G & A Ltd. v HN Jewelry (Asia) Ltd.

In May 2001 the claimant and the first defendant entered into an agreement relating to the supply of jewellery by the first defendant to the claimant. The contract was expressed to be “for three years rolling, commencing on 1 January 2001”. By notice given in August 2003 the first defendant purported to terminate the contract as from 31^st December 2003. Proceedings were commenced at that stage against the first defendant. An expedited trial was arranged. Just before the trial other defendants were joined in circumstances to which I will return. The first defendant purported to withdraw the August notice and the trial became simply a trial of a preliminary issue as to whether the claimant was right in suggesting that the contract was only terminable on three years’ notice.

By a judgment given on the 18^th December 2003 Crane J declared that the effect of the above term was (as submitted by the claimant) that the contract was only terminable on three years’ notice, i.e. that the contract was rolling in the sense that, without notice being given, there was at all times a three year contract. He refused permission to appeal that decision.

When considering permission to appeal on paper I indicated that I would accept it as arguable that the proper construction of “rolling” was that as at 1^st January each year, the contract would become one for a further three years unless reasonable notice had been given. (On that basis I was suggesting if reasonable notice were given the effect would be to leave a two year period from 1^st January after notice.) However, since that was not a suggested construction so far as the defendants were concerned, and, because I thought that the defendants were deliberately not so suggesting because such a construction gave them little benefit as compared to the claimant’s suggested construction, I refused permission to appeal. I directed however that if the application for permission was renewed then the hearing should be inter partes with appeal to follow if permission granted.

The application for permission was renewed. As was made clear during the course of argument, the application was treated as the appeal as though permission had been granted, and this is the judgment following that oral hearing.

The above describes the key issue but there was a second issue which arose in the following way. The claimant had sought mandatory injunctions against the defendants. The defendants had submitted that mandatory injunctions were inappropriate in that it was unclear precisely what it was that the particular defendants had to do. The judge was prepared to insert words “should take all practical steps to . . .” to meet the defendants’ objections. By a separate judgment on the 18^th December 2003, Crane J gave his reasons for ruling that mandatory injunctions with the words inserted should be granted as against certain of the defendants. He refused permission to appeal in relation to that aspect. I refused permission on paper but, again, the application was renewed and argued before us on the 5^th May 2004.

The written agreement was headed “Exclusive Supply Agreement with Heng Ngai”. The contract is short and its provisions can be fully set out as follows:-

“1)

Definition of Terms

Through this document the following definitions will apply:

“G&A” - G&A Limited

“Heng Ngai” - HN Jewellery (Asia) Ltd and Associate Companies

2)

Timing

This contract is made between G&A and Heng Ngai. The contract is for three years rolling, commencing on 1 January 2001. There will then be a meeting once a year by the 15^th of November to plan capacities and work on supply chain planning for the following year.

3)

Exclusivity

All gold and sterling silver products produced by Heng Ngai and sister companies will be supplied to the UK, Irish and Gibraltar markets exclusively through G&A as sole distributor. These products will not be supplied to any other company (except QVC), in either finished or semi-finished form, for onward sale into the UK market.

QVC

The only exception to Exclusivity for the territory will be QVC. Heng Ngai will pay G&A 5% of the nett invoiced turnover to QVC for the UK market. Such payments to be made with full accounting support with independent audit ½ yearly on 1^st September and 1^st March. These will cover the 6 month period ending 30^th June and 31^st December, respectively.

In reciprocation G&A will give Heng Ngai preferred supplier status, i.e. products within Heng Ngai’s technical capability will be sourced from Heng Ngai provided they are at commercial weights and prices and can be delivered within the agreed lead times.

4)

Quantity/Total Manufacture

G&A will endeavour to generate as much business on the products sourced with Heng Ngai as is possible.

G&A will endeavour to buy a maximum of US$300,000 of 9ct gemset merchandise from its other small suppliers in Hong Kong, excluding its subsidiary Dynamic Creations Limited.

