SUPERBRANDS LTD v. ASIA INTEGRATED MEDIA LTD AND OTHERS

HCMP 559/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 559 OF 2008

----------------------

----------------------

----------------------

--------------------------

J U D G M E N T

--------------------------

I.  INTRODUCTION

1.  By Order dated 3 February 2009 I directed that an account be taken of the monies due between Superbrands on the one hand and the Respondents on the other.  The monies are pursuant to a 2004 and a 2006 Agreement.  Questions have arisen in the course of taking such account.  Having heard argument on those questions, I answer them below.

II.  DISCUSSION

A. Question 1: Should the Respondents account to Superbrands for the cash equivalent of benefits in kind received by way of barter?

2.  Under the 2004 Agreement Superbrands appointed the Respondents to promote and sell Superbrands’ products in certain Asian countries.  The products were essentially publications in which owners of leading brand names purchased pages to advertise their brands. 

3.  By the 2004 Agreement, Superbrands would pay to the Respondents a commission equal to 80% of the income received from the sale of Superbrands’ publications. 

4.  According to cl.3.12 of the 2004 Agreement, pages in the publications were to be sold to participating brands at a price which “should not be less than United States Dollars $6,000”.  But “the parties acknowledge[d] that this price was a recommended price only”.  There was “no obligation on the part of the [Respondents] to comply with that recommendation”.

5.  The 2004 Agreement was terminated and superseded by the 2006 Agreement.  But the 2006 Agreement provided that the terms of the 2004 Agreement would “to the extent relevant, form part of, and apply to, the transactions described in the [2006 Agreement].”

6.  The 2006 Agreement required the Respondent immediately to transfer to Superbrands “all amounts received by [the Respondents] from invoices raised” on “Unfinished Publications”. The latter were publications which had been started pursuant to the Respondents’ obligations under the 2004 Agreement, but which had not yet been completed at the time of the 2006 Agreement.  Upon receiving such amounts, Superbrands agreed immediately to transfer “a commission amount equal to 80% of the revenue (without set-off or deduction) derived from completed Unfinished Publications”.

7.  It is Superbrands’ case (as explained by its counsel Mr. Russell Coleman SC) that, in some instances, the Respondents allotted space in a relevant publication to an organisation in exchange (barter) for a benefit in kind (such as a free hotel room).  Mr. Coleman contends that, by the 2004 and 2006 Agreements, the Respondents must account to Superbrands for 20% of the cash equivalent of the benefits received in kind. 

8.  Mr. Coleman suggests that, in any event, benefits in kind were received in payment of invoices raised by the Respondents.  Superbrands should at least have 20% of those invoiced amounts.

9.  But the Respondents (by their counsel Mr. Roger Beresford) say that there is no duty to account for a number of reasons.

10.  Mr. Beresford points out that, in relation to publications covered by the 2004 and 2006 Agreements, no invoices were ever issued in respect of barter arrangements.  Such invoices as the Respondents may have issued in respect of barter transactions related solely to publications under earlier agreements between Superbrands and Chelsea Media (another venture of the 2^nd and 3^rd Respondents).

11.  Mr. Beresford observes that, by cl.3.12 of the 2004 Agreement, the Respondents were not required to charge an organisation any particular price in return for being allotted pages in a publication.  The Respondents were free to “buy” services from particular organisations for the purpose of promoting Superbrands’ products by allotting pages in a given publication to such organisations.

12.  Accordingly, the “barter” of pages for services was not analogous (Mr. Beresford argues) to earning income through the sale of space in publications.  It would be more accurate to characterise the barter as a cost of promoting Superbrands’ publications.  If so, the “benefit” obtained out of the barter should not be something to be accounted for as a cash revenue receipt.  The Respondents’ obligation under the 2004 and 2006 Agreements (Mr. Beresford stresses) is only to account for revenue income received.

13.  Mr. Beresford finally notes the uncontradicted affidavit evidence that Mr. Stephen Smith of Superbrands encouraged the Respondents on numerous occasions “to provide free participation in each project ... of major brands”.  In the single instance covered by the 2004 and 2006 Agreements which Superbrands has identified as having involved barter, the relevant organisation (Hourglass) was allowed to advertise for free in “Superbrands Singapore Volume 3” with the approval of Superbrands’ then Managing Director for Singapore.  No invoice was issued for that transaction.

