TECH GARDEN ASIA LTD v. YUNEEC INTERNATIONAL CO LTD

HCMP 2421/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2421 OF 2015

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JUDGMENT
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Introduction

1. The parties’ dispute arose out of an agency agreement under which the plaintiff (“P”) was appointed the exclusive distributor for radio-controlled model aircrafts and drones (“Yuneec Products”) supplied by the defendant (“D”).  

2. The Yuneec Products were alleged by P to have included an original equipment manufacturer (“OEM”) product called Chroma Camera Drone (“Chroma Products”).

3. P issued the originating summons in these proceedings on 29 September 2015 (“OS”) to seek an injunction restraining D from, among other things, selling the Yuneec Products other than through the agency of P in Hong Kong, Taiwan and Macau, until 20 April 2016[1] or the handing down of the decision in arbitral proceedings to be commenced in Hong Kong, whichever is earlier.

4. One day after P issued the OS, P issued an inter partes summons seeking interim injunctive relief until judgment in this action or further order (“Interim Application”).  The Interim Application came before this court on 9 October 2015 (“Interim Hearing”), and was opposed by D. After hearing respective Counsel for the parties, this court declined to grant any interim relief  but gave directions for a substantive hearing of the OS be fixed on an early date and gave directions for filing of  further evidence.  The substantive hearing took place before this court on 10 November 2015 (“Substantive Hearing”).

5. P  alleged two breaches by D of a Chinese agency agreement dated 22 April 2015 (“Agency Agreement”), namely in :

(i) bypassing P in the direct sale and distribution of Chroma Products  in Taiwan; and

(ii) bypassing P in directly dealing with Zeta Limited (“Zeta”), one of P’s dealers/retailers of Yuneec Products, in Hong Kong.

6. P decided not to proceed with its application in respect of the Zeta matter at the Interim Hearing, and at the Substantive Hearing.

7. Counsel Mr Justin Lam appeared for P, and Mr Mike Lui appeared for D.

Brief background

8. P is a company incorporated in the British Virgin Islands, and is said to be a professional sales company (專業銷售公司).

9. D is a company incorporated in Hong Kong and is part of the Yuneec Group, which is said to be a world leader in electric aviation, with many years of experience in the research, development, manufacture and sales of electric aviation products including “hobby” aviation products such as drones. 

10. According to P, on 25 February 2015, it entered into a first agreement with D pursuant to which P was appointed as the exclusive distributor of the Yuneec Products.  D said it did not have a copy of this earlier agreement and claimed that it was in dubious circumstances that business relationship between P and D had started. 

11. P had so far not produced a copy of this earlier agreement but P did produce a dealership agreement entered into with Zeta dated 25 February 2015 in relation to Yuneec Products for a period of one year until 24 February 2016[2].  In this dealership agreement, P was stated to be the sole distributor of Yuneec Products in Hong Kong, Macau and Taiwan.  This provided some support to P’s claim that there was an earlier agreement.

12. For present purposes, P was relying on the Agency Agreement which, on P’s own case, had superseded the earlier agreement. Under, the Agency Agreement, P’s exclusive distributorship of Yuneec Products was extended to 20 April 2016.

13. P alleged that soon after the Agency Agreement was entered into, there were problems with D in P marketing Yuneec Products, whereas D alleged that P had failed to meet the sales forecast and that P had been slow in developing more channels for the sale of the Yuneec Products.  They denied each other’s allegations.

14. Thereafter, P said it then discovered the two breaches by D of the Agency Agreement, which led to P issuing the OS and also the Interim Application.

15. Clause 11 of the Agency Agreement provides for arbitration in Hong Kong. P has commenced arbitration against D on 8 October 2015[3].

D’s alleged breach in relation to Zeta

16. Although P decided not to proceed with its application concerning Zeta, I will set out briefly P’s allegations in relation to Zeta, just to complete the picture.

17. According to P, it paid a visit to Zeta’s shop on 17 August 2015 and that such visit revealed that D had approached Zeta direct informing them that Zeta should bypass P and directly purchase Yuneec Products from D because P was no longer the sole agent of Yuneec Products[4].

18. Shortly thereafter, P received a letter of termination dated 19 August 2015 from D to P (“Termination Letter”) in which D had made some serious allegations against P.  It was not disputed that the Termination Letter led to 2 meetings between P and D on 21 August 2015 and 27 August 2015 (collectively “2 Meetings”).  P had made a recording of both the 2 Meetings and had produced hand written transcripts of these meetings.

19. Although D said some of the matters which P said were discussed during the 2 Meetings were taken out of context, the following matters were not really disputed by D:

(i) the parties needed to improve on their communications ;

(ii) D agreed to issue a notice to Zeta confirming that P’s exclusive distributorship had not ceased;

20. The  “triggering  events” said to have led to P issuing the OS[5] was an email from Zeta on 11 September 2014 to P copied to D containing complaints about P, and D’s failure to issue the agreed notice to Zeta to confirm that P’s exclusive distributorship.  D’s case was, however, that there was no deadline imposed by P as to when to issue the notice.  The day before the Interim Hearing, Mr Danny Tsang, the Assistant to the Chief Executive Officer of the Yuneec Group filed an affirmation on behalf of D and, among other things, explained the delay in issuing the notice to Zeta, and further confirmed that D had issued the required notice to Zeta on 5 October 2015.

