HCA000559/1984
| IN THE HIGH COURT OF JUSTICE | 1984 No. 559 |
BETWEEN
| PEPSICO PACIFIC TRADING COMPANY LIMITED | Plaintiff |
| | |
| AND | |
| | |
| ARDARA COMPANY LIMITED | Defendant |
____________________
Coram: Hon. Power, J.
Date of Hearing: 26 - 28 March 1984
Date of Delivery of Judgment: 4 May 1984
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JUDGMENT
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1. In this matter the Plaintiff, Pepsico Pacific Trading Company Limited (P.P.T.) are suing the Defendant, Ardara Company Limited (Ardara) for $17, 737, 367. 95 being the balance of the price of goods alleged to have been sold and delivered to Ardara by P.P.T. at Ardara's request, between May 1, 1983 and December 1, 1983.
2. In this application P.P.T. is seeking summary judgment under O.14 in the sum of $3,413, 458.55 upon the basis that Ardara has no defence to that amount of the claim. Ardara resist this application contending, inter alia, that there is a real dispute as to the amount due which requires the taking of an account.
3. Mr. Thomas Tang, a director of Ardara said, in his affidavit, that the issued share capital of the company is owned 50% by his brother-in-law, Dr. Richard Lee and his family, and 50% by Chaucer Investments Ltd. He said that in 1981 Mr. Eric Tang, Mr. William Zao and himself, who are the beneficial owners of Chaucer Investments Ltd. (Chaucer) and Dr. Richard Lee were approached by PepsiCo Inc. (PepsiCo), the American parent company of the Pepsi-Cola group, to see if they would be interested in distributing that company's beverages in Hong Kong. He said that a Letter of Intent dated 29th May 1981 (Annexure to "TT-1") was issued by PepsiCo International Ltd. (P.C.I.), a Bermudan company which is part of the Pepsi-Cola group, and that this letter was countersigned by Dr. Lee. This letter provided that P.C.I. would recommend that PepsiCo licence, a company to be formed by Dr. Richard Lee and Associates on an exclusive basis to distribute the company's beverages in Hong Kong. A Memorandum of Understanding attached to the Letter of Intent stated that until a bottling plant in Shen Zhen came into production the beverages would be supplied by P.C.J. which, I am told, is PepsiCo Japan Ltd.
4. On the 17th August 1981 a formal Distribution Agreement ("TT-1") was executed by Dyndat Ltd. (Dyndat), which later became P.P.T., and Ardara. Indeed the notation above the signature reads "Dyndat Company Limited name has to be changed to PepsiCo Pacific Trading Co., Ltd." and P.P.T., not Dyndat, is referred to throughout the body of the document.
5. It appears that Dyndat was set up by the Pepsi-Cola group to deal with the group's business in Hong Kong and that Ardara was set up by Chaucer and Dr. Lee to conduct the distributorship. It is worth emphasizing, at the outset, that each of the interested groups saw that its best interest would be served by setting up, in one case, a company to handle the distributorship and, in the other case, a Hong Kong company to conduct the business of the Pepsi-Cola group in the Colony. Representatives of these two groups had, it appears, negotiated with each other for some months before eventually entering into the Distribution Agreement.
6. In the preamble thereto the agreement states :-
"Whereas, P.P.T. is engaged in the business of manufacturing, selling and distributing the carbonated softdrinks known as, and sold under, the trademarks "PEPSI-COLA", "TEEM" and '' MIRINDA" (hereinafter "Beverages") under a license agreement with PepsiCo, Inc., the owner of those trademarks;
Whereas, Distributor is desirous of becoming an exclusive distributor of the Beverages in Hong Kong, Kowloon, the New Territories and Macau (hereinafter the "Territory"); and
Whereas, P.P.T. is willing to name Distributor as its exclusive distributor for the Beverages in the Territory and is willing to assist Distributor in establishing and operating its distributorship, subject to the terms and conditions hereinafter set forth."