G&A guarantees a minimum purchase of US$9M for the year ending 31^st December 2001. We will then meet annually to discuss targets for the following year.

5)

Payment

Payment will be made on the 15^th of the month following the month of delivery for all invoices dated within the relevant month. Heng Ngai will confirm which bank this payment should be made to each month.

6)

Deliveries

a)

Delivery Timings

Heng Ngai guarantees delivery of products as follows:

25 working days from the date of order. This should particularly be adhered to in the months July, August, September, October when it is absolutely vital that stock is delivered within the lead times.

There will also be a fast track for urgent orders of 15 working days from the date of order for an agreed quantity of merchandise. This agreed quantity will be negotiated each year.

Heng Ngai will provide details of all holidays and factory closures each year so that an accurate expected delivery date can be calculated for the purpose of monitoring this contract.

b)

Ordering/Quantities

G&A will accept 95-105% of ordered quantities. Heng Ngai will indicate whether a particular shipment is a “partial” or the order is complete on the packaging documents occupying the shipment.

7)

Quality

a)

Stock Rejected by our QC Department

G&A will rigorously inspect all items on each Heng Ngai invoice for any quality defect. G&A’s decision will be final as to what constitutes acceptable quality. Products considered not to be of acceptable quality will be rejected and a sample sent to Heng Ngai by the next available courier movement.

Any stock rejected on quality grounds will be debited from succeeding payments until replaced or final credit is agreed.

b)

Stock Below 0.375 Standard

We will provide to you evidence of failure from the Assay Office. This stock will either be returned to you and the debit deducted from the succeeding labour payment or melted in the UK with the following associated charges:

i)

Melting costs

ii)

Labour costs plus loss

iii)

Assay charges

8)

Gold Quality

Colour – 9 carat merchandise should be the pale yellow colour preferred by the UK market.

9)

Prices

The prices at gold base $362.50 for each item will be agreed and form the accepted price list for each year.

10)

Retrospective Discount

If we cannot conclude the Project Rio discussions satisfactorily we reserve the right to open the discussions on volume discounts.

11)

This Agreement shall be terminated without notice if either party has been wound up or has a winding up issued against him or such circumstance has arisen which reasonably prevents the party to comply with the terms of this Agreement.”

The question is what do the words “The contract is for three years rolling, commencing on 1 January 2001” mean? The agreement was made in May 2001 but it involved the continuation of a one year exclusive agreement which had terminated on 31^st December 2000.

On 29^th August 2003 the first defendant served a notice by registered post, which referred to the exclusive supply agreement and stated:-

“On behalf of Heng Ngai, we hereby give notice and confirm that the Agreement will expire at the end of 31 December 2003. Heng Ngai will not renew the agreement after its expiry and the agreement will not roll into a second three year period.

We would like to review with you opportunities to further develop our trading relationship on a non-exclusive basis and on new terms. We will contact you shortly to exchange ideas and thoughts.”

The notice was signed by Wai-Kit Lau, a director of the first defendant (Mr Lau).

This led to the commencement of the proceedings in which the claimant asserted that the agreement was only terminable on three years’ notice. That in one sense could be said to mischaracterise the claimant’s case, which is that this was a three year agreement and then remained a three year agreement at all times until notice was given that it was no longer so. Be that as it may, the declaration sought was that the agreement was terminable on three years’ notice. So at this stage the rival contentions appeared to be either that the agreement was a three year agreement from day-to-day until notice was given that it was not; or that it was a three year contract rolling in the sense of becoming another three year contract at the end of the period of three years unless, by a reasonable notice, the contract was terminated as at the end of the first period of three years.

The proceedings were initially against the first defendant only and their defence put their position differently. By paragraph 8 they asserted that the agreement was terminable by reasonable notice given prior to 31^st December 2003, but, as an alternative, the suggestion was that the agreement was for three years and would terminate if no notice was given by either side, i.e. there was no acceptance of rolling into a second period of three years.

