XCHRX WONSON INTERNATIONAL HOLDINGS LTD. AND ANOTHER v. TONGA TRADE OFFICE AND OTHERS

HCA 18197/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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REASONS FOR DECISION
ON APPLICATION TO DISCHARGE EX PARTE ORDER
AND DECISION ON INTER PARTES SUMMONS

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1. On 24 November 1999, the Plaintiffs obtained an ex parte order from Yam, J restraining the Defendants from selling, supplying, distributing, promoting, offering, subscribing and advertising for sale in any manner or otherwise engaging in any dealing with "Kingdom of Tonga Millennium 2000" coins made in Gold, Silver or Copper ("the Defendants' Coins") as particularised in the Order Form of the Tonga Trade Office in Hong Kong.

2. On 17 December 1999, the Summons Judge adjourned the hearing of the Inter Partes Summons to 7 January 2000 and continued the injunction until the resumed hearing.

3. The 1st and 2nd Defendants applied to discharge the order on the basis of material non-disclosure. The 3rd Defendant did not take part in the hearing as he has applied for legal aid and the automatic stay of proceedings took effect, there having been no application to lift the stay.

Discharge of ex parte order

4. On 10 January 2000, I ordered that the ex parte order be discharged. Since the parties wished to continue immediately with the hearing of the inter partes summons, the Reasons for the Decision had to be given later.

5. Accordingly, the Reasons for the Decision to discharge the ex parte order are included here, but should be regarded as separate from the Decision on the Inter Partes Summons.

Brief Facts

6. A brief summary of the facts which are relevant to an understanding of the decisions on the discharge of the ex parte order and the Inter Partes Summons is as follows.

The parties

7. The 1st Plaintiff is a listed company carrying on business in metals, but prior to the events described below, it had not carried on business in the production or sale of commemorative coins. Its chairman is Mr Chiu Tao ("Mr Chiu") .

8. The 2nd Plaintiff had previously designed and promoted commemorative items upon the return of Hong Kong to the PRC.

9. The 1st Defendant is the Tonga Trade Office in Hong Kong. There had previously been an honorary consulate in Hong Kong, but the consular post had been changed on 1 July 1997 to the "Tonga Trade Office" pursuant to an Agreement between the respective governments of the PRC and the Kingdom of Tonga. Counsel for the 1st Defendant has stated that he did not rely on any defence of diplomatic immunity.

10. The 2nd Defendant was the head of the Tonga Trade Office. He and Mr Chiu knew each other.

11. The 3rd Defendant was employed as a Senior Business Manager of a company in the 1st Plaintiff's group until termination of his employment on 15 October 1999. He has since been working for the 1st Defendant.

The idea

12. Sometime in May or June 1999, the Plaintiffs discussed the idea of producing and selling commemorative coins to celebrate the millennium.

13. The novelty of the idea, according to Mr Chiu's 1st Affirmation, was that "the coins would be sold in sets of 3, bearing the portraits of ... Mao Ze Dong, Deng Xiao Ping and Jiang Ze Min ... the portrait of President Jiang has never found its way to any commemorative coin before".

Participation of the 1st Defendant

14. In June 1999, the 1st and 2nd Defendants were brought into the project because it was considered that the marketability of the coins would be improved by having a country, viz. the Kingdom of Tonga, as issuing authority.

The designs

15. In July 1999, the design and artwork had been completed by artists commissioned by the 2nd Plaintiff. The reverse of the coins were to show Chinese paper cut designs of a lion, a woman and a dragon respectively.

Alleged oral agreement

16. It is the Plaintiffs' case that in July 1999, there was an oral agreement "reached between the 1st Defendant (through George Chen) and the 1st Plaintiff (acting on behalf of both 1st and 2nd Plaintiffs)" that, amongst other things,

the 1st Defendant would use its best endeavours to procure the approval of the King of Tonga and his Privy Council to the minting and production of the Plaintiffs' coins in the name of the National Reserve Bank of Tonga;

the ideas, design and art works of the Plaintiffs' coins belonged to the Plaintiffs and that they are to be regarded as trade secrets and/or confidential information, and save for the said project should not be used or divulged by the 1st Defendant without prior consent and approval of the Plaintiffs (which is hereafter referred to as "the confidentiality clause"); and

in any event, the 1st Defendant should not compete with the Plaintiffs in the promotion and/or making of any millennium commemorative coins bearing the portraits of Mao Ze Dong, Deng Xiao Ping and President Jiang (which is hereafter referred to as "the non-competition clause").