7. It goes on to provide:-
(i) | that Ardara would be the exclusive distributor of PepsiCo beverages in Hong Kong, Kowloon, the New Territories and Macau; |
(ii) | that Ardara would purchase and provide the assets necessary for the distribution of the beverages; |
(iii) | that the beverages would be purchased solely from P.P.T. at prices calculated by reference to a formula set out in Article 8.2 of the Agreement; and |
(iv) | that P.P.T. would provide an executive to be the General Manager of Ardara. |
8. The period of the Agreement was from June 1, 1981 until December 31, 1983. The Agreement provided that if P.P.T. deemed the distributor's performance satisfactory in all respects, it should notify the distributor not less than 60 days prior to December 31, 1983 of its intention to renew this Agreement for a further period of 10 years. There was also a provision made allowing P.P.T. to terminate the Agreement upon 15 days written notice to Ardara if it committed any one of a number of "Events of Default". Clearly, unless P.P.T. deemed Ardara's performance to be satisfactory, Ardara would have no right to insist on the continuance of the Agreement after December 31, 1983.
9. The Agreement in Article 13.2 provided that nothing contained therein would create or be deemed to create any relationship or agency, partnership or joint venture between the distributor, Ardara, and P.P.T. Article 13.6 stated that the Agreement "expresses fully the understanding among the parties hereto regarding the subject hereof and all prior understandings, representations or agreements, oral or written, are superseded hereby." I am informed that this clause is commonly placed in agreements made by American companies. I do not know what legal effect it is given by American courts. Mr. Ching, for the applicant, did no more than indicate the existence of the clause asking that the Court accept that it meant what it said. Article 13.4 provided that the Agreement "shall inure to the benefit of the parties hereto and to the benefit of their successors and permitted assigns". Article 13.3 forbade the assignment by either party of any of their rights to any third party without prior written consent of the other party.
10. The Agreement was signed by a Mr. Tully on behalf of Dyndat and by a person whose signature I cannot make out on behalf of Ardara. Mr. Tang suggested that this document was also "executed" by PepsiCo. I am not sure exactly what Mr. Tang means when he says that it was executed by PepsiCo. It is true that PepsiCo, by Mr. Peter K. Warren, signed the document under the words "Consented to and approved by PepsiCo Inc.". If Mr. Tang is suggesting that by so doing PepsiCo made themselves a party to the Agreement then he is, in my view, clearly wrong. The Agreement in its preamble sets out the parties thereto namely, P.P.T. and Ardara. It expressly states that P.P.T. operates under a licence agreement with PepsiCo. I am satisfied that by signing the Agreement, PepsiCo did no more than indicate that P.P.T. was acting with its consent and approval. The Agreement would, I am satisfied, have had exactly the same force had PepsiCo not signed thereon.
11. Mr. Tang says that he and the other interested parties considered that they were dealing with PepsiCo, and indeed it may well have been that during the negotiations there was no distinction drawn between those representing PepsiCo and those representing P.C.I. and Dyndat Ltd. However, it seems clear, from the facts placed before me, that the agreement, finally entered into after the completion of the negotiations, was between Dyndat (P.P.T.) and Ardara. Whatever view a layman might take of the matter, there can, in my mind, be no doubt that the parties and the only parties bound by the Distribution Agreement were P.P.T. and Ardara.
12. It is true that several invoices were originally issued in the name of PepsiCo for products purchased by Ardara. I see no real significance in this, however, as it seems clear that the purchases were made from P.P.T. under the Distribution Agreement and that the wrong forms were used for invoicing Ardara.
13. It appears that in about June or July of 1982, it was realized that the sales performance of Ardara was not as good as had originally been anticipated and that Ardara was losing money. It appears that because of this Ardara wished to bottle and distribute another beverage known as Green-Spot and that Ardara sought the approval of the Pepsi-Cola representatives for such a venture. I refer to the persons with whom Ardara then negotiated as "Pepsi-Cola representatives" because again it seems clear that, when negotiations were being carried out, the negotiators on behalf of the Pepsi-Cola group spoke as representatives of that group. I do not see anything significant in this as it seems to me to be clear, both as regards the first agreement and as regards later agreements, that, when the time came to enter into legally binding arrangements, the negotiators were at pains to specify the identities of the parties entering into those arrangements.
