The Shell Company of Hong Kong Ltd v. The Hongkong Electric Co Ltd
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IN THE SUPREME COURT OF HONG KONG (APPELLATE JURISDICTION) CIVIL APPEAL NO. 21 OF 1972 (On appeal from O.J.M.P. 251/71). ________________________
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________________________ JUDGMENT ________________________ Huggins, J.: 1. This is an appeal against a decision of Mr. Justice Blair-Kerr upon a construction summons. The action concerns an Agreement dated 17th June 1970 whereby the Plaintiffs (“Shell”) contracted to supply hydrocarbon fuels to the Defendants (“Hongkong Electric”). That Agreement replaced an Agreement dated 11th January 1965 which would otherwise have expired in 1974. The 1965 Agreement in turn replaced an earlier Agreement made in 1957 and the first issue which I think should be decided is whether, as Hongkong Electric contend, that earlier Agreement, together with a letter dated 20th March 1957, may be looked at as a surrounding circumstance aiding the construction of the 1970 Agreement. 2. This issue arises upon a Respondents’ Notice, the learned judge having held that the documents were inadmissible as evidence. I should say at the outset that it has never been questioned that “surrounding circumstances” may be looked at as an aid to the interpretation of an agreement: what is questioned is whether these particular documents constitute surrounding circumstances for the purpose of interpreting this particular Agreement. Again, it has not been disputed that the Agreement of 1965 may properly be looked at, that Agreement being still in force until discharged at the beginning of the “contract period” specified in the 1970 Agreement. It is contended on behalf of Hongkong Electric that where there is a succession of agreements relating to the same subject matter (in this case the supply of oil) then it matters not how far back into history they may go and all the agreements may be looked at as an aid to the construction of the last one. Counsel conceded that each of the previous agreements would itself have to be construed in the light of its surrounding circumstances, but submitted that while that might affect the weight to be attached to each agreement as an aid in construing later agreements it would not render the earlier agreements inadmissible as evidence. In my view the learned judge could properly exclude the 1957 Agreement on the ground of irrelevancy. There must come a stage when a circumstance ceases to be a surrounding circumstance and, even if that be wrong, I think there must be circumstances which, though they might technically be said to be relevant, are so distant and therefore of such minimal weight that a judge may properly decline to hear evidence of them in the interests of the administration of justice if to admit such evidence might unreasonably prolong the trial. We are told that Shell have “for many years” supplied Hongkong Electric with fuel oil and if the contention of Hongkong Electric is right we could be asked to look at the language used in every contract relating to that supply and for that purpose to receive evidence of the circumstances surrounding the execution of each of those contracts. That would not be, in the words of Mr. Justice Cardozo in Utica City National Bank v. Gunn([1]), to admit evidence of “the genesis ... of the transaction” but to admit evidence of the genesis of the whole relationship between the parties, and I cannot believe it to be right. In my view the learned judge was amply justified in rejecting the 1957 documents. We must, therefore, confine ourselves to a consideration of the circumstances which are accepted by both parties as admissible for the purposes of construction. 3. Passing, then, to the substance of the dispute I venture to begin by emphasising that what we are called upon to do is to construe a document and that the document and the language in which it is written must remain at the centre of our attentions. The surrounding circumstances are a legitimate aid to construction, but we must not let them attain a pre-eminence over the document itself. The Agreement must be “placed in its context” but it is the document “which records a consensus”: per Lord Wilberforce in Prenn v. Simmonds([2]). Again, I do not think anyone has doubted the general principles that one must construe a document as a whole and endeavour to give effect to every word. Nevertheless words in one clause of an agreement should be interpreted in a special sense which is compatible with other provisions only “if that interpretation does no violence to the meaning of which they are naturally susceptible” (Chamber Colliery Co., Ltd. v. Twyerould([3])) and where the evidence provided by the other provisions and by the surrounding circumstances points very clearly to the parties’ having used the words in that special sense. Moreover, in endeavouring to give effect to every word one must have regard to the whole document and not attribute to the parties a precision of language which it is manifest they have not sought to attain. 4. I think it desirable to examine the price structure erected by the 1970 Agreement, starting with clause 01, which lays down the period during which the agreed prices should be payable. The material part of that clause is:
