CALIFORNIA RED LTD v. NEWAY KARAOKE BOX LTD AND OTHERS

HCA748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 748 OF 2008

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RULING ON COSTS

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1. The trial in this action commenced on 4 May 2009 when Ms Priscilla Wong, counsel appearing with Mr Norman Hui, for the plaintiff, opened the plaintiff’s case before me.  After opening her case for the greater part of the day it became apparent, at about 4 p.m., that the plaintiff was no longer maintaining the full extent of its claims as set out in the Amended Statement of Claim and was prepared to limit its relief to a continuation of the interim injunction granted by The Honourable Mr Justice Andrew Cheung on 27 July 2008, with some amendments thereto.  At that point in time, I invited Mr Ashley Burns SC, leading Ms Grace Chow, for the 1^st and 3^rd defendants, to ascertain whether the parties could come to terms and avoid the costs of an 8-day trial, given the plaintiff’s indication that it would be prepared to limit its claims as aforesaid.  Mr Burns SC accepted my invitation and I adjourned the matter to the next day to permit him to take instructions.  On 5 May 2009, the parties sought repeated extensions of time in order to try to resolve the matter amicably and which I granted to them.  Late in the afternoon on 5 May 2009 I adjourned the matter further to 10 a.m. on 6 May 2009.  I was pleased to note that the time granted to the parties had not been wasted because, by 11 a.m. on 6 May 2009, the parties reached settlement in the following terms, which I accepted and was prepared to make an order of court :

1.   Undertakings to the High Court to be given by the 1^st defendant essentially in terms of the order made by Mr Justice A. Cheung with (i) amended to delete words “… or seeking to …”; (ii) amended as indicated by the Deputy High Court Judge Bharwaney as on 4 May 2009 and to limit it in time, i.e. until the expiry or earlier determination of the JPAs.

2.   The parties having agreed that the words “complained of herein” in paragraphs 38 and 39 of the Amended Statement of Claim mean “pleaded in this Amended Statement of Claim” and save as otherwise provided in this order, no further order be made on plaintiff’s claims noting paragraph 6 of the order of Mr Justice A. Cheung on 31 March 2009 but otherwise on the basis that the alleged breaches of duty and/or alleged misconduct pleaded in paragraphs 1 to 42 of the Amended Statement of Claim in this action cannot be re-litigated.

3.   A declaration that the joint venture which previously subsisted between CR and NW no longer subsists and is at end.

4.   Without prejudice to the termination of the joint venture previously subsisting between the plaintiff and the 1^st defendant, the plaintiff and the 1^st defendant shall henceforth uphold and complete the remaining extant JPAs on the basis that each shall pay their respective contributions to licence fees (based on the number of outlets of respective party out of the total number of outlets of the plaintiff and the 1^st defendant) provided therein direct to the record companies concerned AND OBSERVE THE TERMS OF THE SAID JPAs until the end of their respective terms.

5.   Subject to the above and paragraph 6, no order be made on the counterclaim.

6.   Costs of this action and of counterclaim to be determined by Deputy High Court Judge Bharwaney SC after further argument.

NW is a  reference to the 1^st defendant and CR is a reference to the plaintiff.  JPAs are Joint Promotion Agreements which are referred to below.

2. I gave directions for the exchange of written submissions on costs and heard the parties on the matter on 13 May 2009.  This is my ruling on costs.  

3. Mr Burns SC submitted to me that the undertakings offered by his client, the 1^st defendant, were offered without any admission of liability and accordingly, there was no “event” which would enable the court to apply the usual principles governing the award of costs and, in particular, the general principle that costs followed the event.  Mr Burns SC directed my attention to the Hong Kong Civil Procedure 2009 at marginal note 62/3/3 where it is stated that :

“Notwithstanding the general proposition that a court did not sit to determine a substantive question of law which had become academic because there was no dispute to be resolved between the parties, where there was an outstanding issue as to costs the court was entitled to determine the substantive issue so as to decide the liability as to costs.”

4. I accept that submission and I turn to determining whether I would have given an injunction in terms of the undertakings given by the 1^st defendant, namely :

“That the 1^st Defendant whether acting by itself, its directors, officers, servants, agents or any of them or otherwise howsoever be restrained until the expiry or earlier determination of the existing Joint Promotion Agreements (“JPAs”) from directly or indirectly:

(i)  obtaining the exclusive licences for any karaoke music videos of songs that, when released, will be covered by any of the existing JPAs entered into by the 2^nd Defendant with any record company (which are to be scheduled to the order) other than through the 2^nd Defendant under the said JPAs, provided that this Order shall not apply to (a) those new songs, even though covered by the said JPAs, that the Plaintiff shall have decided not to select, and (b) any new song the exclusive licence to which pursuant to a JPA shall have expired – in either of which events the 1^st Defendant shall be at full liberty to approach the record companies for the exclusive licences to the songs; and/or

(ii)  representing to the record companies involved in the said JPAs or any of them that the 2^nd Defendant will in any way refuse or fail to honour the said JPAs or any of them or that the 2^nd Defendant will cease business or be wound up prior to the expiry of the said JPAs.”

5. The facts and background of the case are clearly set out in the judgment of Mr Justice A. Cheung dated 23 July 2008.  I quote from that judgment as follows :

“2. The plaintiff and the 1^st defendant belong to the California Red and Neway groups of companies respectively.  California Red and Neway are the two largest karaoke operators in Hong Kong.  They are competitors and to a limited extent, joint venturers.  Essential to their operations is the obtaining of copyright licences from record companies for playing karaoke music videos and songs (“songs”) in the karaoke “outlets” operated by the groups.  In particular, exclusive licences, albeit for a finite period of time (say three months), to play newly released songs are of great commercial importance to attracting and keeping customers.

3.   Since 2000, the two groups have joined forces in negotiating with record companies for securing licences for songs owned by the companies.  For that purpose, the two groups, through the plaintiff and the 1^st defendant, have entered into two joint venture agreements, one in 2000 and the succeeding one in 2001, and formed a joint venture company, namely, the 2^nd defendant, for use as the vehicle to obtain the licences from the record companies.

4.   Under both joint venture agreements, the term of the joint venture was for one year (subject to renewal in writing) and it could be terminated on one month’s notice.  After expiry of the term of the 2001 agreement, there was no formal renewal and no new joint venture agreement was signed.  However, it is common ground that both parties have continued with the joint venture via the 2^nd defendant “much as before”.

5.   The co-operation is said to have been smooth and successful.  The 2^nd defendant has managed to sign “joint promotion agreements” with a number of record companies in Hong Kong to secure licences for songs released by these companies.  Invariably, the licences are exclusive for an initial period and thereafter they become non-exclusive and, very often, perpetual at no extra cost.  For present purposes, the important thing to note about these joint promotion agreements is that they do not cover individual songs as such.  Rather, a joint promotion agreement typically covers a term of several years, during which the 2^nd defendant may select from songs released by the record company during the term for the grant of (exclusive and then non-exclusive) licences for use at the karaoke outlets of the two groups.  Licence fees are calculated by reference to the selections.

6.   As of the present, there are 9 extant joint promotion agreements between the 2^nd defendant and a number of record companies.  The terms of two of these joint promotion agreements are due to expire this year, five will expire in 2009, one in 2010 and one in 2011.

7.   There is no dispute that these joint promotion agreements are valuable assets.  Given the nature of pop music, the ability to secure the licences for playing newly released songs from active record companies in Hong Kong, particularly on an exclusive basis during the initial period, ensures the two groups of companies an unassailable edge over all possible competitors.

8.   The present dispute arose following the receipt of a letter from the 1^st defendant to the plaintiff dated 31 March 2008, which sought to terminate the joint venture agreement by giving one month’s notice.  On 19 April 2008, the 1^st defendant issued a further letter to the plaintiff saying that the 2^nd defendant should be wound up.  On 22 April 2008, the 1^st defendant issued 7 letters to record companies which have on-going joint promotion agreements with the 2^nd defendant to inform them that the joint venture between the plaintiff and the 1^st defendant (namely, the 2^nd defendant) would be terminated effective on 31 April 2008, the 2^nd defendant would cease to serve its purpose and would therefore be wound up in due course, and the 1^st defendant would be in touch shortly with the record companies with regard to “follow up further co-operation”.  The letters were signed by the 3^rd defendant as director of the 1^st defendant.

