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Grounds publishedDecided 1 Jun 2009
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Court of Appeal

Sports Connection Pte Ltd v Deuter Sports GmbH

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[2009] SGCA 22Case no. CA 114/2008

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Grounds of decision

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  1. Andrew Phang Boon Leong JA (delivering the judgment of the court):

  2. Introduction

  3. [1] This is an appeal against the decision of the trial judge (“the Judge”) in Suit No 280 of 2005 (see Sports Connection Pte Ltd v Deuter Sports GmbH [2008] SGHC 109 (“the GD”)). In his decision, the Judge dismissed the claim of Sports Connection Private Limited (“the Appellant”) against Deuter Sports GmbH (“the Respondent”) for wrongful termination of a letter of agreement dated 28 November 2002 (“the Distributorship Agreement”). The Judge also granted interlocutory judgment in favour of the Respondent with respect to its counterclaim for breach of the Distributorship Agreement, with damages to be assessed.

  4. The parties

  5. [2] The Appellant is a Singapore company that engages in the import, export, retail and wholesale of both local and foreign brands of backpacks as well as other outdoor, camping and athletic products. The Respondent is a well-known German-registered company that engages in the manufacture, export and sale of backpacks and outdoor products under the “Deuter” trade mark. From 1992 to 27 January 2005, the Appellant was the exclusive distributor of Deuter products in Singapore, as well as other countries in the region. During this period, both the Appellant and the Respondent entered into a number of written agreements.

  6. Background facts

  7. [3] In a letter of intent dated 25 May 1995 (“the 1995 Letter”), the Respondent expressed its intention to use the Appellant as its “sole distributor” of Deuter backpack products “in Singapore and Malaysia for three years”. The 1995 Letter also stipulated that it should “be the intent of [the Appellant] to place all orders directly with [the Respondent], advertise and promote Deuter packs and place preseason orders”.

  8. [4] The parties entered into another agreement in December 1999 (“the 1999 Agreement”), which gave the Appellant “exclusive rights to distribute Deuter products in Brunei, Indonesia and Thailand” for a period of three years, beginning on 1 January 2000 and ending on 31 December 2002. The 1999 Agreement also stated:

  9. An addendum to the 1999 Agreement (“the 1999 Agreement Addendum) was entered into on 29 March 2001 to expand the Appellant’s exclusive distributorship of Deuter products to “Singapore, East/West Malaysia, Thailand and Brunei”. In the 1999 Agreement Addendum, the Respondent also agreed to the following:

  10. [5] The parties entered into another agreement on 28 November 2002, ie, the Distributorship Agreement (see [1] above). Pursuant to the Distributorship Agreement, the Appellant was given “exclusive rights to distribute Deuter products in Singapore, East/West Malaysia, Brunei, Thailand and Indonesia” for a period of three years, ending on 31 December 2005. Both parties also, for the first time, agreed upon a non-competition clause which stated that “[p]roducts which are in competition with Deuter range of products may not be sold by [the Appellant] without prior written consent from [the Respondent]” (“the Non-Competition Clause”). The Judge accepted that there was an “understanding” between the parties that the Non-Competition Clause in the Distributorship Agreement would not be activated if the Appellant purchased US$1m worth of Deuter products annually (“the Purchase Target”). This understanding is not in dispute between the parties for the purposes of the present appeal.

  11. [6] For the sake of completeness, and because this is a crucial document, we set out the body of the Distributorship Agreement in full:

  12. [7] The relationship between the Appellant and the Respondent continued pursuant to the Distributorship Agreement until 2004, when cracks (unfortunately) began to develop in it. On the evidence, there were three main reasons why the relationship started to sour. First, the Respondent viewed the Appellant’s discounting of Deuter products over a period of time as excessive. Second, the Respondent was unhappy that there had been a reduction of the Appellant’s wholesale business from 500 retailers’ accounts to 50 retailers’ accounts. Finally, the Respondent took issue with the Appellant’s sale of competing products in its retail stores.

  13. [8] Consequently, there was a lengthy exchange of e-mails between Mr Terry Yee (“Mr Yee”), the Appellant’s managing director, and Mr William Hartrampf (“Mr Hartrampf”), the Respondent’s export manager, between 18 November 2004 and 20 January 2005. Both parties endeavoured to settle their differences, and, subsequently, on 17 January 2005, an amendment to the Distributorship Agreement (“the Amendment Agreement”), which was agreed to take effect from 28 November 2002, was entered into. Pursuant to the Amendment Agreement, the Appellant agreed “not to publicly advertise any discount on Deuter products” and that “[a]ny public advertisement to discount Deuter products can be made only after receiving prior written consent from [the Respondent]”.

  14. [9] In this regard, Mr Hartrampf confirmed during cross-examination that the Amendment Agreement had indeed resolved the disputes between the parties relating to the discounting of Deuter products and the reduction in the number of retailers’ accounts. It is, therefore, common ground (and, in fact, undisputed) that these two issues cannot be used by the Respondent as grounds for the termination of the Distributorship Agreement. Indeed, the Judge held that the discounting of Deuter products by the Appellant prior to the Amendment Agreement could not have been a breach of the Distributorship Agreement. The Judge further held that the Respondent could not rely on the discounting issue to terminate the Distributorship Agreement as the Amendment Agreement had settled and resolved the parties’ differences pertaining to this particular issue. Indeed, we are of the view that the evidence fully supports the Judge’s findings with regard to both these issues.

  15. [10] Accordingly, and this is not disputed by the parties in the present appeal, the sole remaining ground which the Respondent can rely on in order to terminate the Distributorship Agreement is the Appellant’s sale of competing products in its retail outlets in breach of the Non-Competition Clause (see [5] above). That said, the following are, in fact, the more significant e-mails which were exchanged between the parties on the remaining issue relating to the sale of competing products.

  16. (a) E-mail from Mr Hartrampf to Mr Yee, dated 11 December 2004:

  17. (b) E-mail from Mr Yee to Mr Hartrampf, dated 16 December 2004:

  18. (c) E-mail from Mr Hartrampf to Mr Yee, dated 21 January 2005:

  19. (d) E-mail from Mr Hartrampf to Mr Yee, dated 27 January 2005:

  20. (e) E-mail from Mr Yee to Mr Hartrampf, dated 27 January 2005:

  21. [11] Upon receiving Mr Yee’s e-mail dated 27 January 2005, the Respondent issued, on the very same day, a notice of termination (“the Termination Notice”) and terminated the Distributorship Agreement on the following four grounds:

  22. (a) the reduction of the Appellant’s wholesale business from 500 retailers’ accounts to 50 retailers’ accounts;

  23. (b) the Appellant’s excessive discounting of Deuter products over an extended period of time;

  24. (c) the sale of competing products without obtaining the Respondent’s written consent; and

  25. (d) an essential change in the running of the Appellant’s business and financial situation had occurred, and this had the effect of influencing the results which the Respondent could legitimately expect.

  26. [12] As already noted at [9] above, in view of the fact that the Amendment Agreement had conclusively resolved the excessive discounting and reduction of wholesale accounts issues, the Judge held that the first, second and fourth grounds could not be relied upon by the Respondent in order to terminate the Distributorship Agreement. The Respondent has accepted that finding, and the only ground left for the purposes of this appeal is the third one – the breach of the Non-Competition Clause.