Shortly before the trial the first defendant withdrew the notice given by the letter dated 29^th August 2003. This decision was taken in the context of a restructuring of the Heng Ngai group. That restructuring would, at least on the face of it, appear to have taken place in order to avoid the consequences of the claimant’s construction of the exclusive agreement being found to be right. The shares in the first defendant were transferred to Hersey Capital Ltd (Hersey), a British Virgin Islands company, owned entirely by Mr Lau (the fourth defendant), who until that point had been a director of the first defendants and a consultant to the Heng Ngai Group. It appears Hersey had paid HK$2 for the issued share capital of the first defendant. All the assets of the first defendant, apart from the benefit of the contract, had been transferred to another Heng Ngai Group company, HNJ Trading Ltd. A further Heng Ngai company was incorporated in England, HNJ (Europe) Ltd, who became the second defendants.

It was in those circumstances that the claimant joined the second to fifth defendants, the second defendant being the company incorporated to distribute Heng Ngai jewellery in the UK, and the individuals being Mr Yau, the former chairman of the first defendant company and controlling power behind the Heng Ngai Group, Mr Lau, who through Hersey had obtained the shares in the first defendant, and Mr Eric Lo, a former director of the first defendant company.

The above restructuring took place on the 11^th December 2003, with the trial commencing on the 15^th December 2003. The claimant accordingly added the further defendants, amended their particulars of claim and amended the form of relief which they were seeking to include all the defendants. The first and fourth defendants were represented by Mr Leon Kuschke and Mr Stephen Horan. The second, third and fifth defendants were separately represented by Mr Kenneth MacLean QC. It was clearly impossible to have a full trial and thus, since the construction issue affected all defendants, it was that issue which the judge tried, although it was accepted that if the defendants’ contention that reasonable notice was required, it would not be possible for the judge to determine the extent of that reasonable notice. Clearly also the interim relief being claimed against the defendants would be a matter for debate before the judge.

The main thrust of the arguments on behalf of all defendants before the judge was to the effect that the claimant’s submission that three years’ notice was what was required to terminate the contract was wrong. Little was put forward as a positive case as to what alternative basis there may be for terminating the contract. It certainly appears that the contention that if notice were not given prior to the end of the three year period a further three year period would come into being, as suggested by the August notice, had been abandoned. It further seems as though the contention that there would be an automatic termination at the end of three years was abandoned by the amended defence put in on behalf of the first and fourth defendants. The suggested possibilities for terminating the contract became, as I understand it, either that the contract after the period of three years would be terminable on reasonable notice or, as suggested by Mr MacLean for his clients, that the “rolling aspect of the agreement simply means that it continues from year to year unless and until reasonable notice of termination is given”.

Before us the thrust of the submissions made by Mr Kuschke and Mr MacLean were still to the effect that all the court should decide was whether the three year notice contended for by the claimant was the correct result. Mr Kuschke for the first and fourth defendants submitted indeed that that was the only issue before the judge and thus was the only issue before the court. His submission was that if the conclusion was that the judge was wrong, then there was no room for the court considering what was in fact the proper construction of the contract. Mr MacLean did not perhaps take the matter that far, he conceding that if the court had formed the view as to the proper construction of the contract it must be free to say so. What, however, both Mr Kuschke and Mr MacLean submitted was that if the contract was terminable in some way on reasonable notice, then it would not be open to this court to fix the period of that notice without further evidence and in that submission they were clearly right.

