Edwin John Phillips v. Sa Sa International Holdings Ltd.

HCA005190/2001

HCA 5190/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO. 5190 OF 2001

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Coram: Deputy High Court Judge Andrew Cheung in Chambers

Date of Hearing: 15 March 2002

Date of Handing Down Judgment: 2 April 2002

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J U D G M E N T

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1.I have before me an application to strike out the Amended Statement of Claim and a cross application to re-amend the same.

2.The Plaintiff's case, for the purpose of these applications, may be very briefly stated. The Plaintiff and a sleeping partner (Mr. Wain) used to be the only directors and shareholders of a holding company, Lisbech Enterprises Limited, which holds and operates a chain of health and beauty centres under a well-known name in Hong Kong and elsewhere ("the chain"). The Plaintiff and his partner each held 5,000 shares in the holding company. In April 2000, the Plaintiff on behalf of himself and his partner entered into negotiations with the Defendant through its representative for the sale and purchase of not less than 70% (i.e. 7,000 shares) of the shares in the holding company, plus a put option to the Plaintiff and his partner to sell their remaining shares to the Defendant over a number of years. After further negotiations, the Defendant was also interested in the subscription of another 2,000 shares to be allotted by the holding company; and the Defendant also wished to retain the service of the Plaintiff, the principal spokesman of the chain of health and beauty centres, for five years as managing director and chief executive officer of the holding company, so as to provide for the continuity or appearance of continuity of association between the Plaintiff and the chain notwithstanding the intended change in ownership of the holding company.

3.On 28th July 2000, the Defendant's representative proposed to the Plaintiff's solicitor over the telephone that, given the Plaintiff's pivotal role in the chain, an outright sale of the shares in the holding company especially by the Plaintiff would give an impression that the Plaintiff together with his existing successful management team were leaving the chain, which would undermine customers' confidence in the chain. The Defendant therefore proposed that the acquisition should be proceed with by taking, inter alia, the following steps:

(1) The Defendant would first purchase all the 5,000 shares in the holding company held by the sleeping partner at an agreed price.

(2) The Defendant would enter into a Call Option Agreement with the Plaintiff whereby the Defendant could within one year from completion of the sale and purchase of the 5,000 shares require the Plaintiff to sell 2,000 shares to the Defendant at an agreed price.

(3) The Defendant would "undertake ... that after completion of the purchase of the shares from [the sleeping partner], the Defendant would exercise the call option within the call option period of 1 year as and when required by the Plaintiff" ("the undertaking"); however, "in order not to undermine customers' confidence in [the chain] the undertaking would not be reduced to writing but would only be made orally".

(4) After the exercise of the call option, the Plaintiff would have an option to sell the remaining 3,000 shares registered in his name to the Defendant over a period of five years at a price to be fixed by a certain mechanism.

(5) The Plaintiff would continue to manage and operate the chain for five more years as already proposed.

4.According to the pleaded case of the Plaintiff as contained in his latest draft Re-amended Statement of Claim, a meeting was then held on the same day, i.e. 28th July 2000, at the office of the Plaintiff's solicitors. At the meeting, the Defendant's representative repeated to the Plaintiff the above proposal for the Plaintiff's consideration and acceptance. In the course of doing so, the representative "categorically assured to the Plaintiff ... that the Defendant would honour the undertaking as legally binding and enforceable despite the absence of documentation for it" ("the assurance").

5.According to the evidence filed by the Plaintiff in opposition to the strike out application, he sought legal advice from his solicitor who assured him that an oral agreement not reduced to writing was nonetheless legally binding as a matter of law although there could be difficulties in proving the existence of the agreement if it was subsequently denied by the other side, and he was advised that this was really a commercial decision for him to take. According to the pleading and evidence, "In reliance on the assurance and not otherwise", the Plaintiff accepted the revised acquisition plan proposed by the other side.

6.According to the pleading, the above thus constituted an "Overall Agreement" between the parties relating to the Defendant's acquisition of shares in the holding company. In particular, according to the pleading, under the Overall Agreement, the Defendant would purchase from the Plaintiff 2,000 shares that he held in the holding company at the agreed price; in order that customers' confidence in the chain could be maintained, the acquisition of the 2,000 shares would not be done in pursuance of a direct sale and purchase agreement, but would instead take the form of the Defendant's exercising a call option pursuant to a Call Option Agreement within 12 months from the date of completion of the allotment of 2,000 new shares by the holding company and the purchase of the 5,000 shares from the sleeping partner; and the Defendant undertook to exercise the call option within 12 months from the date of completion as and when required by the Plaintiff. Furthermore, in respect of his remaining 3,000 shares, the Plaintiff would be given a put option to require the Defendant to purchase the same by instalments over a period of five years from the date of completion of the sale of his 2,000 shares under the call option, at a price to be fixed in accordance with an agreed mechanism. Moreover, the Plaintiff would continue to manage and operate the chain for a term of five years.

