DRACCO NETHERLANDS B.V v. SIMBA TOYS GMBH & CO. KG

HCA 304/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2014

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J U D G M E N T

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Introduction

1.  In the present action, the plaintiff (“P”) claims against the defendant (“D”) for breach of a licensing agreement and D counterclaims against P for breach of quiet enjoyment of the licensing agreement.

2.  Unless otherwise indicated, in this judgment I will adopt the abbreviations used by P.

3.  D took out a summons on 14 September 2015 seeking an order for security for costs.  On 29 February 2016, Master M Wong ordered that security be paid by P in the amount of HK$500,000 on or before 11 April 2016 (“Order”).

4.  P now appeals against the Order.  It is P’s case that D is not entitled to security, and in any event, the amount ordered is excessive.

5.  Counsel Mr Clive Grossman SC appeared with Mr Hylas Chung for P, and Mr Geoffrey Shaw appeared for D.

Background

6.  P is a limited company incorporated under the laws of the Netherlands, which carries on the business of licensing, manufacturing and distribution in global markets.

7.  D is a limited partnership with limited liabilities incorporated under the laws of Germany which carries on the business of manufacturing and distribution of toys.

8.  P has been granted the right, privilege and authority by Home Focus Development Limited (“Home Focus”)[1], the owner of all intellectual property rights derived from the property entitled “Filly”, a well-known brand of toys for children in the European market based on a fantasy world including characters of ponies, to enter into a licensing agreement with D.

9.  The licensing agreement was entered into between P and D on 10 February 2011 (“Licensing Agreement”).  Under the Licensing Agreement, among other things, P as licensor agreed to grant to D as licensee the right and license to produce and distribute certain “Filly” toy products as defined in Exhibit A attached to the Licensing Agreement (“Products”) within countries in Pan-Europe, with exceptions as stated in the Licensing Agreement (“Territory”) and through distribution channels as defined therein (“Distribution Channels”)[2].

10.  In return, P was to receive a license fee (“License Fee”) for different categories of the Products, namely Category A, B and C respectively as defined in Clause 1 (f) of the Licensing Agreement.  The term of the Licensing Agreement was from 1 January 2011 to 31 December 2013 (“Term”).

11.  It is P’s pleaded case that P and D had further entered into an agreement collateral and in supplement to the Licensing Agreement in or around 14 April 2011 (“Collateral Agreement”) in that the ratios between the agreed License Fees for Category C Products and the Recommended Selling Prices (“RSP”) were agreed as pleaded[3].

12.  Under Clause 17 of the Licensing Agreement, P and D agreed to be subject to the exclusive jurisdiction of Hong Kong and that the Licensing Agreement would be exclusively governed, interpreted and enforced in accordance with the laws of Hong Kong.

13.  P seeks against D, among other things, damages arising out of D’s alleged breach of the Licensing Agreement, an inquiry and/or account of profits in respect of the wrongful acts of D, an injunction to restrain D from using all Intellectual Properties[4] materials and an order for their return, an order to allow P’s auditor to inspect D’s business records and documents relating to the Products, an injunction to restrain D to disclose confidential information pursuant to or relating to the Licensing Agreement[5].

14.  D’s counterclaim against P is based on P’s alleged breach of an implied term of the Licensing Agreement of quiet enjoyment and D seeks damages against P.

The Legal Principles

15.  It is trite that an appeal against an order of the Master is to be heard by way of a rehearing[6].

16.  Under Order 23 rule 1 of the Rules of the High Court, the court has power to order a plaintiff to give security for defendant’s costs.  Order 23 rule 1 states as follow:

“(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court-

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) subject to paragraph (2), that the plaintiff's address is not stated in the writ or other originating process or is incorrectly stated therein, or

(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.

(2) The Court shall not require a plaintiff to give security by reason only of paragraph (1)(c) if he satisfies the Court that the failure to state his address or the mis-statement thereof was made innocently and without intention to deceive.

(3) The references in the foregoing paragraphs to a plaintiff and a defendant shall be construed as references to the person (howsoever described on the record) who is in the position of plaintiff or defendant, as the case may be, in the proceeding in question, including a proceeding on a counterclaim.”