14. Mr. Tang says that in April 1983, after he had received the accounts of Ardara for the year ending 31st December 1982, he telephoned a Mr. Barnes, who was the regional operations director of PepsiCo in Singapore, to inform him that the company no longer had sufficient funds to pay staff salaries and salesmen's commissions. He says that Mr. Barnes relayed this information to Mr. Tulley who was then in the United States and that Mr. Tulley, in due course, informed him that they should keep the company operating until PepsiCo came up with the scheme for remedying the situation. He says that in May Mr. Tulley, Mr. Barnes and a corporate attorney from PepsiCo, Mr. Dick Williams, came to Hong Kong and that, after negotiations, the Distribution Agreement was renegotiated and an Amendatory Agreement No.1 and a Marketing Development Agreement were executed on the 28th June 1983.
15. The Marketing Development Agreement (TT-6) recites itself as having been entered into between PepsiCo and Ardara. It is signed by representatives of those two companies. Under the Agreement PepsiCo agrees to pay Ardara a two-tiered unilateral marketing subsidy composed of a fixed subsidy and a variable subsidy. We need not, in this action, concern ourselves with the variable subsidy. The fixed subsidy was to be in the sum of US$1,700,000. It was agreed that this subsidy would be paid in two payments. The first, which was described as "that portion corresponding to marketing programs for the period prior to December 31, 1982", was to be in the amount of US$1,230,000 and was to be paid upon the signing of the Agreement. The second, which was to be in the sum of US$470,000 and was described as relating to "that portion corresponding to marketing programs for the period for January 1, 1983 to April 30, 1983'', was to be paid on December 31, 1983.
16. It provided in Section 5(c) that:-
" | Notwithstanding anything to the contrary contained in sub-paragraphs (a) and (b) of this Section 5, both the Variable Subsidy and the Fixed Subsidy, to the extent not already paid, shall be payable by PepsiCo to Ardara immediately upon the cessation of Ardara's distributorship for PepsiCo softdrink products, if: |
| (i) | such cessation takes place prior to December 31,1983; and |
| (ii) | Ardara is not then in default under any other agreement, contract or written understanding between Ardara and PepsiCo, or between Ardara and any of PspsiCo's subsidiaries or affiliated companies." |
17. Again this Agreement had in it a "full understanding'' clause saying that it expressed the full understanding of the parties regarding the subject thereof.
18. The Amendatory Agreement No.1 (TT-5) expressed itself as being between P.P.T. and Ardara. It recited the original Distribution Agreement saying that P.P.T. and Ardara were "parties to" it and that they were desirous of amending and supplementing that Agreement. It allowed P.P.T. to terminate that Agreement in its sole discretion upon 7 days written notice. It stated that if Ardara took initial steps within 30 days of such determination to terminate leases and discharge employees then P.P.T. would upon presentation of invoices etc. reimburse the distributor for the reasonable costs associated therewith. Ardara agreed that during the term of the Agreement it would not make any changes in its managerial or supervisory staff. P.P.T. was given the right to exclusively manage Ardara's sales and marketing of Pepsi-Cola beverages and to appoint a sales and marketing manager with complete and exclusive authority to render and implement decisions in the areas of marketing and operations. Further P.P.T. had the right to appoint a financial planning manager who would make final decisions with respect to Ardara's financial functions.
19. The Agreement also provided, in Article 14, that:-
"P.P.T. may, on such terms and at such times as it deems appropriate, arrange for supplemental marketing support to Distributor."
20. Mr. Tang in his affidavit suggested that, by Article 14, P.P.T. assumed the obligation to pay the marketing subsidy which PepsiCo had agreed to pay in the Marketing Development Agreement. I am unable to see how it can be suggested that the words used in Article 14 are capable of bearing this meaning. The words are quite clear. It is stated that P.P.T. "may" arrange for supplemental marketing support. There is clearly no obligation upon P.P.T. so to do. It is a matter entirely within its discretion as to whether or not it will step in and arrange further supplemental support.