  27. [13] An elaboration of the third ground can be found in the Termination Notice itself, which states:

  28. In response to the Termination Notice, the Appellant’s then solicitors, M/s Netto & Magin LLC, on 21 March 2005, wrote to the Respondent to inform it that the Appellant did “not accept [the] wrongful repudiation” and elected to “affirm the [Distributorship Agreement] and shall look towards [the Respondent] for full damages and loss of profits for [the] wrongful repudiation”.

  29. [14] Finally, on 27 April 2005, the Appellant commenced legal proceedings against the Respondent, claiming damages for the Respondent’s wrongful termination of the Distributorship Agreement.

  30. Findings of the trial court

  31. [15] The first issue which the Judge addressed was one of excessive discounting. The Respondent’s complaint was that the Appellant’s excessive discounting of Deuter products over an extended period of time was contrary to its obligation to position Deuter as a “high quality brand”. In this regard, the Judge observed that the Amendment Agreement “had put to rest the parties’ differing views over the matter” (at [11] of the GD). In addition, the Judge observed that it was “patently clear to both the parties that the Amendment [Agreement] was limited only to the discounting and retailer issues” (at [23]). As mentioned earlier (see [9] above), it is common ground and undisputed that both the discounting and retailer issues cannot be used by the Respondent as grounds for the termination of the Distributorship Agreement. Quite rightly, the Respondent has not contested both issues during the appeal, and there is therefore no need to consider these issues further.

  32. [16] As mentioned at [5] above, the Judge accepted that there was an “understanding” between the Appellant and the Respondent that the Non-Competition Clause would not be activated as long as the Appellant met the Purchase Target (see the GD at [13]). Further, the Judge also held (see [12] above) that the only ground which the Respondent could rely on in order to terminate the Distributorship Agreement was the breach of the Non-Competition Clause. In this regard, the Judge found that the Purchase Target was not met for the year 2004 (see the GD at [17]) and that, therefore, the Non-Competition Clause was activated. The Judge also held that the Respondent enforced the Non-Competition Clause and that the Appellant’s refusal to comply with the clause constituted a breach of the Distributorship Agreement (at [24] of the GD). In so far as the Appellant’s allegation that the parties’ act of entering into the Amendment Agreement constituted a waiver of the Appellant’s obligations under the Non-Competition Clause was concerned, the Judge (after considering the correspondence between the Appellant and the Respondent in some detail) held (at [24] of the GD) that it did not. The Appellant has not disputed these findings. In any event, it bears emphasising that, in our view, these findings cannot be impugned on the evidence.

  33. [17] Having established that the Appellant had breached the Non-Competition Clause, the Judge addressed the second issue, which is whether the breach was one that would entitle the Respondent to terminate the Distributorship Agreement. In this regard, the Judge referred to the High Court decision of Singapore Tourism Board v Children’s Media Ltd [2008] 3 SLR 981 (recently affirmed by this court in Children’s Media Ltd v Singapore Tourism Board [2009] 1 SLR 524), where Lai Siu Chiu J stated (at [32]):

  34. Further, the Judge noted the following observations in the English Court of Appeal decision of Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361 where Buckley LJ stated (at 379–380):

  35. [18] The Judge highlighted the following aspects of the relationship between the Appellant and the Respondent in arriving at the conclusion that the Appellant’s unequivocal refusal to cease selling competing products had deprived the Respondent of a substantial part of the benefit to which it was otherwise entitled. First, the Appellant was the exclusive distributor for the Respondent. Secondly, the purpose of the Non-Competition Clause (which would be triggered by the inability to meet the Purchase Target) was to ensure that the Appellant would look after the interests of the Respondent. In particular, the interests sought to be protected by the Non-Competition Clause included market penetration and brand building objectives (reference may, in this regard, be made to the second paragraph of the Distributorship Agreement, reproduced above at [6]). To elaborate, the Judge found (at [27] of the GD) that:

  36. Further, the Judge was of the view that the Non-Competition Clause was “closely allied” to the objectives of market penetration and brand building (see the GD at [28]).

  37. Issues on appeal

  38. [19] In its written submissions to this court, the Appellant contended that the Respondent had wrongfully terminated the Distributorship Agreement as:

  39. (a) The Appellant had met the Purchase Target for 2004 and the Respondent was accordingly not entitled to prospectively activate the Non-Competition Clause in the Distributorship Agreement.

  40. (b) Alternatively, even if the Non-Competition Clause had been activated for 2005, the Appellant’s non-compliance with this clause was not so serious as to entitle the Respondent to terminate the Distributorship Agreement.

  41. [20] However, during oral submissions to this court, the Appellant did not pursue its first submission relating to the Purchase Target. The Appellant, in other words, decided to proceed only with the second (alternative) submission, namely, that the Appellant’s continued sale of competing products did not amount to a breach entitling the Respondent to prematurely bring the Distributorship Agreement to an end.

  42. [21] There are two consequences flowing from the Appellant’s decision to proceed with this appeal on the basis that the Appellant had not met the Purchase Target for 2004. First, we need not discuss the arguments that were made in relation to the Appellant’s first submission. Secondly, it became unnecessary for the Appellant to proceed with its application to amend its pleadings to accommodate the Judge’s express finding that there was an understanding between the parties that the Non-Competition Clause in the Distributorship Agreement would be inactive if the Appellant met the Purchase Target for 2004.

  43. [22] Hence, the only issue before us was whether or not the Appellant’s continued sale of competing products in contravention of the Non-Competition Clause constituted a breach which entitled the Respondent to terminate the Distributorship Agreement. Before proceeding to address this issue, it would be apposite to consider the applicable principles of law first.

  44. The applicable principles of law

  45. When is the innocent party entitled to terminate the contract?

  46. The principles set out in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd

  47. [23] It is axiomatic that not every breach of contract will entitle the innocent party to terminate the contract concerned. As this court put it in RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] 4 SLR 413 (“RDC Concrete”) at [90]:

  48. [24] Indeed, RDC Concrete dealt with the applicable principles as to when the innocent party would be entitled to terminate the contract in some detail (see generally at [89]–[113] of RDC Concrete). An extremely brief summary of those principles was in fact set out by this court in its subsequent decision in Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR 663 (“Man Financial”), as follows (at [153]–[158]):

  49. [25] By way of some further elaboration, the concept of a “condition” as well as the concept of a “warranty” (pursuant to the “condition-warranty approach”) have both been described in RDC Concrete, as follows (at [97]–[98]):

  50. [26] The “Hongkong Fir approach”, on the other hand, has been described (also in RDC Concrete at [99]), as follows:

  51. A critique of RDC Concrete

  52. (1) The critique

  53. [27] Two learned commentaries relating to RDC Concrete have been published since that decision was released (see J W Carter, “Intermediate Terms Arrive in Australia and Singapore” (2008) 24 JCL 226 (“Carter’s Critique”) and Goh Yihan, “Towards a Consistent Approach in Breach and Termination of Contract at Common Law: RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd” (2008) 24 JCL 251 (“Goh’s Critique”)). The latter article, as its title suggests, focuses wholly on RDC Concrete, whereas the former also considers the recent (and significant) High Court of Australia decision of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115 (“Koompahtoo”) (which decision is also noted in Kanaga Dharmananda and Anthony Papamatheos, “Termination and the Third Term: Discharge and Repudiation” (2008) 124 LQR 373 as well as in P G Turner, “The Hongkong Fir Docks in Australia” [2008] LMCLQ 432 (“Turner on Hongkong Fir”)). It might be observed, parenthetically, that the majority of the judges in Koompahtoo (Gleeson CJ, Gummow J, Heydon J and Crennan J) did not (in a joint judgment) rest their decision on the ground that the terms concerned comprised conditions (see Koompahtoo at 140 and 147), but held, instead, that pursuant to the Hongkong Fir approach, the breaches had been serious enough to entitle the innocent party to terminate the contract. (This was in contrast to the view of Kirby J, who, whilst arriving at the same result as the majority, was nevertheless of the view that the Hongkong Fir approach ought not to be part of Australian law – a somewhat controversial view which, however, is not relevant for our present purposes and which, in any event, does not (in our view) represent Singapore law).

  54. [28] A common point of critique of RDC Concrete in both Carter’s Critique and Goh’s Critique centres on the failure in that case to exclude the Hongkong Fir approach where the parties have in fact agreed that the term breached is a “warranty”. In other words, the argument is that where parties are found to have intended (presumably, either expressly or as a matter of construction) a term to be a warranty (hereinafter “a warranty intended by the parties”), their intention should be given effect to and the term concerned should be conferred the legal effect of a warranty (pursuant to the condition-warranty approach) (reference may also be made to Donal Nolan, “Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, The Hongkong Fir (1961)” in ch 9 of Landmark Cases in the Law of Contract (Hart Publishing, 2008) (Charles Mitchell & Paul Mitchell gen eds), (“Nolan on Hongkong Fir”) at pp 293–294). This particular critique is not unpersuasive but, as will be seen (as well as elaborated upon shortly), the approach taken in RDC Concrete is in fact premised on the preference for an outcome arrived at quite independently of the parties’ intention (in situations where the term concerned is not a condition pursuant to the condition-warranty approach). In this respect, therefore, this particular critique proceeds on an entirely different basis altogether. The key to answering the critique obviously lies in the continued validity of the concept of a warranty intended by the parties (pursuant to the condition-warranty approach). Let us now elaborate on this particular category of term.

  55. [29] As a preliminary point, we would also observe that the mere fact that the parties have designated a particular term as a “warranty” (without more) may not necessarily be dispositive of the matter. For example, in the House of Lords decision of L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 (“Schuler”), it was held by the majority of the House that, despite the fact that the parties concerned had expressly utilised the word “condition”, the word was utilised merely in a lay sense, and not as a legal term of art. However, in Man Financial, we did express the view (reproduced below at [59]) to the effect that the majority in Schuler were, in substance and effect, applying the Hongkong Fir approach (as opposed to the condition-warranty approach). Whilst that is one interpretation of the decision in Schuler, it nevertheless does not detract from the general principle just noted to the effect that the facts and context may cast doubt on whether or not the parties intended, even in the situation where there is an express use of the word “warranty”, the term to be a “warranty” in the manner utilised under the condition-warranty approach. In summary, the matter is one of objectively construing the contract concerned.

  56. [30] The objective construction of the contract concerned leads to the possibility that a term can be a warranty (as defined under the condition-warranty approach) in at least two possible situations.

  57. [31] The first situation is where the court finds that the term concerned is not a condition pursuant to the condition-warranty approach. If so, such a term must, ex hypothesi, be a warranty pursuant to that same approach. We assume that, in such a situation, the parties have not expressly stated that the term concerned is a warranty. We would characterise such a term as “a warranty impliedly intended by the parties”. Secondly, a term can be a warranty in a situation where the parties concerned expressly intend it to be a warranty (hereinafter “a warranty expressly intended by the parties”).

  58. [32] In our view, a warranty expressly intended by the parties is, however, likely to be rare (or at least uncommon) in practice. For this reason, we are of the view that the critique in the articles (above at [27]) is, in the main, of theoretical interest and should not (in the nature of things) raise matters of significance in practice (cf also Carter’s Critique ([27] supra) at 247 and Nolan on Hongkong Fir ([28] supra) at p 294).

  59. [33] Indeed, such a situation is likely to be rare (or at least uncommon) if we assume (as we must) that the concept of the “warranty” is that which is embodied within the condition-warranty approach (as to which, see above at [25]). Put simply, a term is a warranty in the sense just mentioned if any breach of it would never entitle the innocent party to terminate the contract, even if the consequences of the breach were so serious as to deprive the innocent party of substantially the whole benefit of the contract which it was intended that the innocent party should have. Such a situation (as already alluded to above) will be rare (or at least uncommon) simply because most parties would be concerned about whether or not they would be legally justified in terminating the contract in the event of a breach of the term concerned. However, that having been said, we cannot rule out the possibility that parties might nevertheless be concerned to ensure that the contract continues in spite of the breach of a term therein (by way of a warranty expressly intended by the parties). Nevertheless, such a situation – it is important to reiterate – is likely (in the nature of things) to be rare (or at least uncommon). Let us now proceed to consider that situation in general and the applicable legal test in particular. However, before proceeding to do so, it would be appropriate, in our view, to consider, first, the situation where a warranty is, instead, impliedly intended by the parties.

  60. [34] Turning, first, to the situation where the parties did not expressly designate the term concerned as a warranty, it is our view that, if the court finds that the parties did not intend a particular term to be a condition (pursuant to the condition-warranty approach), it would necessarily follow that the parties must have intended that term to be a warranty instead. At this juncture, we are back – full circle, as it were – to the condition-warranty approach in its “purest” form. More importantly, the result of such an approach is that there is no scope whatsoever for any application of the Hongkong Fir approach – at least in cases where the factual matrix is such that the application of both approaches would yield different results. This would be the case, for example, where the term which is breached is classified as a warranty under the condition-warranty approach but where the consequences of the breach are so serious as to deprive the innocent party of substantially the whole benefit that it was intended that the innocent party should have. Another obvious example would be where the term which is breached is classified as a condition under the condition-warranty approach but where the consequences of the breach are not so serious as to deprive the innocent party of substantially the whole benefit that it was intended that the innocent party should have (reference may also be made to RDC Concrete ([23] supra) at [102]–[103]).

  61. [35] In summary, therefore, there is, in our view, only one of two conclusions possible if one were to apply the condition-warranty approach: the term concerned is either a condition or a warranty. There is no middle ground. Further, it cannot be argued that the court is unable to objectively ascertain the parties’ intention as to whether a term is to be a condition or warranty in its legal sense. We indicated in RDC Concrete that, in so far as Singapore law is concerned, the court would give effect to the parties’ intention where they have very clearly and unambiguously indicated that a term is to have the effect of a condition (ie, “Situation 1”; see [24] above) or where the court concludes that that term is a condition, having applied the condition-warranty approach (pursuant to “Situation 3(a)”; see [24] above).