7.According to the Plaintiff, pursuant to the Overall Agreement, a Sale and Purchase Agreement relating to the sale of the sleeping partner's 5,000 shares, a Subscription Agreement relating to the allotment of 2,000 shares by the holding company to the Defendant, a Call Option Agreement whereby the Defendant was granted an option to purchase 2,000 shares from the Plaintiff, and a Conditional Put Option Agreement relating to the Plaintiff's option to require the Defendant to purchase his remaining 3,000 shares within five years once the 2,000 shares had been acquired by the Defendant pursuant to the Call Option Agreement were prepared/revised, and eventually executed by the parties. The Sale and Purchase Agreement and the Subscription Agreement were executed on 31st July 2000, whereas the Call Option Agreement and the Conditional Put Option Agreement were executed on 31st August 2000 after the completion of legal and financial due diligence on the holding company conducted by the Defendant's legal and accounting advisers.

8.In each of the above documents signed by the parties, there was contained a similarly worded "entire agreement clause". In particular, clause 8(E) of the Call Option Agreement provided as follows:

"This Agreement sets forth the entire agreement and understanding between the parties or any of them in relation to the sale and purchase of the Call Option Shares [i.e. the Plaintiff's 2,000 shares in the holding company] and the other transactions contemplated by this Agreement and supersedes and cancels in all respects all previous agreements, letters of intent, correspondence, understandings, agreements and undertakings (if any) between the parties hereto with respect to the subject matter hereof, whether such be written or oral."

9.The sale and purchase of the sleeping partner's 5,000 shares and the allotment of 2,000 new shares in the holding company in favour of the Defendant were duly completed. But despite repeated demands, the Defendant refused or failed to exercise its option under the Call Option Agreement to acquire 2,000 shares from the Plaintiff. And because of this, the Plaintiff could not exercise his option under the Conditional Put Option Agreement to require the Defendant to acquire from him his other 3,000 shares in the holding company either. Moreover, in exercise of its voting rights as the majority shareholder in the holding company (after the acquisition of the 5,000 shares and the allotment of the 2,000 new shares), the Defendant subsequently removed the Plaintiff as managing director and chief executive officer of the holding company, and prevented him from entering into the premises of the chain, the Plaintiff having become a minority shareholder in the holding company.

10.In the original Statement of Claim filed, the Plaintiff sued on the orally made Overall Agreement. The claim was a simple breach of contract claim. It was then amended to include a plea of fraudulent misrepresentation relating to the undertaking given by the Defendant's representative that the Defendant would purchase the Plaintiff's 2,000 shares by exercising the call option within 12 months under the Call Option Agreement. Admittedly, this amendment was prompted by the Defendant's indication that by reason of the entire agreement clause, the Plaintiff's claim based on a breach of the alleged Overall Agreement was bound to fail.

11.However, the Plaintiff was unable to supply any particulars of his plea of fraudulent intention against the Defendant; and the Defendant took out the present Summons to strike out the Amended Statement of Claim on the basis that it is frivolous and/or vexatious and/or an abuse of process and/or discloses no reasonable cause of action.

12.On the date of hearing of the Defendant's application, the Plaintiff put in a draft Re-amended Statement of Claim together with a Summons applying for leave to re-amend. In the draft, the Plaintiff's case of fraudulent misrepresentation is dropped. Instead, the Plaintiff now relies on, apart from the original case of a breach of contract based on the oral Overall Agreement, estoppel as well as rectification based on mistake to deal with the Defendant's argument under the entire agreement clause. At the hearing, counsel agreed that the strike out application and the application to amend are really two sides of the same coin, as the Court has under Order 18 rule 19(1) an express power to order amendment of (instead of striking out) a pleading, but on the other hand the Court would not allow a futile amendment. If the new case of the Plaintiff as presented in his draft Re-amended Statement of Claim is liable to be struck out, there is no point in giving leave to amend. On the other hand, if the new case is arguable, or put another way, if it is not plain and obvious that the new case is not arguable, leave to amend should be granted, and there would be no question of striking out the Re-amended Statement of Claim. Accordingly, the two applications were heard in one go.

Entire agreement clause

13.It is common ground between counsel that in order for the Plaintiff's claim to survive the strike out application, he has to overcome the difficulty created by the entire agreement clauses in the various signed agreements, and in particular the one that is contained in the Call Option Agreement. This is because according to the English Court of Appeal decision in Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd. [1999] 1 Lloyd's Rep. 387, depending on the wording and proper construction of the clause actually used by the parties in their contract, an entire agreement clause may be effective to exclude all previous agreements, including any collateral agreements, between the parties that are not contained or repeated in the final written contract signed by the parties containing the entire agreement clause.