14.  I do not agree with Mr. Beresford. 

15.  The effect of the 2004 and 2006 Agreements is that Superbrands is entitled to 20% of the gross revenue obtained from the sale of pages in the Unfinished Publications. The Respondents were to bear 100% of the costs of promoting the publications, presumably out of the 80% commission which they were to obtain from Superbrands.  If Mr. Beresford is correct, the result would be that, where there has been barter of publication space in return for some benefit for the purposes of promoting a publication, the cost of that promotional benefit would in part  be borne by Superbrands.  That transfer of the incidence of costs would run counter to the tenor of the 2004 and 2006 Agreements.

16.  In my view, it is irrelevant that the Respondents were under no obligation to sell publication space at any particular price. The point is that, if they allotted space to some organisation, they had to account for the revenue received for such space. 

17.  By the same token, it is irrelevant if the Respondents failed to invoice an organisation for such space, believing that there was no need to raise an invoice as the space was being traded for some promotional benefit.  It would have been more correct to raise an invoice even if simply to note that space was being allotted on a complimentary basis in return for a benefit in kind.  The Respondents cannot avoid a contractual obligation merely because there is no invoice when there ought to have been.

18.  Nor is it relevant that Superbrand’s Managing Director or Mr. Smith approved the giving of publication space on a complimentary basis.  That by itself would not affect the way in which any notional revenue received for such space should be accounted for in accordance with the parties’ contracts.

19.  The fact that benefits in kind (as opposed to cash) are received makes no difference.  Mr. Beresford reads the Respondents’ contractual obligation too narrowly.  References to cash payments must by commercial implication include the cash equivalent of benefits received.

20.  What I would accept, however, is that on the evidence there appears to be only one relevant barter transaction covered by the 2004 and 2006 Agreements.  That is the one in relation to Hourglass. 

21.  I am not persuaded by Mr. Coleman’s submission that, because invoices in relation to what seem to be Chelsea Media volumes were issued by the 1st Respondent, I should treat such volumes as relating to the 2004 and 2006 Agreements. 

22.  Here I accept the Respondents’ affidavit evidence distinguishing between volumes which were covered by the 2004 and 2006 Agreements and volumes which were covered by different agreements with Chelsea Media.  The mere fact that invoices were issued by the 1^st Respondent does not contradict that evidence. The 1^st Respondent, for instance, might simply have issued such invoices on behalf of Chelsea Media.  I note that those invoices in fact specify Chelsea Media as beneficiary on their face.

23.  I conclude that the Respondents should account for 20% of the cash equivalent of the benefit received from Hourglass.  But that benefit was worth $0 as Hourglass was given advertising space for free.   

B.  Question 2: Are the Respondents obliged to provide further discovery to comply with my February 2009 Order?

24.  Mr. Coleman says that the Respondents have provided minimal disclosure (2 invoices) in relation to the 2004 Agreement.  Sundry orders and invoices for publications in relation to the 2006 Agreement are also said to be missing.

25.  Mr. Beresford replies that the Respondents have made comprehensive discovery and there can be no further utility in asking them to produce more.  There is simply nothing more to disclose in connection with the 2004 and 2006 Agreements.

26.  I agree with Mr. Beresford.

27.  As far as disclosure in relation to the 2004 Agreement is concerned, the Respondents accept that Superbrands books were published in 2004, 2005 and 2006.  But this does not mean that such books were produced pursuant to the 2004 or 2006 Agreements. On the contrary, the evidence is that those books were published in accordance with earlier contracts between Superbrands and Chelsea Media. 

28.  There is a time-lag of more than 2 years before a Superbrands book can be published.  This is because a given publication entails a process of research, editing, selection and production.   All books subject to the 2004 Agreement had not yet been finished by the time of the 2006 Agreement.  These latter books thus were the “Unfinished Publications” mentioned in the 2006 Agreement.  Accordingly, discovery of accounting documents in relation to publications in the period prior to the 2006 Agreement has been minimal, precisely because there has not been much to disclose in relation to the sales of such publications.

29.  Mr. Beresford accepts that a few orders and invoices may be missing in relation to the 2006 Agreement.  But, of relevant orders and invoices identified by Superbrands, one order was verbally cancelled.  The other order, though missing, has been acknowledged in Superbrands’ favour in the account made by the Respondents.

30.  I do not accept Mr. Coleman’s submission that the 2004 and 2006 Agreements also covered publications which were to have been produced by Chelsea Media.  It seems to me that the collection of revenues in connection with the Chelsea Media volumes must have remained with Chelsea Media and were not somehow transferred to the 1^st Respondent. 