17. The 1st and 2nd Defendants deny that there was ever any oral agreement. Indeed there were 3 draft written agreements (apparently made in June, July and August) which did not include those clauses.

July - October 1999

18. From July 1999 onwards, the Plaintiffs went about the process of procuring the minting of the commemorative coins. The Singapore Mint was chosen, although other minting companies, including the Sunshine Mint in the United States, had also been approached.

19. On 27 August 1999, the Government of Tonga approved the proposal to mint commemorative coins. However there were complications arising from a number of matters, including problems concerning the statement of face value in Tongan currency for non-legal tender, and requirements for the display of the Tongan coat of arms on the reverse of the coins which was inconsistent with the Plaintiffs' design of Chinese paper cuts.

20. On 14 September 1999, the Plaintiffs decided to proceed with the minting of coins without any reference to Tonga, although negotiations continued with the Tongan authorities.

Presentation of the Jiang medallion

21. On 5 October 1999, the King of Tonga visited Hong Kong on the way to the Mainland. At a luncheon meeting, at which the press was present, the Plaintiffs presented the King with an enlarged version of the medallion bearing the portrait of President Jiang on the obverse.

22. The next day, there were a number of press articles reporting this event, including photographs showing the medallion in clear detail. The press also reported the fact that this was the first time that President Jiang's portrait had been shown in a commemorative coin, and that it was to be sold in a set of 3 with coins bearing the portraits of Mao Ze Dong and Deng Xiao Ping.

Plaintiffs' decision not to proceed with Tongan issue

23. Notwithstanding the presentation to the King of Tonga on 5 October, it is common ground the Plaintiffs decided not to proceed with the proposal to involve Tonga as the issuing authority. According to the Plaintiffs, they informed the 2nd Defendant of this decision before the luncheon meeting on 5 October. According to the 2nd Defendant, he was informed of this on 14 October.

1st Defendant's decision to produce own coins

24. It would appear that sometime in October, the 1st Defendant commenced a separate project for the production of coins to celebrate the millennium.

1st Defendant's promotion of coins

25. On 11 November 1999, the Beijing International Coin Exposition '99 commenced in Beijing. Both the 1st Plaintiff and the 1st Defendant were exhibitors.

26. The 1st Plaintiff offered their medallions (1 oz. each) in a set of 3 (bearing the portraits of Mao Ze Dong, Deng Xiao Ping and President Jiang respectively on the obverse and paper cuts on the reverse) at $28,000.

27. The 1st Defendant distributed a pamphlet inviting applications for commemorative coins. These coins were shown on the pamphlet to bear the portraits of Mao Ze Dong, Deng Xiao Ping and President Jiang on the obverse. On the reverse was the figure "2000" shown in an oval (as with the Plaintiffs' design).

28. However, the reverse contained the Tongan coat of arms and bore the words "Kingdom of Tonga Millennium 2000" and the face value of 10 Pa'anga.

29. These coins were to be available individually or in sets. Individual coins bearing the portraits were available in gold and silver, and sets were available in gold, silver and cupro nickel. A set of gold coins (1 oz. each) was priced at $17,800.

Ex parte Order

30. On 24 November 1999, the Plaintiffs applied ex parte to Yam, J. and obtained an order restraining the Defendants from any dealing in the Defendants' coins as defined above. The causes of action alleged in the Writ are breach of the July Agreement and breach of the duty of confidence.

31. It is this order which the 1st and 2nd Defendants sought to discharge for material non-disclosure.

Material Non-disclosure - principles

32. It is well-established law that where one party makes an application on short notice to a judge in the absence of the other party, the party making the application has certain obligations which he must fulfil.