  62. [36] If the condition-warranty approach is treated as admitting of only one of two possibilities, ie, that a term is either a condition or a warranty, then (as already noted above) there is logically no place for the Hongkong Fir approach. We are of the view, therefore, that the approach adopted in RDC Concrete is the only one which permits the Hongkong Fir approach to be accommodated in any meaningful sense without simultaneously going to the other extreme of completely effacing (in substance at least) the condition-warranty approach. Indeed, in this last-mentioned regard, the very nature of an intermediate term is such that giving precedence to the Hongkong Fir approach would invariably result in the court looking only at the consequences of the breach since virtually every term would be an intermediate term, simply because it could almost always be argued that the breach of any term could result in either serious or trivial consequences. In our view, this is not desirable. Returning to the central point made at the outset of this paragraph, “legal space” must be made for the application of the Hongkong Fir approach, which itself embodies its own conception of fairness (see also the analysis of F M B Reynolds, “Warranty, Condition and Fundamental Term” (1963) 79 LQR 534 (where it is argued that the focus should be on the nature of the breach, rather than the nature of the term broken); Prof Treitel’s inaugural lecture delivered on 7 March 1980 before the University of Oxford in G H Treitel, Doctrine and Discretion in the Law of Contract (Clarendon Press, 1981) at p 6 (where it is pointed out that the law relating to discharge for breach was focused, originally, on the seriousness of the breach although it later developed to focus on the nature of the term (pursuant to the condition-warranty approach); and Nolan on Hongkong Fir ([28] supra) at pp 270–276 as well as p 294). Stated simply, the fairness in this regard would lie in avoiding the potentially grave injustice which could be occasioned to the innocent party who could potentially suffer the serious consequences of the breach but is unable to terminate the contract because the term is given the legal status of a “warranty” (pursuant to the condition-warranty approach).

  63. [37] The conception of fairness referred to in the preceding paragraph must, by definition and logic, be an objective one. However, it has been argued by Goh that the court would, pursuant to the approach adopted in RDC Concrete and (in particular) by insisting on applying the Hongkong Fir approach as a general rule, be “wanting to do ‘justice’ on its own terms’” (see Goh’s Critique ([27] supra at 267)). Indeed, the author proceeds to elaborate thus (ibid):

  64. [38] In our view, it is clear that, compared to the condition-warranty approach, the Hongkong Fir approach embodies a somewhat different conception of the concept of fairness. However, this does not, ipso facto, render this particular conception an arbitrary one. We do not (in fairness to the learned author) assume him to be arguing that the Hongkong Fir approach embodies (and/or leads to) arbitrariness (see, in particular, his reference to “an objective point of view” in the quotation above).

  65. [39] Indeed, it is also apposite to note, at this juncture, that Diplock LJ’s analysis in the English Court of Appeal decision of Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (“Hongkong Fir”) (which is the root source of the Hongkong Fir approach (see also above at [26])) has received the highest praise. In the leading House of Lords decision of Bunge Corporation, New York v Tradax Export SA, Panama [1981] 1 WLR 711, Lord Wilberforce referred to it (at 714) as a “seminal judgment” whilst Lord Roskill expressed the view (at 725) that “the judgment of Diplock L.J. in the Hongkong Fir case is, if I may respectfully say so, a landmark in the development of one part of our law of contract in the latter part of this century”.

  66. [40] It is also apposite to note that, to the best of our knowledge, all the major Commonwealth jurisdictions have endorsed the Hongkong Fir approach (these include Australia (see, for example, Koompahtoo ([27] supra); Canada (see, for example, the Alberta Supreme Court decision of Dow Chemical of Canada Limited v R V Industries Ltd (1979) 9 Alta LR (2d) 129; the Ontario Court of Appeal decision of Jorian Properties Ltd v Zellenrath (1984) 46 OR (2d) 775; the Ontario High Court of Justice decision of First City Capital Ltd v Petrosar Ltd (1987) 61 OR (2d) 193; the British Columbia Court of Appeal decision of Lehndorff Canadian Pension Properties Ltd v Davis Management Ltd (1989) 59 DLR (4th) 1; the Alberta Court of Appeal decision of First City Trust Co v Triple Five Corp Ltd (1989) 57 DLR (4th) 554; the British Columbia Court of Appeal decision of Ramrod Investments Ltd v Matsumoto Shipyards Limited (1990) 47 BCLR (2d) 86; and the Alberta Provincial Court decision of Krawchuk v Ulrychova [1996] 8 WWR 183 (and cf the Supreme Court of Canada decision of Field v Zien (1963) 42 DLR (2d) 708 as well as the Ontario Court of Appeal decision of 968703 Ontario Ltd v Vernon (2002) 58 OR (3d) 215)); and Hong Kong (see, for example, the Hong Kong Court of Final Appeal decision of Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1; the Hong Kong Court of Appeal decisions of Leung Yee v Ng Yiu Ming [2001] 1 HKC 342 and Creatiles Building Materials Co Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309; the Hong Kong Court of First Instance decisions of Samsung Hong Kong Ltd v Keen Time Trading Ltd [1998] 2 HKLRD 341 (affirmed in the Hong Kong Court of Appeal decision of Samsung Hong Kong Ltd v Keen Time Trading Ltd [1999] 2 HKC 447), Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 4 HKLRD 447 (affirmed in the Hong Kong Court of Appeal decision of Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] 1 HKLRD 55) and Secretary for Justice v Yu’s Tin Sing Enterprises Co Ltd [2008] HKCU 1391; [2008] HKCFI 768; as well as Stephen Hall, Law of Contract in Hong Kong – Cases and Commentary (LexisNexis, 2nd Ed, 2008) at ch 10).

  67. [41] Unfortunately (and, again, to the best of our knowledge), none of these decisions actually deals (expressly at least) with the precise relationship between the condition-warranty approach and the Hongkong Fir approach. We attempted to do so in RDC Concrete ([23] supra) and now are attempting to deal with at least one remaining issue that has arisen from the critique in the articles cited earlier (at [27] above).

  68. [42] It is appropriate, at this juncture, to consider the powerful argument proffered in Goh’s Critique ([27] supra) to the effect that the approach adopted by this court in RDC Concrete does not give full effect to the intentions of the parties inasmuch as if the parties’ intention was that the term breached was to be a warranty, then the court ought to give effect to that intention. However, to do this would be to return fully to the condition-warranty approach and (more importantly) to leave no scope for application of the Hongkong Fir approach, which (as we have already explained above) is undesirable. It is true that the author does argue that the Hongkong Fir approach can still apply where the parties’ intention is not objectively ascertainable. However, whilst theoretically attractive, such an argument does not, with respect, recognise (as we mentioned above at [35]; see also below at [44]) the fact that in a situation where the term concerned has been ascertained by the court to be a condition, the intention of the parties has, ex hypothesi, been ascertained. Indeed, it is difficult to envisage or even imagine a situation where the intention of the parties cannot be objectively ascertained by the court. Goh is, however, correct in arguing that the court has, on the approach adopted in RDC Concrete, gone further and imputed (albeit not, as we explain below, as an irrebuttable presumption) an intention to the parties in nevertheless proceeding to apply the Hongkong Fir approach in a situation (it is important to emphasise) where the court has decided that the term was not intended by the parties to be a “condition”; as the author put it (see Goh’s Critique at 264):

