HONG KONG EXPRESS AIRWAYS LTD AND ANOTHER v. KING POWER TRAVELER CO LTD

HCA 1099/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1099 OF 2010

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  This is a trial of preliminary issues.

2.  The Plaintiff Airlines wish to terminate King Power's appointment as exclusive supplier of duty free goods under the terms of two 2007 Agreements as modified by a June 2009 Addendum (covering both Agreements).  On their face, the Agreements and Addendum expressly entitle the Airlines to terminate King Power’s appointment without cause upon the giving of notice within a specified period.

3.  But King Power contends that the Addendum does not truly reflect what it had orally agreed with the Airlines by way of modification of the Agreements.  King Power says that, just before signing the Addendum, the Airlines orally accepted that King Power’s appointment would be for a fixed term of 5 years running until mid-2014.  That oral acceptance (King Power says) superseded a break clause in the original Agreements which entitled the Airlines to terminate without cause.  As a result, King Power alleges that its appointment could only be terminated upon cause being shown.  The oral acceptance (King Power argues) ought to have been (but was not) incorporated into the Addendum. 

4.  King Power therefore wants to enjoin the Airlines from terminating its appointment prematurely.  King Power also asks for rectification of the Addendum to reflect the alleged oral agreement.

5.  The issue which I have to determine is whether there was an oral agreement as alleged by King Power and (if so) with what effect on the Airlines’ entitlement under the original Agreements to terminate King Power’s appointment at will.   

II. BACKGROUND

6.  In mid-2007 the Airlines signed Agreements appointing King Power as their supplier of inflight duty free goods.

7.  King Power’s appointment under the HK Express Agreement was for 5 years.  That was subject to a break clause entitling HK Express or King Power to terminate the appointment without cause by giving 5 months’ written notice.  King Power’s appointment under the HK Airlines Agreement was likewise for 5 years.  This was subject to a break clause permitting termination of the appointment without cause upon giving 4 months’ written notice.

8.  Both Agreements contained terms stipulating that they could not be varied except by writing signed by both parties and that all prior agreements, representations, or understandings had been superseded by the Agreements.  The Agreements further provided that their terms were to be regarded as embodying the entire contract among the parties.

9.  In the wake of the financial crisis, the Airlines complained about what they regarded as the low level of commission payable by King Power under the Agreements.  From mid-2008 the Airlines began to negotiate for more commission.  The Airlines were hoping for commission of at least 25%.  But the negotiations were protracted and difficult.

10.  Between mid-2008 and mid-2009, a number of drafts of what later became known as the Addendum were produced.

11.  An August 2008 draft provided for commission of at least 13.5%.  It also extended the duration of the Agreements.  Otherwise it left all other terms and conditions of the Agreement in effect.  The Airlines were unhappy with this draft, because they considered commission of 13.5% to be too low.  This draft was not agreed and negotiations continued sporadically.

12.  On 12 January 2009 Mr. Ray Jayasekera (King Power’s Vice President) emailed Mr. Stanley Kan (the Airlines’ General Manager of Ground and Inflight Services).  The email stated that King Power’s Finance Director and board had approved an increase in the commission payable to at least 25%.  This approval was “based on [Mr. Jayasekera’s] assurance that [he] will personally arrange to get the cart packing cost in GG reduced from H$170 to H$85 within 3 months”.

13.  A March 2009 draft reflected this rise in commission to at least 25%.  The draft also allowed the termination of the Agreements without cause upon the giving of 4 months’ notice.  Otherwise, all other terms of the Agreements were to remain in force.  This draft was never signed.

14.  On 20 April 2009 Mr. Kan emailed Mr. Jayasekera asking for “some feedback” on the commission issue.

15.  On 4 May 2009 Mr. Jayasekera replied to Mr. Kan that the Addendum “will soon be cleared by our solicitors and it would be ready for me to send you for your signature (with the commission structure agreed by [the Airlines]”.  On the evidence before me, it is unclear precisely which draft of the Addendum Mr. Jayasekera was referring to. 