21. This Agreement deleted Article 8.3 of the original Distribution Agreement. This Article had provided that "distributor shall pay for the beverages on 30 day credit terms in Hong Kong Dollars". Mr. Tang in his affidavit suggested that the effect of this clause was that Ardara was not required to pay P.P.T. for products delivered to it during the subsidy period. When the Agreement is read as a whole, this view is clearly not tenable and, indeed, Mr. Mills-Owens who appeared for the Defendant did not seek to advance it. I am satisfied that the liability to pay was not affected by the deletion. Indeed on the face of it the deletion put Ardara in a less advantageous position as it no longer had a specified 30 day credit period. It seems to me clear, however, that the deletion was made to give Ardara greater, not less, flexibility, as regards payment, during the subsidy period.
22. Article 15 provided that P.P.T. would cause Ardara to receive a subsidy in an amount equal to distributor's operating losses during the subsidy period which exceeded the sum of $3,379,000 provided such losses were caused by one or more of a number of specified events. In the outcome there was no argument that there were losses and that they were caused by one or more of the specified events. Article 15 also provided, amending Article 11.3 of the Distribution Agreement, that if Ardara "achieves results in excess of, or sustains operating losses in an amount less than" $3,379,000, the resulting differential would be credited or paid to P.P.T.
23. The "Subsidy Period" was specified to be from May 1, 1983 to December 31, 1983. It is common ground that what was provided was that if Ardara's loss exceeded $3,379,000, P.P.T. would cause Ardara to receive a subsidy in the amount of such excess and that if Ardara made a profit or made a loss less than $3,379,000, P.P.T. would be entitled to that profit or to a sum equal to the difference between $3,379,000 and the loss. The sum of HK$3,379,000 is equivalent to US$470,000. It will be remembered that PepsiCo was to pay that sum as part of the fixed subsidy to Ardara on the 31st December 1983, the last day of the subsidy period. It might well have happened that, if Ardara had "broken even", as the financial plan prepared at the time of the signing of the Agreement (''TT-9") suggested it would, the overall financial position between Ardara, P.P.T. and PepsiCo would have been settled by a series of book-keeping adjustments and that if a loss had been sustained, in whatever amount, again by a series of book-keeping adjustments in all 3 companies, only the amount of the actual loss would have been paid to Ardara. There was however, it must be stressed, no agreement to that effect. The matter could have been adjusted in that way only if the parties, for the sake of convenience, had agreed to such an arrangement. They might have done so or they might not have done so - there was nothing, I am satisfied, that bound them to do so.
24. Ardara did not prosper during the subsidy period and on the 23rd November 1983 Mr. Zao, according to Mr. Tang, handed over debit note No. 19/83, dated 23rd November 1983, ("WZ-1") in the amount of HK$3,347,846.05 This debit note was said to be for "price adjustment for products sold for period May 16, 1983 to October 2, 1983". It was a price rise which related to goods already delivered to Ardara. Mr. Tang says, understandably, that he queried this price rise and that he was told that it did not matter as P.P.T. "was going to subsidize Ardara's losses anyway" and that P.P.T. was imposing the "increase in order to obtain a tax advantage for PepsiCo.". Mr. Tang says he did not agree to this price rise. It is, however, not of any significance in this application as P.P.T. do not seek summary judgment with regard thereto.
25. The Agreement was finally terminated by P.P.T. which gave notice of termination by a telex dated 30th November 1983. Ardara acknowledged the termination be way of its telex of the 9th December 1983. ("TT-13"). Ardara, according to Mr. Tang, transferred its assets to P.P.T., pursuant to Article 18 of the Amendatory Agreement No.1, and issued an asset release on 3rd February 1984. Article 2 of the Amendatory Agreement No.1 required P.P.T. to reimburse Ardara for the reasonable costs associated with termination of leases and dismissal of employees. However Ardara does not appear to have made any claim in this regard.
