TIN TIN YAT PAO (INTERNATIONAL) LTD. (IN LIQUIDATION) v. TIN TIN PUBLICATION DEVELOPMENT LTD.

FACV No. 18 of 2000

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 18 OF 2000 (CIVIL)

(ON APPEAL FROM CACV NO. 163 OF 1999)

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J U D G M E N T

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Chief Justice Li :

1. I agree with the judgment of Sir Anthony Mason NPJ.

Mr Justice Litton PJ :

2. I agree with Sir Anthony Mason NPJ's judgment.

Mr Justice Bokhary PJ :

3. I agree with Sir Anthony Mason NPJ's judgment.

Mr Justice Silke NPJ :

4. I agree with Sir Anthony Mason NPJ's judgment.

Sir Anthony Mason NPJ:

Introduction

5. In 1982, the appellant acquired the rights to publish the Chinese language newspaper, the "Tin Tin Daily News", and published it from then until 1 December 1984. Accordingly, at that time, the appellant owned the business of publishing the newspaper and its associated goodwill.

6. On 1 December 1984 the appellant granted an exclusive licence to Genvon Ltd to print and publish the newspaper for a period of two years on terms that Genvon was to pay a monthly licence fee of $50,000 during the term of the licence. By the Licence Agreement Genvon had an option of renewal for two years, any such renewal to be on the same terms (including the provision for renewal). On 17 December 1984 Genvon appointed the respondent as its agent to carry on the newspaper publishing business. By a Novation Agreement dated 2 September 1985 the respondent was substituted for Genvon and became the direct licensee of the appellant. In November 1986 there was a dispute between the appellant and the respondent over non-payment of licence fees due under the Novation Agreement. The appellant then terminated that Agreement and, by a further Licence Agreement dated 19 November 1986, the appellant granted another company an exclusive licence to print and publish the newspaper for a further term of five years from 1 December 1986, with an option of renewal for another five years, for a monthly licence fee of $50,000. After further negotiations, a Settlement Agreement was entered into involving the settlement of all outstanding disputes.

7. The Settlement Agreement led to a Second Licence Agreement dated 28 January 1987 by which the appellant granted the respondent a fresh exclusive licence to publish the newspaper for a period of ten years from 1 December 1986 at a monthly fee of $80,000 with an option to renew for a further five years. By a Supplemental Agreement dated 6 May 1987, the monthly licence fee was increased to $300,000.

8. All the licence agreements were in substantially similar terms. The terms of the Second Licence Agreement are indicative of the tenor of all the agreements. By clause 1(1), the appellant granted to the respondent an exclusive licence to the exclusion of the appellant to print and publish the newspaper, using the existing equipment and the name "Tin Tin Daily News" together with past and future copyright in the newspaper. By clause 1(2), these rights were expressed to include the right to adapt the style, language, format, colouring, photograph, general design and outlay of the newspaper, the political stance of the newspaper; "the right as to the goodwill of the said newspaper" and the right to register itself as the proprietor publisher printer and/or editor under the Control of Publications Consolidation Ordinance. By clause 6, the appellant warranted that it would not permit the newspaper's name to be used in any business, would not interfere or compete with the respondent's publication of the newspaper and would not assign its right to publish the newspaper to anyone else.

9. The present dispute between the parties began in 1990. The appellant claimed that the agreements had been procured by one Wai Kin Bong (a director of the appellant) in his own interest rather than in the interests of the appellant and in breach of trust. The respondent claimed that the agreements were valid and that it was entitled to exercise the rights granted for the term of the licence.

The proceedings

10. In 1990 the appellant commenced the present proceedings against the respondents. By its amended statement of claim, the appellant alleged that one or more of the agreements was or were invalid or had been validly rescinded and sought declarations and consequential relief on the basis that the respondents or some of them were accountable as fiduciaries and liable in damages for the conduct of the business. In the alternative, the appellant sought a declaration that, on the footing there was a valid licence agreement, the appellant was entitled to receive the licence fee of $300,000 per month. By its defence, the respondent pleaded that the licence agreements had been validly granted and that it had tendered payment of certain licence fees payable. The respondent also made a payment into court.

11. On 19 June 1996, the respondent wrote to the appellant and purported to exercise an option to renew the licence for a further 5 years.

12. This appeal by way of leave arises out of two applications made in the course of the proceedings. The first was an application made by the respondent to amend its defence and counterclaim, to withdraw its notice of payment into court and for payment out of the moneys paid in. The second was the appellant's application for interim payment of licence fees.