14.In Inntrepreneur Pub Co. (GL) v East Crown Ltd. [2000] 2 Lloyd's Rep. 611, Lightman J. analysed the purpose and rationale behind an entire agreement clause and the relevant case law as follows (at pp 614 to 615):

"7. The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the undergrowth and finding, in the course of negotiations, some (chance) remark or statement (often long-forgotten or difficult to recall or explain) upon which to found a claim, such as the present, to the existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search, and the peril to the contracting parties posed by the need that may arise in its absence to conduct such a search. For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be found in the document containing the clause and not elsewhere, and that, accordingly, any promises or assurances made in the course of the negotiations (which, in the absence of such a clause, might have effect as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible in evidence, as is suggested in Chitty on Contract, 28th ed., vol. 1 par. 12-102: it is to denude what would otherwise constitute a collateral warranty of legal effect.

8. Entire agreement clauses come in different forms. In the leading case of Deepak Fertilisers & Petrochemical Corporation v. Davy McKee (London) Ltd. [1998] 2 Lloyds Rep. 139, affirmed [1999] 1 Lloyd's Rep. 387, the clause read as follows:

10.16 Entirety of Agreement

This contract comprises the entire agreement between the PARTIES ... and there are not any agreements, understandings, promises or conditions, oral or written, express or implied, concerning the subject matter which are not merged into this CONTRACT and superseded thereby ...

Mr. Justice Rix and the Court of Appeal held in that case (in particular focusing upon the words "promises or conditions") that this language was apt to exclude all liability for a collateral warranty. In Alman & Benson v. Associated Newspapers Group Ltd., 20 June 1980 (cited by Mr. Justice Rix at p. 168), Mr. Justice Browne-Wilkinson reached the same conclusion where the clause provided that the written contract "constituted the entire agreement and understanding between the parties with respect to all matters therein referred to", focusing on the word "understanding". In this case, the formula used is abbreviated to an acknowledgement by the parties that the agreement constitutes the entire agreement between them. That formula is, in my judgment, amply sufficient to constitute an agreement that the full contractual terms to which the parties agreed to bind themselves are to be found in the agreement and nowhere else. That can be the only purpose of the provision. This view is entirely in accord with the judgment of Mr. John Chadwick, Q.C. (as he then was), sitting as a deputy High Court Judge in McGrath v Shah, (1987) 57 P. & C.R. 452. An entire agreement provision does not preclude a claim in misrepresentation, for the denial of contractual force cannot affect the status of a statement as a misrepresentation. The same clause in an agreement may contain both an entire agreement provision and a further provision designed to exclude liability, eg for misrepresentation or breach of duty. As an example, cl. 14 in this case, after setting out in cl. 14.1 the entire agreement clause, in cl. 14.2 sets out to exclude liability for misrepresentation and breach of duty. Whether this latter provision is legally effective for this purpose may turn on the question of its reasonableness as required by s. 3 of the Misrepresentation Act 1967: see e.g. Inntrepreneur Estates(CPC) Ltd v Worth, [1996] 1 E.G.L.R. 84. But (contrary to the contentions of Crown) s. 3 has no application to an entire agreement clause provision defining where the contractual terms between the parties are to be found: see McGrath v. Shah sup. It seems to me, therefore, that cl. 14.1 of the agreement provides in law a complete answer to any claim by Crown based upon the alleged collateral warranty."

Undertaking/assurance not inconsistent with Call Option Agreement?

15.Mr. Tang, quite correctly, accepted that these decisions correctly set out the general principles of law, but sought to get round them by three arguments. First, he argued that "the terms and conditions of the Overall Agreement did not contradict, vary, add to or subtract from the terms and conditions of the [Call Option Agreement]", and rather the Call Option Agreement was provided for by the Overall Agreement. He argued, by reference to his latest draft pleading (paragraph 20B), that "there was no conflict between the undertaking provided for under the Overall Agreement and the [entire agreement clause in the Call Option Agreement]."

16.I reject this argument. The subject matter of the Call Option Agreement is the 2,000 shares held by the Plaintiff in the holding company. It is the same subject matter covered by the undertaking and assurance comprising the Overall Agreement. The Call Option Agreement gives the Defendant an "option" to require the Plaintiff to sell to the Defendant the 2,000 shares at the agreed price during the period of one year, on and subject to the terms of the Call Option Agreement (clause 2(A)). It also provides that if the call option is not exercised by the Defendant during the option period of one year, the call option "shall lapse" (clause 2(D)). Quite plainly, the alleged Overall Agreement seeks to "add to" the Call Option Agreement an obligation on the part of the Defendant to exercise the option within the option period as and when required by the Plaintiff to do so. Put another way, it seeks to "subtract from" the Call Option Agreement the option, i.e. the choice, of the Defendant to buy or not to buy the 2,000 shares from the Plaintiff. Likewise, it may be said that the Overall Agreement seeks to "contradict" and/or "vary" the Call Option Agreement.