26. The original affidavit supporting the application was by Mr. Roland Teo Cheng San. Mr. Teo attached to his affidavit a letter from Ardara dated the 15th December 1983 ("RTCS-1"') in which Ardara stated that they were claiming US$470,000 under the Marketing Development Agreement and HK$14,286,000 under the Amendatory Agreement No.1. The latter claim they stated was made up as follows:-
| Total losses for year 1983 | HK$17,665,000 |
| Less amount due under Article 11.3 | 3,379,000 |
| Balance of Subsidy due | HK$14,286,000 |
| | =========== |
27. In order to establish the total loss figure Ardara attached to that letter a Profit and Loss Statement for the period January 1, 1983 to December 7, 1983.
28. Mr. Ching pointed out that P.P.T. was not seeking summary judgment in the full amount of its claim. He conceded that the original claim of $17,737,367.95 had to be reduced by any amounts as to which there was a dispute. The first such amount was the amount of $3,347,846.05, the amount of the price adjustment referred to above, which reduced the claim to $14,389,521.90. He said that this amount had to be further reduced by $10,938,153.95. He arrived at this figure by taking the figure of $14,749,000 which was the loss suffered by Ardara during the period from May to December 1983, i.e. the Subsidy Period, and subtracting therefrom the sum of $3,347.846.05 for which he had already made allowance as set out above. It was Mr. Ching's contention that the figure of $10,938,153.95 represented the total amount of any claim that could be made against P.P.T. by Ardara under Article 15 of the Amendatory Agreement No.1 ("TT-5") and that, subject to the 2 minor adjustments set out below, Ardara had no answer to a claim against it for $3,451,367.95 that being the difference between $10,938,153.95 and $14,389,521.90, the adjusted outstanding balance for goods delivered.
29. It is true that, as regards the Profit & Loss Statement used by Mr. Ching, Mr. Tang in his affidavit said "This is only a draft statement and ... it is only put forward at this stage to give this Honourable Court an indication of the quantum of this part of Ardara's claim against PepsiCo and/or P.P.T."
30. Mr. Ching, however, rightly in my view, submitted that he was entitled to rely upon the figure set out therein, showing the loss suffered, as the figure representing the maximum claim that Ardara was, in this O.14 application, able to formulate P.P.T. The two further adjustments which had to be made were because of an arithmetical error in Credit Note 61/83, which required that an amount of $37,909.40 be subtracted, and because of disputed credit note 55/83, which required that an amount of $84,322.80 be subtracted. The final figure thrown up after these subtractions is $3,329,135.75. Mr. Ching submitted that as regards this amount no arguable defence had been established.
31. Mr. Mills-Owens stressed that the Court must look at the overall situation and place this O.14 application in the context of that situation. He submitted that prior to June 1983 Ardara had reached a point where it could no longer continue to trade and that the only reason Ardara continued to trade was because of the support given to it by the Pepsi-Cola group. He submitted that it was very much in the interest of the Pepsi-Cola group to have the distributorship continue uninterrupted and that after June 1983 the managerial and financial control of Ardara was taken over by persons placed in Ardara by the Pepsi-Cola group. He submitted that amounts remained unpaid for goods delivered because the persons placed in control of Ardara by the Pepsi-Cola group had failed to make payments. I do not think issue can be taken with Mr. Mills-Owens' submissions thus far. However, he went on to submit that there was no benefit at all to Ardara and its shareholders flowing from the arrangements entered into in June 1983 and that P.P.T., because it had placed persons in control of Ardara, must be responsible for any losses incurred there-after and for the consequent failure to pay for the goods delivered.
32. I cannot agree with these submissions. It seems to me quite clear that there was an advantage to Ardara in the arrangements entered into because it allowed Ardara to go on trading with the hope that it would, eventually, find itself in a situation of profit. The suggestion that there was no advantage in the arrangements for Ardara, in my view, flies in the face of common sense. Ardara was controlled by businessmen who, after several weeks of negotiation, were prepared to enter into a package which they must have hoped would save the company.
33. I can see no merit in the suggestion that P.P.T. can somehow be held responsible for the continued failure of Ardara because it had placed officers, in accordance with the Agreement, in managerial and financial control of Ardara. There is nothing in the evidence which would establish that these officers did other than try to put Ardara into a profitable financial position. It is perfectly clear that the reason they did not pay for all of the goods that were delivered was because they did not have sufficient money to do so. I am unable to see how it can be suggested that they were somehow at fault in this regard and that P.P.T. can be made liable for this fault.