13. In its proposed amendments, the respondent sought to plead matters showing that the name "Tin Tin Daily News" had ceased to be distinctive of the appellant and had become distinctive of the respondent and that, as at the date of the Novation Agreement, and the Second Licence Agreement, the appellant had no goodwill in respect of the business of publishing the newspaper and hence no right to publish it or grant a licence in relation to it (para.11 of the proposed amended defence). The respondent also sought to plead that the Novation Agreement, the Second Licence and the Supplemental Agreement were void by reason of the mutual mistake of the appellant and the respondent, the mistake being that the parties believed at the time when the three Agreements were made that the appellant owned the goodwill of the business of printing and publishing the newspaper, the goodwill then being the property of the respondent (paras.22A, 39A and 54A of the proposed amended defence).

14. Deputy Judge To refused leave to amend the defence and counterclaim and ordered payment to the appellant of $2,700,000 on account of licence fees. On appeal, the Court of Appeal by majority (Nazareth V-P and Yam J, with Mayo JA dissenting) allowed the appeal and granted leave to amend, holding that the proposed defence was arguable.

The Court of Appeal

15. The majority in the Court of Appeal appears to have considered that the licence granted was simply a licence of goodwill, dissociated from the conduct of a business. If this view be correct, their Lordships were right in thinking that it was a licence in gross and of no effect. In concluding that the Agreements, more particularly the Novation Agreement and the later Agreements, did no more than grant a licence of goodwill, their Lordships were influenced by the respondent's argument on authorities relating to passing off.

16. Neither the Court of Appeal nor the primary judge discussed the proposed defence of mutual mistake. No doubt their Lordships considered that the viability of such a defence hinged on the goodwill question.

The respondent's case

17. The respondent's arguments in support of the case for leave to amend, may be shortly stated as follows :

(1) That there was, apart from the licence of the goodwill, no licence of a business to which that goodwill related ("the licence in gross point");

(2) that, in any event, with the passage of time, certainly by the time of the Novation Agreement and the Second Licence Agreement, the business and the goodwill had became the property of the respondent ("the subsequent licence in gross point");

(3) that, in order to succeed in recovering the business and the goodwill, it was necessary to imply a term in the Agreements that the respondent would re-transfer the business and the goodwill to the appellant at the expiration of the licence and no such term could be implied ("the need to imply a term point");

(4) that the name "Tin Tin Daily News" had ceased to be distinctive of the appellant and had become distinctive of the respondent ("the passing off point"); and

(5) that there was a defence of mutual mistake.

The law of passing off

18. The law of passing off as it relates to goodwill is both the claimed foundation for the proposed defence and the source of its destruction. In a well-known passage in Star Industrial v. Yap Kwee Kor [1976] FSR 256, Lord Diplock said (at 269) :

"A passing-off action is a remedy for the invasion of a right of property not in the mark, name or get-up improperly used, but in the business or goodwill likely to be injured by the misrepresentation made by passing-off one person's goods as the goods of another. Goodwill, as the subject of proprietary rights, is incapable of subsisting by itself. It has no independent existence apart form the business to which it is attached."

19. Two points emerge from this passage. The first is that passing off is a remedy for the invasion of a right of property not in the name or mark, but in the business or goodwill likely to be injured by a relevant misrepresentation. The second and related point is that goodwill has no independent existence apart from the business to which it is attached. See also Warnink v. Townend & Sons (Hull) [1979] AC 731 at 741, per Lord Diplock.

20. "Goodwill" was famously described by Lord Macnaghten in The Commissioners of Inland Revenue v. Muller & Co's Margarine Ltd [1901] AC 217 in these terms (at 223-224) :

"It ... is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing that distinguishes an old-established business from a new business at its first start ... However widely extended or diffused its influence may be, goodwill is worth nothing unless it has the power of attraction sufficient to bring customers home to the source from which it emanates."

Goodwill includes every positive advantage acquired, arising out of the business, whether connected with the premises where it is carried on, with the name under which it is carried on or with any other matter carrying with it the benefit of the business.

21. In the case of a newspaper business, the goodwill will embrace many positive advantages, not least being the name or title and the reputation which it possesses. It will include also the wide range of matters which attracts the readership, including style, format, design and political stance (a matter over which the Licence Agreements conceded freedom of action to the licensee).

22. It follows from the proposition that goodwill is a right of property associated with the business to which it is attached. That goodwill, being personal property, is assignable and may be bought and sold in connection with the business to which it is attached. Indeed, a transaction which is intended to assign a business as a whole necessarily passes the goodwill to the assignee because the goodwill is attached to the business (see Wood v. Hall (1915) 33 RPC 16).