17.In my judgment, the wording of the entire agreement clause in the Call Option Agreement is sufficiently clear to exclude the Overall Agreement insofar as it relates to the undertaking or assurance by the Defendant to exercise the option to acquire the 2,000 shares from the Plaintiff as and when required by him. The two cover the same subject matter. According to the entire agreement clause, the Call Option Agreement represents the latest and only agreement between the parties relating to the subject matter of sale and purchase of the 2,000 shares in question, "all previous agreements, ... understandings, agreements and undertakings (if any) between the parties" having been "superseded" and "cancelled" "in all respects" by the Call Option Agreement.

18.As mentioned above, Mr. Tang, quite correctly, did not seek to dispute the correctness of the decision of the Court of Appeal in Deepak or that of Lightman J. in Inntrepreneur, but only sought to argue, as described above, that there was no inconsistency between the previous agreement, i.e. the undertaking or assurance comprising the Overall Agreement, and the entire agreement clause in the Call Option Agreement. For the reasons set out above, I reject Mr. Tang's first argument.

Estoppel

19.Mr. Tang's second argument is based on estoppel. He argued by reference to his latest draft pleading (paragraphs 21 to 23) that both the allotment of new shares and the sale of the 5,000 shares held by the sleeping partner in favour of the Defendant required the consent of the Plaintiff as a director of the holding company. In reliance upon the assurance, the Plaintiff to his detriment gave his consent to the allotment and the sale of the 5,000 shares and signed the Subscription Agreement, the Call Option Agreement and the Conditional Put Option Agreement, thereby making himself a minority shareholder in the holding company and depriving himself of the opportunity to dispose of his shares in the holding company as a controlling shareholder and free from restrictions. Mr. Tang argued that by reason of the undertaking, the assurance and the Overall Agreement, "it is unconscionable for the Defendant to rely on and the Defendant is thereby estopped from relying on the said entire agreement clauses so as to evade its obligation under the undertaking."

20.Mr. Tang relied on the first instance decision of Mr. Terence Etherton Q.C. sitting as a Deputy High Court Judge in the English case Walmsley v Acid Jazz Records Ltd., unreported, 31st March 2000, in support of his estoppel argument. In that case, the claimant entered into an agreement with the defendant to record master tape recordings of musical works embodying the performances of the claimant in certain works as interpreted by the claimant. Those works involved copyrights owned by others. According to the agreement, the claimant warranted or was responsible for all necessary copyrights. The court accepted the evidence of the claimant that there were, however, assurances made by the representatives of the defendant to the effect the defendant would take care of the copyrights. Subsequently, the claimant sued for his royalty entitlements under the agreement, whereas the defendant, having failed to obtain the necessary copyrights and having received demands by the copyright holders in relation to the recordings made by the claimant, refused to pay the claimant his royalties and counterclaimed for damages arising from the copyright holders' claims. In the agreement between the parties, there were two entire agreement clauses in the following terms (clause 8(f) of the agreement and clause 15 in the schedule to the agreement):

"8(f) The provisions set forth herein constitute the entire agreement of the Parties. This Agreement may not be modified, altered or changed except by an instrument signed by a duly authorised officer of the Company and by the Artist. The Parties acknowledge that they are to enter into a more formal agreement, at which time the provisions of this Agreement shall be superceded, until such time the provisions hereof shall apply to the exclusion of all preceding correspondence and agreements between the Parties.

...

15. This document constitutes the entire Agreement between the Parties hereto and no statement, promise or inducement made by any such party which is not contained herein shall be binding or valid and this Agreement may not be enlarged, modified, amended or altered except by a separate agreement in writing signed by the Parties hereto."

21.The court dealt with the clauses and the argument of estoppel relied on by the claimant as follows:

"I did not understand Mr Walmsley [the claimant]'s evidence to be that he was unaware of his obligations under the strict wording of the Agreement. His case and his evidence was that he believed the strict wording did not apply in relation to the copyright in the Led Zeppelin musical work and the Tina Turner sample because of the assurances he had previously been given.

In the light of the findings of fact I have made, I turn to consider whether, by virtue of waiver or estoppel, Acid Jazz is precluded from alleging breach of the strict wording of the Agreement as to the existence of relevant copyright licences, the absence of the rights of third parties in the copyright in the Track, and the ability of Acid Jazz to licence and exploit the Track anywhere in the world. In this connection, helpful concessions were made by Counsel. On the one hand, Mr Saini conceded that, particularly in the light of Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd. [1999] 1 Lloyd's Rep. 387, the "entire agreement" provisions of clause 8(f) of the Agreement and para 15 of the Schedule to the Agreement, as well as the waiver provisions of clause 5(a) of the Agreement and para 9 of the Schedule to the Agreement, it was not possible for Mr Walmsley to rely upon a collateral contract or waiver. On the other hand, Mr Martino conceded that none of those provisions would be effective to preclude any operation of the doctrine of estoppel or relief in equity.