17.  From the various authorities, Mr Grossman SC had summarized and set out the following general principles:

(1) It is not an inflexible or rigid rule that a plaintiff resident abroad should provide security for costs[7];

(2) In exercising its discretion whether to order security or not, the court will have regard to all circumstances of the case, in particular the likelihood of the plaintiff in succeeding the case.  If the plaintiff’s case is genuine and strong, no order for security for costs would be granted[8];

(3) The court has to strike a balance between what would be too oppressive to the plaintiff and what would give the defendant a measure of security; and will take into account the bona fide nature of the claim and any element of overlap between the claim and the counterclaim[9];

(4) The court must have regard to the defendant’s prospects of success or whether it has an arguable defence[10];

(5) Where a foreign plaintiff makes a claim which is met by a counterclaim, and the hearing of the counterclaim would mean that all or substantially all of the matters raised in the claim would have to be fully investigated and litigated, it would not be appropriate to order security for costs because the litigation of the counterclaim might well show that the plaintiff’s claim was a good one in any case, and that it would be wrong to stay his claim[11];

(6) The court will also take into account the financial position of a foreign plaintiff[12].

18.  Although there was no dispute by Mr Shaw on the above general principles, he had referred the court to a number of authorities where it had been held that it is usual that a foreign plaintiff is required to give security.  In particular, he referred to the following passage from Tagliani v Lee, [2005] HKEC 1415, HCPI 878/03, 12.9.05(unrep) :

“The principles governing the ordering of security for costs against a non-resident plaintiff were usefully summarised, by reference to the English and Hong Kong authorities, by Deputy Judge Carlson in Elecvision Inc v Achiever Industries Ltd [2003] HKLRD 60, at paragraphs 9 and 10. Put briefly, it is prima facie unjust that a foreign plaintiff, who is more or less immune against costs if he is unsuccessful, should be allowed to proceed without making funds available within the jurisdiction, against which any costs order against him may be executed[13].”

19.  Further, it is stated in paragraph 23/3/3 of HKCP that:

“An order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial[14].”

20.  With the above principles in mind, I now turn to the present appeal.

P’s Claim

21.  According to D, as the Term expired on 31 December 2013[15], according to Clause 7(c) and 1 (k) thereof, D should have 90 days from the expiry to dispose of any unsold Products (“Sell-Off Period”). However, P purported to extraordinarily and immediately terminate the Licensing Agreement pursuant to Clause 14 (a) of the agreement on 15 January 2014 (“Extraordinary Termination”), without any remaining Sell-Off Period.

22.  Clause 14 (a) of the Licensing Agreement provided that P had the right to terminate the agreement extraordinarily for a good cause with immediate effect, upon fulfilment of at least one of the alternative requirements set out thereunder[16].

23.  It was P’s case that there were the following breaches of the Licensing Agreement on the part of D:

(1) In breach of Clause 1 (f), D had understated License Fees by, among other things,

(i) Wrongfully categorizing the Products in calculating the License Fees;

(ii) Wrongfully claiming the 3 % deduction for Products in Category B purportedly relating to TV–promotion;

(iii) Wrongfully understating the quantities of Products with figurines sold in calculating the License Fees;

(iv) Wrongfully reporting the calculation of the License Fees.

(2) In breach of Clause 1 (f) and the Collateral Agreement, D adopted higher RSPs for Category C Products without the consent of P and thereby D earned higher profit margins and/or has been unjustly enriched;

(3) In breach of Clauses 1(f) and 10(a) of the Licensing Agreement, D understated License Fees by wrongfully adopting the discounted prices and/or prices after deductions in calculating the License Fees instead of the wholesale or retail prices before any deductions ;

(4) In breach of Clauses 1 (f) and 11 (f) of the Licensing Agreement, D understated the License Fees by wrongfully deducted a sum of 71,308 Euros from the License Fees as reimbursements for Products returned to P;

(5) In breach of Clauses 2 (a) and 1 (d) of the Licensing Agreement, D sold directly and/or indirectly to countries and/or market outside the Territory;

(6) In breach of Clauses 2(a) and 1(j), D wrongfully understated the License Fees by wrongfully sold directly or indirectly outside the Distribution Channels of the Products to persons and/or entities.