21. It was in light of the above that P decided not to proceed with its application in relation to Zeta.

D’s alleged breach in relation to the Chroma Products

22. This matter seemed first came to light  on about 27 July 2015, when D informed P by skype that it planned to ship to Taiwan the Chroma Products produced for Horizon Hobby[6].  Horizon Hobby is understood to be a retailer with its headquarters in USA.

23. There was a series of emails between the parties which were produced in 4 separate batches:

(i) from 28 July 2015 12:50 pm – 29 July 2015 4:55pm (“1^st Batch”)[7]

(ii) from 29 July 2015 5:02 pm – 5:37:51pm (“2^nd Batch”)[8]

(iii) from 28 July 2015 12:50pm – 30 July 2015 5:49pm (“3^rd Batch”)[9]

(iv) from 7 August 2915 11:09:32 – 10 August 2015 12:52pm (“4^th Batch”)[10]

24. It was D’s case that through the above email communications, as early as about end of July 2015 P had knowledge and consented to the import of Chroma Products into Taiwan.  In fact, it was D’s initial case that P had assisted in such import.

25. P claimed that it was only on about 17 September 2015 that it discovered from Horizon Hobby’s website that Chroma Products were being sold in Taiwan through Horizon Hobby behind P’s back and that there are currently 5 local distributors in Taipei for Chroma Products .

The Law

26. P’s application is made under section 45(2) of the Arbitration Ordinance (Cap 609), which provides that:

“On the application of any party, the Court may, in relation to any arbitral proceedings which have been or are to be commenced in or outside Hong Kong, grant an interim measure.”

27. Mr Lam also referred the court to Muginoho Co Ltd v Vimiu HK Co Ltd, unrep, HCMP 107/2012, 24 February 2012 in which M Chan J had referred to the above section and continued the interim injunction in aid of the Japanese arbitration proceedings, subject to a few variations.

28. As submitted by Mr Lam, the applicable principles for an injunction in aid of arbitration in Hong Kong are the same as interlocutory injunctions pending resolution of court disputes: see eg Prema Birkdale Horticulture (Macau) Ltd v Venetian Orient Ltd[2009] 5 HKLRD 89; Eastman Chemical Ltd v Heyro Chemical Co Ltd (No 2) [2012] 3 HKLRD 307, and in the present case, the principles in American Cyanamid Co and Ethicon Ltd [1975] AC 396 are applicable.

29. There is no dispute by Mr Lui on the above general principles.

The Issues

30. D does not contest this application on the ground that there is no serious issue to be tried as to whether Chroma Products fall within the Yuneec Products covered by the Agency Agreement.

31. As set out by Mr Lui in his skeleton submissions, D opposes the application on the following grounds:

(i) P has failed to show by way of credible evidence that its alleged loss cannot be adequately compensated by damages;

(ii) P has failed to explain satisfactorily the delay in seeking the injunction against D ;

(iii) The unjustified delay means that the status quo has shifted, namely the status quo is that at the time of commencement of these proceedings Chroma Products had already been imported into and sold in Taiwan by Horizon Hobby for at least 2 months.

The Evidence

32. The Business Development Manager of P Mr Lee Kin Lai had filed a total of 3 affirmations in support of the OS, the Interim Application and/or in reply to affirmations filed on behalf of D.  P’s sole shareholder and director Mr Mok Tsan San had filed an affirmation in to provide a personal undertaking as to damages, on behalf of P.

33. Mr Danny Tsang, the Assistant to the Chief Executive Officer of D, had filed 2 affirmations on behalf of D.

Serious Question to be tried

34. The serious question to be tried posed by Mr Lam is whether D has breached the Agency Agreement by directing/permitting/allowing the distribution of Chroma Products in Taiwan otherwise than through the agency of P.

35. Mr Lam accepts that the grant of the injunction may be said to finally dispose of the matter as the Agency Agreement only lasts until 20 April 2016 but he relies on what was said by Cheung CJHC in Lai Hoi Ping and anor v Persons Occupying and others, unrep, HCMP 2975-2976/2014, 15 November 2014, and submits that this simply means that the court would pay a higher regard to the merits of the claim.

36. In Lai Hoi Ping, Cheung CJHC has said that there are undoubtedly authorities which say that in cases where the grant or refusal of an injunction would in effect dispose of the action finally the court will have more regard to the prospect of success; but it should be firmly borne in mind that this higher regard to the merits of the case is but one factor in the consideration of the balance of convenience[11]. 

37. One of the main issues at the Interim Hearing was whether P had assisted in the import of the Chroma Products into Taiwan.  Mr Lui accepted at the Substantive Hearing that on the evidence whether there had been actual assistance on the part of P was not clear, but it was D’s case that P knew and consented to the import as early as about end of July 2015, and that there had been unjustified delay in P issuing the OS and the Interim Application.

38. The 1^st Batch of emails indicated that on 28 July 2015, P had been informed by D that Horizon Hobby would be shipping its Chroma series to Taiwan and P had pointed out to D that this seemed to be in conflict with the Agency Agreement.  D replied to ask P to understand the relationship between D and Horizon Hobby, and that D could not do anything on the issues and that D had to provide the Horizon Hobby with the necessary Taiwan National Communications Commission certificate (“NCC Certificate”) for such import.  D was at that time asking P to help to allow Horizon Hobby to use P’s NCC Certificate for the import and D indicated that it was willing to share P’s 50% application/testing fee for the NCC Certificate.