Proceedings and injunctions

9.   This led to the commencement of proceedings and application for interlocutory injunctions by the plaintiff against the 1^st and 3^rd defendants.  Holding injunctions have been granted and this judgment deals with the application for injunctions on an inter partes basis.

…

11.    On the facts of the present case, the major fight is over the licences to the so-called new songs.  And they are divided into two categories – those that, when released, will be covered by the extant joint promotion agreements and those that will not.  It is the plaintiff’s application, in essence, that in relation to the first category of new songs, the 1^st and 3^rd defendants cannot “touch” the joint promotion agreements, which have already secured the right for the licences to these songs in favour of the 2^nd defendant and thus the two groups of companies.  In relation to the second category of songs, the plaintiff’s application is basically that the 1^st and 3^rd defendants must obtain the licences to those songs via the joint venture vehicle, the 2^nd defendant.

…

20. In my view, it is at least arguable that clause 17.4 requires the 1^st defendant to honour subsisting licences that the 2^nd defendant has obtained before the termination of the joint venture agreement.  Here, it should be noted that “licences” have been defined in the 2001 agreement to mean exclusive licences with record companies.  Although the joint promotion agreements are not licences for individual songs as such, I take the view that it is arguable that they are “licences” within the meaning of the 2001 agreement and are covered by clause 17.4.

21. In those circumstances, notwithstanding (as per the 1^st defendant’s case) the termination of the joint venture agreement, under clause 17.4, the 1^st defendant would still need to honour the licences obtained by the 2^nd defendant from record companies, for so long as they are still subsisting (after the termination).  And in this regard, although technically, with the exception of one joint promotion agreement, the plaintiff and the 1^st defendant are not parties to these agreements, I take the view that it is at least arguable that the 1^st defendant is still caught by clause 17.4 in the sense that it must, via the 2^nd defendant, honour the joint promotion agreements so as not to jeopardise the right for the licences obtained thereunder.

22. In my view, to that limited extent, the plaintiff has shown a serious question to be tried.  However, it is important to note that clause 17.4 only applies to the subsisting joint promotion agreements.  Moreover, it does not apply, given the definition of “licences” in the joint venture agreement, beyond the period of time when the songs in question are to be exclusively licensed to the 2^nd defendant pursuant to the joint promotion agreements.

23. In other words, it does not apply to new songs that are not covered by any subsisting joint promotion agreements, i.e. the second category of songs I have identified above.  Nor am I concerned with songs to which the 2^nd defendant’s right is only limited to non-exclusive licences.

24. Clause 17.4 has not been specifically pleaded by the plaintiff.  But its implications have been fully explored at the hearing and no pleading point has been taken.  In any event, it is a matter of amendment and does not affect the substance of the matter.

…

30. The situation is different in relation to those new songs that will be covered by the existing joint promotion agreements.  In relation to these songs, the joint promotion agreements are already in place.  All that remains for the parties to do is to select the songs by agreement.  Of course, if the parties cannot come to any agreement, no song is selected.  But as a matter of practical reality, given that the 2^nd defendant has through these joint promotion agreements secured the exclusive rights to these new songs, commercial considerations would dictate the parties’ reaching reasonable agreement on the selection of these new songs.

31. For that reason, I am not troubled by the degree of co-operation that will be required from the parties in order for them to honour clause 17.4 in terms of the new songs that will be covered by the existing joint promotion agreements. That is not an absolute bar to granting the interlocutory injunction prayed for.  It is really a matter of degree, to be considered in conjunction with all other relevant discretionary considerations.”

6. Clauses 17 and 18 of the Joint Venture Agreement (“JVA”) dated 17 November 2001 provided as follows :

“Termination

17.1   Either party shall be entitled to terminate this Agreement by giving the other party one (1) month’s prior notice in writing.

17.2   This Agreement shall terminate immediately if an effective resolution is passed to wind up the Company or if a liquidator is otherwise appointed (but without prejudice to any rights either party may have against the other arising prior to such termination).  

17.3   Despite its termination, this Agreement shall continue to bind the parties and the Directors and the Company to such extent and for so long as may be necessary to give effect to the rights and obligations embodied in it.

17.4   For the avoidance of doubt, termination of this Agreement in accordance with this clause will not affect or prejudice the rights and obligations of either CR or NW under this Agreement nor will it affect or absolve the parties’ obligation and commitment in respect of the Licenses and/or the Projects and/or any promotional plans prior to such termination.

18. Consequences of notices under clause 17.1

18. If either party shall serve a valid notice of termination under clause 17.1 the parties shall be bound to procure a winding up of the Company upon expiration of the termination notice.”

7. Mr Burns SC submitted that I could not grant permanent injunctions in the absence of a cause of action and in particular, in the absence of an established duty on the part of the 1^st defendant and/or breach of such duty.  On my reading of the Amended Statement of Claim, the duty on the part of the 1^st defendant is expressed in section 29A in these terms :

“29A.  The Plaintiff avers that despite Clause 17.1 of the JV Agreement and irrespective of the notice which a party may give thereunder, Clause 17.4 of the JV Agreement required the Plaintiff and the 1^st Defendant to honour subsisting licences which the 2^nd Defendant had entered into with record companies during the subsistence of the said joint venture agreement.  Furthermore, it was the intention and understanding of the Plaintiff and the 1^st Defendant that notwithstanding any notice of termination issued by one party to another under the said joint venture and quasi-partnership, the Plaintiff and the 1^st Defendant were to honour subsisting licences which the 2^nd Defendant had entered into with record companies.”

8. However, Mr Burns SC submitted, inter alia, that :

(1) clause 17.4 of the 2001 JVA did not provide that CR and NW should “honour” subsisting licences.  As observed in paragraph 24A.1 of the Amended Defence, in so far as it has any relevance at all, the clause merely provides that termination of the agreement would not “… affect or absolve the parties’ obligations and commitment in respect of [inter alia] Licenses [as defined in the 2001 JVA] …”;

(2) as is observed in paragraph 24A.2 of the Amended Defence, with the exception of the JPA entered into with Emperor Entertainment (Hong Kong) Limited (to which the plaintiff and the 1^st defendant were respectively parties, together with the 2^nd defendant), neither the plaintiff nor the 1^st defendant were parties to any of the other JPAs which were extant at the time of the termination of the joint venture and accordingly had no obligations or commitments in respect of them;

(3) moreover, none of the provisions of the 2001 JVA imposed obligations on the parties vis-à-vis such JPAs as had been entered into pursuant to the joint venture agreement.  As appears from clause 3.1 of the 2001 JVA, the joint venture operation was confined to “obtaining” licences (as defined) — obviously, through the 2^nd defendant as the joint venture vehicle.  Clause 4.1 required the parties to “… agree on Karaoke songs the Licenses of which are intended to be obtained” but clearly that provision was concerned with a process of selection prior to entering into any particular licence and in any event would have been unenforceable on the basis that it constituted an agreement to agree in the future;

(4) in any event, clause 17.4 of the 2001 JVA cannot be construed as imposing any obligation on the parties to incur further liabilities (as would be the case if they were required to continue to “honour” JPAs to the extent of incurring further liabilities after termination of the JV).  This would be contrary to the express terms of clause 17.4, the effect of which is to preserve the parties’ rights and obligations which have accrued prior to the termination of the JVA.  It would also be contrary to clause 18 requiring the parties to procure the winding up upon expiration of the termination notice; and

(5) whatever the true construction might be of clause 17.4 of the 2001 JVA (and it may well be that its meaning is so uncertain as not to be enforceable or capable of enforcement), the important point, for the purpose of considering the question of costs in this action, is that no alleged breach of this clause has been pleaded (or even ever suggested).