24.  It was also P’s case that D had also infringed P’s intellectual property rights and confidentially by, among other things:

(1) by failing to obtain P’s prior written consent before, among other things, manufacturing, selling and using Products for marketing or advertising methods;

(2) by among other things, disclosing the full contents of the Licensing Agreement in a letter dated 4 December 2013 by D’s German legal representative to a company known as Universal Trends GmbH ;

(3) by instituting legal proceedings against Universal Trends in or about end of 2013 in Germany for violation of the Property without the consent of P;

(4) by failing to return all intellectual properties particularized by P in its RASOC[17].

25.  P had further alleged that D had failed and/or refused to provide promotional investments, reports and accounting statements to P in breach of Clauses 9(a) and (b), 11(a), 11(c), and 11(d) of the Licensing Agreement.

26.  Finally, in breach of Clause 11(b) of the Licensing Agreement, D failed to make payments in the amount of 75,000 Euros in accordance with the accounting statement for the 3^rd quarter 2013 to P despite repeated demands and requests.

27.  P’s case was in light of all the above breaches, each fundamental and constituted an act of repudiation, it was entitled to accept the repudiation and extraordinarily terminate the Licensing Agreement. Further, after Extraordinary Termination, D wrongfully continued to sell the Products and yielded gross profit of 12,751,106.95 Euros.

Prospects of Success

28.  It was Mr Shaw’s submission that it cannot be said that P has “good” prospects of success.  He pointed out that D’s reasonable forecast sales for Products sold during the 4^th quarter 2013 were EUR 12m, namely some EUR 48m a year, or some HK$500m, and further P is claiming some HK$600m in this case, and yet P purported to terminate the Licensing Agreement because of an alleged failure of payment of EUR 75,000, which, according to D’s case, was paid by way of set-off as pleaded[18].

29.  However, P’s case was that it was entitled to give notice for the Extraordinary Termination by reason of D’s various breaches and not simply for the failure of payment of EUR 75,000.  Further, as pointed out by P, the figures for the forecast sales were only D’s figures, which had not been admitted by P and P simply has no knowledge of the alleged figures until the accounts have been provided by D.

30.  Mr Wong Tik Lung Eric who affirmed his 4^th affirmation on behalf of P to oppose D’s application for security for costs had estimated that the outstanding License Fees owing from D to P were not less than some EUR 655, 969.60, based on a table he produced, and the calculations were based on an inventory report of the Products as at 31 December 2013 submitted by D to P (“Inventory Report”).

31.  Mr Shaw submitted that there were two problems in what was said by Mr Wong, firstly his calculations were made in October 2015 but based on the Inventory Report, which was of some 20 months earlier and based on prices in December 2013, and prior to the Extraordinary Termination; and secondly, what Mr Wong said had not been pleaded by P, and this was conceded by P before Master Wong.

32.  P denied there was any concession, and Mr Grossman submitted that P had simply not asserted it as P had not received any further accounts from D since December 2013, and reiterated that P simply had no knowledge of what the correct figures should be without the accounts.

33.  At the hearing, Mr Shaw had made submissions on the merit of P’s case almost point by point.  

34.  Ultimately for the purpose of the present application, Mr Grossman mainly relied on D’s failure of provision of documents in support of his argument that P’s case at least in this respect has a high degree of probability of success.  He submitted that under the Licensing Agreement, D was to provide P with :

(i) Under Clauses 9(b), a written marketing plan for each of the years of 2011, 2012, and 2013;

(ii) Under Clause 11(a), quarterly accounting statements for the 1^st quarter of 2014;

(iii) Under Clause 11(c), accounting statements regarding the sales effected, as specified therein;

(iv) Under Clause 11(d), D’s business records and documents relating to the Products to be inspected by P’s auditor.