Not until that date were Shell bound to sell and deliver oil or were Hongkong Electric bound to purchase, receive and pay for oil, under this Agreement: between the date of signature of the Agreement and the beginning of the “Contract Period” any sale and purchase of oil between the parties was under the 1965 Agreement. The new price to be paid for each grade of oil supplied is to be constituted of various “elements” but the foundation of the calculation is the “Basic price”. However, the Basic price is not to be as basic as one might expect, because although the Basic price for each grade of oil is set out in Schedule B that Basic price is itself “subject to adjustment”: clause 06.02. There are five clauses there indicated as containing grounds for adjustment, namely clauses 06.05, 06.06, 06.07, 06.08 and 06.09. Clause 06.05 is in these terms:
It is common ground that the words “existing” and “as at the date hereof” must refer to 11th June 1970, the date of execution of the Agreement. Clause 06.06 is the clause to be construed and I will come back to that later. Clause 06.07 provides:
Clauses 06.08 and 06.09 provide for re-negotiation of the Basic prices in certain circumstances. Clause 06.04, which we have seen mentioned in clause 06.07, provides:
(In passing it may be pointed out as an example of the unhappy language in which the whole of this Agreement is expressed that the Hong Kong Government is credited with the remarkable power of being able to levy a decrease in an impost, as distinct from a decreased impost.) These imposts, it will be seen, do not appear as an adjustment of the Basic price but as an addition to the Basic price and the relevant variations in such imposts are those occurring “during the currency of this Agreement”. A similar expression appears in clause 11, which provides:
It is conceded that clauses 06.05, 06.07, 06.08 and 06.09 must be construed as taking account of variations occurring during the period between the execution of the Agreement and the beginning of the contract period (a period which, for the sake of brevity, I shall hereinafter refer to as “the building period”). It is conceded that Shell ran no risk in relation to imposts under clause 06.04 and I think it follows that the words “during the currency of this Agreement” must include the building period, since variations under this clause are to be applied only after the expiration of “14 days after the date on which the said increase or decrease becomes officially leviable”. If “the currency of the Agreement” meant “the currency of the Contract Period” then an impost increased seven days before the beginning of the Contract Period could not have been passed on to Hongkong Electric during the first seven days of the Contract Period. The similar words in clause 11 must equally include the building period because it is inconceivable that disposal of Hongkong Electric’s interest during that period should not have been within the contemplation of the parties or that, it being within their contemplation, they should deliberately fail to provide for such an eventuality. 5. Clause 06.06 is in these terms:
There is, of course, no reason why the parties should not have decided that, in relation to this particular adjustment of the Basic Prices, increases during the building period should be disregarded whereas all the other adjustments were to take the building period into account. One would expect such a differentiation to be expressed in clear words and it is contended by Hongkong Electric that by using different words the parties have in fact used clear words to indicate their intention to differentiate. That argument would have carried more weight had the parties used the same words wherever the intention was clearly to include the building period, but, as we have seen, they did not do so. 6. Before going further I think I should introduce Schedule E, which makes express reference to clause 06.06. It states
However, having mentioned the Schedule I propose first to consider clause 06.06 independently of it. In so doing I do not ignore the rule, to which I have already alluded, that a document must be construed as a whole, but merely take account of the fact that the meaning of the Schedule is in doubt. Indeed, contrary to the contentions of both parties the learned judge came to the conclusion that the Schedule was meaningless. It is, I think, a legitimate approach to the interpretation of a clause to make a preliminary interpretation based on the ordinary meaning of the language found in it and then to see whether anything in the remainder of the document indicates that that interpretation is not the correct one. 7. Although the learned judge thought otherwise it seems to me the words “on the date of the commencement of this Agreement” are prima facie apt to convey one meaning and one meaning alone, i.e. what is expressed in Schedule E as “on the date of signature of this Agreement”. The document begins with the words “An Agreement made the seventeenth day of June one thousand nine hundred and seventy”. A thing, whether it be a document or a broomstick, commences to exist as such on the date on which it is made: until the maker, as it were, stands back and says “It is finished” the thing is still in the process of being made, but once work upon it is complete the fact that it is not immediately seen to be in active use does not prevent its having commenced its existence. It is suggested that since effect must be given to every word some distinction should be drawn between “the date of the commencement of this Agreement” and “the date of this Agreement”. That argument is altogether too subtle for my comprehension in the absence of any express definition of either phrase. It is not disputed that as a matter of law an agreement commences on the day of execution, that being the day upon which its terms commence to bind the contracting parties. 