd defendant invests clients' funds. It has been run profitably largely because of the plaintiff's conduct of its affairs. In 1992, the plaintiff, for reasons which will no doubt be canvassed at trial, wished to end his association with the Arral group of companies. To achieve this, on 23rd December 1992, a written agreement called the Stock Purchase Agreement was reached between the plaintiff and the 1st and 2nd defendants by which the 2nd defendant would purchase its shares held by the 1st defendant. The plaintiff would thus become effective owner of the 2nd defendant. The agreement has not yet, however, been completed. A state of affairs which has led to the present action.

4. Amongst other things, the parties are at odds as to the true construction of the agreement. The agreement contains a number of conditions to be met before completion or "closing" as it is termed in the agreement. The plaintiff's case is that it was implied in the agreement that all parties would cooperate to ensure the conditions were met. Although not a party to the agreement, the 3rd defendant would also have to cooperate because of the administrative services which it provided and because it was effectively under the control of the 1st defendant.

5. The first defendant, which alone is resisting the reamendments, asserts that the agreement is a simple one. Certain conditions were to be met on or before 1st April 1993 at which time the agreement would be closed. Those conditions have not been met. Accordingly, the obligation on the part of the 1st defendant to sell its shares in the 2nd defendant never became binding.

6. The plaintiff seeks to make three significant reamendments. First, he wishes to introduce in paragraph 2 of the points of claim, the historical facts leading up to the making of the agreement. This will show the genesis and purpose of the agreement and enable the plaintiff to resist the narrow construction, particularly as to time, which the 1st defendant seeks to place on the agreement.

7. Second, in paragraph 4(2) of the points of claim, the plaintiff has pleaded an implied term that he and the 1st defendant should cooperate to secure the performance of obligations by the 2nd defendant under the agreement. By way of particulars from which that term might be implied, he wishes to give particulars of the inter-relationship between the defendants by virtue of cross-directorships and other personalities.

8. Third, the plaintiff wishes to plead a further implied term that neither the plaintiff nor the 1st defendant would do or refrain from doing an act which would cause the non-fulfilment of the agreement. In support of that plea, the plaintiff would repeat the particulars which he seeks to give in relation to the first implied term. The two implied terms are to ensure that the 1st defendant will not be able to rely on what the plaintiff says is its own wrong.

9. The 1st defendant's resistance to these amendments is both general and specific. In general, it says that the agreement contains an "entire agreement" clause. Extrinsic evidence is, therefore, not admissible to prove terms other than those in the agreement itself.

10. The authorities upon entire agreement clauses are somewhat sparse. They seem to consist of a decision of a deputy judge (now a judge of the High Court) in McGrath v. Shah [1989] 57 P&CR 452 and the view of the Law Commission expressed in Command 9700 [1986]. It is not necessary for the purpose of this application for me to discuss these authorities. It is sufficient to say that the precise effect of an entire agreement clause still remains to be established. It is certainly open to the plaintiff to argue at trial that there was an additional term, or more than one, which the parties intended to be of contractual effect and to which the court should give effect. Consequently, the entire agreement clause in the agreement is no bar to the proposed reamendments.

11. The 1st defendant then attacked the reamendments in detail. Again, I do not think that it is necessary for me to go through each objection. In broad terms, the objections were that the matters to be raised were contrary to the terms of the agreement, introductory of subjective intention or otherwise frivolous and unhelpful.

12. It was not in dispute that the background facts against which a written agreement is entered can be pleaded and relied upon as to the meaning and effect of the written agreement and for the determination of the presumed or implied intention of the parties. In particular, in a commercial contract, the court should know the commercial purposes of the contract which involves knowledge of the genesis of the transaction, the background, the context and the market in which the parties are operating. Authority for these propositions may be found in Prenn v. Simonds [1971] 1 W.L.R. 1381 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989.

13. In my judgment, the matters which the plaintiff seeks to introduce all fall comfortably within these principles. Accordingly, I allow the reamendments sought by the plaintiff.

14. I have not been addressed upon the precise terms of the order which I should make. Accordingly, I make an order nisi in terms of paragraphs 1,2,3, 8 and 9 of the plaintiff's summons.

15. The application is fit for two counsel.