16.  In his email response Mr. Jayasekera apologised for the delay in dealing with the matter.  He explained the delay as “due to changing a commission structure (which was agreed by both parties and stipulated in to the agreement) mid stream before expiry of agreement”.  That (Mr. Jayasekera continued) was “apparently legally complicated”.

17.  Mr. Jayasekera elaborated that to the legal mind it was “not legally justifiable cause to change price and or commission agreed at the signing of an agreement, unless mutually agreed with no treat, force and or pressure applied to a party by the party”.  According to the lawyers “justifiable causes are if either party fails to fulfill its obligation stipulated in the agreement”.  The upshot of the legal difficulty was that “it has taken [King Power] much time and effort convincing the solicitors”.

18.  Nothing further appears to have happened until 18 May 2009. 

19.  On that day, Mr. Kan sent another email to Mr. Jayasekera expressing “surprise [that] till now another 2 weeks time pass and we are still remaining....”  Mr. Kan asked whether Mr. Jayasekera could meet him on Wednesday (20 May 2009) to “settle all unclear matter”.  Mr. Kan indicated that he would invite Capt. Ronal Lim (the Airlines’ then Chief Operating Officer) to join the meeting.

20.  Mr. Jayasekera replied on the same day that the Addendum was “signed to day by [King Power] and it will be sent to you tomorrow morning (as it is on my table) for you to received tomorrow itself”.  On the evidence, it is again unclear which draft of the Addendum was being referred to by Mr. Jayasekera and what (if anything) happened to the copy of the draft apparently signed by King Power.

21.  It appears, however, that copies of 2 Supplemental Agreements (neither signed by King Power) were forwarded by email to the Airlines on 18 May 2009.  These 2 documents may possibly have been what Mr. Jayasekera was writing about on 4 and 18 May 2009.  The 2 documents provide for commission of 25% and the extension of the original Agreements to mid-2014.  The 2 documents, however, do not contain any provision allowing the Airlines to terminate at will without having to show cause.  Instead, the documents stipulate for termination without cause only “by mutual agreement on terms and conditions acceptable to both parties”. 

22.  Thereafter, at some point in late May 2009, Mr. Jayasekera met with Mr. Kan.  Capt. Lim was present as presaged in Mr. Kan’s email of 18 May.  This was the first time that Capt. Lim and Mr. Jayasekera met face to face. 

23.  At the meeting Mr. Jayasekera claims to have emphasised King Power’s readiness to increase commission to 25%, but only subject to the condition of a 5 year fixed term without early termination at will.  According to Mr. Jayasekera, Capt. Lim replied that “he would consider and let [Mr. Jayasekera] know his decision”.  However, Mr. Kan is adamant that at the May 2009 meeting nothing was said about a 5 year fixed term in exchange for agreement on a 25% commission. 

24.  Nonetheless, it is King Power’s case that Capt. Lim called Mr. Jayasekera shortly thereafter to confirm the Airlines’ acceptance that of a 5 year fixed term without provision for termination at will.   

25.  By an email of 8 June 2009 referring to a telephone conversation with Mr. Kan, Mr. Jayasekera stated that King Power “would wish to maintain the termination clause in the Addendum/Supplemental Agreement”.  In oral evidence, Mr. Jayasekera said that by that remark he was reiterating King Power’s desire for a termination clause along the lines found in the 2 draft Supplemental Agreements mentioned above.

26.  In response to Mr. Jayasekera’s remark on the termination clause, Ms. Jacqueline See (the Airlines’ General Manager of the Service Delivery Department) commented by email on the same day as follows: “Term -- as in the main contract, however, will be extended to 31 June 2014”. This meant (Ms. See explained in evidence) that the term in the original Agreements permitting termination without cause on giving several months’ notice should stand.