What however also became clear was that Mr Kuschke, at least as an alternative, espoused the term which I had suggested as a possible basis on which this contract could be terminated. He submitted that this court should not however rule on that since the term was no more than another way of holding that the contract was terminable on reasonable notice. As it seems to me that is an unacceptable submission. Clearly the length of reasonable notice will depend on evidence, but there is a question of construction which can and indeed should be addressed. There are, as I see it, four possible candidates as the proper basis on which this contract might be terminated. There is first the claimant’s submission that this is a contract of three years until notice is given that it is not; there is the construction I suggested as a possibility of a reasonable notice being given at the end of the first of any period of three years, leaving a two year block remaining; there is Mr MacLean’s suggested possibility that once a three year period has been completed the contract would run for a further year, terminable by reasonable notice ending on the 31^st December of that year; and there is Mr Kuschke’s suggested alternative, which is that once the period of three years has terminated the contract continues simply subject to reasonable notice being given. As to which of those alternatives is the appropriate construction there is no necessity for evidence. The question is simply one of construction of the contract. As to what period of reasonable notice might be required in any one of the last three of the alternatives suggested, that would require evidence and it would not be right for this court to lay down the appropriate period.

What could not be satisfactory would be for this court to consider whether as a matter of construction the claimant’s three year notice requirement was appropriate, without considering the alternatives.

Much of the argument of Mr Kuschke and Mr MacLean as to why the claimant’s suggested construction must be wrong related to the obligations that they said flowed or did not flow under the terms of the agreement. Mr Kuschke and Mr MacLean recognised that under clause 3 Exclusivity, G&A was effectively the sole distributor and that there was reciprocation for Heng Ngai agreeing to that by virtue of the obligation on G&A to buy products from Heng Ngai insofar as Heng Ngai was technically capable of producing those products (see the first and third paragraphs of clause 3). However, Mr Kuschke and Mr MacLean suggested first that the absence of any guaranteed minimum purchase in the second and third years and the absence as they contended of any obligation on Heng Ngai to deliver products at all under the contract and in particular clause 6, meant that first G&A were not obliged to place orders over a period of three years and it would thus be unreasonable to impose exclusivity on Heng Ngai in such a situation; and second it would be equally unfair to impose on G&A an obligation to buy products from Heng Ngai, and only Heng Ngai, if Heng Ngai were not obliged to deliver.

It seems to me that on the proper construction of this contract Heng Ngai were obliged to deliver goods as ordered by G&A, and that that is the proper construction of clause 6. Furthermore, it seems to me that G&A were obliged to buy from Heng Ngai all products to be supplied by G&A so long as Heng Ngai were technically capable of producing the same. The fact that minimum quantities were not agreed for the second and third years was something which the three year contract contemplated in any event. Furthermore, the fact that a minimum quantity had not been agreed for the second and third years did not make the contract one-sided. G&A, under clause 4, had to endeavour to generate as much business on the products sourced with Heng Ngai as was possible, they were obliged to meet to discuss the targets for the following year so as to enable Heng Ngai to be prepared for orders; and under clause 6 Heng Ngai were bound to deliver stock. It was on that basis that they were prepared to agree a three year contract and there is no reason to think that they would not have been prepared to have a contract rolling forward in blocks of two to three years on that agreed basis. It furthermore seems unlikely that this form of long-term relationship was intended to be ended by some short period of notice given at any time while the relationship was in being.

At one time it was suggested that the word “rolling” simply contemplated a three year contract rolling forward from year to year within that three year period. However it seems to me that that concept does not fit with the agreement that there should be a meeting once a year by the 15^th November to plan capacities for the following year. That carries with it, together with the word “rolling”, the concept of this contract continuing after the 31^st December 2003. The meeting on the 15^th November in each year further carried with it the concept of a taking of stock as to how the relationship was going as between the parties. That is emphasised by the last line of clause 4, which referred to the annual meeting to discuss targets for the following year.