  69. [43] However, as we have already pointed out above, if the court decides that the parties did not intend the term concerned to be a “condition”, it would necessarily follow (if Carter’s Critique and Goh’s Critique as well as their proposed approach are accepted) that the parties must have intended that term to be a warranty. If so, as also pointed out above, this would leave no scope whatsoever for the application of the Hongkong Fir approach. In our view, it is difficult (perhaps even impossible) to effect a perfect integration between both these approaches. That is why this court, in RDC Concrete, observed thus with regard to the effective fate of the “warranty”, as follows (at [107]–[108]):

  70. [44] As already mentioned (above at [42]), Goh is correct in pointing out that the court is, in effect, applying the Hongkong Fir approach as “imputed” to the parties as a general rule (provided that it has decided that the term is not a condition), although it is important to note that this general rule is subject to a limited exception (see below at [48]–[50] and [57]). In contrast, the learned author argues, on the other hand, that the Hongkong Fir approach ought to be applied as “a fallback rule” [emphasis added] instead (see Goh’s Critique, especially at 261). However, as we have already emphasised a number of times during the course of this judgment, the approach adopted by Goh would not, with respect, be practically viable inasmuch as there would be virtually no situation where the court could (on his approach) turn to the Hongkong Fir approach by way of a fallback position. It is important to reiterate the important point that the court would necessarily (from both practical as well as theoretical perspectives) have ascertained that the parties intended the term concerned to be either a condition or a warranty. To elaborate, if the court decides that the parties intended the term concerned to be a condition, that is an end to the matter (even under the approach adopted in RDC Concrete) inasmuch as the innocent party is entitled to terminate the contract. If, however, the court decides that the parties did not intend the term to be a condition, it must necessarily follow (leaving aside the Hongkong Fir approach for the moment) that the parties must have intended the term to be a warranty instead. Put simply, either the parties intended the term concerned to be an important one (in which case it would be a condition) or they did not (in which case it would be a warranty). If so, then there is no need (or even justification) for the court to go any further and apply the Hongkong Fir approach; that particular approach has, in effect, become moribund.

  71. [45] However, might it be also argued that there could be situations where whilst the parties did not intend the term to be a condition, they might have intended that the term be an intermediate one instead of a warranty? Whilst theoretically attractive, such an argument fails, in our view, to take into account the fact (noted above at [36]) that an intermediate term will, by its very nature, always tend to cover the entire “field”, so to speak (see also above at [43]). More importantly, this result stems, in the final analysis, from the conceptual incompatibility of the condition-warranty approach on the one hand and the Hongkong Fir approach on the other. It is true that, on a practical level, both approaches often yield the same result. However, as we have already pointed out (above at [34]), certain fact situations could also yield radically different results which are arrived at as a result of the conceptual incompatibility just mentioned. Put simply, the condition-warranty approach entails looking at the nature of the term concerned whereas the Hongkong Fir approach entails looking at the actual consequences of the breach instead (see also RDC Concrete ([23] supra) at [99], reproduced above at [26]). This is an important point because it means that, on both theoretical as well as practical levels, a court must necessarily commence with the application of either the condition-warranty approach or the Hongkong Fir approach.

  72. [46] Indeed, in RDC Concrete, this court commenced with the condition-warranty approach (pursuant to Situation 3(a)). This being the case, then the concept of the “intermediate term”, which is the quintessential product of the Hongkong Fir approach, only operates later (pursuant to Situation 3(b)). Such an approach is, in our view, both eminently just and fair as well as practical. As already mentioned (at [36] above), the application of the Hongkong Fir approach right at the outset would leave no “legal space” for application of the condition-warranty approach. On the other hand, as we have explained in some detail above, application of the condition-warranty approach must nevertheless also leave “legal space” for application of the Hongkong Fir approach. Most importantly, the approach adopted (pursuant to Situation 3(a) and Situation 3(b) in RDC Concrete, and in that particular order of priority) achieves, in our view, a just and fair outcome, balancing both approaches in the process.

  73. [47] It is, however, important, at this juncture, to note (indeed, emphasise) that the intermediate term is not thereby without legal significance: The combined legal effect as a result of the application of, first, Situation 3(a) and then Situation 3(b) is that if a term is not a condition under the condition-warranty approach (Situation 3(a)), the court will then consider whether the innocent party is nevertheless legally justified in terminating the contract under the Hongkong Fir approach (Situation 3(b)); in other words, if the term is not a condition, it is presumed to be an intermediate term instead. In this regard, the concept of the “warranty” has been effectively effaced (see also above at [43]). The issue that now arises is whether or not that effacement is (or ought to be) a total one. If, in other words, a term is not a condition (pursuant to Situation 3(a)), is it (at least in substance and effect) irrebuttably presumed to be an intermediate term (pursuant to Situation 3(b))? Or, could it be argued, on the contrary, that the presumption just mentioned is rebuttable? In particular, could it be argued that, where the parties expressly designate the term concerned as a “warranty” in clear and unambiguous terms (viz, a warranty expressly intended by the parties), the presumption is thereby rebutted? This is an important issue to which our attention must now turn.

  74. [48] Although we observed earlier in this judgment (above at [32]–[33]) that a situation in which the parties expressly agree a term to be a warranty is likely to be in practice rare (or at least uncommon), we would not categorically hold that the parties can never agree that a particular term should have the legal effect of a “warranty” in the sense the word is understood and utilised pursuant to the condition-warranty approach (cf also the English High Court decision of M & J Polymers Ltd v Imerys Minerals Ltd [2008] 1 Lloyd’s Rep 541 at 547). In this regard, we are envisaging a possible situation where the parties state this not only clearly but also in no uncertain terms – in other words, the parties, expressly state that any breach of a particular term, no matter how serious and regardless of the consequences of the breach, would never entitle the innocent party to terminate the contract (this is, in fact, the “reverse” or “mirror” image of Situation 1 (as to which, see below at [51])). As opposed to simply stating expressly, without more, that the term concerned is a “warranty”, such a stipulation by the parties does, in no uncertain terms, in fact convey their intention that a term is to be a warranty, as that is defined under the condition-warranty approach. The potential difficulties introduced by Schuler ([29] supra) – where there was some ambiguity as to the objective meaning of a term – would therefore not arise in such a situation.

  75. [49] It is significant to note, at the outset, that Diplock LJ himself in Hongkong Fir ([39] supra) acknowledged (at 70) that:

  76. The type of term described in the preceding paragraph would, in fact, be of the nature described by Diplock LJ in the above quotation. Indeed, it is also significant to note that the learned judge also acknowledged (ibid) that what we have described as the Hongkong Fir approach was subject to express provision in the contract (which would, again, include the type of term described in the preceding paragraph).