39. This brought a reply from P on 29 July 2015 4:55pm reiterating that P signed the Agency Agreement with D and not Horizon Hobby, and that it was D’s obligation to ensure that the Agency Agreement was not breached, and that P was concerned how D would protect P’s interest in Taiwan if there were other Yuneec Products sold in Taiwan but not distributed through P.  In the same email, P explained that it was not a matter of the cost for the NCC Certificate but how D could use it to import Chroma Products.

40. The above was followed by 2 emails in the 2^nd Batch, namely an email from D on 29 July 5:02pm which asked P to help issue the invoice regarding the NCC application[12], and a reply from P at 5:37:51pm by simply sending a NCC Certificate application fee invoice no 000183 (“Invoice”).  The Invoice was dated 29 July 2015 and was for an amount of TWD 95,000, being 50% for the NCC Certificate fee.  The Invoice also contained P’s bank account details.  It was however not signed.

41. D’s reply of 30 July 2015 at 5:49 pm is found in the 3^rd Batch, which stated that in order to make the payment, D’s accounts requested the receipt or invoice from NCC for the certificate application fee, and asked P to send the same[13].

42. There was no response from P.  The 4^th Batch contained 2 emails[14].  The one from D to P on 7 August 11:09:32 stated as follows:

“Regarding the Horizon Chroma import to Taiwan, we need an NCC approval certificate with Horizon’s name on it.

Would you please help to follow up this case.  Thank you”

43. D’s reply on 10 August 2015 12:52pm was:

“We like to help you. Please clarify:

1) Which Taiwan importer be authorized?

2) Which NCC to be authorized?

We have 4 NCC:

……

For Chroma, I don’t know how they will make use of our NCC.”

44. Thereafter there was no response from D, and the above email on 10 August 2015 seemed to be the last communication the parties had on the matter of Chroma Products.

45. It can be seen from the emails that the parties’ relationship was still amicable at end of July or early August 2015.  As said above, P had reminded that D should not breach the Agency Agreement in relation to Horizon Hobby shipping Chroma Products to Taiwan and D had said it could not do anything on the issue, and asked P to understand D’s relationship with Horizon Hobby, and that D had to provide the NCC Certificate to Horizon Hobby.

46. At the Interim Hearing, based on Mr Tsang’s 1^st affirmation, Mr Lui was submitting that the evidence of P’s assistance in the import included that D had paid the Invoice.  After the Interim Hearing, Mr Tsang filed his 2^nd affirmation.  It transpired that D in fact had not paid the amount on the Invoice, and Mr Tsang explained the reason that the Invoice was not paid was that it had not been signed by P, and that the parties did not follow up on the matter in the end.

47. Anyway, Mr Lee had in his 3^rd affirmation in reply explained that the Invoice was only a draft, which was neither signed nor chopped by P, and that it was not issued to obtain payment from D, and that it was sent because D had wished to obtain a quotation for the NCC Certificate application costs[15].

48. Mr Lam in his skeleton submissions criticized D was guilty of “knowingly distorting the email correspondence” and that P had never assisted D in importing Chroma Products.

49. I accept that from the emails, even though the 4^th Batch of emails showed that P was not unwilling to help D with the NCC Certificate in relation to Horizon Hobby’s import of Chroma into Taiwan, there was no sufficient evidence that there had been any actual assistance on part of P for such import.  

50. Mr Lee’s explanation for the 4^th Batch of emails P’s email was sent only as a gesture of goodwill on part of P to “begin negotiations with D about the import of Chroma into Taiwan”. 

51. Although the emails did not in fact show that the parties would “begin negotiations” about the import of Chroma into Taiwan, bearing in mind the relationship of the parties at the time, and also Clause 6 of the Agency Agreement provides that D undertakes and warrants that during the parties’ co-operation, for whatever problems which have occurred, D, in the spirit of equality and amicable negotiation, will first communicate with P to explore a resolution of the problem[16], Mr Lee’s explanation is not unbelievable.

52. I accept, however, that as early as about 27 of 28 July 2015, P was informed by D about Horizon Hobby’s intended import of Chroma Products into Taiwan.

53. There was no follow up on the matter after 10 August 2015.  As seen earlier, about a week later, the Zeta matter then came up.  This was followed shortly thereafter by the Termination Letter, followed by the 2 Meetings.  It was not disputed that neither P nor D raised the matter of the import of Chroma Products into Taiwan during the 2 Meetings.  They seemed to be pre-occupied with the dispute in relation to Zeta and discussions on continuing their co-operation under the Agency Agreement. The 2 Meetings were fruitful.  After 27 August 2015, the parties continued their co-operation under the Agency Agreement and D resumed its supply of Yuneec Products to P for exclusive distribution to retailers in Hong Kong.

54. It was not disputed that P did not take any steps in relation to the Chroma Products until about end of September 2015 when the OS was issued.  The triggering event leading to P taking legal action was the Zeta matter, and it was P’s case that while preparing its case, on about 17 September 2015, it discovered the actual import of Chroma Products into Taiwan behind P’s back.

55. There was no evidence to contradict Mr Lee’s evidence that it was only on 17 September 2015 that P discovered the actual import of Chroma Products, and that this was followed by the issue of the OS 12 days later.  Having considered all those events in August, I do not see sufficient evidence of any unjustified delay on the part of P to take legal action in relation to the Chroma Products.