8. It is only when one looks at the other terms of the 1970 Agreement, and in particular at clause 01, that the case for Hongkong Electric becomes arguable at all. Indeed, the crux of this case, as it seems to me, is the question whether clause 06.06 is linked with clause 01 by reason of the reference to “the date of the commencement of this Agreement”. The learned judge was persuaded that it was. This is an Agreement which contemplated the supply and purchase of oil during a period which was to start at a future date. I make no apology for referring, as I did in argument, to the analogy of a lease, for I think it assists in highlighting the difficulty which the parties have created for themselves in this case. A lease is a document by which the parties covenant the one with the other for the creation of a tenancy and, subject to one limitation, that tenancy may commence from a future date. The actual period of the tenancy is nowadays, though perhaps inaccurately, described as “the term”. The normal lease will therefore begin “This lease made etc.” and will contain a provision that the term shall be for a period of so many years from a specified day. Applying this analogy to the present case, what the parties have unfortunately done is to provide not that “the term” shall be for a period of so many years from a specified day but that “the lease” itself shall be for a period of so many years from a specified date. It may not be very helpful to say that that is not a form of words which would commend itself to an experienced conveyancer. A lease which lawfully provides for a future tenancy must in the nature of things have a potential life-span longer than the period of that tenancy. Nevertheless a lease in that form would probably present no great difficulty of interpretation, for it would be obvious what the parties intended. 9. Turning to the Agreement we have to interpret I find that clause 01 says “the term of this Agreement (hereinafter called the ‘Contract Period’) shall commence on 1st October 1971 ......” – there is an alternative date which is not material. The Agreement (the lease in my analogy) was executed on 17th June 1970, so that there is no possible doubt that clause 01 was defining what in a lease would be the period of the tenancy – in this case the period of supply of oil. Now two things must be noticed. First, what is defined in clause 01 is the phrase “the term of this Agreement” and no other phrase or word. It does, however, show that the parties were liable to confuse the period during which the Agreement had legally binding effect with the shorter period during which oil would be supplied under the Agreement. On the other hand, having made that confusion they expressly said that thereafter whenever they wished to refer to the period during which oil would be supplied they would use the expression the “Contract Period”. The effect of that in our analogy would be that the word “Agreement” would thereafter stand for the lease and the words “Contract Period” would stand for the term of the tenancy. 10. When we look at clause 06.06 we find that reference is made not to “the date of the commencement of the Contract Period” but to “the date of the commencement of this Agreement”. Why should it be assumed that the confusion which the parties had previously resolved should once again have been introduced into the Agreement? The reason suggested, as I understand it, is what may perhaps be shortly described as commercial probability: we are asked to look at the surrounding circumstances and to say that the words used cannot bear the meaning which in ordinary every day usage they would in my view necessarily bear. “The Agreement” would normally mean the agreement and would not bear the unusual connotation given to it in clause 01, while “the date of the commencement” of that Agreement would, as a matter of law, be the date on which it was executed. 11. If I do not refer expressly to all the surrounding circumstances which have been relied upon by Mr. Wilmer in support of Hongkong Electric’s interpretation of clause 06.06 it should not be taken as slighting his argument or as indicating that I have not considered them all. I have, I hope, given to every part of the evidence the weight which it deserves but I have come very clearly to the conclusion that there is nothing which compels us to attach to the words of clause 06.06 a meaning other than that which they would normally convey. 