  77. [50] We have also raised (above at [45]–[47]) the issue as to whether a presumption that a term is an intermediate term (under Situation 3(b)) is an irrebuttable one that is writ in stone. We are of the view that the answer to this particular issue must be in the negative. Consistently with Diplock LJ’s views, which were noted in the preceding paragraph, it must surely be open to the parties to expressly agree (in clear and unambiguous language) that the term concerned can never give rise to a legal right to terminate the contract, regardless of the consequences of the breach of that particular term (viz, to agree to a warranty expressly intended by the parties). Such an agreement would, in our view, clearly rebut the (initial) presumption that the term is an intermediate term. We also note that such a term is (as we have observed above (at [32]–[33])) likely to be rare (or at least uncommon) to begin with. We would add that, in such circumstances, the conception of fairness embodied in the ideal of the sanctity of contract should be given effect to (indeed, priority) in this particular situation.

  78. [51] A similar approach (which also, in fact, embodies the ideal of the sanctity of the contract) is to be found in Situation 1. One issue that arises in relation to Situation 1 is whether it could be said that Situation 1 and Situation 3(a) are, in effect, the same – at least in so far as the issue of termination is concerned. Situation 1 itself was, in fact, described in RDC Concrete ([23] supra) in the following terms (at [91]):

  79. (Reference may also be made, in this regard, to Man Financial ([24] supra) at [154].)

  80. [52] It is important, at this point, to reiterate that Situation 1 relates to a situation where there is a clear and unambiguous statement that, in the event of a breach and/or a certain event or events occurring, the innocent party will be entitled to terminate the contract. Much will, of course, depend on the precise language as well as the context concerned (cf, for example, the recent English Court of Appeal decision of Rice v Great Yarmouth Borough Council [2003] TCLR 1 (critiqued by Simon Whittaker, “Termination Clauses” in ch 13 of Contract Terms (Oxford University Press, 2007) (Andrew Burrows & Edwin Peel eds) at pp 277–283) and the New South Wales Court of Appeal decision of Hewitt v Debus (2004) 59 NSWLR 617 (“Hewitt”) with the New South Wales Court of Appeal decision of Honner v Ashton (1979) 1 BPR 9478 (“Honner”) (which Meagher JA, who dissented in Hewitt, in fact followed)).

  81. [53] Turning to Situation 1 proper, its basis is founded on giving effect to the parties’ intention by way of a termination clause that may not necessarily involve a breach of contract but nevertheless has the legal effect (in substance) of a condition (pursuant to the condition-warranty approach) (see also per Lord Diplock in the House of Lords decision of Afovos Shipping Co SA v Romano Pagnan and Pietro Pagnan [1983] 1 WLR 195 at 203 (“Afovos Shipping”); though cf per Glass JA in Honner (at 9483); reference may also be made to J W Carter, “Termination Clauses” (1990) 3 JCL 90 at 104–105 (“Carter on Termination Clauses”) as well as to the recent English Court of Appeal decision of Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] 1 Lloyd’s Rep 461 (“Stocznia Gdynia SA”) (where it was held (it appears as a matter of construction) that the termination clause concerned furnished the same right, as that contained under the common law, to treat the contract as discharged)).

  82. [54] Situation 3(a), on the other hand, relates to the breach of a condition proper (pursuant to the condition-warranty approach). Viewed in this light, Situation 1 in RDC Concrete might (and this is a very important point) be regarded (having regard to the preceding paragraph) as a more explicit way of characterising (from the perspective of legal effect) a situation that falls (in substance) within the purview of Situation 3(a). Put simply, there is no difference (in substance) between Situation 1 and Situation 3(a).

  83. [55] It should, however, be noted, at this juncture, that whilst Situation 1 entails (in substance) the same legal effect as a condition (pursuant to the condition-warranty approach), this is only with regard to the termination of the contract. However, this does not necessarily mean that, from a remedial perspective, the innocent party is also entitled to the full measure of damages if there has, in fact, been no breach which would have entitled it to terminate the contract at common law (see the English Court of Appeal decision of Financings Ltd v Baldock [1963] 2 QB 104 (“Financings”) as well as the High Court of Australia decision of Shevill v The Builders Licensing Board (1982) 149 CLR 620; but cf Afovos Shipping and (more importantly) the English Court of Appeal decision of Lombard North Central Plc v Butterworth [1987] QB 527 (“Lombard”) (which demonstrates that the effect of Financings could be avoided by appropriate drafting and which is noted in G H Treitel, “Damages on Rescission for Breach of Contract” [1987] LMCLQ 143 as well Hugh Beale, “Penalties in Termination Provisions” (1988) 104 LQR 355); reference may also be made to Stocznia Gdynia SA as well as Carter on Termination Clauses ([53] supra) and Brian R Opeskin, “Damages for Breach of Contract Terminated Under Express Terms (1990) 106 LQR 293); indeed, even if the contract itself stipulates the damages recoverable, the term concerned might still be unenforceable as constituting a penalty clause (see, for example, Financings and Lombard).

  84. [56] There are also further issues raised with respect to possible legal mechanisms for the control of termination clauses pursuant to Situation 1 (as well as with respect to non-termination clauses under the “mirror” or “reverse” image of Situation 1, which we have termed warranties expressly intended by the parties), which need not, however, concern us in the present judgment (and see generally Whittaker ([52] supra) as well as Beale ([55] supra)).

  85. (3) Conclusion

  86. [57] We would therefore reaffirm the approach laid down in RDC Concrete for the reasons set out above, subject to the extremely limited exception that, where the term itself states expressly (as well as clearly and unambiguously) that any breach of it, regardless of the seriousness of the consequences that follow from that breach, will never entitle the innocent party to terminate the contract, then the court will give effect to this particular type of term (viz, a warranty expressly intended by the parties). It bears noting that the specific reasons for this particular exception (see above at [48]–[50]) as well as the fact that such a term may be subject to control via possible legal mechanisms (see above at [56]) have, in fact, already been set out above.

  87. [58] We turn now to a complementary set of applicable principles that is equally important for the purposes of the present appeal, viz, the relevant factors in ascertaining whether or not a given contractual term is a condition.

  88. The condition-warranty approach – relevant factors in ascertaining whether a given contractual term is a condition

  89. [59] This court, in Man Financial ([24] supra) set out, in some detail, the relevant factors which a court should consider in ascertaining whether or not a given contractual term is a condition, bearing in mind that there is, in the final analysis, no magical formula as such. In the circumstances, we can do no better than to set out, in extenso, the relevant part of that judgment, as follows (at [160]–[174]):

  90. [60] We now turn our attention to the final set of applicable principles that is relevant for the present appeal (and which has not, apparently, been canvassed in previous local decisions), viz, the relevant factors in ascertaining whether or not the breach is sufficiently serious such that the innocent party is entitled to terminate the contract pursuant to the Hongkong Fir approach.