56. Further, in my view, P’s case is consistent throughout compared to D’s.  D’s case is rather confusing. 

57. D’s solicitors had written to P’s solicitors on 5 October 2015 referring to the OS and setting out reasons why there was no proper basis for P to take out the Interim Application[17].  Most of this letter concerned the Zeta matter, but in relation to the Chroma Products, it was pointed out that the Chroma Products were sold to Taiwan with P’s assistance, and D had asked in the letter that if P considered that D’s “direct distribution” of the Chroma Products to Taiwan was a breach of the Agency Agreement, how (sic) would P assist D in such delivery. 

58. There was no actual denial by D in the above letter of its direct distribution of Chroma Products to Taiwan, and all D was saying was that it was with the assistance of P.  There was no mention of Horizon Hobby, although D’s solicitors did refer to the 1^st Batch of emails produced by P.

59. 3 days later and the day before the Interim Hearing, on 8 October 2015, Mr Tsang’s 1^st affirmation was filed.  D’s case at that time was that OEM products such as the Chroma Products should not be covered by the Agency Agreement or sold through P because these were products strictly belonging to other companies, and that the Chroma Products belonged to Horizon Hobby and Horizon Hobby wanted to import them to Taiwan, and asked D to help.  D then asked P to help, and Mr Tsang said since about end of July 2015, the Chroma Products had been imported into Taiwan with the assistance of P and sold by Horizon Hobby in Taiwan[18].  Mr Tsang had in his 1^st affirmation also produced figures of total gross sales of Chroma Products by D to Horizon Hobby from May to September 2015, which were global figures and not only Taiwan[19].

60. To summarise, D’s initial case at the Interim Hearing was, among other things, that: (i) Chroma Products were OEM products not covered by the Agency Agreement; (ii) Chroma Products belonged to Horizon Hobby; (iii) the total gross sales figures provided were of Chroma Products sold by D to Horizon Hobby globally including Taiwan from May to September 2015; (iv) in the limited time available, D had not been able to provide figures of net profits made by D in those months; (v) P had assisted in the import of Chroma Products sold by Horizon Hobby in Taiwan.

61. After the Interim Hearing, Mr Tsang filed his 2^nd affirmation and D’s case then changed completely.

62. What Mr Tsang said in his 2^nd affirmation was that Chroma Products were placed by Horizon Hobby direct with Firebird Technology Co Ltd (“Firebird”), which according to Mr Tsang is a company within the Yuneec Group for OEM production[20].

63. According to Mr Tsang, the modus operandi has been that when an order is placed with Firebird by Horizon Hobby, Firebird will then cause the factory Good Power International (China) Co Ltd (“Good Power”) which shares the same address as Firebird to produce the  products.  After production, Good Power would ship the finished products to Horizon Hobby according to instructions given by Horizon Hobby. 

64. Mr Tsang had produced a copy of the purchase order placed by Horizon Hobby on 27 March 2015 with Firebird[21] and an air waybill dated 5 June 2015 bearing Good Power as shipper, for Chroma Products to be shipped to Chicago from Pudong, Shanghai[22] (“Air Way Bill”).  Mr Tsang had also produced a copy of the list of export of products dated 6 March 2015 bearing Good Power’s name therein as the handling office (“Export List”)[23].

65. Mr Tsang’s evidence was that Horizon Hobby was/is the owner of the Chroma trademark and he had produced emails from Horizon Hobby and search record from the United States Patent and Trademark Office to show that Horizon Hobby had in fact filed to register the word mark “Chroma” on 27 February 2015[24]. 

66. It was thus said by Mr Tsang that there was no way that D could be said to have “included” Chroma Products as Yuneec Products covered by the Agency Agreement as Chroma Products were never D’s products at all[25].

67. Mr Tsang in his 2^nd affirmation further tried to explain about the figures of gross sales of Chroma Products said to be by D to Horizon Hobby in the months from May to September 2015, provided by him in his 1^st affirmation.  He said upon further enquiries with the responsible officers of D, he was told that he had “mixed up” the sales made by D and the sales by other companies within the Yuneec Group, and that D itself in fact did not handle any part of the production or distribution of the Chroma Products at all[26].

68. After the filing of Mr Tsang’s 2^nd affirmation, D’s solicitors had written to P’s solicitors on 26 October 2015, stating that as it was D’s case that it did not handle any part of the production or distribution of the Chroma Products, P’s application in the OS was “superfluous”[27].

69. At the Substantive Hearing, this court had asked the parties to clarify as to who actually imported the Chroma Products into Taiwan.  Mr Lui responded by saying that neither P nor D knew who actually imported the Chroma Products into Taiwan.  It was also Mr Lui’s submission that there was no basis for P to say it was D which imported the Chrome Products into Taiwan.

70. Mr Tsang was the Assistant to the CEO of Yuneec Group, and was said to be responsible for managing and supervising matters relating to the operations of D. 

71. There was no attempt on D’s part to arrange for any of its “responsible officers” to make an affirmation to explain the “mix up”.  In any event, whether “mix up” or not, it is clear from what Mr Tsang had said in his 2^nd affirmation that the gross sales figures supplied by him in his 1^st affirmation of Chroma Products to Horizon Hobby in the months from May to September 2015 had included sales figures in Taiwan.  Mr Tsang was trying to explain that the sales were by other companies within the Yuneec Group and not D.  From his evidence, I would have thought which other companies within the Yuneec Group had been supplying the sales of Chroma Products to Taiwan should be within the knowledge of D.  Mr Lam said he understood from Mr Tsang’s evidence that it was Firebird which was the importer and Firebird has the same shareholder and director as D.