35.  On the provision of written marketing plan, D’s case was that these had been submitted to P for the years of 2011, 2012 and 2013 by email, but P said that what were submitted did not comply with Clause 9(b).

36.  As for quarterly accounting statements, D admitted that the quarterly accounting statement for the 1^st quarter of 2014 had not been provided.  It was D’s case that its obligation under Clause 11(a) did not survive the Extraordinary Termination.  However, Mr Grossman pointed out that D’s solicitors had informed P by letter on 18 February 2014, which was after the notice of Extraordinary Termination, that D would provide the accounting statements after D had disposed of the balance of the Products and calculated the damage it had suffered.

37.  It would thus seem from D’s case that it had agreed to provide the quarterly accounting statements for the 1^st quarter of 2014.  Mr Grossman further pointed out that the balance of the Products had been sold some time ago but still no accounting statements have been produced by D so far.

38.  As for accounting statements regarding sales, D claimed that it had reported License Fees to P on 11 occasions, the last being on 23 January 2014, according to the format specified by P, and that P had not complained about the format or categorization of any of those reports[19].

39.  Finally, in relation to inspection of D’s business records and documents relating to the Products by P’s auditor, D said D had proposed on 13 February 2014 that the audit exercise took place in the week of 10 March 2014, but the Extraordinary Termination took place on 18 February 2014, and D’s obligation under Clause 11 (d) did not survive the Extraordinary Termination.

40.  Shortly after the commencement of this action, P had tried to obtain an interlocutory injunction to (i) restrain D from selling or distributing the Products without P’s consent, knowledge or approval, and (ii) allow its business records and documents relating to the Products to be inspected by P’s auditor.  P did not proceed with (i) after having sight of D’s affirmation, and (ii) was later not granted by Chung J who gave reasons for his decision on 28 March 2014 (“Reasons”)[20].

41.  In the Reasons, Chung J had considered Clause 11(d), and had expressed doubt as to whether Clause 11(d) was a contractual term which was intended to “survive” the Extraordinary Termination, but even if it did “survive”, the balance of convenience was against the grant of an interlocutory injunction.  Chung J had also considered that firstly it was not contended that the inspection was to be “on site” and P was seeking a domestic injunction whereas D is out of jurisdiction and secondly, there was no urgent need for inspection, and further that inspection of documents could be available in the normal course of the action.

42.  Anyway, it is P’s pleaded case that P had requested to inspect D’s business records and accounting documents relating to the Products by letter dated 12 November 2013[21] and, as mentioned earlier, D had agreed to make arrangements for such to take place on 10 March 2014.  However, the inspection was subsequently denied by D.  P’s case is that it had been deprived of its right to conduct reconciliation exercises or receive relevant accounting records and documents in order to ascertain the accuracy and truthfulness of D’s reports on D’s business records and documents relating to the Products including but not limited to manufacturing and production accounts records of all Products, sales records by Product category, purchasers or wholesalers and retailers, Distribution Channels and Territory[22].

43.  D’s main defence on the provision of quarterly statements and business records and/or accounting documents relating to the Products was that its obligation did not survive the Extraordinary Termination. A copy of the Licensing Agreement had not been provided to this court in its entirety although the Clauses therein had been set out in the RASOC.  It was provided under Clause 11 (d) that P was entitled to inspection at any time  of D’s business records and documents relating to the Products, and also P was entitled to at all times request an inventory report showing the then inventory of Products.  Further, it was provided under Clause 11 (a) that P was to receive the accounting statements no later than 14 days after the end of each and every quarter.

44.  It would appear that from 12 November 2013 until the date of Extraordinary Termination, D had not produced its business records and documents relating to the Products for inspection.  The reasons were not quite clear at this stage.

45.  As set out in paragraph 23/3/2 of HKCP that it is not to say that every application for security for costs should be made the occasion for a detailed examination of the merits of the case.  It is not the function of the court, when faced with an application for security for costs, to make a ‘preliminary run’ at deciding the ultimate success of failure of the claim, and that parties should not attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure[23].