12. I have no desire to be critical of those who drafted the documents in this case and by so saying will probably indicate that I suspect this has been a case of “too many cooks”. Transactions of this size necessarily involve consideration of a variety of factors and this may result in suggestions from sundry persons for the inclusion of provisions to deal with those factors and a loss of the consistency of language which a single draftsman may more readily achieve. Reference to this variety of factors brings me to the argument that price was the deciding factor which led Hongkong Electric to sign this Agreement. The learned judge stated as a fact that “the only way in which Shell could interest Hongkong Electric in such a long-term contract was by the price factor”. With respect to him I think this statement was not justified. No doubt where the substance of a contract is a sale of goods the price factor must loom large in the thinking of both vendor and purchaser, but there may be other factors and in this case the evidence points conclusively to there having been other factors in the minds of those acting for Hongkong Electric. The Memorandum of Agreement dated 6th August 1969 and signed by both parties, which, subject to two conditions which were in the event fulfilled, required the conclusion of the 1970 Agreement, recited that Hongkong Electric desired not only to purchase lower cost fuel but also ‘to receive other benefits including a considerable reduction in inventory that will arise from the construction of the Shell Company of Hong Kong Limited’s new terminal”. The plural number of the word “benefits” and the inexhaustiveness of the examples thereafter mentioned cannot escape notice. Clause 06.08 of the Agreement itself refers to “the continued security and flexibility of supply afforded to the Sellers”. I would not wish to over emphasise what may appear a minor slip on the part of the learned judge, but it may have coloured his approach to the whole question of commercial probability. 13. It was the corner stone of Mr. Wilmer’s argument that Hongkong Electric would not, as a matter of sound business sense, commit themselves to a long-term contract of this nature until they knew for certain what would be the prices at the time delivery started in Hong Kong. That appears to me an over simplification of the problem as it must have presented itself to Hongkong Electric. They were dealing with a company with whom they had had a business relationship (and presumably not an altogether unsatisfactory relationship) for many years. They were offered what have been described by Mr. Wilmer as “fringe” benefits but what must in fact have contributed a not insignificant part to the overall effect of the finished tapestry. They were protected from any departure by Shell from the general level of world oil prices by having the basic prices geared to the posted prices in Bandar Mah Shahr. Shell have objected to the finding by the learned judge that “in the 1969 draft Agreement, Shell was proposing that price escalation and de-escalation (sic) should be provided for in an entirely new way”. One may perhaps quibble at the use of the word “entirely” but it cannot be gainsaid that a very large element of novelty was there introduced. It is true that both parties agree that Hongkong Electric had a limited knowledge concerning posted prices, but what they had was enough to allay any fears they might have that they were putting themselves at the mercy of Shell. They were protected from the result of any major dislocation of normal world oil supply patterns. They were no longer, as they were under the 1965 Agreement, to be liable to pay more by reason of increases in freight rates. Indeed, the only “freight element” discernible in the agreed prices is the delivery charge under clause 06.03 for oil delivered to the North Point Power Station. Hongkong Electric were not new comers among the large scale oil consumers and they would not be incapable of making their own forecast of possible movements of oil prices and oil freight charges. In the result I see no absurdity in their having come to the conclusion in 1969 that the advantages offered by the proposed new Agreement would outweigh the advantages of completing the 1965 Agreement and thereafter negotiating a new contract with Shell or with some other supplier. 14. From the arguments of counsel on both sides it would appear to be a fact that whether the interpretation contended for by Shell or the interpretation contended for by Hongkong Electric is the right one the other side must have made an unfortunate error of business judgment which one would not expect a prudent businessman to make. That such is the position emphasises the futility of relying upon commercial probability as an aid to construction in the present case. For this reason, and also because I think there is a very real danger of being led astray by the plethora of figures and examples of the working of the alternative interpretations placed before the learned judge, I do not propose to refer to those figures and examples. 15. The strongest argument in favour of Hongkong Electric’s interpretation is one which in some measure is advanced by both sides, viz. that, if the other side’s interpretation is what the parties intended, that intention could so easily have been expressed in an unambiguous manner. For reasons which I shall endeavour to explain later I think that on a consideration solely of drafting techniques the interpretation contended for by Shell is less defensible than is the interpretation of Hongkong Electric, because of the presence of Schedule E – which I must now consider. I have much sympathy with the learned judge in his desperation at the difficulty in elucidating the object of inserting this provision, although in the result I have been unable to share his view that it is meaningless. Schedule E was deliberately inserted in the 1970 Agreement pursuant to another Memorandum dated 6th August 1969 and signed by both parties which was in these terms:
That these two companies should have gone to the trouble they did without intending to achieve some purpose is unthinkable and it is for that reason that counsel on both sides are unwilling to admit defeat in endeavouring to unearth that purpose. 16. The first thing which strikes one about this Schedule is, as the learned judge himself remarked, that although it refers back to clause 06.06 there is nothing in the body of the Agreement to refer the reader to the Schedule. Even it were not for the Memorandum of 6th August 1969, which in any event appears to be something more than part of the “negotiations” since it is accepted that it constituted part of “the attachment” to the Memorandum of Agreement, this fact alone would in my view be an indication, however weak, that the Schedule was an after-thought. The very words of the Schedule reinforce that view. That, however, is not the same thing as saying, as did the learned judge, that the parties “had altered their intentions”, for he used that phrase as indicating a change of substance and not merely of form, he having, as it seems to me, at several points in his judgment assumed that the words “at the date of the commencement of this Agreement” in clause 06.06 meant what Hongkong Electric say they mean. Neither counsel before us has fallen into the error of suggesting that Schedule E altered the contractual intention, but each consistently maintained that Schedule E supported the interpretation he was advancing. However untidy it may appear to a legal draftsman to include a schedule without referring to it in the body of the document I know of no rule, and counsel has not suggested that any exists, that a provision relegated to a schedule has less force and effect than a provision not so relegated. 17. The next point to notice is that Schedule E declares that it was inserted “for ease of operation of Clause 06.06”, which leads one to look for some possible difficulty in the operation of that clause. It is no criticism of counsel that they have been astute to point out difficulties in a calculation which, though at first sight intricate, appears on analysis to be fairly simple. The difficulty suggested by Mr. Neill is that of ascertaining the average of the prices posted by the four companies at Bandar Mah Shahr on the day on which the Agreement was signed. The Agreement was signed at 9:30 a.m. in Hong Kong. We may take judicial notice of the fact that, since Hong Kong is many degrees cast of Iran, when the Agreement was signed the day was yet young in Bandar Mah Shahr, although we have no reason to believe that in 1969 it was anticipated signature would take place at that early hour. We do not know when the prices are posted there nor whether it was practicable to communicate them to Hong Kong the same day. However, the argument is that the purpose of the Schedule was to establish ‘the actual datum figure for the purposes of clause 06.06” or, in other words, “to show at what point the parties joined the escalator”. That would be more readily understandable if difficulty was anticipated in ascertaining the true average and if what was intended to be done by Schedule E was to state a figure which was to be deemed the average price required. Two related considerations militate against such an interpretation. The verb in the Schedule is “is”, which indicates a present fact rather than an assumption. Moreover, the Memorandum which was the forerunner of Schedule E required that the average price “be calculated” on the date of signature of the Agreement. If the Schedule did no more than place on record the actual average price it really did not “ease the operation” of clause 06.06, although it might prevent a dispute at some future date if one of the parties forgot what the average price had been on the relevant date. 18. The difficulty which Mr. Wilmer submits that Schedule E was intended to overcome is even more insubstantial, although prima facie his approach is more logical than that of the other side. Mr. Wilmer submits that the way in which the Schedule is intended to “ease the operation” of clause 06.06 is simply by providing an example of how the calculation is to be done. It is inherent in this argument that the average on any other specified date could have been inserted and would have provided an equal ease of operation of the clause. The difficulty is said to be that there is an uncertainty as to what exactly is meant by “the average of the posted prices ...... for Light Fuel Oils Free On Board Bandar Mah Shahr” because the documents do not show what form the postings take nor how the average is to be calculated. We know that at all material times the four companies had each posted one price for light fuel oil at Bandar Mah Shahr and that an average could always be obtained by adding together these four prices and dividing by four. What is suggested is that the companies might have done something different, e.g. one of them might have posted two prices, as it is agreed has been done elsewhere. That would certainly add a complication, although I cannot for