As I have said, it seems to me it cannot have been the contemplation that this contract could be brought to an end by any short period of notice. Mr Kuschke’s preferred construction that a three-months’ notice bringing the contract to an end as at the 31^st December 2003, or a short period of notice at any time after the 31^st December 2003 does not seem to me to be a likely result contemplated by the parties. However at the other end of the spectrum it seems to me that the claimant’s construction of a rolling contract, making this a three year contract from each and every day that the contract existed, also has quite unreasonable and strange results. The contract appears to be looking at the trade between the companies in an annual way. The fact that the 15^th November is deliberately chosen is because that is a date by which targets for the next year, 1^st January to 31^st December, can conveniently be discussed. In clause 6 delivery times are said to be particularly important for the months of July, August, September, October, which again suggests the parties looking at their production by reference to the seasons of the year. It would seem to me unnatural to contemplate that, as at the 15^th November of any year (for example), if targets on being discussed gave rise to difficulties such that the long-term arrangement should cease, the parties would think that three years from the 16^th November would be the appropriate period. Furthermore, the three year notice period advocated by the claimant has the strange result of making it a requirement that the parties should have served their notice as of the 1^st January 2001 if they wished to terminate on 31^st December 2003. Not only would that be strange if the contract had actually commenced on 1^st January 2001, but it simply did not fit with the parties having actually signed the contract in May 2001, albeit it ran from the earlier date.

It seems to me that there are really only two possible constructions of this contract. First is the construction which I suggested, i.e. that in any year the parties were free to give reasonable notice ending at the end of that year that the contract was no longer to be for three years, bringing the contract to an end two years after the 1^st January of the following year. The alternative is the construction suggested as a possibility by Mr MacLean, which is that reasonable notice could be given terminating at the end of any year, leaving just one year for the contract to run. Both constructions fit with the concept of this contract being effectively an annual contract reviewed from year to year. Both could be said to be consistent with the concept of the contract “rolling” forward.

It seems to me however that Mr MacLean’s suggested construction does not give sufficient meaning to the phrase “for three years rolling”. Under Mr MacLean’s construction, if no notice is given then, as I understand it, the contract could have only two years to run, in that notice prior to the end of the second year will terminate the contract one year thereafter. My preferred construction produces a situation in which if no notice is given prior to the end of a year, then there is a further three years of the contract.

As will by now be clear, of the alternatives I prefer the construction which allows for the giving of notice at the end of the first year of three, leaving two years of the contract to run.

I appreciate that without further evidence it may be thought difficult for this court to give guidance as to how long that notice should be. But it may assist if I say that once one has reached the position that this contract is terminable by the giving of a notice terminating on 31^st December of the first year of three, the result is that there are a further two years for the parties to sort out how they will carry on their business. That being so the notice required at the end of that first year of three would seem to me not to have to be very long. Indeed, my suggestion would be that the meeting on the 15^th November in any year that the contract exists provides a clue as to the period of notice required. Six weeks from the 15^th November would seem to me, with a further two years to run, to be likely to be the sort of notice required.

The above being my view, the appropriate order to make is that permission to appeal should be granted and the appeal allowed. The declaration to which the claimant should be entitled should reflect the term which I have advocated.

There is no issue before the Court of Appeal that the claimant are entitled to interlocutory relief. The issue is whether mandatory injunctions should have been granted against the first defendant and the third, fourth and fifth defendants, and in particular whether the terms of those mandatory injunctions, with the words inserted by the judge, are clear enough to allow those defendants to know precisely what it is that they may or may not do.

The form of the injunction against the First Defendant about which there is complaint is 1(b) of the judge’s order which orders “the first defendant to take all practical steps to procure that any sister and/or associate companies do not, whether through their agents, employees, directors or otherwise, directly or indirectly supply or sell gold and silver sterling products produced by the First Defendant, and/or any associate and/or sister companies, in finished or semi-finished form, in or for onward sale to the UK, Ireland and Gibraltar (save to QVC in the United Kingdom) other than exclusively through the Claimant”. The order against the third, fourth and fifth defendants, i.e. against Mr Yau, the controller of Heng Ngai, and Mr Lau, who was a director of the first defendant and now owns the first defendant through Hersey, and Mr Lo, is in the following form that they and each of them “take all practical steps to procure that the First Defendant, or any sister and/or associate companies do not, whether through their agents, employees, directors or otherwise, directly or indirectly supply or sell gold and sterling silver products produced by the first defendant and / or any associate and/or sister companies, in its finished or semi-finished form, in or for onward sale to the UK, Ireland and Gibraltar (save to QVC in the United Kingdom) other than exclusively through the Claimant”. The order then lists companies which are to be regarded as sister and associate companies.

