The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 51 of 1997

 

Phillips Petroleum Company Appellant

v.

(1) Thomas W. Quintin and (2) Sandra J. Westphal Respondents

 

FROM

 

THE COURT OF APPEAL OF THE CAYMAN ISLANDS

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 16th February 1998

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Lloyd of Berwick

Lord Nolan

Lord Hoffmann

Lord Clyde

  ·[Delivered by Lord Hoffmann]

 

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This is a claim by Phillips Petroleum Company ("Phillips") to enforce guarantees of the indebtedness of one of its customers, a company called Max Oil Company Inc ("Max Oil"), which had been given by the company's directors, Mr. Quintin and Ms. Westphal ("the respondents").  Phillips was a supplier of petroleum products to Max Oil pursuant to an agreement dated 22nd January 1991 called a Branded Marketer Sales Contract ("BMSC").  This agreement replaced a BMSC in similar terms between Phillips and another company controlled by the respondents called Pit Stops of America Inc ("Pit Stops").  The term of the new agreement was expressed to be from 1st January 1991 to 31st December 1993.  For the purpose of implementing this agreement, the parties subsequently entered into two subsidiary agreements, namely a Terminal Access Agreement dated 17th April 1991, which dealt with the mechanics of delivery to Max Oil or its agents at the Phillips terminal, and an Electronic Funds Access Agreement dated 11th February 1991 which dealt with the mechanics of payment.  On 28th January 1991, a few days after the execution of the BMSC but plainly as part of the same transaction, the respondents signed guarantees in a standard form used by Phillips.  The material parts read as follows:-

"IN CONSIDERATION of PHILLIPS PETROLEUM COMPANY ... (`Creditor') entering into certain agreements and/or leases with, and extending credit to, MAX OIL INCORPORATED ... (`Principal Debtor') and in order to induce Creditor to do so, the undersigned jointly and severally hereby guarantee the prompt payment at maturity of all indebtedness hereafter or heretofore so incurred by the said Principal Debtor to Creditor under the terms of all and any such agreements, leases and extensions of credit.

 

1. This guaranty is accepted by Creditor and such agreements and leases are entered into and such credit extended subject to the following conditions:

 

... the time of payment of any such indebtedness ... may be extended from time to time by Creditor to the Principal Debtor without notice to the undersigned ... all of which may be done without, in any way, affecting the obligations hereby created ...

 

2. This instrument is intended to be and shall be construed as a continuing guaranty without further notice to the undersigned and shall not be revoked by the death of any of the undersigned but shall remain in full force and effect until the undersigned or a legal representative of the undersigned or his estate shall have given notice in writing to enter into no further agreements, leases or other obligations, nor extend further credit on the security of this guaranty, and until such written notice shall be received by Creditor ...

 

3. A return receipt for a certified letter shall be conclusive evidence of receipt of notice of revocation.  Such revocation when made shall apply only to agreements, leases, credits or other indebtedness or obligations created subsequent to date of receipt of such notice of revocation, and shall not apply to indebtedness thereafter becoming due and payable under leases, agreements, sales or other obligations entered into prior to such revocation."

 

4. In late 1992 the parties negotiated a premature termination of the BMSC and its replacement by a new BMSC between Phillips and a company, said to be controlled solely by Ms. Westphal, called SJW Oil Company ("SJW").  Two agreements were executed on 1st December 1992.  The first was the new BMSC between Phillips and SJW and the second was a Mutual Cancellation Agreement ("MCA") between Phillips and Max Oil which cancelled the 1991 BMSC.  Both agreements were expressed to take effect from 1st January 1993.

 

5. The learned judge (Schofield J.) found as a fact that there was an oral understanding between Phillips, Max Oil and SJW that the new BMSC and the MCA would not take effect unless and until SJW obtained a government licence necessary to carry on the business of distributing petroleum.  Such a licence was never obtained and, in consequence, Phillips never made any supplies to SJW.  Instead, it continued to supply Max Oil until 6th April 1993, when the latter ceased to carry on business after a raid by agents of the Internal Revenue.  The contractual basis upon which Phillips thought it was selling and Max Oil thought it was buying during the period 1st January to 6th April 1993 is a matter of controversy which their Lordships find it unnecessary to decide, but there is no dispute as to two matters; first, that Max Oil became liable to pay for the supplies, and secondly, that US$721,526 remains owing.  Phillips accordingly claims against the respondents under their guarantees.

 

6. The respondents contended before Schofield J. that:-

 

(1)  upon the true construction of the guarantee, it applied only to indebtedness arising from credit extended pursuant to the BMSC; 

 

(2)  by Colorado law (which is agreed to govern all the agreements) evidence of the oral understanding suspending the effect of the new BMSC and the MCA was inadmissible;

 

(3)  the MCA therefore terminated the 1991 BMSC with effect from 1st January 1993.  Any indebtedness incurred by Max Oil thereafter was not pursuant to the BMSC, even if it may have been pursuant to a new arrangement, agreed orally or by conduct, which incorporated all its terms.

 

(4)  The subsequent indebtedness therefore did not fall within the guarantee.