  91. Relevant factors in ascertaining whether there was substantial deprivation of benefit (pursuant to the Hongkong Fir approach)

  92. [61] In ascertaining how serious the breach must be before the innocent party is entitled to terminate the contract, various formulations have been suggested in the case law. Examples of such formulations (which relate to both the condition-warranty approach and the Hongkong Fir approach, bearing in mind that the former deals with hypothetical consequences and the latter with actual consequences that occur upon a breach of contract) include the following: “fundamental breach” (see generally the House of Lords decision of Suisse Atlantique Société d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 (“Suisse Atlantique”)); “breach going to the root of the contract” (see also generally Suisse Atlantique and Koompahtoo ([27] supra) (see below at [63])); breaches that “go so directly to the substance of the contract” (see the English Court of Appeal decision of Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003 at 1012 (affirmed, Wallis, Son & Wells v Pratt & Haynes [1911] AC 394)); and “frustrate the commercial purpose of the venture” (which is the terminology commonly attributed to the English Court of Exchequer Chamber decision of Jackson v The Union Marine Insurance Company, Limited (1874) LR 10 CP 125, although the case itself does not use this precise wording). In our view, it would appear, with respect, that there is no real difference (in substance) amongst this as well as the other formulations (although they are obviously phrased, linguistically speaking, in different ways). What is difficult is ascertaining whether or not the consequences of the breach are sufficiently serious based on the precise facts concerned.

  93. [62] In our view, the focus must be on the formulation laid down by Diplock LJ in Hongkong Fir ([39] supra) itself: The innocent party must establish deprivation of “substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration” (see Hongkong Fir (at 66)) for the performance of the innocent party’s own obligations. At bottom, the focus is on determining what exactly constituted the benefit that it was intended the innocent party should obtain from the contract (which, looked at in one sense, is a question of construction, but not in the sense utilised in the context of ascertaining whether a term is a condition pursuant to the condition-warranty approach (cf also Koompahtoo (especially at [55], reproduced below at [63]) as well as Turner on Hongkong Fir ([27] supra) at 435–436, although Turner was probably referring to construction in the latter sense just mentioned)), and then examining very closely the actual consequences which have occurred as a result of the breach at the time at which the innocent party purported to terminate the contract in order to ascertain whether the innocent party was, in fact, deprived of substantially the whole benefit of the contract that it was intended that the innocent party should obtain. We would emphasise here that regard should be had only to the actual consequences and events resulting from the breach.

  94. [63] The broad approach mentioned in the preceding paragraph is broadly consistent with that adopted by the majority of the court in the High Court of Australia decision of Koompahtoo (which also contains some helpful factors (particularly at [54]) which, however, cannot (in the nature of the inquiry) be exhaustive, let alone conclusive). In that case, the majority of the court (comprising Gleeson CJ, Gummow J, Heydon J and Crennan J) observed thus (at [54]–[56]):

  95. General reference may also be made to J W Carter, Breach of Contract (The Law Book Company Limited, 2nd Ed, 1991) (“Breach of Contract”) at paras 655–684.

  96. [64] There is, in fact, no magical formula that would enable a court to ascertain whether or not the breach is sufficiently serious so as to permit the innocent party to terminate the contract pursuant to the Hongkong Fir approach. There are certainly a number of general formulations (some of which have been set out above at [61]). However, as we have noted above (at [61]), these general formulations are, in fact, similar in substance. More specifically, there are also particular factors which can be found in the case law (such as those set out by the majority of the court in Koompahtoo (at [54], reproduced in the preceding paragraph). However, as we have also noted above (at [63]), they are by no means either exhaustive or conclusive. In the final analysis, the actual decision as to whether or not the breach concerned is sufficiently serious so as to permit the innocent party to terminate the contract is largely dependent on the precise factual matrix of the case itself (see also Breach of Contract at para 655 and Ewan McKendrick, Contract Law – Text, Cases, and Materials (Oxford University Press, 3rd Ed, 2008) at p 795).

  97. Our decision

  98. Introduction

  99. [65] We turn now to apply the above principles to the facts of the present appeal, commencing (in accordance with the approach set out in RDC Concrete (above at [23]–[26]) as well as the factors set out in Man Financial (above at [59])) with an inquiry as to whether or not the Non-Competition Clause is a condition.

  100. Whether the Non-Competition Clause is a condition

  101. [66] In so far as this particular issue is concerned, the Appellant submitted that the Non-Competition Clause was not a condition. Support for this submission was derived mainly from the evidence adduced during cross-examination of the Respondent’s sole witness, Mr Hartrampf. The Appellant further submitted that the Non-Competition Clause was a warranty, and that the breach of the Non-Competition Clause did not deprive the Respondent of substantially the whole benefit that it intended to obtain from the Distributorship Agreement.

  102. [67] As stated above (at [59]), it cannot be over-emphasised that it is impossible to formulate a magical set of criteria which one can apply in every situation to ascertain whether or not a particular term is a condition. It is therefore important to bear in mind the fact that the primary focus should be centred on ascertaining the intention of the contracting parties themselves by construing the actual contract itself (including the contractual term concerned) in the light of the surrounding circumstances as a whole.

  103. [68] We agree with the Appellant that the Non-Competition Clause is not a condition. The learned Judge had applied the Hongkong Fir approach in determining whether the breach was one that would entitle the Respondent to terminate the Distributorship Agreement. As such, it is quite clear that the Judge had (at least implicitly) made a finding of fact that the Non-Competition Clause was not a condition and, on that basis, had then applied the Hongkong Fir approach. On the totality of the evidence, which we will elaborate upon in a moment, it cannot be said that such a finding was wrong.

  104. [69] In particular, we note that the parties (in particular, the Respondent) had no intention of treating the Non-Competition Clause as a strict prohibition. Indeed, it is, in our view, clear beyond peradventure that the Respondent had always known throughout (ie, both before as well as after the Distributorship Agreement had been entered into) that the Appellant not only sold competing products but also that that was the Appellant’s business strategy which (paradoxically) actually ensured the maximum exposure as well as sales of the Respondent’s own products. In so far as the former point is concerned, this is evident even from the objective documentation. For example, in an e-mail (dated 1 December 2002) sent by Mr Hartrampf to Mr Yee shortly after the Distributorship Agreement had been entered into, the former stated thus:

  105. [70] It is true that this particular e-mail was sent after the Distributorship Agreement had been signed and ought not (strictly speaking) to be taken into account in ascertaining the parties’ intentions vis-à-vis the Non-Competition Clause. However, in this court’s decision in Zurich Insurance (Singapore) Pte Ltd v B-Gold Interior Design & Construction Pte Ltd [2008] 3 SLR 1029 (“Zurich Insurance”), it was observed (at [132(d)]) that “there should be no absolute or rigid prohibition against evidence of previous negotiations or subsequent conduct, although, in the normal case, such is likely to be inadmissible” where, for example, a party attempts to trawl through evidence in an attempt to favour its subjective interpretations of the contract and/or where a party attempts to persuade the court to adopt a different interpretation from that suggested by the plain language of the contract in a situation where the context of the contract concerned is not clear and obvious.

  106. [71] Although we do not purport to lay down a general principle of sorts (given this court’s view in Zurich Insurance (ibid) that “the relevance of subsequent conduct remains a controversial and evolving topic that will require more extensive scrutiny by this court at a more appropriate juncture”), on the specific facts before us (in particular, the fact that the e-mail just set out at [69] above not only referred to the Non-Competition Clause but was also sent by Mr Hartrampf to Mr Yee very soon after the Distributorship Agreement had been signed), this is an occasion when this particular e-mail sheds valuable light on the context surrounding the intention of the parties when they entered into the Distributorship Agreement in general and agreed upon the Non-Competition Clause in particular. More specifically, this e-mail clearly reveals that the parties were aware not only of the Appellant’s practice of selling competing products but also (and perhaps more importantly) of the Respondent’s acquiescence in this practice provided that such a practice did not “cause [the Respondent] to lose what it has gained”.