So far as concerns estoppel and equitable principles, I have found as a fact that Mr Cullen told Mr Walmsley not to approach Warner Chappell for clearance in respect of the led Zeppelin musical word "Whole Lotta Love", and that Dean Rudland told Mr Walmsley not to re-record the Tina Turner sample. I find that those statements were made by representatives of Acid Jazz with the intention that they should be relied upon by Mr Walmsley and he did rely upon them in entering into the Agreement. I reject the evidence of Mr Piller that Mr Walmsley would have known that only Mr Piller had the authority to make such statements on behalf of Acid Jazz. Those statements were within the apparent or ostensible authority of Mr Cullen and Mr Rudland respectively. It would plainly be unjust if Acid Jazz was permitted now to enforce the strict terms of the Agreement without taking account of those statements. Brikom Investments Ltd. v. Carr [1979] 1 QB 467, [1979] 2 All ER 753 to which I was referred, is authority that those findings of fact are sufficient to raise an estoppel or (if not strictly promissory estoppel) an equity precluding Acid Jazz from now relying upon the strict wording of the Agreement in relation to copyright infringement."

22.Mr. Tang argued that similarly in the present case, first, the entire agreement clause in the Call Option Agreement does not prevent the Plaintiff from relying on the doctrine of estoppel; and second, applying the doctrine to the (assumed) facts of this case as summarised above, the Defendant is estopped from relying on the entire agreement clause in the Call Option Agreement to defeat the Plaintiff's case based on the undertaking and/or assurance contained in the Overall Agreement in making his claim against the Defendant.

23.In Walmsley, counsel for the Defendant conceded that the entire agreement clauses in that case did not preclude any operation of the doctrine of estoppel or relief in equity. In my judgment, in the light of the wordings of the entire agreement clauses in that case, that concession was understandably and correctly made. The entire agreement clauses in that case only said that "no statement, promise or inducement made by any ... party which is not contained herein shall be binding or valid ..." The clauses dealt with the legal binding effect or legal validity of the pre-contractual statements, promises or inducements. They did not in any way nullify, withdraw, cancel or supersede these previous statements, promises or inducements. In those circumstances, the clauses did not prevent the claimant from relying on the pre-contractual assurances relating to copyrights to ground an estoppel argument.

24.This analysis of mine is consistent with the explanation given by Lightman J. in Inntrepreneur Pub. Co. v East Crown Ltd. [2000] 2 Lloyd's Rep. 611 relating to why in Deepak, the Court of Appeal said (at p. 395, para. 34) that the entire agreement clause there did not apply to preclude a claim in misrepresentation. For this was the result of the construction of the wording used in the entire agreement clause there. Amongst the paragraphs I cited above from that judgment, Lightman J. explained (at p. 614 para. 8) the position in relation to misrepresentation as follows:

"An entire agreement provision [that only denies a pre-contractual representation of any contractual force] does not preclude a claim in misrepresentation, for the denial of contractual force cannot affect the status of a statement as a misrepresentation."

25.In my judgment, what was said in relation to a claim in misrepresentation is to a substantial extent also applicable to a plea of estoppel. In other words, to a large extent but subject to an exception, as I shall try to explain later, everything depends on the wording used in the entire agreement clause in question.

26.Turning to the entire agreement clause in the Call Option Agreement in the present case, and particularly when one compares the wording used with that used in Walmsley, one can immediately see that the wording used in the present case is much wider in scope. According to our clause, the Call Option Agreement "supersedes and cancels in all respects" " all previous agreements, ... understandings, agreements and undertakings (if any) between the parties". It does not simply say that those previous agreements, understandings, agreements and undertakings shall not be binding or valid. It actually says that they are superseded and cancelled by the Call Option Agreement.

27.If a previous representation is superseded and cancelled subsequently by the party making the representation, which supersession and cancellation are agreed to by the representee, then, in my judgment, it is not open to the representee to thereafter rely on the superseded and cancelled representation to mount a case of estoppel. Put another way, if the representation has been superseded and cancelled since made, particularly by agreement, the representee will be left with no representation on which to base any argument of estoppel. In my judgment, as a matter of principle and logic, it does not matter at all whether the subsequent supersession and cancellation of the representation was done by the representor and representee face-to-face, through correspondence, through their representing solicitors, or through a signed agreement between them containing the appropriate wording of supersession and cancellation. What can be done face-to-face must be capable of being done through solicitors and/or by means of a written agreement containing the appropriate wording. Whether one calls the wording of supersession and cancellation an entire agreement clause is really a matter of label and convenience. The only important thing is to look at the wording of the clause and find out whether it has the effect of superseding and cancelling the previous representation which if left surviving would potentially constitute a basis for mounting an argument of estoppel.