46.  Whether P’s case has a good prospect of success has further been said to be a relative exercise in the sense that the court will also have to consider the prospects of success of D, and that it has been said that this is to be approached in a broad-brush manner, and the court is not to embark on an assessment exercise as though it were considering an application for summary judgment under Order 14[24].

47.  At this stage, having considered the material before this court and on a broad brush basis, I am of the view that P does have a bona fide or genuine claim against D, and on the present available evidence, I am unable to say that P’s case in so far as the D’s alleged breach of Clauses 11(a) and/or (d) does not have a good prospect of success.

D’s Counterclaim

48.  D claimed that the “quiet enjoyment term” was an implied term of the Licensing Agreement and that P wilfully and intentionally acted to disturb the market for the Products which resulted in a loss of revenue for D, and that P was in breach of the quiet enjoyment term.

49.  P’s case was that there was no “quiet enjoyment term” implied into the Licensing Agreement, and that in any event, P was not in breach of any such implied term, as D only started to sell and/or dump the Products onto the market after the notice of the Extraordinary Termination was served by P. Also, P’s case was that due to the retrospective effect of the Extraordinary Termination, D was in fact not entitled to sell after 1 November 2013.

50.  Having considered D’s counterclaim, the main issue would still be whether P was entitled to give notice for the Extraordinary Termination and whether D was entitled to sell after the Extraordinary Termination.  I am of the view that there is overlap between P’s claim and D’s counterclaim, and the hearing of the counterclaim would mean that substantially all of the matters raised in P’s RASOC would have to be fully investigated and litigated.

Exercise of discretion

51.  It has been said that the court should be slow to exercise its discretion to order security against a plaintiff where to do so would effectively be tantamount to providing security to the defendant for the prosecution of its counterclaim[25].

52.  It has also been said that where both the plaintiff and the counterclaiming defendant reside out of the jurisdiction, and the counterclaim arises out of the same transaction and raises the same basic issues as the claim, both parties should be treated alike in relation to security for costs, since it would be mere chance which party would be plaintiff and which defendant, and therefore the court should order the plaintiff to give security for costs in respect of the claim, and also order the counterclaiming defendant to give security for costs in a similar amount in respect of the counterclaim[26].

53.  Mr Grossman submitted that although P could also seek security from D, there was not much point in both parties providing security, and that the more appropriate approach in the circumstances of the present case would be neither has to provide security for costs. 

54.  During the appeal, Mr Grossman also raised a new argument which was not raised at the hearing before Master Wong, namely that there is reciprocal enforcement procedure in place between the Kingdom of Netherlands and Hong Kong under the Foreign Judgments (Reciprocal Enforcement) Ordinance, Cap 319[27] (“FJREO”).   

55.   Mr Grossman referred the court to Tagliani v Lee, and that the court therein had considered that the existence of an agreement for the reciprocal enforcement of judgments was a factor that the court could take into account on an application for security for costs. 

56.  It has further been stated in paragraph 23/3/4 of HKCP that:

“If the plaintiff is resident in a jurisdiction which has a common law system similar to that in Hong Kong and there is an arrangement for the reciprocal enforcement of judgments between Hong Kong and that jurisdiction, more evidence about the difficulties in enforcing a judgment may be required before the court exercises its discretion to order security for costs (Izumo Mokko Co Ltd v TS Lines Ltd [2007] 2 HKLRD 363, at 370 and Lim Yi Shenn v Wong Yuen Yee [2012] 3 HKLRD 505) … Such evidence may comprise showing that it will be necessary to incur additional costs and suffer delay in having to instruct foreign lawyers to enforce, seeking to locate assets abroad against which to execute and/ or showing that some means of execution or enforcement available in Hong Kong may not be readily available in the overseas jurisdiction (see Re All Our Kids Hong Kong Ltd (unrep, HCCW 141/2007, [2011] HKEC 815) …[28]”

57.  Mr Shaw submitted that Mr Grossman was not entitled to rely on the above point as this was not raised before and that neither party has or is able to adduce evidence on appeal as to the matters stated above and further the Netherlands does not have a common law system similar to that in Hong Kong.  Mr Grossman argued that it is a matter of law that there is such a reciprocal arrangement.