  107. [72] This last-mentioned statement is best understood in the light of the understanding (already referred to earlier in this judgment) to the effect that both parties were ultimately concerned with achieving the Purchase Target, viz, that the Appellant purchase at least US$1 m worth of the Respondent’s goods annually (see [5] above). Indeed, that is also why there was an understanding (also referred to at [5] above) to the effect that the Non-Competition Clause would not be invoked provided that the Purchase Target was met. The upshot is that the parties never intended the Non-Competition Clause to be a condition inasmuch as any breach of it, regardless of the seriousness of the consequences of the breach concerned, would entitle the Respondent to terminate the Distributorship Agreement. Put simply, the central aim and focus of the Non-Competition Clause was to encourage and incentivise the Appellant to reach the Purchase Target.

  108. [73] We also note that Mr Hartrampf agreed, under cross-examination, that the Non-Competition Clause was not a “cast iron prohibition against competing products” but was, rather, a “way of saying” that the Respondent wanted to ensure that the Appellant purchased at least US$1 m worth of its goods annually. This lends further weight to our conclusion that the Non-Competition Clause is not a “condition” and that the main focus of that particular clause was to ensure that the Purchase Target was achieved. In summary, there is simply insufficient evidence to indicate that the parties had evinced any intention that the Non-Competition Clause was to have the legal status of a condition.

  109. The consequences flowing from the breach of the Non-Competition Clause

  110. [74] Having established that the Non-Competition Clause is not a condition, it becomes necessary to consider (in accordance with the approach set out in RDC Concrete (at [24] above)) whether or not the Respondent was nevertheless still entitled to terminate the Distributorship Agreement pursuant to the Hongkong Fir approach. We pause to note that the Non-Competition Clause did not expressly set out in clear and unambiguous terms whether or not the innocent party would be entitled to terminate the Distributorship Agreement in the event of a breach and/or a certain event or events occurring and, hence, Situation 1 in RDC Concrete (see above at [24]) was not applicable in the context of the present appeal.

  111. [75] In so far as the Hongkong Fir approach is concerned, this court in RDC Concrete noted (at [107]; see also above at [35]) as follows:

  112. [76] The resolution of the present issue therefore turns on this single question: Has the Respondent been deprived of substantially the whole benefit that it was intended that the Respondent should obtain from the Distributorship Agreement?

  113. [77] In accordance with the broad approach which we have set out above (at [62]–[64]), what is required to be done in the present appeal, as in any other case where one party to a contract relies upon a breach by the other party as giving him a right to elect to terminate the contract pursuant to the Hongkong Fir approach, is to examine the actual consequences which have occurred as a result of the breach of the Non-Competition Clause at the time at which the Respondent purported to terminate the Distributorship Agreement (bearing in mind that this must be effected in relation to the substance and the context of the contract itself) and to decide whether the consequences have deprived the Respondent of substantially the whole benefit which it was the intention of the parties as expressed in the Distributorship Agreement that the Respondent should obtain.

  114. [78] In this regard, the consequences which resulted from the breach of the Non-Competition Clause are two-fold. First, the amount of purchases by the Appellant dropped from over US$1 m to US$788,031.45. Secondly, the objectives of “market penetration” and “high quality brand positioning” might possibly have been compromised.

  115. [79] In so far as the drop in purchases by the Appellant is concerned, it is clear, in our view, that, notwithstanding the fact that the drop was not insignificant, the Respondent has not thereby been deprived of substantially the whole benefit which it was the intention of the parties that the Respondent should obtain under the Distributorship Agreement.

  116. [80] However, this is not an end to the matter. As we have alluded to above, the Distributorship Agreement also referred to the objectives of “market penetration” and “high quality brand positioning”. In this regard, it would be helpful, in our view, to set out the actual context in which these objectives were utilised; these are to be found in the second paragraph of the Distributorship Agreement, as follows (reproduced above at [6]):

  117. [81] It is clear that whilst one of the means by which “market penetration” and “high quality brand positioning” were to be achieved by the Appellant on behalf of the Respondent was by the sale of the latter’s products, the “promotion” of those products was equally important. That having been said, it is artificial, in our view, to draw a sharp distinction or dichotomy between the promotion of the Respondent’s products on the one hand and the sale of them on the other. Both, in fact, go hand in glove. Indeed, there is more than a rough correlation between the two. Looked at in this light, it would appear that, although sales of the Respondent’s products by the Appellant had presumably dropped (drawing this inference from the Appellant’s reduced purchases of the Respondent’s products), this did not mean that there had been little or no “market penetration” or “high quality brand positioning” of the Respondent’s products. Indeed, the fact that there had been fairly substantial sales of these products suggests that there had been some “market penetration” as well as “high quality brand positioning” of the same. In this regard, it should be noted that the Respondent had acknowledged in the e-mail dated 1 December 2002 that “good sales success” had hitherto been achieved in spite of the Appellant selling competitive brands (see [69] above). We do note, however, that, in so far as there might have been excessive discounting of the Respondent’s products, this would have militated against “high quality brand positioning” even in the face of satisfactory sales of the said products. In this regard, though, we also note that the issue of excessive discounting is, in any event, no longer a live one between the parties (see below at [84]).

  118. [82] Even if we draw a sharp distinction between promotion of the Respondent’s products on the one hand and the sale of them on the other, it is clear, in our view, that the objectives of “market penetration” and “high quality brand positioning” could still be fulfilled despite the fact that competing products were being sold by the Appellant. Indeed, it was a main plank of the Appellant’s case that the sale of competing products was, in fact, an integral part of its strategy to actually maximise the sale of the Respondent’s products. Although there was no conclusive evidence before us as such, what evidence there was suggested that the Respondent was not only aware of the Appellant’s business strategy but also accepted it – a point that was driven home not only in the responses by Mr Hartrampf during cross-examination but also by the apparently successful commercial relationship between the parties for more than a decade. Indeed, in so far as the last-mentioned point is concerned, the 1999 Agreement did not contain any non-competition clause. Such a non-competition clause only materialised in the Distributorship Agreement, which was entered into on 28 November 2002, by which time (as just mentioned) the parties had already been in an apparently successful commercial relationship for the past decade. Indeed, prior to the Distributorship Agreement, the Respondent never had to rely on any non-competition clause, even though the Appellant was obligated to “make every effort to promote and sell the Deuter products to achieve market penetration and high quality brand positioning”, as seen from the 1999 Agreement. Further, it was not, in our view, an inevitable or forgone conclusion that the sale of competing products by the Appellant was necessarily incompatible with the objectives of “market penetration” as well as “high quality brand positioning”. For example, effective and aggressive advertisement in the various mediums of communication, promotions, strategic marketing of Deuter products and loyalty benefits for regular customers of Deuter products were just some of the alternative means that could have been harnessed by the Appellant in order to meet the aforementioned objectives.

  119. [83] The Termination Notice (see [11] above) was also significant; it listed three specific “grievances”, as follows:

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