myself see that the complication would create any real difficulty in the application of the formula. What is more important is that an example of the calculation at a day when that complication did not in fact exist would not make the calculation easier in relation to a date when it did exist. We do not know why more than one price has been posted elsewhere and are not to assume that the same reason might also lead to the posting of more than one price at Bandar Mah Shahr. I am confident that if more than one price were posted there the parties would be able to discover the effect of the Agreement in relation thereto without the necessity of seeking the assistance of this Court. It was suggested that different prices might be posted for different qualities of light fuel oil and that such qualities might not even correspond to the “grades” listed in Schedule A. That, I confess, would open up the possibility of problems which the Agreement may not have provided for. It is, however, to introduce a measure of speculation into the case which is unjustified and the problems which might thereby be raised are certainly not answered by Hongkong Electric’s interpretation of Schedule E. The learned judge said that he did not understand the submission that Schedule E was merely an example and I have no doubt he intended to convey not that Mr. Wilmer had not made himself clear (for I am sure Mr. Wilmer addressed his argument to the judge with the same clarity that he demonstrated before this Court) but rather that he was unable to observe any force in the argument. I sympathise with him, because a more roundabout method of exemplifying the actual calculation of the average would be hard to imagine. As I understood Mr. Wilmer, he also suggested that the posted prices might, so far as Hongkong Electric were concerned, have taken an entirely different form and his argument included an analogy to stock market prices. I think this analogy is liable to be misleading. It seems that he was talking of the share prices at which business is reported to have been done, for he referred to the possibility of a weighted average’s arising from the fact that different quantities of shares (or of oil) might be sold at various prices. The little information which the court has been given about “posted prices” does make it clear that they “announce publicly the prices at which oil is offered by the oil industry to buyers generally”. The important word is “offered”: whether the offers are accepted and, if so, in respect of what quantities are irrelevant considerations. 19. I said that Mr. Wilmer’s approach was more logical than that of the other side and my reason for so saying was tied up with the argument that a much simpler and clearer method of expressing Shell’s interpretation of Schedule E could so easily have been adopted. While it was, as we have seen, expressly agreed by the Memorandum of 6th August 1969 that a schedule be included, there was no reason why the parties should not have agreed instead that the relevant average price be inserted directly into clause 06.06 and thus have avoided the use of a schedule. On the other hand, if the parties intended to do nothing more than give an example showing how the average price was to be arrived at, that example could properly be included in a schedule, although one would then have expected to see some indication that it was intended to be nothing more than an example. But why should the parties have chosen to base their “example” on the prices posted on “the date of signature”? As I have already indicated, the selection of any other date would have avoided the confusion which has occurred and would have “eased the operation” of clause 06.06 to the same extent. I find myself driven to the conclusion that Shell’s approach to Schedule E is the correct one in spite of the objections to which I have referred. 20. The contra proferentem rule can have no application in the present case. While I fully accept that the rule is neither obsolete nor obsolescent it is common ground that it applies only where there is an ambiguity which, on the opinion I have formed, does not exist here. Nor would I be prepared to apply the rule to a case where, as it seems to me, there really is no proferens: the parties were at arm’s length in regard to the price and there is no question of one party’s having sought to insert a provision for its own protection. That I deem to be the only type of case where the rule has been applied to commercial contracts. Furthermore, I think Mr. Neill is right when he says that at the material date for the construction of this Agreement it was impossible to say whether a particular interpretation would be pro or contra any party who was a proferens. 21. In my view clause 06.06 when interpreted in the light of the whole Agreement excluding Schedule E shows a manifest intention that “the date of the commencement of this Agreement” should be understood to be the date of execution. It follows from what I have been saying about the meaning of Schedule E that I think the effect of construing clause 06.06 in the light of the whole Agreement including that Schedule can only be to strengthen the conclusion that that was the intention of the parties as they have expressed it. 22. I would allow the appeal and answer the first question posed by the originating summons “Yes”. |