34. Mr. Mills-Owens was at pains to stress that the arrangements entered into in June 1983 were a package and that they must be considered in that light and he submitted that the only way in which the package could be untied was by the taking of accounts.
35. Mr. Mills-Owens submitted that there was a clear understanding between the parties that there would be an account at the end of the period and that support for the existence of such an understanding could be derived from the fact that there were no demands for payment of goods delivered during the subsidy period and from the fact that P.P.T., which had appointed the officers running Ardara, did not cause the payments to be made. While it may be true that no specific demands were made for payment it seems clear that debit notes and invoices were always delivered by P.P.T. to Ardara (paragraph 3 of William Zao's affidavit). It is clear from the "Schedule of Payments Received" ("RTCS-6") that payments were made for goods during the period of the subsidy. It is true that all of these payments did not relate to goods delivered during that period, however, the fact that some payments were being made clearly indicated a recognition of the duty to pay for goods received. It is true that the full amount of the debit notes and invoices was not paid but it seems to me clear beyond argument that this was so not because of the existence of the "understanding" contended for but because Ardara did not have the cash to make full payments. I see nothing in the evidence which might establish any "understanding" of the sort contended for by Mr. Mills-Owens.
36. Is it nonetheless arguable that the Court must regard the agreements as a package that can only be untied by the taking of accounts? I am satisfied that it is not. As I have already indicated I am satisfied that, although the representative capacity of the negotiators for the Pepsi group may have been blurred at times during negotiations, the parties were at pains, when the time came for drawing up the documents that would govern the legal relations between them, to ensure that the parties to those documents and the legal relationship of those parties were clearly defined.
37. Mr. Mills-Owens further contended that the amount owed by PepsiCo under the Marketing Development Agreement must be regarded as a debt owed by "the PepsiCo group" to Ardara. I am unable to agree with this contention. The Agreement is perfectly clear and speaks for itself. The parties thereto are PepsiCo and Ardara, and only those parties are bound by the terms of that Agreement.
38. Mr. Mills-Owens suggested that if PepsiCo is taking the attitude, and it appears that it is, that, by virtue of Clause 5(c)(ii), it is, because Ardara is in default under the Amendatory Agreement No. 1, not liable to pay any amount under the Agreement, that this is a matter that must come into a final accounting between the three parties. He suggested if PepsiCo is taking that attitude and is able to establish that it is not liable, then an action, which could be by way of counterclaim in the present action, would lie against P.P.T. because it had by its officers placed Ardara in the position where it was not entitled to succeed in its claim against PepsiCo. As I have already indicated I see nothing in the evidence to suggest that Ardara could successfully maintain any such claim. It is perfectly clear that Ardara did not pay money owed to P.P.T. because it had no money to pay. As I have already indicated I do not consider that there is evidence to establish the existence of any "understanding" between the parties that the amount owed by PepsiCo to Ardara would be part of a final accounting. There is a clear contract between PepsiCo and Ardara and whether or not any amount is owing must be governed by the terms of that contract.
39. Mr. Mills-Owens submitted also that some form of estoppel arose because of representations made by P.P.T. to Ardara. I can see no facts that would establish representations sufficient to support an estoppel of the kind contended for by Mr. Mills-Owens.
40. I am satisfied that under the Agreement that existed between P.P.T. and Ardara the latter is now liable to make payment for the goods delivered and that P.P.T. must, therefore, succeed to the extent of $3,329,135.75 I give judgment for P.P.T. in that amount. I make an order nisi that Defendant pay the Plaintiff's costs of this application to be taxed.
| (N.P. Power) |
| Judge of the High Court |
Representation:
Mr. Charles Ching, Q.C., and Mr. William Stone instructed by Baker & McKenzie for Plaintiff.
Mr. Richard Mills-Owens, Q.C. and Mr. Allman-Brown instructed by Johnson, Stokes & Master for Defendant.