9. I do not agree with these submissions.  I construe the words in clause 17.4 of the JVA that the termination of the JVA will not “affect or absolve the parties’ obligations and commitment in respect of the Licenses … prior to such termination” as creating a positive duty on the part of the plaintiff and the 1^st defendant to honour subsisting licenses that the 2^nd defendant has obtained before the termination of the JVA.  I also construe the word “Licences” in the JVA as including the JPAs albeit that those agreements are not licenses for individual songs.  That conclusion is buttressed by the terms of clause 17.3 which state that, despite its termination, the JVA shall continue to bind the parties and the directors and the 2^nd defendant to such extent and for so long as may be necessary to give effect to the rights and obligations embodied in it. 

10. Those rights and obligations include, by clause 3.1, the obligation on the parties to use their best endeavours to cooperate with each other to negotiate and obtain licenses in accordance with the terms of the JVA and, by clause 4.1 thereof, to agree on the karaoke songs the licenses of which are intended to be obtained.  It is clear from these terms and from the subsequent conduct of the parties, in pursuance of the terms of this and the previous JVA, that the obligation of co-operation is and has been extended to entering into JPAs and to selecting new songs being offered under those JPAs.  Therefore, there is a positive duty, notwithstanding the termination of the JVA, to pay for the songs already selected through the vehicle of the 2^nd defendant and to select new songs being offered under extant JPAs, also through the vehicle of the 2^nd defendant, and to pay the license fees for the same.  Notwithstanding the termination of the JVA, under clause 17.4, the plaintiff and the 1^st defendant would need to honour subsisting licenses obtained by the 2^nd defendant by funding the payment for the same in their agreed proportions.  In this connection, I am in agreement with Mr Justice A. Cheung that, although the plaintiff and the 1^st defendant are not parties to the JPAs, with the exception of one JPA, the plaintiff and the 1^st defendant are required by clause 17.4 to honour JPAs, via the vehicle of the 2^nd defendant, so as not to jeopardise the right to the licenses obtained or obtainable thereunder.

11. So far as the selection of new songs to be released under the JPAs is concerned, clause 4.2 of the JVA which, in my view, also survives the termination, provided that if the parties were able to reach agreement as to some but not all of the karaoke songs, the licenses of which were intended to be obtained, they should obtain licenses on the agreed karaoke songs and either party might at its own costs and expenses, obtain exclusive licenses under remaining or other karaoke songs on which no agreement had been reached.  Accordingly, there is no positive obligation on the part of the 1^st defendant to agree to take up any new song offered under the JPAs, but, of course, if it does not do so, then the plaintiff is entitled to take them up for its own use.  As Mr Justice A. Cheung observed, as a matter of practical reality, commercial considerations would dictate the parties reaching reasonable agreement on the selection of these new songs.  Accordingly, Mr Justice A. Cheung was not troubled by the degree of co-operation that would be required from the parties in order for them to honour clause 17.4 in terms of the new songs that would be covered by the existing JPAs.  He was therefore prepared to grant the interim injunction in the terms that he did.  Likewise, I would have granted injunctions in similar terms up to the expiry of the JPAs in question, notwithstanding Mr Burns SC’s submission that a court should not grant a prohibitory injunction if the effect of that would be to force the parties to cooperate with each other against their wishes.  The 1^st defendant is not forced to accept brand new hit songs.  It can refuse to accept them, in which case the plaintiff can enjoy the exclusive license for those songs if it chooses to take them up for itself.  However, it would appear to be commercially irrational for the 1^st defendant to take such a stance. 

12. The submission that there was no breach of the alleged duty to honour subsisting licenses and JPAs can be dealt with shortly.  On 22 April 2008, the 1^st defendant issued 7 letters to record companies which had existing JPAs with the 2^nd defendant to inform them that the joint venture between the plaintiff and the 1^st defendant, Twin Success (the 2^nd defendant) would be terminated effective on 30 April 2008, that the 2^nd defendant would cease to serve its purpose and would therefore be wound up in due course, that the plaintiff and the 1^st defendant would separately pay directly to the record companies monies due, that the 2^nd defendant would cease all activities on 30 April 2008 and the 1^st defendant would not be liable for any dealings and documents entered into by the 2^nd defendant on or after that date, and that the 1^st defendant would be “in touch shortly with regard to follow up future co-operation”.

13. Another round of letters was sent on 2 June 2008 to the record companies.  This letter referred to the earlier letter of 22 April 2008 informing them that joint venture was terminated effective on 30 April 2008 and that the 2^nd defendant should have ceased business.  The letter went on to state that, “in the premises, the 2^nd defendant is unable to accept any further new KMVs from the addressee or to make any payment of licence fees.”   The letter went on to inform the record companies that the plaintiff could not on its own undertake any action concerning or representing the 2^nd defendant. 

14. In my view, these letters clearly threatened breach of the existing JPAs by expressly stating that the 2^nd defendant would not continue to make payment of license fees in respect of songs licensed for the use of the plaintiff and the 1^st defendant.  This information, together with the statement that the 2^nd defendant would no longer be making any selection of any future songs, could have entitled the record companies in question to terminate the existing JPAs, to the detriment of the plaintiff.  This risk of termination in fact materialised, as can be seen from the letters received from the record companies at the end of April 2008 appearing at pp.1121, 1124, and 1141 of Trial Bundle B.

15. In issuing the said letters of 22 April 2008 and 2 June 2008, the 1^st defendant acted in breach of the duty to honour subsisting JPAs.  However, it is true that, after the interim injunction granted by Mr Justice A. Cheung, the solicitors for the 1^st defendant wrote to the plaintiff’s solicitors under cover of a “without prejudice save as to costs” letter dated 1 August 2008 offering to continue with the selection and utilizing of new songs to be provided by the record companies under the existing JPAs and paying its due proportion for the licence fees for such songs on the basis that the plaintiff would pay its due proportion, and that such contributions be paid directly by the plaintiff and the 1^st defendant to the record companies.  In a further “without prejudice save as to costs” letter dated 15 August 2008, the 1^st defendant’s solicitors reiterated that the proposal was a workable arrangement in the interest of all parties which enabled new songs to be selected and utilized under the JPAs and that they were not aware that the record companies would not accept their clients’ proposal that the plaintiff and the 1^st defendant paid them directly (as opposed to payment being made through the vehicle of the 2^nd defendant). 

16. Apparently, the record companies have been willing to accept payments directly from the plaintiff and the 1^st defendant and, therefore, the failure of the 2^nd defendant to make the payments is no longer a matter of concern. 

17. Obviously, if the offer contained in the said letter of 1 August 2008 had been on the basis that the arrangement would last until the expiry of the existing JPAs, there would no longer be any basis to provide injunctive relief in favour of the plaintiff.  However, it is clear from the terms of the said letter that the offer was made “pending the trial of the captioned action or the winding up of Twin Success (the 2^nd defendant) whichever is earlier”.

18. Mr Burns SC made the further submission that there was no basis to grant injunctive relief preventing the 1^st defendant from winding up the 2^nd defendant or representing that the 2^nd defendant would cease business or be wound up prior to the expiry of the existing JPAs.  In support, he relied on clause 18 of the JVA stating that if either party shall serve a valid notice of termination under clause 17.1, the parties shall be bound to procure a winding up of the 2^nd defendant upon expiration of the termination notice.  I do not accept this submission.  On my construction of clause 18, the clause is subject to clauses 17.3 and 17.4 so that the winding up of the 2^nd defendant must be postponed until such time when the 2^nd defendant’s obligations in respect of licences and existing JPAs have come to an end. 

19. For these reasons, I conclude that the plaintiff has partially succeeded in its claims.

20. I can now proceed to exercise my discretion on the award of costs in this case.  In doing so, I am guided by the oft cited statement of principle of Nourse LJ in In re Elgindata Ltd (No.2) [1992] 1 WLR 1207 at p.1214A-D :

“The principles are these.  (i) Costs are in the discretion of the court.  (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made.  (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs.  (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.  Of these principles the first, second and fourth are expressly recognised or provided for by rules 2(4), 3(3) and 10 respectively.  The third depends on well established practice.  Moreover, the fourth implies that a successful party who neither improperly nor unreasonably raises issues or makes allegations on which he fails ought not to be ordered to pay any part of the unsuccessful party’s costs.”