72. Clause 4 of the Agency Agreement provides that P is to be protected by D in respect of all market rights in the 3 areas of co-operation, namely Hong Kong, Macau and Taiwan, and that the sales of Yuneec Products within these 3 areas shall be directly and indirectly through P. 

73. Clause 6 of the Agency Agreement further sets out the undertakings of D, and D has undertaken and warranted that it is the sole legal owner of all rights and benefits of Yuneec Products and that it undertakes to be bear full responsibility for the cooperation in relation to the Yuneec Products.

74. I accept Mr Lam’s submission that D cannot evade liability for breach by saying it is not D but Firebird or another company in the Yuneec Group which was/is the importer.

75. Ownership of the trademark of “Chroma” does not mean that the Chroma Products are not Yuneec Products which fall within the provisions of the Agency Agreement.  Mr Tsang’s own evidence that the Chroma Products bear the “Yuneec” brand as well[28].

76. There is no sufficient evidence at this stage that the Agency Agreement does not cover OEM products.  In fact, Mr Tsang had also produced an invoice from Firebird, the company for OEM production, to D for Yuneec Products which were in turn sold by D to P[29]. 

77. As mentioned earlier, D recognized that whether Chroma Products are covered by the Agency Agreement is a serious issue to be tried. 

78. Although the evidence indicated that P was informed by D the intended import of Chroma Products into Taiwan through Horizon Hobby, P having been informed or P’s knowledge of such intended import does not necessarily mean that there had been any waiver or consent on P’s part to D importing or distributing Chroma Products directly to Taiwan, otherwise than through the agency of P.

79. Mr Lam submitted that D must mount a very high threshold to establish waiver on the part of P.  As summarised by Wilken and Ghaly, The Law of Waiver, Variation and Estoppel (3^rd ed) at 4.45, waiver requires (1) an unequivocal representation by X either by words or conduct that it will forgo certain rights and that (2) X makes the representation when it is aware of the facts that give rise to the rights which are being forgone, of the right to forgo those rights and the connection between the two.

80. I accept Mr Lam’s submission that the requirements are not satisfied in the present case.  There is no sufficient evidence that P had waived or consented to D’s breach, if any.

81. So far as merits of P’s claim is concerned, I accept Mr Lam’s submission that even with a higher regard to the merits, P has made out a case that there is at the very least a serious issue to be tried, namely that D has breached the Agency Agreement by directing/permitting/allowing the distribution of Chroma Products in Taiwan otherwise than through the agency of P.  In fact, I would add that in my view, P has demonstrated a strong prima facie case.

Inadequacy of Damages and Balance of Convenience

82. As said by Cheung CJHC in Lai Hoi Ping, a higher regard to the merits is one factor in consideration of the balance of convenience.  Mr Lam submitted that in cases involving exclusive distributorships, the courts have repeatedly held that the balance of convenience lies in favour of enforcing the agreements and maintaining the status quo, lest the supplier be able to take unfair advantage of the distributor’s efforts in building up a market and brand name for the products.

83. Mr Lam referred the court to the case of Decro-Wall International S A v Practitioners in Marketing Ltd [1971] 1 WLR 361.  This case involved an oral exclusive distributorship contract, which was held to be breached by the plaintiffs in appointing other concessionaries. The plaintiffs provided undertakings in lieu of the imposition of a final injunction.  The Court of Appeal held inter alia that the plaintiffs ought not to be released from their undertakings.  Salmon LJ (as he then was) stated that:

“For my part I think that the judge would have been plainly right in granting such an injunction and that therefore the plaintiffs ought not to be released from this undertaking. If the plaintiffs were released from it, they and the concessionaires they appointed in breach of their contract with the defendants would be left free to take advantage of this breach and enjoy the fruits of the time, effort and money which the defendants have expended during the last three years in creating and building up a thriving market for the plaintiffs’ goods in the United Kingdom. Damages in such a case are very difficult to prove and I do not believe that they would by themselves be an adequate remedy. To release the plaintiffs from this undertaking would therefore be a positive encouragement to contract-breakers. No doubt the plaintiffs cannot be compelled to continue to supply the defendants until the termination of the contract. So far, however, they have continued to do so. They could now, of course, cut off supplies before July 1971. The undertaking however ensures that they could obtain no advantage from adopting such a course. Indeed if they did so they would probably lose the benefit of the market built up for them by the defendants in the United Kingdom and increase the damages which are to be assessed by the official referee.”[30] (Emphasis added)

84. In the above case, Sachs LJ also stated that:

“It would indeed have been wrong for the courts to allow the plaintiffs freedom in breach of their obligations to inflict on the defendants a ruinous blow – one which would incidentally break up their business in a way for which damages can never provide full compensation”[31].

85. Mr Lam further referred to the case of Evans Marshall & Co v Bertola SA (No 1) [1973] 1 WLR 349, which concerned the grant of an interlocutory injunction to enforce a sole agency agreement.  In relation to balance of convenience, Sachs LJ held  that:

“In the instant case, as in that case, an attempt is being made which, if unjustified, would deprive the plaintiffs of the benefit of having built up a name for Bertola sherry with the aid of expending the best part of half a million pounds for that purpose in a dozen years.