31.  I therefore think that the Respondents’ have complied with their discovery obligation under the February 2009 order.

C.  Question 3: Should the Respondents now pay the net amount ($152,757.17) which they accept as due to Superbrands upon the taking of an account?

32.  The Respondents are amenable to paying the amount forthwith.

D.  Questions 4 and 5: What interest (if any) should there be on such payment?

33.  The parties agree on interest of 1% over HSBC’s Hong Kong dollar prime rate. Interest is to run from 1 July 2007 until payment.

E.  Question 6: Should the Respondents account to Superbrands for interest on the US$250,000 bonus payment that they have held onto?

34.  Under the 2006 Agreement, in addition to commission, the Respondents were entitled to US$25,000 for each of 10 specified Unfinished Publications.  The 10 publications have now been published and distributed.  Accordingly, the Respondents’ account has claimed US$250,000 as due from Superbrands.

35.  By cl.2.2(c) that sum of US$250,000 would be payable by Superbrands provided that:-

“(i)    payment is to be made within 60 days of the customers of the relevant Unfinished Publication having received all copies of the complete Unfinished Publication in good order and within correct jackets;

(ii)    the obligations set out in clause 2.1 in relation to that Unfinished Publication, or any other obligation imposed on [the Respondents] under [the 2006 Agreement], have been properly performed;

(iii)    If:-

(A)  [the Respondents have] not, within the 60 day period referred to in paragraph clause 2.2(c)(i), and in [Superbrands’] reasonable opinion, properly performed the Key Obligations in relation to that unfinished Publication, payment will be deferred for another 60 days to allow [the Respondents] to perform such obligations; and

(B)  despite the extension of time, [the Respondents have] still not, in [Superbrands’] reasonable opinion, performed the Key Obligations, [Superbrands] is only obliged to pay [the Respondents], in relation to an unfinished Publication, the amount of US$25,000 upon [Superbrands] receiving payment of not less than 90% of the invoiced amount for that Unfinished Publication.”

36.  Superbrands says that it has been kept out of money that ought to have been remitted to it in relation to the 10 Unfinished Publications.  Presumably this would be for the periods corresponding to the durations when Superbrands would be amassing 90% of the amounts that ought first to have been remitted to it upon completion of each of the 10 Unfinished Publications.  It is far from clear to me what these durations would be.

37.  Here the accounting exercise which I have ordered nets off amounts that would have been due to the Respondents against amounts due to Superbrands.  The netting off has resulted in a balance due from the Respondents to Superbrands and (as just discussed) interest has been charged on that balance.

38.  The accounting exercise has been undertaken because Superbrands did not immediately pay 80% of amounts remitted to it by the Respondents and the Respondents in retaliation did not immediately remit monies received by it to Superbrands.  There is no point now at the end of the day to insist on the Respondents paying a gross amount to Superbrands, only for Superbrands immediately to come under an obligation to repay a sizeable part of such amount to the Respondents. 

39.  More specifically, the accounting exercise results in a rough and ready netting out of principal and interest amounts payable to the Respondents against principal and interest amounts payable to Superbrands.  The interest chargeable on the former principal amounts cancels out the interest chargeable on the latter principal amounts. 

40.  In those premise, it would be wrong in principle to charge further interest on the US$250,000.  That latter sum forms part of the netting off exercise.  Any interest which would have accrued on that sum in the hands of Superbrands may be treated (admittedly in a rough-and-ready manner) as written off against the interest accruing to the same sum in the hands of the Respondents.

41.  Interest should then only be chargeable on the balance found due and owing to Superbrands from the Respondents.  This interest has been dealt with in Questions 4 and 5.

F.  Questions 7 and 8: Should the Respondents be made to pay some portion (and if so, what) into Court as security for the performance of any outstanding obligations under the 2004 and 2006 Agreements?

42.  As far as I can see, there is no provision in the Agreements for a payment into Court as security.  In any event, I do not think that the Court has jurisdiction to require such a payment into Court.

III.  CONCLUSION

43.  I would answer the Questions posed as follows:-

(1)  No.

(2)  No.

(3)  Yes.

(4)  Yes, interest should be paid.

(5)  Interest should be at 1% over HSBC Hong Kong dollar prime from 1 July 2007 until payment.

(6)  No further interest is to be accounted for on the US$250,000.

(7)  No.

(8)  Not applicable.

44.  I shall hear the parties on costs and any consequential orders.