21. In this case, it is clear to me that the plaintiff’s claim was framed on a much wider basis.  In particular, the plaintiff sought an injunction against the 1^st defendant from directly or indirectly negotiating, entering into or performing any licensing agreement, involving the licensing of any musical works or karaoke music videos with any record company otherwise than for or on behalf of the 2^nd defendant.  For the reasons made apparent in the judgment of Mr Justice A. Cheung dated 23 July 2008, the plaintiff had no basis for contending that the termination of the JVA by the service of the one month’s notice by the 1^st defendant did not bring the joint venture to an end in respect of the future commercial activities of the plaintiff and the 1^st defendant.  The JVA dated 17 November 2001, which was designed to create a duopoly of the plaintiff and the 1^st defendant in the karaoke market and to drive smaller operators out of business, would have been declared in many other jurisdictions as being contrary to the competition law in force in such jurisdictions.  Although Hong Kong prides itself as a world city and one of the world’s financial centres, we have yet to introduce a competition law.  However, even absent a competition law, the court is likely to lean against upholding the continuing validity of joint venture agreements such as the one in question dated 17 November 2001.  Competition law apart, Mr Justice A. Cheung clearly explained in paragraphs 14 to 18 of his judgment dated 23 July 2008 why the plaintiff’s wider claims were untenable.  Notwithstanding that judgment, the plaintiff has maintained its wider claims up until the 1^st day of trial on 4 May 2009.  If the plaintiff had limited itself, after the judgment of 23 July 2009, to the reliefs it sought on the 1^st day of trial, substantial costs would have been saved.  I find that this is a case where the plaintiff has raised issues and claims on which it would have failed had it maintained them to the end of trial, and that the plaintiff’s stance has caused a significant increase in the costs of the proceedings.  Therefore, I am minded to award the plaintiff only a part of its costs of the action.

22. Ms Wong sought at least two-thirds of the costs of the action.  Mr Burns SC, on the footing that the plaintiff had partially succeeded and which, of course, he did not accept, submitted that the proportion of costs must weigh heavily in the favour of the 1^st defendant. 

23. Having given careful and anxious consideration to the matter, I come to the view that the plaintiff ought to be awarded 40% of the costs of the action against the 1^st defendant.  The previous costs in the case were ordered to be costs in the cause.  The plaintiff can recover 40% of those previous costs from the 1^st defendant.

24. I should make mention of the submission that was made that until the amendment of the Statement of Claim on 2 April 2009, which introduced section 29A, the plaintiff could not have succeeded even on the limited basis that it did.  It is clear to me that the amendment was prompted by the views expressed by Mr Justice A. Cheung on clause 17.4 in his judgment dated 23 July 2008 and that, without such amendment, the plaintiff could not have succeeded.  However, the effect of the amendment is to include it retrospectively from the date of the Writ and it matters not that the amendment is prompted by submissions made from the Bench.  The plaintiff is still entitled to its costs of the action if it succeeds as a result of the amendment.   Mr Burns SC, however, submitted that the costs of the action should be awarded to the 1^st defendant up to the date of the amendment made on 2 April 2009 as the plaintiff could not have succeeded without such amendment.  Support for such submission can be found in the Hong Kong Civil Procedure 2009 at marginal note 20/8/28 :

“Where the amendment amounts to the assertion of a new claim and abandonment of the original claim in the writ, leave is only granted on payment of defendant’s costs to date of amendment with a stay until payment.”

However, the time for making such a submission was when the application was leave to amend was made.  The order made by Mr Justice A. Cheung in respect of the said amendment dated 31 March 2009 was that the costs of and occasioned by the amendments be to the defendants in any event.  Either there was no application for costs of the action up to the date of the amendment or such an application was not allowed.  In any event, it is too late to take the point now. 

25. The corollary of my ruling on costs is that the 1^st defendant has partially succeeded on its counterclaim in obtaining a declaration that the JVA of 17 November 2001 is at an end.  Notwithstanding that the terms of the settlement agreement do not set out a date on which the joint venture agreement is said to have ended, had that the matter remained in issue, I would have found in favour of the 1^st defendant on the issue and concluded that the JVA was validly terminated on 30 April 2008.  However, the 1^st defendant would not have succeeded on that part of its counterclaim seeking an order requiring the plaintiff to procure or assist in procuring the winding up of the 2^nd defendant before the expiry of the existing JPAs.  In the circumstances, I award the 1^st defendant 60% of the costs of the 1^st defendant counterclaim against the plaintiff.

26. The costs that I have awarded to the plaintiff and the 1^st defendant include the costs of the claims up to the 1^st day of trial on 4 May 2009 and the costs of the argument as to costs on 13 May 2009.  I make no order as to costs in respect of the costs of the 2^nd and 3^rd day of trial which were spent entirely by the parties in negotiating terms of settlement and which were expended for the benefit of both parties.

27. The plaintiff would not have succeeded against the 3^rd defendant.  Although the 3^rd defendant signed the letters of 22 April 2008, he did so as director of the 1^st defendant and not in any personal capacity.  Mr Justice A. Cheung did not grant any injunctive relief against the 3^rd defendant and neither would I have, had this matter proceeded to trial.  It therefore follows that the plaintiff must pay the costs of the action to the 3^rd defendant.

28. I also direct that there be certificate for two counsel.

29. It remains for me to thank all counsel involved in the case for their helpful oral and written submissions and in particular, for procuring the parties’ agreement to the terms of settlement, which has saved a substantial amount of the court’s time and costs.

30. After completing the draft of the above ruling, I received letters from the parties’ solicitors dated 15 May 2009.  I make no comment on those letters save to note that their contents have not caused me to vary my ruling on costs.

HCA 748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 748 OF 2008

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J U D G M E N T

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1.  This is an application to vary the costs order nisi that I made when I handed down judgment on 23 July 2008 granting the plaintiff certain interlocutory relief against the 1st defendant. 

2.  I ordered, on a costs order nisi basis, that the costs of the application for injunctions be in the cause.  Shortly thereafter, those acting for the 1st and 3rd defendants sought, by correspondence, to vary the costs order nisi.  Technically, that was not right because anybody wishing to apply to vary a costs order nisi should do so by means of a summons and that technical mistake, unfortunately, has led to some very involved arguments regarding whether the 1st and 3rd defendants are entitled to make their application at all since even though they eventually took out a summons to apply to vary, that summons was taken out of time, strictly speaking.

3.  Given the conclusion that I have reached in relation to the substantive application to vary the costs order nisi, I do not find it necessary to dwell on this highly technical matter as to whether the 1st and 3rd defendants are out of time or not.

4.  Turning immediately to the substantive application to vary, the 1st and 3rd defendants essentially ask the Court to reserve the costs to the trial judge.  I start from the proposition that costs is really a matter of discretion and the further proposition that understandably, in the nature of things, the judge who deals with a particular application should, generally speaking, be in the best position to deal with the costs of that particular application.  But again, fairly understandably, there could be circumstances – and from time to time, one comes across them – where the fair determination of the costs of a particular application would, conceivably, be dependent on something that is presently not known to the judge who has dealt with the application and those costs would be better left to be dealt with by someone else later on, such as the trial judge after the determination of the main issues at trial.

5.  Turning to the present application, it was an application for a number of interlocutory injunctions.  At the end of the day, the plaintiff was only partially successful in obtaining a limited injunction against the 1st defendant.  In relation to the 3rd defendant, who is the controlling director and shareholder of the 1st defendant, the Court, in view of the limited injunction that it was prepared to grant against the 1st defendant, did not see fit to order a separate injunction against the 3rd defendant. 

6.  The Court, in any event, has not been prepared to grant other injunctions that have also been sought and other interlocutory relief such as discovery against the two defendants in question.  One other fact to note is that in granting the limited relief in favour of the plaintiff, the Court placed emphasis on a point that had not really been relied on by the plaintiff in its pleading or skeleton submission, ie, clause 17.4 of the relevant agreement. 