In my judgment, this is accordingly a case where there is everything to be said for maintaining the status quo up to trial – which ought, if the parties use proper efforts, to commence in not more than four months from now.  Whatever its result as regards liability, there is nothing to be said at this stage in favour of abrupt and disruptive changes in trading methods and policy[32].”

86. Mr Lam submitted that the observations set out above apply with equal force to the present case for the following reasons set out in his skeleton:

(i) P had invested a significant amount of time, effort and funds into developing the market for Yuneec Products.  The only way in which P would reap the reward from such marketing efforts is to earn profits from the price difference for the sale of Yuneec Products as exclusive distributor. If D were allowed to bypass P in Taiwan in respect of Chroma Products, P’s efforts would go unrewarded.  The loss to P and its market share in Taiwan would be very difficult to prove. Further, given the uncertain and contingent nature of P’s remuneration under the Agency Agreement[33], it would be impossible to calculate the gain which P would have received had Chroma Products been distributed in accordance with the Agency Agreement.

(ii) D would be able to take advantage of its own breach and enjoy the fruits of the time, effort and money which P had expended to build up a name and market for Yuneec Products, which ought to be shared with P under the terms of the Agency Agreement by way of discounted sales.

(iii) The sale of Chroma Products would inevitably decrease sales of other Yuneec Products in Taiwan such as Q500 products.  Consumers would regard Chroma Products as one of the products in the Yuneec series.  It is unlikely that they would purchase both Chroma Products and Q500 products at the same time.

(iv) The loss to D, if the injunction were wrongly granted, would not be significant.  D could continue to sell Chroma Products through P in Taiwan, enabling P to receive its due reward pursuant to the Agency Agreement for marketing Yuneec Products in Taiwan.  Insofar as D would allege that it did not need to share any of the profits with P by way of discounted sale if the Agency Agreement were validly terminated, such loss would be easily calculable and could be compensated for in damages.

(v) D had failed to provide any financial information on its sales of Chroma Products in Taiwan, despite previously indicating that it would do so[34], and this would suggest that the loss to D as a result of the injunction would not be significant.

(vi) Further, Mr Mok, the sole shareholder and director of P, is willing to give an undertaking in damages to D in the standard form, and he has more than sufficient assets to honour the undertaking.

87. Mr Lui argued that the above reasons have no merit, and his submissions were:

(a) In relation to (i) above, P relied upon difficulty or impossibility in calculating the gain which it would have made had Chroma Products been distributed pursuant to the Agency Agreement.  Such submission was erroneous since difficulty in or impossibility of quantifying financial loss would not mean inadequacy of damages as compensation for the loss.  If P could not quantify financial loss, this would mean that it could not discharge its onus of proof.  P was not contending that the financial loss it suffered was so huge that a figure could not be given.  It also did not say that there would be loss of non-monetary nature that is unquantifiable.

(b) As to the alleged costs spent by P under the Agency Agreement, they had already been quantified.  They could be compensated by damages and it was not said that D could not pay.

(c) P’s submission in (ii) above had nothing to do with the question of whether P’s loss (as alleged) could be adequately compensated by damages.  It was analytically wrong to lump together factors going to “overall justice” with arguments relevant to the question of adequacy of damages.  If P could not cross the first hurdle of demonstrating on the evidence that its loss could not be adequately compensated by damages, it would not be necessary to further consider the question of “justice” under the established American Cyanamid analysis.

(d) As for (iii), there was no evidential basis for the assertion that “The sale of Chroma would inevitably decrease sales of other Yuneec Products in Taiwan such as Q500 products.  Consumers would regard Chroma as one of the products in the Yuneec series.  It is unlikely that they would purchase both Chroma and Q500 products at the same time”.  In fact, this speculation highlighted the fallacy of P’s case: P was not seeking an injunction to stop the sales of Chroma Products in Taiwan, instead P wanted Chroma Products to be sold through it as the sole distributor; if P were right with this point about the “competing” sales of Chroma Products and other Yuneec Products, it would be difficult to see what loss P would suffer in the present situation (ie with Chroma Products sold by Horizon Hobby) that it would not equally suffer in the alternative situation (ie with Chroma Products sold by P itself), since in both situations the sales of Chroma Products would “inevitably” reduce the sales of other Yuneec products.  P’s submission was thus flawed.

(e) As for (iv) and (v) above – These points were no longer relevant because the fact was that Chroma Products were not sold by D itself but Horizon Hobby and D had not been involved in their manufacturing and sales.

88. So far as the above final point made by Mr Lui, as mentioned earlier, I am of the view that D cannot simply turn around now and say D had/has not been involved in the manufacturing and sales of Chroma Products in Taiwan, and that it was some other companies within the Yuneec Group, and that D had/has nothing to do with such sales.  There are obligations, undertakings and warranties on D’s part under the Agency Agreement to ensure that that the sales of the Yuneec Products within the 3 areas will be directly or indirectly through P.

89. On the “competing” sales of Chroma Products and other Yuneec Products point, I accept that there was no sufficient evidence that the sale of the Chroma Products would inevitably decrease sales of other Yuneec Products, but this does not necessarily mean that P would suffer equally in the present situation as in the case that Chroma Products are sold through P.  This is because in the latter case, P would be earning profits from the price difference of the Chroma Products if such were sold through P.