27.  Upon receipt of Ms. See’s email, Mr. Jayasekera says that he was puzzled as Ms. See’s reply contradicted what (on King Power’s case) Capt. Lim had already accepted (namely, a 5 year fixed term not terminable at will).  Mr. Jayasekera’s evidence is that he contacted Capt. Lim for an explanation.  According to Mr. Jayasekera, upon Capt. Lim confirming that a 5 year fixed term contract not terminable at will was acceptable to the Airlines, he emailed back the simple words “Thank you” in answer to Ms. See’s comment on termination.

28.  On 16 June 2009 Mr. Jayasekera forwarded a further draft of the Addendum.  This further draft (Mr. Jayasekera wrote in his covering email) contained “all what was agreed by [King Power] and [the Airlines]”.  The further draft proposed a commission of 25% and a period 5 years.  The further draft expressly stated that the provisions in the original Agreements entitling termination at will were to be “superseded by this Addendum”. 

29.  Upon receiving this further draft, Mr. Kan instructed Ms. See to “study the termination part in mo[re] details”.

30.  A final draft Addendum was subsequently prepared.  It is not clear by whom that draft was prepared.  It may possibly have been by the Airlines. 

31.  This final draft provided for commission of 25% and extended the original Agreements so as to be “effective for a period of 5 years from June 2009 until and up to May 2014”.  But otherwise all terms of the original Agreements (including the break clauses allowing termination without cause) were to remain in full force.

32.  On 24 June 2009 a copy of this final draft Addendum was forwarded to Mr. Jayasekera for execution by King Power.  By this time the final draft had already been signed by Capt. Lim on behalf of HK Airlines and Mr. Kan on behalf of HK Express.

33.  Mr. Jayasekera noticed that the final draft was different from that which King Power had sent on 16 June 2009.  So he telephoned Capt. Lim for an explanation.  What happened (Mr. Jayasekera asked) to the fixed term of 5 years which could not be terminated without cause? Capt. Lim’s evidence is that he answered Mr. Jayasekera along the following lines: “If I have given you my assurance, you have my assurance”.

34.  On the strength of Capt. Lim’s response, Mr. Jayasekera says that he felt able to recommend approval of the final draft Addendum to King Power’s President.  The latter (Mr. Jayasekera continues) signed the Addendum accordingly.

35.  Pursuant to the break clauses in the original Agreements, the Airlines issued Termination Notices to King Power in June 2010.  The Notices purported to terminate King Power’s appointment without cause.  The Notices stated that they were to take effect within 5 months (in the case of HK Express) and 4 months (in the case of HK Airlines).

36.  King Power protested.  It argued that the power to terminate without cause in the original Agreements had been superseded by the signing of the Addendum.

37.  The Airlines claim to have terminated Capt. Lim’s employment on 30 August 2010.  This is disputed by Capt. Lim who maintains that he tendered his resignation.

38.  On 8 October 2010, pending this trial of preliminary issues and upon payment of $2 million into Court by King Power as fortification for the Airlines’ potential damages, the Airlines undertook “not to enter into a final contract with any other alternative concessionaire to supply in-flight duty-free products until further order”.

III.     DISCUSSION

39.  Although the parties originally put forward 3 issues for the resolution of the Court, there is actually only one question. The parties’ counsel acknowledged this at trial.  As drafted by the parties, the sole question arising in this case comes in 2 parts as follows:-

“(1) Was an oral agreement reached, prior to the execution of the Addendum which was not clearly reflected in the Addendum, between the representatives of the parties (with actual or apparent authority to reach such an agreement), that neither party is entitled to terminate the [original] Agreements without cause during the term of the Agreements as amended by the Addendum, namely, from June 2009 to May 2014?

(2) If the answer to (1) is yes, is King Power entitled to an order of rectification of the Agreements and the Addendum to reflect such oral agreement?”

A.      Sub-Question (1): Was there an oral agreement?

40.  Where a party seeks to contradict the terms of a written contract, “convincing proof” is required to establish that, on the balance of probability, the actual terms agreed are different from those recorded in the document.  See Thomas Bates Ltd. v. Wyndham’s Ltd. [1981] 1 WLR 505 (Brightman LJ at 521F).