7.  So from more perspectives than one, the plaintiff cannot be said to be wholly successful in the application.  It cannot be said to have been successful on the main grounds that it originally relied on when taking out the application for injunctions. 

8.  I wish to say – and I have made clear to Miss Grace Chow who has done her best in presenting her clients’ case this morning – that in ordering costs to be in the cause on a costs order nisi basis, I have taken those facts fully into account.  As I have also pointed out – and there is no dispute about it – the normal practice, at least in the past, is for a successful plaintiff granted an interlocutory injunction, to be granted his costs in the cause and for a successful defendant to be granted his costs in the cause. 

9.  As Hong Kong Civil Procedure 2008, vol 1, para 29/1/44 correctly points out, that normal practice has been departed from in recent years and, as I said at the outset, after all, costs is a matter of discretion.  In the circumstances of the present case, as I said, I have fully taken into account the two factors that I have outlined, namely, that the plaintiff has not been wholly successful in its application for interlocutory injunctions and the limited injunction that it has managed to obtain is based on an argument that was not previously relied on by the plaintiff when the application was first taken out.

10.  In fact, it is with those matters, amongst others, in mind that I have decided to only order costs in the cause rather than make any other more favourable order to the plaintiff even though the plaintiff has indeed managed to obtain some interlocutory relief out of the application. 

11.  In my view, that takes care of, in its entirety, the first point made by Miss Chow on behalf of her clients in this morning’s application to vary the costs order nisi.

12.  The next substantive point taken by Miss Chow is that since clause 17.4 has not been formally pleaded, there is a chance of the plaintiff not taking clause 17.4 as a point at trial or not succeeding on that point.  In that case, it would be unfair if my costs order nisi were to stand and make the two defendants bear the costs of the interlocutory injunction.

13.  I proceed on the basis that in the circumstances of the present case, there is no realistic possibility of the plaintiff not running clause 17.4 at trial.  After some exchange between the bench and the bar during Miss Chow’s submission, I believe counsel accepts the court’s assessment of the situation. 

14.  The remaining point is, therefore, that the plaintiff may not succeed at trial in relation to clause 17.4 and I can, in fact, add that there is always the possibility of the plaintiff not succeeding at trial at all on any point.  But the difficulty with Miss Chow’s argument is that if this sort of argument is given the weight that Miss Chow is urging this Court to give, it would mean that, at least in most cases where the court grants an interlocutory injunction, costs should be reserved to the trial judge.  To say the least, that has not been the practice.  When pressed, Miss Chow is only able to say that the only difference between the trial judge dealing with the matter after trial and this Court dealing with the question here and now, is that the trial judge, with the benefit of hindsight, might come to a different conclusion on the incidence of costs.  I do not deny that that is a possibility but, in my view, that is not a sufficient reason for reserving the question of costs to the trial judge. 

15.  As I intimated to Miss Chow, if her argument should be given the sort of weight that she has been contending for, it applies not only to the question of costs in an application for interlocutory injunction, it would also apply to the question of costs in all sorts of interlocutory applications.  Of course, that by itself may not be a conclusive reason for rejecting the argument.  But, having looked at the matter in the round and having asked myself why this Court, as compared with the trial judge, cannot and should not deal with the question of costs but instead should burden the trial judge with deciding the question of costs of a matter that the trial judge has not seized of, I cannot find any good answer. 

16.  Having considered the matter in the round, I am of the view that this Court should deal with the question of costs here and now and I am further of the view that the costs order nisi that I made is indeed the fairest order in the circumstances of the case.  As I said, it takes into account the fact that the plaintiff has not been wholly successful in this application.  It also takes into account the fact that clause 17.4 was not a point originally relied on by the plaintiff.  Furthermore, by definition, it takes into account what will happen at trial, ie, the outcome of the trial. 

17.  The court must, in this sort of situation, take a broad-brush approach in deciding the question of costs and, as I said, having borne in mind all the relevant circumstances of the case, I am of the view that the costs order nisi is indeed the right order to make.  So I refuse the 1st and 3rd defendants’ application to vary the costs order nisi and I make it an absolute order.

18.  Subject to further argument, I take the view that today’s argument is really part of the application itself because an application must include, amongst other things, the costs of that particular application and I tend to think that today’s hearing is merely a continuation of the application and that the fairest order for today’s costs is also costs in the cause, ie, today’s costs should form part of the costs of the application and therefore be covered by the order as to costs that I have just made absolute. 

[Submissions on costs]

19.  Today’s application is not really to challenge or to defend the costs order nisi.  I do not see things that way.  I see today’s application as an opportunity for the parties to present oral arguments before the Court on the question of costs and the Court has been greatly assisted by the written as well as oral submissions as to the correct order to make.  The costs order nisi, from one perspective, was merely a provisional indication by the Court as to its then thinking.  So, as I say, I really see today’s hearing as a continuation of the application itself.  I think the fair order to make is that the costs of the application to vary – and for the avoidance of doubt, that includes the costs of the relevant correspondence because I do not want any side argument later on as to whether the earlier letters formed part of the costs of the application – be costs in the cause.

HCA 748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 748 OF 2008

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J U D G M E N T

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Introduction

1.  This is an application for interlocutory injunctions.

2.  The plaintiff and the 1^st defendant belong to the California Red and Neway groups of companies respectively.  California Red and Neway are the two largest karaoke operators in Hong Kong.  They are competitors and to a limited extent, joint venturers.  Essential to their operations is the obtaining of copyright licences from record companies for playing karaoke music videos and songs (“songs”) in the karaoke “outlets” operated by the groups.  In particular, exclusive licences, albeit for a finite period of time (say three months), to play newly released songs are of great commercial importance to attracting and keeping customers.

3.  Since 2000, the two groups have joined forces in negotiating with record companies for securing licences for songs owned by the companies.  For that purpose, the two groups, through the plaintiff and the 1^st defendant, have entered into two joint venture agreements, one in 2000 and the succeeding one in 2001, and formed a joint venture company, namely, the 2^nd defendant, for use as the vehicle to obtain the licences from the record companies.

4.  Under both joint venture agreements, the term of the joint venture was for one year (subject to renewal in writing) and it could be terminated on one month’s notice.  After expiry of the term of the 2001 agreement, there was no formal renewal and no new joint venture agreement was signed.  However, it is common ground that both parties have continued with the joint venture via the 2^nd defendant “much as before”.

5.  The co-operation is said to have been smooth and successful.  The 2^nd defendant has managed to sign “joint promotion agreements” with a number of record companies in Hong Kong to secure licences for songs released by these companies.  Invariably, the licences are exclusive for an initial period and thereafter they become non-exclusive and, very often, perpetual at no extra cost.  For present purposes, the important thing to note about these joint promotion agreements is that they do not cover individual songs as such.  Rather, a joint promotion agreement typically covers a term of several years, during which the 2^nd defendant may select from songs released by the record company during the term for the grant of (exclusive and then non-exclusive) licences for use at the karaoke outlets of the two groups.  Licence fees are calculated by reference to the selections.

6.  As of the present, there are 9 extant joint promotion agreements between the 2^nd defendant and a number of record companies.  The terms of two of these joint promotion agreements are due to expire this year, five will expire in 2009, one in 2010 and one in 2011.

7.  There is no dispute that these joint promotion agreements are valuable assets.  Given the nature of pop music, the ability to secure the licences for playing newly released songs from active record companies in Hong Kong, particularly on an exclusive basis during the initial period, ensures the two groups of companies an unassailable edge over all possible competitors.