90. P said it had invested a significant money, time and effort into the marketing of Yuneec Products.  The evidence (including what was said by P and not denied by D during the meeting on 27 August 2015[35] ) would support P’s case that it had been distributing Yuneec Products since about late February 2015.  By about August 2015, P would have invested in the marketing of Yuneec Products for at least about 6 months.  This is not a short period in light of the total agency period.  Although Clause 2 of the Agency Agreement provides that, 90 days prior to the expiry, in absence of any special circumstances, the parties shall negotiate with a view to continue their co-operation, there is no guarantee that the Agency Agreement will be extended upon expiration, particularly in light of the parties’ present relationship.  The only way P could be rewarded is from profits from the price difference for the sale of Yuneec Products within the agency period.  Under the Agency Agreement, D was to give P a discount of not less than 40% for the Yuneec Products.  As the discount is not a fixed but varying amount, I accept that there would be difficulty in calculating the gain which P would have received had Chroma Products been sold through P.

91. Difficulty in calculating the gain or loss does not necessarily mean inadequacy of damages as compensation for the loss.  It was, however, not disputed by D that P had already invested “significant money, time and effort” into the marketing of Yuneec Products, which was its obligation under Clause 3 of the Agency Agreement.  Actual costs had been quantified by P, but P had also mentioned time and effort which would be unquantifiable.  Even though it would appear that D did not find P’s performance satisfactory and there was the Termination Letter, notwithstanding D’s complaints and the Termination Letter, after the parties had met and discussed during the 2 Meetings, the parties agreed to continue their co-operation under the Agency Agreement after 27 August 2015.

92. As pointed out by P in the email of 28 July 2015 12:50 pm that the Chroma series were using “exactly ST 10/, CGO2/+, CGO3 with Yuneec brand name” and this was in conflict with the Agency Agreement. Those products referred to by P were/are on P’s NCC Certificates for P to import into Taiwan.  As further seen in the email 29 July 4:55pm P had again voiced its concerns as to how D would protect P’s interest in Taiwan if there were other Yuneec Products sold in Taiwan but not distributed through P.

93. Mr Lam submitted that granting of an injunction in respect of the Chroma Products only means that D, whether by itself or its officers, directors, employees, servants or agents or otherwise, cannot not sell or distribute Chroma Products otherwise than through the agency of P in Taiwan.  It does not mean that D cannot sell at all, and that the loss to D, if the injunction were wrongly granted, would not be significant, as D could continue to sell all Yuneec Products through P in the 3 areas until the expiration of the Agency Agreement.

94. As in the case of Decro-Wall and pointed out by Salmon LJ,  in the present case, D, if in breach of the Agency Agreement and if no injunction were to be granted, would be left free to take advantage of the breach and enjoy the fruits of the time, effort and money which P had invested in developing the market in Taiwan.  I am satisfied that in such a case damages would be difficult to prove and they would not by themselves an adequate remedy.

95. It was initially D’s case that the volume of sales between D and Horizon Hobby is substantial, and that the consequence of any injunction prohibiting the supply of Chroma Product to Horizon Hobby even for sales in Taiwan is unpredictable, and that if Horizon Hobby is to withdraw orders already with D of the OEM production of the Chroma Products, the financial loss is likely to be substantial.

96. However, D has now said there was a “mix up” and its case is that D did not handle any part of the production or distribution of the Chroma Products.  As D’s solicitors said in their letter of 26 October 2015, P’s application against D is “superfluous”.  If this is now D’s stance, it is not clear what financial loss, if any, D will suffer if the injunction were to be granted.

97. It has been said by Lord Diplock, among other things, in American Cynamid, that :

“Where other factors appear to be evenly balanced it is a counsel of prudence to take such measures as are calculated to preserve the status quo. If the defendant is enjoined temporarily from doing something that he has not done before, the only effect of the interlocutory injunction in the event of his succeeding at the trial is to postpone the date at which he is able to embark upon a course of action which he has not previously found it necessary to undertake; whereas to interrupt him in the conduct of an established enterprise would cause much greater inconvenience to him since he would have to start again to establish it in the event of his succeeding at the trial[36].”

98. What Lord Diplock had said about preserving status quo was in the context where other factors appear to be evenly balanced.  In my view, the factors in the present case tilt towards P for the reasons put forward by Mr Lam.

99. Further, in light of D’s present stance, it seems D is saying that P has issued the OS against the wrong party, but if this is so, it is not clear on what basis D is asking that the status quo be maintained.

100. Mr Lui had argued that due to P’s unjustified delay in issuing the OS after its knowledge of the intended sale, the status quo had shifted and that Chroma Products had already been imported into and sold in Taiwan by Horizon Hobby.

101. Mr Lui referred to the case Garden Cottage Ltd v Milk Board [1984] AC 130 where Diplock LJ had said[37]:

“The status quo is the existing state of affairs; but since states of affairs do not remain static this raises the query: existing when? In my opinion, the relevant status quo to which reference was made in American Cyanamid is the state of affairs existing during the period immediately preceding the issue of the writ claiming the permanent injunction, or, if there be unreasonable delay between the issue of the writ and the motion for an interlocutory injunction, the period immediately preceding the motion. The duration of that period since the state of affairs last changed must be more than minimal, having regard to the total length of the relationship between the parties in respect of which the injunction is granted; otherwise the state of affairs before the last change would be the relevant status quo.”

102. Mr Lui also referred to Graham v Delderfield [1992] FSR 313 where Dillon LJ had quoted the same passage above from Lord Diplock, and said further that it would seem that it must be the service rather than the issue of the writ that fixed the status quo where there was no letter before action and there was delay after the issue of the writ before service. 