58.  As provided in s3 of FJREO, the enforcement of judgments given in the superior courts of any foreign country would be extended to a foreign country only where the Governor in Council was satisfied that: “substantial reciprocity of treatment will be assured as respects the enforcement in that foreign country of judgments given in the superior courts” of Hong Kong.

59.  It had been held by Recorder Horace Wong SC in Lim Yi Shenn v Wong Yuen Yee [2012] 3 HKLRD 531that the court’s traditional approach to the exercise of the discretion under Order 23 rule 1(1)(a) was that unless there were other considerations to show that ordering security would be unjust, prima facie, security against a foreign plaintiff would be ordered, as it was just to do so, and this was because commonly, enforcement of any judgment for costs in the event of the plaintiff’s action being dismissed would be difficult and costly, and further there was no inflexible rule that a foreign plaintiff had to provide security[29].

60.  Recorder Wong had also considered s 3 of FJREO in Lim Yi Shenn.  The plaintiff in that case ordinarily resided in Singapore.  The Learned Recorder had said that he was entitled to infer from s3 that in Singapore the procedure for enforcement of a Hong Kong judgment would be substantially similar to that provided in FJREO, and that this was what “substantial reciprocity” meant in FJREO, and that in the absence of any evidence filed by the defendants to show, for example, that despite the substantial reciprocity, there existed some special difficulties and burdens for enforcement in Singapore which they would not encounter if the enforcement was done in Hong Kong, he could not assume that there were any difficulties for enforcement in Singapore that were particular to that jurisdiction.  Recorder Wong found that the evidential burden was discharged by the plaintiff’s showing that there was an available regime which provided for reciprocal enforcement of judgments in Singapore, and although this was not conclusive but the burden rested with the defendants to show that nonetheless, it was just to require the plaintiff to provide security[30].

61.  Even though the Netherlands does not have a common law system, in light of s 3 of FJREO, I cannot assume that there are going to be difficulties for enforcement in the Netherlands that are particular to that country. There has been no sufficient evidence in any event to this effect.

62.  The burden rests with D to show that it is just to require P to provide security.

63.  Mr Shaw had also argued that D’s address in Hong Kong on the writ herein was not truly or correctly stated.  Mr Wong explained in his 4^th affirmation that P adopted the address of Dracco Company Limited, P’s affiliate company, in Hong Kong.  Mr Wong has in his affirmation provided P’s registered office address in the Netherlands.

64.  P is suing in Hong Kong through solicitors here, and P’s solicitors’ address was clearly stated on the writ, as well as the Hong Kong address of Dracco Company Limited.  As stated in paragraph 6/5/5 of HKCP[31], where a plaintiff sues by a solicitor, his address on the writ needs not be his “place of residence”.  Here, although P did not state its registered office address on the writ, it was clearly stated in the RASOC that P is a company incorporated under the laws of the Netherlands.  There was no sufficient evidence that any mis-statement of the address, if any, was anything other than innocent, or that there was any intention to deceive on the part of P, by failing to state its registered address in the Netherlands in the writ.

65.  Having considered all the above, and all the circumstances of this case, with respect to the Master, I have come to a different view, and I am not satisfied that it is just to require P to provide security in the present case.  I am therefore prepared to allow P’s appeal.

Quantum

66.  Mr Wong had said in his 4^th affirmation that in any event, D’s costs in this action up to the conclusion of exchange of the 1^st list of documents should not exceed HK$450,000.

67.  As I am allowing the appeal, I do not really need to consider the quantum, but would just say I do not consider the amount ordered, if security is appropriate, to be oppressive. 

Conclusion

68.  I hereby set aside the Order and dismiss D’s summons filed on 14 September 2014.  P has in fact paid the amount into court.  I thus order the amount paid into court to be paid out to P.

69.  Costs normally follow the event.  I order D to pay P’s costs below and of this appeal, to be taxed if not agreed.  This is an order nisi which shall be final after 21 days.