28.Mr. Tang argued that the doctrine of estoppel is an equitable doctrine, which operates in appropriate circumstances precisely to defeat any unjust insistence on strict legal rights under contract or the common law in general. Therefore, even if the wording of the entire agreement clause is apt to supersede, cancel or withdraw a previous representation made, equity would and may still intervene in an appropriate case to prevent a party from unfairly or unconscionably placing reliance on the clause.

29.Is this an arguable argument, bearing in mind that I am only concerned with an amendment/strike out situation? Mr. Tang has not cited any authority in support of his general preposition in relation to how equity in general and the doctrine of estoppel in particular work. Walmsley, as analysed above, does not necessarily assist Mr. Tang, as the entire agreement clauses there did not supersede or cancel the previous assurances given, and the status of the case as an authority on estoppel is no different from those cases in the books on estoppel, of which there are quite many, which did not concern an entire agreement clause. Indeed the case of Brikom, cited by the Court in Walmsley, in support of its decision on the estoppel argument, was one of those cases and did not involve any entire agreement clause at all.

30.During submission, I asked Mr. Tang in effect under what circumstances a representor would be prevented by equity to rely on an entire agreement clause to escape from a previous representation, promise or assurance, even though the clause specifically superseded and cancelled (or sought to supersede and cancel) his previous representation, and when the clause was contained in a written agreement freely entered into by the parties. Mr. Tang replied essentially that everything would depend on the facts, and he cited the extreme case of a fraudulent inclusion of the clause into the written agreement. He did not define the circumstances under which equity would intervene or an estoppel would arise notwithstanding the presence of an entire agreement clause superseding and cancelling the previous representation or promise. I am prepared to accept that arguably Mr. Tang is correct in relation to his example of fraud. But the difficulty of Mr. Tang is that fraud is not part of his pleaded case according to his latest draft pleading, and obviously he no longer seeks to plead or mount on behalf of his client any case based on fraud or anything of that sort, he having very properly deleted from his draft Re-amended Statement of Claim the plea of fraudulent misrepresentation.

31.But this is not necessarily the end of Mr. Tang's second argument. It is not difficult to imagine a situation where both parties to a contract agreed amongst themselves that for whatever reason they should keep a term of the contract agreed between them from being included in the written contract to be signed. The reason could be that they wanted to keep the term secret amongst themselves. In the absence of any formality requirement, this would not render the term omitted from the written contract not a term of the contract between the two; it would only mean that the written contract eventually signed did not contain all the terms agreed between the parties comprising the contract between them. Indeed this would constitute an exception to the parol evidence rule, so that extraneous evidence would be admissible to prove the oral term omitted (deliberately) from the signed written contract.

32.In my judgment, the legal position should remain the same as a matter of principle if there was included in the written contract an entire agreement clause, when the parties never in fact agreed to vary or cancel the oral term. (Ex hypothesi, when I say the parties never in fact agreed to vary or cancel the oral term, I am excluding the entire agreement clause itself as representing a subsequent agreement to cancel the oral term.) Obviously, in this example of mine, the entire agreement clause was not intended by the parties to be applicable to exclude the omitted term as one of the terms agreed between the parties comprising the contract between them. It was only meant to apply to other pre-contractual representations, assurances, etc. that did not find their way into the written contract. No fraud amongst the parties inter se was involved in the inclusion of the entire agreement clause into the written contract. Like the previous example, the written contract containing the entire agreement clause simply did not contain all the agreed terms between the parties, something that was ex hypothesi intended by them to be the case. Now if one of the parties to the contract subsequently wanted to take undue advantage of the entire agreement clause and argued that the (deliberately) omitted term did not form part of the contract between the parties, or had been superseded or cancelled by the written contract containing the entire agreement clause, in my judgment, one way of stopping him from doing so would be the deployment of an estoppel.

33.In other words, it would be totally unjust and inequitable to allow that party to take advantage of the very oral agreement between the parties that they would leave out from the written contract one of the agreed terms to subsequently argue that the term left out did not form part of their whole contract, by relying on the entire agreement clause in the written contract; and he should be estopped from asserting that the agreed term that was omitted deliberately from the written contract did not form part of the whole contract between the parties, particularly if the deliberate omission was suggested by that party for its purpose. In those circumstances, I consider it at least arguable that an estoppel would arise, notwithstanding the presence of the entire agreement clause. No fraud need be pleaded or relied on.

34.This is not precisely the way Mr. Tang has pleaded his client's case in the latest pleading. As I said, the pleaded estoppel relates only to the undertaking and assurance that the Defendant would exercise the option, and not to the agreement or understanding between the parties that in order to maintain customers' confidence in the chain, the purchase of the Plaintiff's 2,000 shares would be dressed up as a free option that could be exercised by the Defendant according to its wish, with the undertaking of the Defendant to exercise the option being kept secret and not reduced to writing. This way of putting the estoppel does not adequately pinpoint the injustice, inequity or unfairness involved in allowing a party to take advantage of the very agreement to leave out a term from the written document to deny that the term forms part of the whole agreement, by relying on the entire agreement clause contained in the written document.