41.  I do not think that King Power has adduced convincing proof of the alleged oral agreement between Mr. Jayasekera and Capt. Lim for a 5 year fixed term.

42.  First, with the possible exception of one email, there is no contemporaneous written evidence supporting the assertion that an oral agreement had been reached between Capt. Lim and Mr. Jayasekera on a 5 year fixed term. The one possible exception is the 16 June 2009 email from Mr. Jayasekera enclosing a further draft Addendum described as embodying “all what was agreed”. 

43.  But, looking at the 16 June 2009 in its context, I am unable to take it at face value.

44.  Throughout his evidence in Court, Mr. Jayasekera contended that King Power was only prepared to concede a 25% commission to the Airlines in return for a 5 year fixed term not terminable at will.  But this contention is difficult to square with the existing documentary evidence.  

45.  Prior to the late May meeting among Mr. Jayasekera, Mr. Kan and Capt. Lim, the parties’ correspondence suggests that King Power was prepared to pay a 25% commission as early as January 2009.  This is apparent from Mr. Jayasekera’s 12 January 2009 email to Mr. Kan.  There is no mention in that email of a higher percentage of commission being conceded only in return for a definite 5 year term. The sole qualification mentioned in the 12 January 2009 email relates to “cart packing cost”.  One asks rhetorically, if a 5 year term was so important to King Power as claimed by Mr. Jayasekera, why was there no express mention of this in the 12 January 2009 email as a condition for the King Power board’s approval of a 25% commission?

46.  Following the 12 January 2009 email, the March 2009 draft (incorporating a 25% commission and clause enabling termination without cause) was prepared.  But King Power seems to have delayed signing the same.  Mr. Kan pressed for a response.  Mr. Jayasekera blamed King Power’s lawyers for the delay. 

47.  It further seems from Mr. Jayasekera’s email of 4 May 2009 that the problem exercising King Power’s lawyer was the lack of consideration (“justifiable cause”) moving from the Airlines to King Power in return for the higher commission accepted by the latter.  But, if this reading of the email is right, the document fits oddly with King Power’s case.

48.  Even on King Power’s version of events, as at the beginning of May 2009, Mr. Jayasekera had not come to any agreement with Capt. Lim on a fixed 5 year term. That would not happen until late May 2009.  On that basis, what was it that King Power was running through its lawyers for vetting prior to a formal signing by King Power? On King Power’s present case in this litigation, everything would still have been up in the air in the absence of an agreement on a 5 year fixed term.  Why would the lawyers even be worrying about any problem of a lack of consideration supporting the variation in commission? King Power contends that it would not have entered into any agreement for a significant variation of commission without the quid pro quo (consideration) of a 5 year fixed term.

49.  The correspondence from Mr. Jayasekera blaming King Power’s lawyers for delays in the signing of an agreement indicates to me that, contrary to Mr. Jayasekera’s present recollection, King Power did not regard a 5 year term as a prerequisite to agreement on a 25% commission.  On the contrary, the correspondence suggests that, by early May 2009 a 25% commission had long been agreed in principle and, prior to the formal signing of a draft Addendum embodying such agreement in principle, King Power had asked its lawyers to vet a draft Addendum.

50.  It is true that on 18 May 2009 the 2 draft Supplemental Agreements were sent to the Airlines by King Power and these did not include any clause permitting unilateral termination without cause (as opposed to mutual agreement).  Until then, no document directly or indirectly hints at a desire on King Power’s part to have a fixed 5 year period terminable only upon cause.  The sending of the 2 draft Supplemental Agreements then may conceivably have been an attempt on King Power’s part, perhaps at the prompting of its lawyers, to re-open matters which had been previously regarded as settled, in order to obtain a secure 5 year period.  In any event, nothing seems to have happened in relation to the Supplemental Agreements.