33. One of the most important obligations is that the applying party has to make full and frank disclosure to the judge of material facts.

34. Facts are material if they are "relevant to the weighing operation" which the judge has to carry out in deciding whether or not to grant the ex parte order (Citibank N.A. v Express Ship Management Services Ltd [1987] HKLR 1184, 1190).

35. If facts which are material to this weighing operation are not disclosed, the Court ought to discharge the ex parte order without going into the merits. There cannot be, as it were, an ex post facto justification of the order obtained by a party guilty of material non-disclosure, and the ex parte order should be discharged, although the plaintiff could of course apply for a fresh injunction inter partes.

Misinformation and Material Non-disclosure

36. In my view, the ex parte order ought to be discharged because the Plaintiffs had misinformed the judge hearing the ex parte application of one material matter, and had failed to disclose to the judge at least one fact which was material to the weighing process.

No copyright obtained or confidential information imparted

37. As part of the Plaintiffs' case that the Defendants were acting in breach of the duty of confidence, the Plaintiffs had claimed in the ex parte hearing that confidential information as to how to obtain copyright permission from the Chinese authorities for the use of the 3 Chinese leaders' portraits had been shared with the 1st and 2nd Defendants.

38. Paragraph 31 of Mr Chiu's 1st Affirmation in support of the ex parte application stated:-

"Even though the Plaintiffs have circulated and advertised the Plaintiffs' coins in the market for sale, there are still material confidential information not available to the public such as : -

a. the need to get copyright permission from the Chinese government in using portraits of the 3 Chinese leaders and how to get it ..."

39. Mr Chiu asserted in paragraph 16 of the same Affirmation that the Plaintiffs had taken steps to and had obtained copyright permission from the China Government for the use of the 3 Chinese leaders' profiles in the coins. In paragraph 14, he asserted that full information as to how to obtain copyright permission from the China authority were given to or shared with the 1st or 2nd Defendants on a confidential basis.

40. It has now transpired that no copyright permission had ever been obtained by the Plaintiffs, and no information about how to get it was imparted to the Defendants.

41. In Mr Chiu's 2nd Affirmation, he says at paragraph 17 that he had "made a mistake". He says that the Singapore Mint had asked for copyright documents, and since the Singapore Mint had later proceeded to manufacture the medallions, he "wrongly assumed that there was copyright permission obtained ...".

42. In my judgment, the misinformation as to the method of obtaining copyright permission was a most material aspect of the case presented on the ex parte application.

43. The Plaintiffs had chosen to emphasize this as 1 of only 2 matters of confidential information that was still not available to the public as at the date of the ex parte application, notwithstanding the Plaintiffs' own publication of the medallions. It was clearly one of the main factors that was intended to be put in the weighing operation.

44. The Plaintiffs had not made any reasonably sufficient inquiry about this factor before putting their case the way they had. It is not suggested that they were mistaken as to the purport of any documents which they had in their possession. No efforts had been made between 11 November and 24 November to verify (with the Singapore Mint or the Chinese authorities) the "assumption" made that such permission had been obtained.

45. The allegation that confidential information as to how to get copyright permission had actually been imparted to the 1st and 2nd Defendants was no more than inference upon assumption, yet it was placed before the judge as fact.

46. In my judgment, on this piece of misinformation alone, I would discharge the ex parte order.

Publication of Jiang coin before Coin Exposition

47. Further there was in my view one important piece of material non-disclosure. The Plaintiffs failed to disclose to the judge that as early as 5 October 1999, they had made public their medallions bearing the portrait of President Jiang.

48. It is the Plaintiffs' case, in relation to the breach of the duty of confidence, that their idea of putting the portrait of President Jiang (in addition to Mao Ze Dong and Deng Xiao Ping) on commemorative coins had the quality of confidence, because the portrait of President Jiang had never been placed on a commemorative coin before.