8.  The present dispute arose following the receipt of a letter from the 1^st defendant to the plaintiff dated 31 March 2008, which sought to terminate the joint venture agreement by giving one month’s notice.  On 19 April 2008, the 1^st defendant issued a further letter to the plaintiff saying that the 2^nd defendant should be wound up.  On 22 April 2008, the 1^st defendant issued 7 letters to record companies which have on-going joint promotion agreements with the 2^nd defendant to inform them that the joint venture between the plaintiff and the 1^st defendant (namely, the 2^nd defendant) would be terminated effective on 31 April 2008, the 2^nd defendant would cease to serve its purpose and would therefore be wound up in due course, and the 1^st defendant would be in touch shortly with the record companies with regard to “follow up further co-operation”.  The letters were signed by the 3^rd defendant as director of the 1^st defendant.

Proceedings and injunctions

9.  This led to the commencement of proceedings and application for interlocutory injunctions by the plaintiff against the 1^st and 3^rd defendants.  Holding injunctions have been granted and this judgment deals with the application for injunctions on an inter partes basis.

10.  Grant of prohibitory interlocutory injunction is of course governed by the American Cyanamid principles ([1975] AC 396), and one has to consider whether there is a serious question to be tried and if the answer is in the affirmative, questions of adequacy of damages and balance of convenience come into play.

11.  On the facts of the present case, the major fight is over the licences to the so-called new songs.  And they are divided into two categories – those that, when released, will be covered by the extant joint promotion agreements and those that will not.  It is the plaintiff’s application, in essence, that in relation to the first category of new songs, the 1^st and 3^rd defendants cannot “touch” the joint promotion agreements, which have already secured the right for the licences to these songs in favour of the 2^nd defendant and thus the two groups of companies.  In relation to the second category of songs, the plaintiff’s application is basically that the 1^st and 3^rd defendants must obtain the licences to those songs via the joint venture vehicle, the 2^nd defendant.

Serious question to be tried

12.  It is in that context that I propose to deal with the question of whether there is a serious question to be tried.  In my view, there are two crucial issues here, namely (1) whether the 1^st defendant is entitled to terminate the joint venture agreement on one month’s notice; and (2) the effect of clause 17.4 of the 2001 joint venture agreement.

13.  On the first question, the plaintiff seeks to argue, and this is its only pleaded case, that because the parties have entered into joint promotion agreements with terms extending to 2011, neither side has intended the joint venture between them to be terminated before 2011.  In those circumstances, the provision in the 2001 agreement (clause 17.1) giving either side the right to terminate the agreement by one month’s notice has been superseded by the parties’ subsequent intention and implied agreement, after they have by conduct extended the original term of the 2001 agreement.  As I say, this is the plaintiff’s only pleaded case on termination.

14.  I reject the argument as being unarguable.  First, it is contrary to the express provision in the 2001 agreement, namely, clause 17.1.  It would require an extremely strong case, in the absence of any subsequent express agreement between the parties, for the plaintiff to argue successfully that notwithstanding the express term, in continuing the 2001 agreement by conduct, they have impliedly agreed to vary the express provision to the one contended for by the plaintiff now.

15.  Secondly, this argument is contradicted by the facts.  The simple fact is that both during the term of the original 2000 agreement and the term of the subsequent 2001 agreement, there were joint promotion agreements signed, the terms of which went beyond the respective terms of the 2000 and 2001 agreements.  Yet, those two agreements expressly provided for the right to terminate the agreements upon one month’s notice.

16.  Thirdly, the plaintiff’s argument is quite contrary to clause 17.4 of the 2001 agreement which clearly envisages that there may be subsisting licences notwithstanding the termination of the joint venture agreement.  Clause 17.4, which I will return to, reads:

“  For the avoidance of doubt, termination of this Agreement in accordance with this clause will not affect or prejudice the rights and obligations of either [the plaintiff] or [the 1^st defendant] under this Agreement nor will it affect or absolve the parties’ obligation and commitment in respect of the Licenses and/or the Projects and/or any promotional plans prior to such termination.”

17.  Fourthly, I find the suggestion that because a joint venture has acquired an asset that will or is expected to last for a substantial period of time, the joint venturers must have intended and impliedly agreed that their joint venture is not to be terminated until after expiry of the expected life of that asset despite an express agreement in their joint venture agreement that it can be terminated by giving one month’s notice, rather unattractive as a matter of common sense.

18.  Since the plaintiff has not run any alternative case on the pleadings or at the hearing that the joint venture agreement can be terminated by a reasonable notice and such notice exceeds one month, I need not consider that possibility.  So far as this first issue identified by me is concerned, I am of the view that there is no serious question to be tried.

19.  But that is not the end of the matter, and I must come to the second issue, namely, the effect of clause 17.4.

20.  In my view, it is at least arguable that clause 17.4 requires the 1^st defendant to honour subsisting licences that the 2^nd defendant has obtained before the termination of the joint venture agreement.  Here, it should be noted that “licences” have been defined in the 2001 agreement to mean exclusive licences with record companies.  Although the joint promotion agreements are not licences for individual songs as such, I take the view that it is arguable that they are “licences” within the meaning of the 2001 agreement and are covered by clause 17.4.

21.  In those circumstances, notwithstanding (as per the 1^st defendant’s case) the termination of the joint venture agreement, under clause 17.4, the 1^st defendant would still need to honour the licences obtained by the 2^nd defendant from record companies, for so long as they are still subsisting (after the termination).  And in this regard, although technically, with the exception of one joint promotion agreement, the plaintiff and the 1^st defendant are not parties to these agreements, I take the view that it is at least arguable that the 1^st defendant is still caught by clause 17.4 in the sense that it must, via the 2^nd defendant, honour the joint promotion agreements so as not to jeopardise the right for the licences obtained thereunder.

22.  In my view, to that limited extent, the plaintiff has shown a serious question to be tried.  However, it is important to note that clause 17.4 only applies to the subsisting joint promotion agreements.  Moreover, it does not apply, given the definition of “licences” in the joint venture agreement, beyond the period of time when the songs in question are to be exclusively licensed to the 2^nd defendant pursuant to the joint promotion agreements.

23.  In other words, it does not apply to new songs that are not covered by any subsisting joint promotion agreements, ie the second category of songs I have identified above.  Nor am I concerned with songs to which the 2^nd defendant’s right is only limited to non-exclusive licences.

24.  Clause 17.4 has not been specifically pleaded by the plaintiff.  But its implications have been fully explored at the hearing and no pleading point has been taken.  In any event, it is a matter of amendment and does not affect the substance of the matter.

Specific performance and injunction

25.  Before I move on to deal with the questions of adequacy of damages and balance of convenience, I need to deal with one matter.  It is the plaintiff’s own pleaded case that the joint venture between the parties is in fact a quasi partnership and the parties owe to each other duties of good faith and duties as partners.  Both parties have co-operated in the conduct of the joint venture’s quasi partnership business “in a close and smooth fashion and with mutual confidence”.

26.  I take the view that the joint venture agreement is an agreement which the court would not decree specific performance of.  Nor would the court grant a prohibitory injunction if the effect of which would be to force the parties to co-operate with each other against their wishes.  That would be to decree specific performance through the backdoor.  See Spry, Equitable Remedies (7^th ed) 122-125, 598 et seq; Hummingbird Music Ltd v Acconci [2007] 4 HKLRD 79; Worth Achieve Associates Ltd v Huang Sheng Yi [2007] 3 HKLRD 797.

27.  Applying the general principles to the present case, it is quite plain to me that regardless of the defendants’ argument on the notice point, the plaintiff’s application for interlocutory injunction regarding new songs that, when released, will not be covered by any existing joint promotion agreements must fail.  In order to secure those songs through the 2^nd defendant, which is the effect of the injunction the plaintiff is seeking against the 1^st defendant, the 1^st defendant will be forced to co-operate with the plaintiff against its wish.  On the materials before me, I do not accept the argument that securing the licences to those songs or entering into a new joint promotion agreement regarding those songs would require minimal co-operation between the parties.  A quick look at a typical joint promotion agreement would immediately reveal that it contains many terms that require not only the agreement between the record company and the 2^nd defendant, but also the agreement between the plaintiff and the 1^st defendant amongst themselves.  Matters requiring agreement include the term of the joint promotion agreement, the terms of the licences including the fees and duration, the selection of songs, etc.  They require mutual trust and confidence as well as co-operation between the parties, and from what has happened, these important elements are simply lacking, at least on the part of the 1^st defendant.  This is despite the apparent willingness, if not eagerness, on the part of the plaintiff to carry on with the joint venture with the 1^st defendant as before.