51.  Instead, according to King Power, Capt. Lim agreed in late May 2009 to a fixed unbreakable 5 year term.  But no document records this.  Capt. Lim acknowledges that he did not make any note.  Mr. Jayasekera has not produced any writing on his part recording the alleged agreement.  This is strange.  If the 5 year term was crucial to King Power, one would have expected an internal record of some sort by King Power, if only to report what would have been regarded as a breakthrough in negotiations with the Airlines on the commission issue.

52.  It is not until 8 June 2009 that Mr. Jayasekera comes back with an email to the Airlines stating that King Power would prefer a termination clause as drafted in “the Addendum/Supplemental Agreement”.  That may be a reference to the Supplemental Agreements sent in May 2009 as Mr. Jayasekera contended in the witness box.  But then why did Mr. Jayasekera also refer to “the Addendum”?  Note that when Mr. Jayasekera produced a draft Addendum for the Airlines on 16 June 2009, the term in that draft providing for the superseding of the break clauses in the original Agreements was different from the equivalent term in the Supplemental Agreements.

53.  To my mind, the real difficulty in King Power’s case is that, when Ms. See insisted in her email of 8 June 2009 on retaining the break clauses found in the original Agreements, Mr. Jayasekera merely replied “Thank you”.  If (as King Power asserts) Capt. Lim had clarified to Jayasekera on the telephone that King Power would have a secure 5 year term, why would Mr. Jayasekera only say “Thank you” to Ms. See.  “Thank you’“ signifies “I agree with what you have said and have nothing to add”.  If there had been some sort of agreement or understanding reached with Capt. Lim, Mr. Jayasekera would surely be informing Ms. See of precisely that.

54.  Thus, when Mr. Jayasekera wrote that the 16 June 2009 draft contained “all what had been agreed,” I cannot be certain with any degree of conviction that the draft constituted an accurate summary of what had been agreed with Capt. Lim.  The draft could merely have signified what Mr. Jayasekera was hoping could be further negotiated or finessed.  As I have observed, there may already have been one such attempt (namely, the sending of the 2 draft Supplemental Agreements) to re-visit what had apparently been previously accepted.  The 16 June 2009 draft could have been another such attempt.

55.  Second, I did not find Capt. Lim’s evidence to constitute “convincing proof”. 

56.  In the course of examination and cross-examination, Capt. Lim typically resorted in his answers to the subjunctive mood.  For example, when asked about specific alleged conversations on certain dates with Mr. Jayasekera, he would reply: “I must have said so”.  Asked how he responded to Mr. Jayasekera’s alleged complaints that the final draft did not reflect what had been agreed on a 5 year term, Capt. Lim’s response was guarded.  He said that he told Mr. Jayasekera: “If I have given you my assurance, you have my assurance.”  Why (one wonders) did Capt. Lim phrase his answer to counsel in such equivocal manner?  Does the word “if” signify that an assurance of a 5 year term was actually given or does it leave open the possibility that an assurance was not given?

57.  Taken as a whole, the foregoing suggested to me that, with the lapse of time, Capt. Lim’s recollection had become vague.  He supposed that he had said or done something (“must have said or done so”), but could not be certain. He was clear that Mr. Jayasekera called him up on numerous occasions and on every such time there would be discussion of a 5 year fixed term.  But beyond this, Capt. Lim did not strike me as being able to recall precisely what was said on which one (if any) of those numerous occasions. 

58.  There could well have been general talk between Capt. Lim and Mr. Jayasekera over the telephone about a 5 year fixed term.  But whether there was specific agreement in the course of a conversation about anything on some date is another matter.  I am not confident that Capt. Lim actually remembers having reached a particular agreement at some specific time. 