The above injunctions are, Mr Kuschke and Mr MacLean would suggest, in mandatory form and it is submitted that because they do not make clear precisely what it is that the defendants are required to do the judge has failed to apply the guidance given in Redland Bricks Ltd v Morris [1970] AC 652, in the speech of Lord Upjohn, where at 665F he said “Every case must depend essentially upon its own particular circumstances”, but then went on to set out certain general principles, including the general principle at 666G:-

“If in the exercise of its discretion the court decides that it is a proper case to grant a mandatory injunction, then the court must be careful to see that the defendant knows exactly in fact what he has to do and this means not as a matter of law but as a matter of fact, so that in carrying out an order he can give his contractors the proper instructions.”

The more fundamental criticism that the judge had failed to follow the guidance given in Zockoll Group Ltd v Mercury Communications Ltd [1998] Fleet Street Reports 354, was not pursued but it is right that it should be the starting point. In that case Lord Justice Phillips having set out at length a passage from a speech of Lord Jauncey in R v Secretary of State for Transport ex parte Factortame Ltd (No.2) [1991] 1 AC 603 at 683 relating to the granting of interlocutory injunctions and in particular mandatory interlocutory injunctions said at page 366 this:

“I would concur with this passage as providing detailed guidance to the approach of the court when considering an application to grant a mandatory interlocutory injunction. A more concise summary, which I would commend as being all the citation that should in future be necessary, is the following passage in the judgment of Chadwick J in Nottingham Building Society v Eurodynamics Systems [1993] F.S.R. 468 at 474:

In my view the principles to be applied are these. First, this being an interlocutory matter, the overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be ‘wrong’ in the sense described by Hoffmann J.

Secondly, in considering whether to grant a mandatory injunction, the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage, may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action, thereby preserving the status quo.

Thirdly, it is legitimate, where a mandatory injunction is sought, to consider whether the court does feel a high degree of assurance that the plaintiff will be able to establish this right at a trial. That is because the greater the degree of assurance the plaintiff will ultimately establish his right, the less will be the risk of injustice if the injunction is granted.

But, finally, even where the court is unable to feel any high degree of assurance that the plaintiff will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory state. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweigh the risk of injustice if it is granted.”

To the above I would simply add that albeit Simon Brown LJ as he then was did not in any way disagree with the above formulation, he was inclined to put the matter quite shortly in relation to the granting of a mandatory injunction, which was the point in issue on that appeal in the following terms:

“ “Where does the balance of convenience lie?” or, to my mind the preferable formulation of this issue: “which course carries the lower risk of injustice?” ”.

The position in the instant case is somewhat different than will be that in many cases where mandatory injunctions have been considered. Although this injunction is mandatory in form, it carries with it much which is simply negative. What the court was faced with was what appeared to be a blatant attempt to switch the business of one company out of the Heng Ngai Group and then replace the claimant with a Heng Ngai Group company in the United Kingdom, such attempt being carried out, as the evidence indicated, by the three individuals. The claimant had been attempting to have a speedy trial of an action prior to that attempt being made. What the judge’s order seeks to do is in effect to preserve the status quo, pending the hearing of the trial which then had to take place at a later date.

There is not as I see it any real difficulty in the defendants, who are the subject of the mandatory orders, doing that which is necessary to see that the status quo is in fact preserved. That being so, and having regard to the conclusion that I have reached on the true construction of this contract, I would not grant permission to appeal against the orders made by the judge.