23. Fundamental to the law's recognition that goodwill is transferable in connection with the continuing business to which it is attached is the notion that goodwill attaches to the business, not to its proprietor nor to the person who happens to carry it on. Once this is accepted, it necessarily follows that the owner of a business may license another person to conduct the business, in which event the goodwill of the business, attaching to the business, passes to the licensee, most certainly when there is an express assignment of goodwill. In principle, there is no difference between this case and the sale and transfer of a business to another followed by a re-sale and transfer back to the original owner.

24. Although the mere use of a name cannot be the subject of a licence for there is no property in a name as such (Harrods Ltd v. Harrod's (Buenos Aires) Ltd (1997) FSR 420 at 443), a licence to use a name may be granted in association with a business and its goodwill (Harrods v. Harrod's (Buenos Aires) Ltd at 444).

The licence in gross point

25. Before the Licence Agreement with Genvon Ltd, the appellant was the printer and publisher of the newspaper and proprietor of the business which became the subject of the licence to Genvon Ltd. It was scarcely contested that, at this stage, the licence of goodwill accompanied the licence to operate the business to which the goodwill was attached. Although Mr Silverleaf QC for the appellant had some difficulty in identifying in what the business consisted, it seems reasonably clear that the licensee was permitted by the Agreement to conduct the business of printing and publishing the newspaper which had formerly been printed and published by the appellant. So the licence related to a business and its attached goodwill. It was not a licence in gross.

The subsequent licence in gross point

26. The subsequent renewals of the licence did not materially alter this position . On the assumption that the operation of the business (with its attached goodwill) was to revert to the appellant at the expiration of a licence period - an issue to be dealt with later in these reasons - there was an obvious need for the respondent to secure a renewal of a licence on its expiry in order to enable it to continue to operate the business of printing and publishing the newspaper. If one thing is clear, it is that the parties did not intend by the Agreements that outright ownership of the business should pass to the respondent. Another thing that is reasonably clear is that the business and the goodwill were at no stage separated one from the other so as to bring about a separation of the goodwill from the business. True it was that there was a division between the licensee's interest in both the business and the goodwill and the appellant's "reversionary" interest in both, but that is another matter.

27. In this respect, it is significant that in para.11 of the proposed amended defence the respondent pleads that it is both the proprietor, printer and publisher of the newspaper and the owner of the goodwill. The case pleaded is not a licence in gross but rather that from 18 December 1984 or some time thereafter the appellant had no interest in the business or the goodwill which it could licence. On the assumption which we are presently making, there is no substance in this point.

28. It should, however, be mentioned that the respondent places considerable emphasis on the fact that the usual assets of a newspaper publishing business reside with the respondent, not the appellant. There is, for example, no mention in the Licence Agreements of staff, equipment (except in the Second Licence Agreement), contracts with advertisers and subscribers. Perhaps that is to be expected once an owner of a newspaper publishing business gives a licence to another to operate the business. The items mentioned, or most of them, are matters one usually associates with the operator of a business. In any event, we have no difficulty with the notion that, consistently with a licence to operate a business, it is for the licensee to make its own arrangements with respect to these matters.

The need to imply a term point

29. Mr Prescott QC for the respondent criticised the appellant's argument that on the expiry of a licence there was a "reversion" of the operation of the business and the goodwill to the appellant. What was required, according to Mr Prescott, was an undertaking by the licensee to re-transfer the business and goodwill. Otherwise there would no legal obligation to do so.

30. This argument fails to give effect to the true character of the Licence Agreements. They operate to give permission to the respondent to carry on a business for a limited period of time, preserving the ultimate ownership of that business for the benefit of the appellant. As a matter of contract, there can be no doubt that the Licence Agreements contain an implied negative covenant that the respondent will not operate the business beyond the term of the licence. Quite apart from any question of passing off, the appellant would be entitled to an injunction to restrain the respondent from continuing the business beyond the term of the licence. Indeed, the respondent's argument that a series of limited licence agreements, intended to confer limited rights on the respondent and preserve the ultimate ownership of the appellant, have vested absolute ownership of the business in the licensee amounts to turning the Licence Agreements on their head.

The passing off point

31. The respondent's argument is that, at some point before the Novation Agreement and the Second Licence Agreement, the name "Tin Tin Daily News" became associated in the mind of the public with the respondent as the proprietor of the business and the publisher of the newspaper to the exclusion of the appellant. Alternatively, the name ceased to be distinctive of the appellant with the result that the appellant ceased to have an exclusive right to the use of the mark. In other words, the respondent's claim is that, at best from the appellant's perspective, it would fail in a passing off action based on its assertion of ownership of the name and, at worst, the respondent would succeed against the appellant in a passing off action brought by it in reliance on its ownership of the name.

32. The answer to this argument is that this is a contract case not a passing off case. It is no answer to a soundly based claim in contract that a licence to operate a newspaper publishing business has expired, to say that the owner of that business has lost the exclusive right to the use of the name under which the newspaper is published.