35.However, a pleading should only be struck out, and a plaintiff excluded from the judgment seat, if the claim in question is beyond rescue by amendment: See Hong Kong Civil Procedure 2002 Vol. 1 para. 18/19/5 para. (2) (p. 304). In my judgment, based on the assumed facts, it is open to the Plaintiff to allege that there was indeed an oral agreement between the parties that the Defendant should purchase from the Plaintiff his 2,000 shares which should be achieved not directly but deviously via the Defendant's exercising the option under the Call Option Agreement within the call option period of one year as and when required by the Plaintiff, and that there was a further oral agreement to conceal from the public this agreement by not reducing the same in writing and including it as part of the Call Option Agreement (or any other written agreements between the parties). In reliance on the agreement to buy the shares by exercising the option, and in pursuance of the further agreement to conceal, the agreement to buy the shares by exercising the option was not contained or included in the Call Option Agreement, which by agreement of both parties also contained an entire agreement clause which provided finality in all respects save in relation to the secret agreement to buy the shares. In those circumstances, it would be unjust and inequitable to allow the Defendant to retract from its agreement to buy the shares by exercising the option by denying its existence by reference to the entire agreement clause. The Defendant is estopped from denying that the agreement to buy the shares by exercising the option forms part of the whole agreement between the parties.

36.This, in my judgment, is, put at the lowest, an arguable contention that would serve to rescue the Plaintiff's claim at the strike out level.

Mistake and rectification

37.I turn to the last argument of Mr. Tang based on mistake and rectification. In the latest draft pleading, no particulars are supplied in relation to the alleged mistake in the inclusion of the entire agreement clause in the Call Option Agreement (paragraph 20A), but Mr. Tang said he relied on the Affirmation filed by the Plaintiff's solicitor in opposing the strike out application, which detailed the mistake in question. The gist of the mistake is that the Plaintiff's own solicitor mistakenly construed and understood the meaning and effect of the entire agreement clause, and wrongly thought that it did not affect the undertaking or assurance previously given; he allowed the clause to remain in the Call Option Agreement and did not render any advice or correct legal advice to his client relating to the true construction and effect of the entire agreement clause, and the possible consequences of allowing the clause to remain in the draft Call Option Agreement, or that of his client signing the Call Option Agreement containing such a clause. Mr. Tang therefore argued that the inclusion of an entire agreement clause in the Call Option Agreement was contrary to the intentions of the parties under the Overall Agreement, and accordingly, "and in so far as may be necessary, the Plaintiff would seek an order that each of the 4 documents [including the Call Option Agreement] be rectified by the deletion of the entire agreement clause therefrom." (paragraph 24)

38.Mr. Tang did not cite any authority to support his argument that on the assumed facts, his client is entitled to claim rectification. Mr. Tang accepted and conceded in argument that in order to maintain a claim for rectification, there has to be a common mistake by both parties, in this case a common mistake relating to the proper construction and effect of the entire agreement clause.

39.In relation to a common mistake, Mr. Tang pointed to the Plaintiff's solicitor's mistake described above as the mistake on his side. He argued by reasoning that a similar mistake must have been made by the solicitors acting for the Defendant. He said either the Defendant and perhaps more importantly its solicitors were aware of the true construction and effect of the entire agreement clause, or they were not. In the latter case, it would mean that there was a similar mistake on the Defendant's side. In the former case, it would mean that the Defendant fraudulently and without good faith inserted or allowed the insertion of the entire agreement clause into the draft Call Option Agreement, and allowed the same to remain in the final Call Option Agreement signed by the parties, contrary to the previous undertaking or assurance given by the Defendant. This former case cannot have been the case without an admission by the Defendant that it has acted fraudulently or without good faith, in which case a unilateral mistake would suffice. Therefore, so Mr. Tang reasoned, the latter case must have been the case and thus there was a common mistake by both sides justifying rectification. In submission, he did not rely on a unilateral mistake as justifying the Plaintiff's claim for rectification. See generally Snell's Equity (30th ed.) paras. 43-06 to 43-13.

40.I can see the logic of Mr. Tang's argument. But it is not watertight. It was quite possible that the Defendant and its solicitors simply did not intend the entire agreement clause to apply to the undertaking or assurance in question, and assumed that that was also the reason of the Plaintiff and its solicitors in agreeing to the inclusion of the clause in the Call Option Agreement. They need not have inferred that the Plaintiff or his solicitors had misunderstood the true legal meaning of the entire agreement clause.

41.But this need not be the end of the matter. At this strike out stage, the Plaintiff need not establish on a balance of probabilities that the Defendant and its solicitors must have made the same mistake in relation to the true construction of the entire agreement clause, instead of their believing that the clause would not be applied to the undertaking or assurance as per the parties' prior agreement not to reduce the same in writing. All this would be a matter of inference to be drawn by the Court based on the evidence and surrounding circumstances at trial. At this stage, it is quite impossible to say that the inference which the Plaintiff would ask this Court to draw is an inference not supported by any material at all. Put another way, the inference contended for by the Plaintiff is an arguable inference, notwithstanding the existence of other competing inferences that the Court can draw from the material available.