28.  This being the case, in relation to this category of new songs that will not be covered by any existing joint promotion agreements, I am of the view that there really is no chance of the plaintiff obtaining a permanent injunction at trial to force the 1^st defendant, in effect, to use the 2^nd defendant to obtain the licences.  That being the case, and in the absence of exceptional circumstances, I do not see how an interlocutory injunction to that effect can be granted against the 1^st defendant, pending trial: Hummingbird, supra, para 19.

29.  This is therefore an additional reason for refusing any interlocutory injunction in favour of the plaintiff in relation to those new songs that, when released, will not be covered by the existing joint promotion agreements.

30.  The situation is different in relation to those new songs that will be covered by the existing joint promotion agreements.  In relation to these songs, the joint promotion agreements are already in place.  All that remains for the parties to do is to select the songs by agreement.  Of course, if the parties cannot come to any agreement, no song is selected.  But as a matter of practical reality, given that the 2^nd defendant has through these joint promotion agreements secured the exclusive rights to these new songs, commercial considerations would dictate the parties’ reaching reasonable agreement on the selection of these new songs.

31.  For that reason, I am not troubled by the degree of co-operation that will be required from the parties in order for them to honour clause 17.4 in terms of the new songs that will be covered by the existing joint promotion agreements. That is not an absolute bar to granting the interlocutory injunction prayed for.  It is really a matter of degree, to be considered in conjunction with all other relevant discretionary considerations.

Adequacy of damages and balance of convenience

32.  I now move on to the questions of adequacy of damages and balance of convenience.

33.  Given my analysis above, I am only concerned with a possible interlocutory injunction relating to those new songs that, when released, will be covered by the existing joint promotion agreements.

34.  I take the view that damages will not be an adequate remedy to the plaintiff.  The short reason is that it will be extremely difficult, if not impossible, to assess the effect of allowing the 1^st defendant to approach the record companies for the exclusive licences to these new songs, to the business and income of the plaintiff.  Putting aside the fact that the plaintiff does not operate the karaoke outlets by itself which are operated by its associated companies – the plaintiff being a provider of management and administrative services to the karaoke outlets (including the provision of the requisite licences), it is difficult to perceive how one can correlate, with any degree of accuracy, the loss of the exclusive licence for, say, one new song, with the diminution in revenue (if any) of a particular karaoke outlet or maybe more importantly, with the long-term effect (if any) on the business.  Incidentally, I do not accept for one moment the argument that since the plaintiff does not run a karaoke outlet by itself, the loss of exclusive licences would not cause the plaintiff any loss.  That argument overlooks the commercial reality of the matter.  And as I said, it is difficult to accurately correlate the loss of an exclusive licence for a particular song with the loss of revenue in an outlet. 

35.  Quantum is difficult to assess and damages is not an adequate remedy.

36.  By the same token, I am prepared to proceed on the basis that damages will likewise not be an adequate remedy to the 1^st defendant, which obviously wishes to sever all relationships of co-operation with the plaintiff and to engage in an all-out competition with the plaintiff.  It is difficult to assess how the inability to exclusively acquire the licences for the new songs will impact on the 1^st defendant’s plan to outgun the plaintiff in the unlimited competition to come.

37.  So far as balance of convenience is concerned, given that there are already in existence subsisting joint promotion agreements which will, by definition, cover the new songs under consideration, practical considerations plainly favour maintaining the existing arrangement pending trial.

38.  Maintaining the status quo is doubly attractive in the present case given my view that there should be a speedy trial of the action.  The limited injunctions that I am prepared to grant are only for a relatively short period of time and the prejudice to the 1^st defendant would be kept to a minimum. 

39.  One other factor I take into account is the question of whether the plaintiff is good for the cross undertaking as to damages – although as I said, damages is not an adequate remedy to either side.  The plaintiff has made a loss in the year 2006 and its current assets, according to the financial statements for that year, comprised to a large extent amounts due from related companies.

40.  This cannot be overlooked but is not an insurmountable obstacle.  I would require fortification of the cross undertaking as to damages.  On the very limited materials before me, I believe a payment-in of $500,000, or a bank guarantee for that amount, is adequate, subject to liberty to both sides to apply to vary the same as future circumstances may warrant.

41.  Subject to that being forthcoming, I am minded to grant an interlocutory injunction to restrain the 1^st defendant from obtaining or seeking to obtain the exclusive licences for any karaoke music videos of songs that, when released, will be covered by the existing joint promotion agreements, other than through the 2^nd defendant under those existing joint promotion agreements, pending trial.

42.  The injunction is subject to the rider that it shall not apply to those new songs, even though covered by the existing joint promotion agreements, that the plaintiff shall have decided not to select, nor shall it cover any new song the exclusive licence to which pursuant to a joint promotion agreement shall have expired – in either of which events the 1^st defendant shall be at full liberty to approach the record companies for the exclusive licences to the songs.

43.  I am further prepared to grant an interlocutory injunction to restrain the 1^st defendant from representing to the record companies involved in the existing joint promotion agreements that the 2^nd defendant will in any way refuse or fail to honour those agreements, pending trial.

44.  Beyond these two limited injunctions, I am not prepared to grant any further relief in favour of the plaintiff.

45.  In particular, in relation to the specific discovery sought, given the general discovery to be made after the close of pleadings, I do not find the discovery sought to be necessary.

Position of the 3^rd defendant

46.  As regards the position of the 3^rd defendant, the only basis for making a claim against him is that he is a director of the 2^nd defendant. 

47.  It is of course trite that as a director of the 2^nd defendant, he owes fiduciary duties to the 2^nd defendant, and amongst other things, he must not allow himself to be in a position of potential conflict.  However, speaking realistically, if he should decide to resign from the board of the 2^nd defendant tomorrow (with or without appointing a replacement director), his fiduciary duties towards the company would cease.  This is, of course, relevant in considering whether the court should grant an injunction against him pending trial.

48.  Having given the matter some thought, I am of the view that the balance lies against granting any injunction against the 3^rd defendant personally, given the limited injunctions that I have indicated I am prepared to grant against the 1^st defendant.  I believe those limited injunctions will be sufficient to protect the plaintiff’s position. 

49.  In any event, since the 3^rd defendant is a director of the 1^st defendant, an injunction against the 1^st defendant is, for all practical purposes, good against the 3^rd defendant as director provided that the necessary penal notice is endorsed on the injunction order.

Speedy trial

50.  As far as the question of speedy trial is concerned, the plaintiff is eager to have a speedy trial whereas the 1^st and 3^rd defendants have been silent on the matter thus far. 

51.  I have considered the suggested directions proposed by the plaintiff as well as the issues raised between the parties.  The plaintiff’s statement of claim is not perfect and there is room for improvement.  But looking at the matter in the round, and bearing in mind the current state of the court’s diary, I take the view that it is possible to hold a speedy trial in January or February next year.  (As at the time of writing, earlier dates are not available).

52.  I give the following directions nisi:

(1)    there be a speedy trial of the action and counterclaim;

(2)    the plaintiff do file and serve its reply and defence to counterclaim within 14 days from the date of this judgment;

(3)    the parties do file and serve their respective lists of documents within 14 days thereafter, and there be mutual inspection of documents within 7 days thereafter;

(4)    the parties do file and serve their signed witness statements as to fact within 21 days thereafter, and save where otherwise directed by the trial judge, they shall stand as their makers’ respective evidence-in-chief at trial;

(5)    the parties shall set down the case for a speedy trial within 7 days thereafter, with an estimate of 8 days (which shall be confirmed in writing by the parties’ counsel at the time of setting down), and convenience of counsel shall not be considered in fixing dates;

(6)    the trial shall not commence earlier than two months after setting down and there shall be a pre-trial review before the trial judge (if possible) not later than 21 days before the commencement of trial;

(7)    the parties must inform each other and the court forthwith if they or any of them should become aware of any matter or development that may affect the above estimate of trial or the holding of the speedy trial on the dates fixed;

(8)    time shall run during the summer vacation;

(9)    the parties shall within 5 days from the date of this judgment approach the listing clerk of the court to pencil-mark the available trial dates, which shall be formally confirmed upon setting down as provided in (5) above;

(10)   liberty to apply for further or other directions generally.