33. The passing off cases on which the respondent relies have no bearing on the issue under consideration. In essence they deal with the question whether a trade name or mark, admittedly an aspect of goodwill, has ceased to be distinctive of the business or goods of the proprietor or has became deceptive, a question which is different from the question before this Court. The cases cited by the respondent are cases in which the same or a substantially similar name or mark has been used by two separate businesses so that the question is whether the name or mark, which represents an aspect of goodwill, belongs to one business rather than the other to the exclusion of that other. Here, the respondent had, during the currency of the agreement, an exclusive right to publish the newspaper - to the exclusion of the appellant and everyone else.

34. Oertli v. Bowman [1959] RPC 1 is a case on which the respondent strongly relies. There the appellant licensed the respondents to manufacture mixing machines of a certain design and licensed the respondents to do so under its registered trade mark Turmix. The licences were not licences under the Trade Marks Act. In the circumstances, the use of the mark by the respondents meant that it was no longer distinctive of machines of the appellant's manufacture, thereby invalidating the appellant's registration of the mark. The appellant's action for passing off therefore failed. The use of the mark in relation to the products of two separate businesses was fatal because success in such an action depends upon the reputation of the mark denoting the goods of a particular business.

35. Lord Reid made the point (at 7) that the appellant during the licence had not controlled or exercised any power to control the manufacture or sale of the machines or given any notice that they had any connection with the machines. Had these steps been taken, the appellant might have developed a reputation in connection with the machines. The respondent relies on Lord Reid's comment to support a submission that, in the absence of provisions in the Licence Agreements providing for quality control and supervision by the appellant in this case, the name "Tin Tin Daily News" has ceased to be distinctive of the appellant. This submission ignores the fact that here we are concerned with one business with which the name is associated.

36. More to the point are the comments of Viscount Simonds (at 5) :

"If a trader sells under licence an article by a name which has already become distinctive of his licensor, it may well be difficult, if not impossible, for him, when for any reason the licence has expired, to prove that the name has ceased to be so distinctive. But, so far as a passing-off action is concerned, this appears to me to be due not to the importation of any equitable doctrine but to the sheer difficulty of proof. It may be that the terms of the licence expressly or impliedly deny to the licensee the right to use the name, but that again has nothing to do with a passing-off action. If he breaks his contract he can be sued without proof of passing-off."

37. The respondent seeks to overcome the appellant's submission that here we are confronted with a single business carried on under a particular name rather than two separate businesses contesting use of a single name by suggesting that, even here, there are two separate businesses, namely the appellant's and the respondent's. That is not so. There is but one business and it is being conducted by the respondent. That is what para.11 of the proposed amended defence alleges. The allegation is that the respondent was licensed to operate the appellant's business, that it continued to operate that business and that in course of time that business became the property of the respondent to the exclusion of the appellant. The paragraph does not allege that there are two separate businesses.

The mutual mistake point

38. Mr Prescott QC conceded that there were difficulties with this proposed defence. He was right to do so. When the parties are in full agreement on the terms and subject of their contract, neither can set up the individual mistake of one party or the mistake of both parties to invalidate the agreement. As Denning L.J. said in Frederick E. Rose (London) Ltd v. William H. Pim Jnr & Co Ltd [1953] 2 QB 450 at 460 :

"Even a common mistake as to the subject matter does not make it a nullity. Once the contract is outwardly complete, the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground : see Solle v. Butcher [1950] 1 KB 671 at 691."

No such ground is pleaded here.

39. The application for leave to amend fails because the proposed amendments disclose no arguable defence.

40. I would allow the appeal to make the orders which the parties are agreed ought to be made in the event of the appeal being wholly successful. These are (i) that the orders of the Court of Appeal are set aside; (ii) that the order of the judge dated 3 June 1999 as amended by his order of 8 June 1999 is restored subject to the substitution for the sum of HK$2,700,000 shown in paragraph 2 of the order of 3 June 1999 of the sum of HK$6,600,000; and (iii) that the respondent do pay to the appellant its costs of the appeal to this Court and of the appeal to the Court of Appeal.

Chief Justice Li :

41. The Court unanimously allows the appeal to make the orders which the parties are agreed ought to be made in the event of the appeal being wholly successful. These are (i) that the orders of the Court of Appeal are set aside; (ii) that the order of the judge dated 3 June 1999 as amended by his order of 8 June 1999 is restored subject to the substitution for the sum of HK$2,700,000 shown in paragraph 2 of the order of 3 June 1999 of the sum of HK$6,600,000; and (iii) that the respondent do pay to the appellant its costs of the appeal to this Court and of the appeal to the Court of Appeal.