42.The latest draft pleading does not allege, let alone supply the requisite particulars of, any mistake on the part of the Defendant or its solicitors. In those circumstances, the allegation of mistake/rectification contained in the latest draft pleading, as it now stands, is simply bad in law. But this is a matter of capable of cure.

43.Can the Plaintiff mount any argument based on mistake/rectification in relation to the non-inclusion of the undertaking or assurance in the Call Option Agreement, a contention that was briefly alluded to during submission? This has not been pleaded, and in any event in my judgment this cannot be done. The difficulty as I see it is this. According to Snell's at para. 43-08,

"There can thus be no rectification if the omission of a term was deliberate, even if this was due to an erroneous belief that the term was unnecessary or that it was sufficiently dealt with in an antecedent oral agreement, ... and similarly if the instrument intentionally contains a provision which in fact means something different from what the parties thought it meant."

44.Given my analysis of the assumed facts above, and in particular the way I analysed how an estoppel may arguably be raised based on the assumed facts, the omission from the Call Option Agreement of the agreement to buy the shares by exercising the option was deliberate; and put another way, the agreement to purchase the Plaintiff's 2,000 shares was deliberately disguised as an option to purchase; and therefore an option to purchase instead of an agreement to purchase was intentionally contained in the Call Option Agreement, which according to the parties' real agreement meant something very different from an option that could be exercised by the Defendant according to its own wish. In those circumstances, any attempt to plead mistake/rectification in relation to the non-inclusion of the undertaking or assurance in the Call Option Agreement must fail; and to be fair to Mr. Tang, he has not included any such plea in his latest draft pleading.

45.For the reasons explained above, I think the Plaintiff's mistake/rectification argument is arguable, provided that suitable amendment is made to the pleading in the draft Re-amended Statement of Claim and proper particulars of mistake on the part of the Defendant (including its solicitors) are supplied.

46.For the sake of completeness, I record Mr. Tang's concession that what happened subsequently between the parties, referred to both in the pleadings and evidence filed, merely serves to evidence the making of the Overall Agreement comprising the undertaking and assurance, but does not by itself gives rise to any cause of action against the Defendant. In any event, none is pleaded.

Outcome

47.In short, I have come to the conclusion that the Plaintiff's case as pleaded in his latest draft pleading, as it now stands, is bad. But it is not beyond rescue in relation to the estoppel argument along the lines I indicated above. In the circumstances, I give leave to the Plaintiff to re-amend the Amended Statement of Claim to plead an estoppel along the lines I indicated above (but not otherwise), on the condition that the plea of fraudulent misrepresentation contained in the Amended Statement of Claim be deleted. Further, I also give leave to re-amend the Amended Statement of Claim by the inclusion of a case based on mistake and rectification along the lines indicated above. I do not give leave to re-amend the Amended Statement Claim by the inclusion of a case that the undertaking or assurance does not contradict, vary, add to or subtract from the terms of the signed documents between the parties, particularly the Call Option Agreement, as now pleaded in paragraph 20B of the draft Re-amended Statement of Claim.

48.I further order that the Re-amended Statement of Claim be filed and served by the Plaintiff within 14 days from the date hereof, the Defendant have leave to re-amend its Amended Defence within 14 days thereafter, and the Plaintiff have leave to re-amend his Amended Reply within 14 days thereafter. I make no order in relation to the Defendant's Summons to strike out (save as to costs).

49.I make an order nisi that the Plaintiff pay to the Defendant forthwith its costs of and occasioned by the Plaintiff's application to re-amend his Amended Statement of Claim, and all costs of and occasioned by as well as all costs thrown away by the re-amendment to be effected by the Plaintiff pursuant to the leave to re-amend granted by me above, as well as the Defendant's costs of and occasioned by its application to strike out the Amended Statement of Claim, all to be taxed on a common fund basis if not agreed. This is already the third time the Plaintiff seeks to put forward a proper case against the Defendant, he is still unsuccessful and has to try it one more time. Fraud has been pleaded when there is no or insufficient material to sustain it. The Defendant was perfectly entitled to take out its Summons to strike out. Much costs and time have been wasted in the process. All this should be reflected in my order as to costs, and that is why I order that costs be paid forthwith on a common fund basis.

50.Unless either party applies to vary the order nisi within 14 days after the handing down of this judgment, the same will become an absolute order upon the expiry of the 14-day period.

Representation:

Mr. Ronald Tang instructed by Messrs. Lee Chan Cheng, for the Plaintiff.

Mr. Jonathan Harris instructed by Messrs. Richards Butler, for the Defendant.