53.  Any application to vary the directions nisi must be made within 3 days after this judgment is handed down, failing which the same shall become absolute upon the expiry of the 3-day period.

Costs

54.  I make a costs order nisi that the costs of this application be in the cause.  I grant a certificate for two counsel.

55.  I thank counsel for their assistance. 

HCA748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 748 OF 2008

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R U L I N G

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1. The plaintiff and the 1st defendant had together established a joint venture through the 2nd defendant.  This was done by means of two joint venture agreements in writing; the first dated 18 July 2000, which lasted for a year, and then they entered into another, dated 17 November 2001, which was also expressed to be for a further year.  Under the terms of both agreements each party had a right to terminate the agreement by giving the other one month’s notice in writing after which the 2nd defendant would be wound up.  Notwithstanding the expiry of the second agreement the plaintiff and the 1st defendant continued their joint venture on the terms of the second agreement.  This state of affairs continued until 31 March this year when the 1st defendant sent the plaintiff a letter purporting to terminate the joint venture after the expiry of one month.

2. On 19 April the 1st defendant sent another letter informing the plaintiff that the 2nd defendant would be wound up.  The business of the joint venture company, the 2nd defendant, is that of a karaoke box, as is that of the plaintiff and the 1st defendant.  In this line of business, companies such as these obtain licences to use popular songs which can then be played at karaoke establishments.  These licences are obtained and paid for from record companies who own the recording rights.

3. During the course of the conduct of the joint venture the 2nd defendant had entered into a number of joint promotion agreements (“JPA’s”) securing the rights to recordings of popular songs for which the 2nd defendant would pay substantial fees during the currency of each of the JPA’s.  It has contracted with seven record production companies to secure these rights.  These JPA’s have been obtained since the establishment of the 2nd defendant in 2000 and now some of these agreements are set to run until 2011. 

4. The effect of the purported termination by the 1st defendant of the joint venture and its intention to see to it that the 2nd defendant is to be wound up in accordance with the terms of the second joint venture agreement - the same terms having also appeared in the first joint venture agreement - is that the fate of the JPA’s remain to be resolved. 

5. The plaintiff is unwilling to see the joint venture agreement terminated.  I am told by Miss Wong, who appears for the plaintiff, that the joint venture has been a financially successful one and much goodwill has been obtained from this relationship to the benefit of the 2nd defendant. 

6. A deadlock has been arrived at.  The 3rd defendant, who is the 1st defendant’s director and who controls it, wishes to take a different direction for the 1st defendant.  His position is that the terms of the joint venture agreement must take effect; the joint venture agreement is now at an end, the termination period having run its course and the 2nd defendant must now be wound up.  

7. The plaintiff does not accept this interpretation.  Key to its argument is that with the various JPA’s still current, the reasonable expectation of both joint venture parties must have been that the joint venture would continue, presumably until the last of the JPA’s expired.  The 1st defendant has written to the recording companies, with whom the 2nd defendant has entered into the JPA’s, informing them of these events with a view to securing the termination of the JPA’s as soon as can be achieved. 

8. In these circumstances the plaintiff obtained an ex parte injunction from Barnes J on 30 April 2008 restraining the 1st defendant and the 3rd defendant from - and these are the terms of the learned judge’s order:

“directly or indirectly negotiating, entering into, proceeding on any licensing agreement(s), licensing contract(s) and/or any arrangement involving the right to use any musical work(s) and/or karaoke music video(s) with any record company in respect of any work(s) or any karaoke music video(s) the subject of any agreements or arrangement(s) in respect of which the 2nd defendant has secured rights or otherwise, causing enabling or assisting others so to do.  For the avoidance of doubt, this injunction applies only to rights already secured by the 2nd defendant.”

9. The purpose of this order was to prevent the 1st and 3rd defendants from harming the 2nd defendant’s current JPA’s.  On the return date, which was 9 May, these two defendants gave undertakings in those terms and the matter has been adjourned to 17 July, before me, for the matter to be substantively argued, when it will be said on behalf of the 1st and 3rd defendants that the undertakings should be discharged because the plaintiff will not be able to demonstrate that there is a serious issue to be tried between the parties.  The evidence, it will be said, is all one way; the joint venture agreement gives either party a right to termination and provides for a winding up of the 2nd defendant. 

10. Since the undertakings were given on 9 May, the 3rd defendant has caused further letters to be written to the recording companies who still have current JPA’s with the 2nd defendant, the effect of which correspondence has also been to further inform them of the termination of the joint venture agreement.  It is these letters, which, whilst not breaching the terms of the undertakings of 9 May, have caused the plaintiff to come again with this application for an injunction to prevent a repetition of such letters being sent to these parties, which are said to be causing alarm and confusion amongst the recording companies.

11. This is a short-term measure to hold the ground until 17 July when the availability or otherwise of the interlocutory relief that has already been obtained will be decided.  The terms of the injunction now sought are these:

(1) That the 1st and 3rd defendants, in the case of the 1st defendant whether acting by itself, its directors, officers, servants, agents, employees or any of them or otherwise howsoever and in the case of the 3rd defendant whether acting by himself, his servants, agents, employees or any of them or otherwise howsoever be restrained until the determination of the plaintiff’s summons issued herein on 5 May 2008 or further from directly or indirectly terminating or otherwise announcing the termination of any contract entered into by the 2nd defendant which has not been terminated by approval and consent of the board of directors of the 2nd defendant or otherwise causing, enabling or assisting others so to do.

(2) That the 1st and 3rd defendants in the case of the 1st defendant whether acting by itself, its directors, officers, officers, servants, agents, employees or any of them or otherwise howsoever, in the case of the 3rd defendant whether acting by himself, his servants, agents, employees or any of them or otherwise howsoever, be restrained until the determination of the plaintiff’s summons issued herein on 5 May 2008 or further order from directly or indirectly terminating, ceasing or otherwise announcing the termination or cessation of the business of the 2nd defendant or otherwise causing, enabling or assisting others so to do.

12. Mr Burns, SC, for the 1st and 3rd defendants, submits that where the plaintiff is unable to get its case for an injunction off the ground because it cannot demonstrate a serious issue to be tried, to now attempt to stop the 1st or 3rd defendants from communicating with the recording companies to inform them of what is going on between these disputing parties is simply not right.  This has not caused alarm or confusion, as the plaintiff suggests, and it appears that in any event the plaintiff, through a subsidiary company, is also taking steps to move on from its relationship with the 1st defendant in the joint venture arrangements, which is evidenced by a draft sponsorship agreement entered into by one of the plaintiff’s subsidiaries.  This interpretation is not accepted by the plaintiff and will no doubt be further argued over on 17 July.

13. So far as this application is concerned, it seems to me that where there are now in place undertakings, the purpose of which is to hold the fort until proper time can be provided for the substantive argument, I should grant this injunction as well.  I regret that the court’s lists have not been able to provide an earlier date for the substantive argument, nevertheless it strikes me that this type of correspondence may well have the effect of undermining the whole purpose of the injunction granted by Barnes J and reproduced in the undertakings of 9 May.  The intention was to preserve, as best as could be devised, the contractual status quo and letters of this sort do run counter or at least may run counter to the intention of the injunction and the undertakings whilst not in fact amounting to a breach of those undertakings. This order and the undertakings will form a package of measures to preserve what is now left of the joint venture until I am able to decide on the fate of the undertakings and whether they should be discharged.  If they are, then there can be no possible justification for the injunction.  This will be decided on 17 July and an order will therefore now go in terms of the summons, but I will give the parties liberty to apply as to any amendment of the terms which may be considered appropriate.

14. I will reserve the costs of the summons to 17 July.