59.  A lack of clear recollection on Capt. Lim’s would not be surprising.  This would not only be because of the lapse of time. It would also be because (as Capt. Lim acknowledged) throughout the negotiations with King Power, Capt. Lim’s focus was on obtaining a 25% commission.  He did not pay much attention to other details (including the effective period of King Power’s appointment).  He regarded those other details as minor. He had many other responsibilities to handle.  Capt. Lim characterised himself as a macro-manager.  He accordingly left the details of the duty free inflight sales to be handled by his subordinates (including Mr. Kan and Ms. See).

60.  Third, I did not regard Mr. Jayasekera’s recollection of events as reliable.

61.  I have already discussed my difficulties with Mr. Jayasekera’s evidence in relation to his 16 June 2009 email.  I find equally implausible, on the standard of a balance of probability, his alleged conduct upon receiving the final draft Addendum for signature by King Power’s President. 

62.  Mr. Jayasekera’s evidence was that he realised that the final draft did not conform with what he had agreed with Capt. Lim. So he called Capt. Lim again and, on the strength of what Capt. Lim said, told his President to go ahead and sign.  But it seems to me more likely, if matters had transpired as Mr. Jayasekera now contends, that he would not be telling his President to sign. The more likely response would have been to go back to the Airlines and insist on their revising the final draft.  If the 5 year term was vital to King Power, I doubt Mr. Jayasekera would have left agreement on such term at no more than a vague unrecorded oral assurance on the part of Capt. Lim.

63.  It is suggested that I should attach weight to Mr. Jayasekera’s claims about what Capt. Lim had said because they are mentioned in a letter from King Power to the Airlines dated 5 July 2010. 

64.  That letter argued that “the whole intent of the addendum had been to give increased margin to [the Airlines] in exchange for a fixed term contract of five years”.  The letter stated that “the intent of the agreement had been both, at the time of concluding the addendum and subsequently confirmed by your Chief Operating Officer (as signatory to the addendum)”. 

65.  But I am unable to attach any probative value to the letter’s statements. Those were made after the Termination Notices were issued by the Airlines, when King Power was arguing that the Airlines had no entitlement to terminate early.  In any event, I find the statements cryptic and unhelpful as to how precisely it is claimed that Capt. Lim “confirmed” the intent of the Addendum.

66.  Consequently, I would answer “no” to sub-question (1). 

67.  I note in passing that, if I had found that Capt. Lim had entered into the alleged oral agreement, I would have found that he at least had apparent authority to do so.  The Airlines held him out as having authority to sign the Addendum. On that basis, there must have been the implicit representation that Capt. Lim was entitled on behalf of the Airlines to agree the matters covered by the Addendum (including the duration of King Power’s appointment and any limitations to such period).

B.      Sub-question (2): Should there be rectification?

68.  In light of my answer to sub-question (1), the issue of rectification does not arise.  I would answer “no” to sub-question (2).

69.  I note that, even if I had found in King Power’s favour on rectification, I would not have granted a permanent injunction in consequence. I think that damages would have been an adequate remedy.  The Airlines should not be compelled to retain a supplier which they clearly no longer wish to engage.

IV.     CONCLUSION

70.  There will be a Declaration that the Airlines were entitled to terminate King Power’s appointment by their Termination Notices.  The Airlines are released from their undertakings to the Court not to enter into any contract with alternative concessionaires.

71.  King Power’s Counterclaim (seeking Declarations that the Airlines were not entitled to terminate King Power’s appointment and consequential relief) is dismissed.

72.  There will be the following Order Nisi:-

(1)   The Airlines are to have the cost of the trial of preliminary issues, such costs to be taxed if not agreed, with certificate for 2 counsel.

(2)   Insofar as previously reserved costs are concerned, the Airlines are to have their costs incurred in relation to King Power’s applications for interim relief, such costs to be taxed if not agreed, with certificate for 2 counsel.

(3)   Within 14 days, the parties are to agree a list of outstanding issues (if any) in this action as well as directions for the disposal of such issues.

(4)   There will be liberty to apply. 

73.  This trial being a discrete event in itself, I have not qualified my proposed cost orders with the words “in any event”.