DYNO-ROD PLC v. STIRLING DRAINAGE SERVICES LTD AND ANOTHER

1984, No. 5041

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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DECISION

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1. The plaintiff, which is an English company, has some reputation in the field of drain, pipe and related cleaning services. It is anxious to extend its operation and reputation. It does so by the grant of franchises by licensing independent contractors to use its name, knowledge and experience. In November 1981 it entered into a detailed agreement with the 1st defendant as licensee and the 2nd defendant as principal.

2. It appears that the lst defendant commenced operations in Hong Kong at the beginning of 1982. Some time after June 1982 the plaintiff became unhappy about the way in which the 1st defendant was conducting itself. In May 1983 the plaintiff wrote to the 1st defendant terminating the agreement. The plaintiff took no immediate action to enforce its rights under the agreement. Instead there were negotiations aimed at transferring the 1st defendant's business to a third party, the result of which, according to the plaintiff, would have been to salvage something for both the plaintiff and the 1st defendant. These negotiations, however, broke down in December 1983. The plaintiff then sought to recover outstanding licence fees and required the 1st defendant to cease using its name and logos and providing cleaning services in Hong Kong. In reply the 1st defendant through the 2nd defendant wrote to the plaintiff denying liability and, for the first time, asserting that the 1st defendant had not been incorporated until January 1982, some two months after the agreement was made. The 1st defendant sought recovery of the sum of £20,000 which had been paid upon the making of the agreement.

3. The plaintiff now applies under order 14 against the 1st defendant for:

and against the 2nd defendant for interlocutory judgment for damages to be assessed in respect of breach of warranty of authority.

4. I will first deal with the 2nd defendant. The 2nd defendant signed the franchise agreement (which we now know of course to be no agreement at all) as director of the 1st defendant as well as in his personal capacity as principal. By signing the agreement it is contended by the plaintiff that the 2nd defendant warranted the existence of the 1st defendant and his authority to act for it.

5. At the time when the agreement was signed there had undoubtedly been some confusion on the part of both the plaintiff and the 2nd defendant about who or what was precisely to be licensee. The fact remains, however, that the agreement is in the name of the 1st defendant and not only has it been signed by the 2nd defendant as director and in a personal capacity, but the 2nd defendant has initialled every page. In my view, there can be no argument but that, by that written agreement, the 2nd defendant warranted authority as the plaintiff contends.

6. On the authority of Delta Construction Company Limited v. Lidstone et al. ⁽¹⁾,I am satisfied that an individual making a contract on behalf of a company which has not yet been incorporated may be liable in damages for breach of warranty of authority to a third party. However in the 14th edition of Bowstead to which I was referred by the plaintiff, the learned author says in Article 121, warranty of authority:

"Where a person by words or conduct represents that he has authority to act on behalf of another and a third party is induced by such representation to act in a manner in which he would not have acted if such representation had not been made, the first mentioned person is deemed to warrant that the representation is true and is liable for any loss ...."

Mr. King who represents both defendants has argued very forcibly that the plaintiff was not induced by any representation made by the 2nd defendant to enter into the agreement. He points out that the evidence adduced on behalf of the plaintiff talks of negotiations which led to the making of the agreement, being conducted with a Mr. Mike Arden in England. There is no evidence that the 2nd defendant was involved in these negotiations. It is contended for the 2nd defendant that although the agreement, which had been signed by Mr. Arden as a director of the 1st defendant, was sent to the 2nd defendant for signature, the 2nd defendant's signature was no more than a formality. The signing of the agreement by the 2nd defendant did not induce the plaintiff to enter into the agreement which indeed had already been signed in part by the plaintiff.

7. I think there is an arguable point and, in the circumstances, the 2nd defendant should have unconditional leave to defend.

8. As far as the 1st defendant is concerned, it is conceded by the plaintiff that the agreement itself is a nullity. A company cannot by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence. Authority for this is the case of Watal Land and Colonization Company Limited v. Pauline Colliery and Development Syndicate Limited.⁽²⁾ However, that case also establishes that facts may show that a new contract is made with the company after it's incorporation on the terms of the old contract.

9. It is contended for the plaintiff that the dealings between the plaintiff and the 1st defendant between January 1982 and May 1983 are admissble of only one interpretation namely, that a new agreement on the same terms as the written agreement was made between the two parties. For its part, the plaintiff has supplied equipment and advertising material and permitted the use of its name and logo. The plaintiff has also given training in England to employees of the lst defendant and sent its own employees to Hong Kong for the purposes of inspection and assistance. The lst defendant has made use of the plaintiff's name, has rendered accounts to the plaintiff of work done and has paid commission to the plaintiff in respect of that work.

10. For the 1st defendant, Mr. King argues that the agreement was a long and detailed document. Not all of the duties and obligations falling upon the parties under that document have been fulfilled. Further, in so far as the plaintiff has supplied training and equipment, they were of doubtful value. The facts, such as they are, admit of other explanations besides the conclusion of an agreement on the sane terms as the original. In any event, the facts should be properly canvassed by oral evidence. The case is therefore not a proper one for judgment under Order 14.

11. Mr. king has very properly drawn my attention to Order 14 and the various notes thereto Which appear in the White Book. The principles are sufficiently well-know, I hope, that I do not need to set them out in detail here. Suffice it to say that I can see no other explanation for the conduct of the parties, and in particular that of the 1st defendant, than that a new agreement was entered into by implication on the same terms as the original agreement.

12. However, the 1st defendant has a counterclaim for ￡20,000 being the sum paid to the plaintiff in accordance with the terms of the original agreement, for an account of monies had and received by the plaintiff, and for damages for wrongful termination of the original agreement or the implied agreement.

13. The first 2 elements of the counterclaim do not stand up in view of my finding of a new agreement. In any event, there is no suggestion that £20,000 was paid by the 1st defendant so it has no basis for a claim. But there is a considerable difference of opinion about the quality of performance of the parties' respective obligation under the new agreement and the reason for the negotiations for the disposal of the 1st defendant's business. These are matters which can only be resolved at trial and which, if resolved in the 1st defendant's favour, may result in the award of damages.

14. So the 1st defendant has a counterclaim and, applying the principles to which I earlier referred, should also have leave to defend.

(1) 96 D. L. R. (3d) 457.

(2) (1904) A.C. 120