 

7. Schofield J., after hearing the evidence of lawyers from Colorado at some length, held that evidence of an oral suspensive condition was admissible unless it would contradict an express terms of the contract.  He could find no such contradiction.  It followed that the 1991 BMSC continued in force.  In the alternative, he held that even if the post-1992 indebtedness did not arise from the 1991 BMSC, it arose from extensions of credit to Max Oil which fell within the terms of the guarantee.

 

8. The Court of Appeal disagreed on both points.  Collett J.A., who gave the judgment of the Court, held that once 1st January 1993 had come, the oral suspensive condition contradicted the express provision that the new BMSC and the MCA were to come into force on that date.  It was therefore inadmissible under Colorado law.  He also construed the guarantee as limited to supplies under the BMSC.  The appeal was therefore allowed.  Phillips submits that the Court of Appeal were wrong and that the judgment of Schofield J. should be restored.

 

9. It is accepted that if Schofield J. was right in construing the guarantee to cover extensions of credit otherwise than under the 1991 BMSC, the appeal must succeed.  Their Lordships are indebted to Mr. Popplewell Q.C. for an outstanding argument in support of the decision of the Court of Appeal, but they are satisfied that on this point the learned judge was right.  They have therefore not found it necessary to hear argument on the admissibility of evidence of the oral suspensive condition.

 

10. Mr. Popplewell drew attention to the fact that, in its opening words, the guarantee is said to be in consideration of Phillips entering into "certain agreements and/or leases".  "Certain", he said, means certain; it means agreements of which the identity can be ascertained by evidence, either of what had already happened, such as the BMSC executed a week earlier, or of what the parties had in contemplation.  The evidence, he said, showed that what the parties had in contemplation was the sale of petroleum products under a BMSC.  It was never contemplated that Phillips would sell under some informal arrangement such as, on the respondents' case, prevailed after 1992. The words "and extending credit", although not governed by "certain", were in Mr. Popplewell's submission coloured by their context and place in the agreement.  If they applied to any extension of credit, there would have been little, if any, point in restricting the "agreements and/or leases" covered by the guarantee.  Phillips could claim indebtedness arising under any agreement whatever by characterising it as an extension of credit.  He also referred to the provision by which extension of the time to pay was not to release the guarantors; this, too, would not be required if all extensions of credit were already covered by the guarantee.  It followed that "extensions of credit" should be confined to credit extended pursuant to agreements made or contemplated by the parties when the guarantee was signed.

 

11. If this was the correct construction of the opening words of the instrument, then Mr. Popplewell said that the operative words of guarantee could not have a wider meaning.  The guarantee was not of any indebtedness but of indebtedness "so" incurred under the terms of any and all "such" agreements, leases and extensions of credit.

 

12. Mr. Popplewell was then faced with the provisions by which the guarantee was expressed to be a continuing guarantee and a notice of termination was required to notify Phillips that it should not "enter into ... further agreements ... nor extend further credit on the security of this guarantee".  This plainly contemplated that agreements concluded and credit extended after the date of execution could fall within the terms of the guarantee.  But Mr. Popplewell said that these terms could be accommodated within his construction.  The guarantee was a continuing guarantee because it applied to all future credit extended under the BMSC.  As for the references to "further agreements", they covered the case in which an agreement contemplated by the parties at the time when the guarantee was signed had not in fact been concluded before notice of revocation was given.  In this case there might not have been such an agreement, but the guarantee was in a standard form to cover all eventualities and might easily therefore have language which was redundant in the instant case.

 

13. Their Lordships agree that the use of the word "certain" indicates that not all agreements and leases between Phillips and Max Oil will necessarily come within the terms of the guarantee.   It  will  apply  only  to  agreements  or  leases identified in some way which the parties may be supposed to have had in mind.  If the opening clause of the guarantee had stood alone, there would be much to be said for Mr. Popplewell's submission that the means of identification is to look for specific agreements which the parties had in mind.  But the termination provisions clearly show that the parties contemplated that the guarantee would apply to "further" agreements.  This means agreements additional to those previously made.  Their Lordships cannot accept as plausible the explanation that these words were intended only to deal with an instant change of heart on the part of the guarantor which might enable him to avoid liability under agreements specifically contemplated but not yet concluded at the time when the guarantee was signed.

 

14. At this point, therefore, the finely crafted argument begins to unravel and one has to go back to the beginning and ask what meaning can be given to "certain" which avoids these consequences.  In their Lordships' opinion, the agreements to which the guarantee applies are identified not specifically but generically.  What the parties had in mind was agreements and extensions of credit concerning the supply of petroleum products.  Provided that the agreement fell within this description, it would be one of the "certain" agreements covered by the guarantee.  On this view, any sale of petroleum products by Phillips to Max Oil on credit terms would be an "extension of credit" within the terms of the guarantee.  It is unnecessary to consider what the position might be in various unlikely situations which were suggested, in which credit was extended for reasons unconnected with the petroleum business.

 

15. It follows that the indebtedness of Max Oil arises from an extension of credit by Phillips which is covered by the guarantee.  Their Lordships will therefore humbly advise Her Majesty that the appeal should be allowed, the judgment of the Court of Appeal set aside and the judgment of Schofield J. restored.  The respondents must pay the appellant's costs in the Court of Appeal and before their Lordships' Board.

 

© CROWN COPYRIGHT as at the date of judgment.