103. In Graham, the plaintiff knew in April 1990 of the basis of his potential claim against the defendants and had available to him not only his own knowledge of matter but also information from another source.  In June 1990, the plaintiff first took legal advice but was told he had no legal remedy and that in August 2010, he managed to take photographs as evidence, and consulted other solicitors.  However, it was not until about end of October 2010 that he issued the writ, which was then not served until 20 November 2010 and at the same time applied for an interlocutory injunction.  The judge took into the significance of the delay in refusing to grant any interlocutory relief, but gave directions for a speedy trial.  The Court of Appeal agreed and held that the status quo was that at 20 November 2010, that the judge was entitled to take into consideration the significance of the delay, and dismissed the plaintiff’s appeal.

104. I have said earlier that there was no sufficient evidence of “unjustified delay” on the part of P. 

105. There was also no information as to when exactly the import and sale of Chroma Products began in Taiwan.  On the evidence, it would appear that at least by 10 August 2015, the parties were still communicating in relation to the use of P’s NCC Certificate, and it would appear that the import of Chroma Products into Taiwan had not yet started at that stage.

106. As I have mentioned, what Mr Tsang had said about the gross sales figures for Chroma Products would seem to have included Taiwan, but nothing had since been produced.  In particular, no figures had been produced for Taiwan.

107. D had not produced any evidence on when the import/actual sales of Chroma Products in Taiwan started, whether by D or any other company in the Yuneec Group or Horizon Hobby, nor the gross sales figures on any actual sales of Chroma Products in Taiwan as at the date of the issue of the OS, for the court to ascertain what is the status quo or to consider preservation of any status quo.

Conclusion 

108. Having considered all the above, it is my view that the balance of convenience tilts in favour of granting the injunction sought by P in relation to the Chroma Products in Taiwan and damages are not an adequate remedy.  I am thus prepared to grant an injunction to P in relation to the Chroma Products in Taiwan.

109. The scope of the injunction sought by P in the OS is not limited to the Chroma Products.  There was, however, no sufficient evidence or allegations that D had breached the Agency Agreement in relation to other Yuneec Products, or in the other areas apart from Taiwan.

110. I am therefore only prepared to grant an injunction in the terms as sought by P but restricted to the sale and distribution of Chroma Products in Taiwan.  This is on the basis of P’s and also Mr Mok’s personal undertaking as to damages.

111. So far as the application relating to Chroma Products, P is the overall successful party, I see no reason as to why costs should not follow the event.  This includes the costs of the Interim Application and the Interim Hearing. 

112. P has sought costs on indemnity basis.  Although D was wrong about P had assisted in the import of Chroma Products into Taiwan, there was no sufficient evidence that P/Mr Tsang was deliberately misleading the court.  I am not satisfied that D’s conduct or there are other circumstances which would justify the court imposing an order on indemnity basis.

113. As for the costs for the application in relation to Zeta, there was no letter from P to D to remind D of its agreement to send the agreed notice to Zeta after the 2^nd meeting on 27 August 2015.  Mr Lui submitted there was no justification in P taking out such application, that this part of P’s application was premature and unnecessary. 

114. However, it was not disputed that D did agree to send the notice, and even though there was no deadline agreed, it would be reasonable to expect D to send it shortly after the 2^nd meeting on 27 August 2015. 

115. P had produced an email from Zeta to P dated 11 September 2015, which was copied to D with Zeta listing out a series of complaints against P in relation to alleged problems over price reduction, charge-back, quotas and marketing[38].  Although P’s reply to Zeta was not copied to D, the email from Zeta copied to D should have alerted D or reminded D of its agreement to send the agreed notice to D that P remained the exclusive distributor of Yuneec Products.  Yet, D failed to do so, until 5 October 2015, after the issue of the OS and the Interim Application.

116. Having considered all the circumstances and the conduct of both parties, I am of the view that a reasonable and fair order would be no order as to costs.

117. In relation to apportionment of costs, Mr Lam proposed that the percentage of costs attributable to the Hong Kong part/Zeta part to be about 10 %.  There was no counter proposal by Mr Lui.  I find Mr Lam’s proposal reasonable and accept the same.

118. I will order costs to be summarily assessed and on paper.  P is to submit its statement of costs within 10 days, and D is to submit its list of objections within 10 days thereafter.

[1] The expiry date of  P’s sole distributorship in the agency agreement

[2] B:53

[3] B:252-263

[4] See para 26, B:25

[5] See para 43- 48, B:29-31

[6] See para 31, B:27

[7] B:104-105

[8] B:181-182

[9] B:273- 275

[10] B:277-278

[11] At para 10, pg 6

[12] B:181

[13] B:273

[14] B:277

[15] See para 16, B:246

[16] B:39

[17] B:313-314

[18] See paras 31-33, B:138-139

[19] See paras 34-35, B:139-140

[20] See para 7, B:228

[21] B:235

[22] B:236

[23] B:237

[24] See para 4, B:227, and also 230-233

[25] Para 8, B:228

[26] See para 6, B:228

[27] B:325

[28] See para 31, B:138

[29] B:240-241

[30] At pgs 371H – 372B-C

[31] At pg 378H

[32] At pg 382

[33] See Clause 4

[34] Para 34, B:139-140

[35] Bottom part, B:199

[36] At G-H, pg 408

[37] At B-D, pg 140

[38] B:116-117