49. Mr Chiu said in his Affirmation in support of the ex parte order that the Plaintiffs "intended to make [their coins] public" at the coin exposition in Beijing which commenced on 11 November. To all intents and purposes, when one reads his Affirmation, the quality of confidence was preserved until then (11 November).

50. Yet the Plaintiffs had themselves made public their medallions bearing the portrait of President Jiang on 5 October, more than a month before the coin exposition. I do not accept the submission of Mr Dennis Law, counsel for the Plaintiffs, that there was no publication of details until the coin exposition. The press photographs of an enlarged version of the `Jiang medallion' was the subject of 4 press articles on 6 October 1999. The articles also reported the fact that the medallions were to be sold in a set of 3, together with those bearing the portraits of Mao Ze Dong and Deng Xiao Ping, and that they were to be 1 oz. each.

51. There was a good deal of argument before me whether a competitor could have finished production of similar coins within a reasonable time for sale of such millennium coins, if the process of production (commencing with production of artwork, etc.) had started on 6 October.

52. However, that is not the focus of the issue here. The information presented to the judge hearing the ex parte application was that there was no publication of even the idea of a `Jiang coin' until 11 November. If that were so, the Defendants must (or would most likely) have been in breach of the duty of confidence when they also came up with the pamphlet showing a `Jiang coin' at the same time.

53. The case against the Defendants of breach of the duty of confidence was thus substantially bolstered by the non-disclosure. The issue of sufficiency of time available for production of `Jiang coins' after 6 October 1999 was not even open to consideration by the judge. In my view, the non-disclosure was clearly material.

Order

54. I ordered that the injunction given by Yam, J. on 24 November 1999 be discharged, and that there be an inquiry as to any damages sustained by the Defendants by reason of the said order of Yam, J., such damages to be assessed with interest.

55. I also ordered that the costs of the application for discharge be paid by the Plaintiffs to the 1st and 2nd Defendants.

56. Counsel for the 1st and 2nd Defendants have asked that the costs should be paid forthwith, instead of "in any event" which would mean that the Defendants would have to wait until the end of the entire case. I agree. Where, as I have found, there has been misinformation and material non-disclosure, the order made by the judge on the ex parte application should be discharged without going into the merits. Therefore, these costs are discrete and should not be affected by the determination of the case after trial. Accordingly, in the exercise of my discretion, I would order that the costs be paid forthwith.

57. As for the scale of costs, counsel for the 1st and 2nd Defendants have also asked that costs be paid on an indemnity basis. In my view, this case is within the scope of `ordinary hostile litigation'. I see no reason for awarding a higher scale.

Inter Partes Summons

58. On the hearing of an inter partes summons for an interlocutory injunction, the principles to be applied by the Court in the exercise of its discretion are the well-known guidelines set out by the House of Lords in American Cyanamid Co. Ltd v Ethicon Ltd [1975] A.C. 396. The questions the Court has to ask are :-

(a) is there a serious issue to be tried?

(b) are damages an adequate remedy?

(c) where does the balance of convenience lie?

(a) Is there a serious issue to be tried ?

59. Counsel for the 1st and 2nd Defendants submit that there is no serious issue to be tried on either cause of action, whether (i) the alleged breach of the July Agreement or (ii) the alleged breach of the duty of confidence.

Alleged breach of July Agreement

60. As for the alleged breach of the July Agreement, counsel for the 1st and 2nd Defendants have submitted that the `non-competition' clause had not been included in any of the 3 draft agreements that had passed between the parties. Consequently they say that it is no more than a bare assertion by the Plaintiffs, unsupported by any contemporaneous documentary evidence. Further they say Mr Chiu's creditworthiness should be doubted by reason of his misinformation and failure to make full and frank disclosure.

61. I have taken into account the fact that this `non-competition' clause was not included in any of the 3 drafts. However the situation remains that Mr Chiu, who was one of the persons said to be personally involved in the project, has said on affirmation that such an agreement not to compete "in any event" had been made. This court cannot try the issue on affirmations.

62. Therefore the issue - that the Plaintiffs have bound the 1st Defendant not to compete with them - has to be a serious issue to be tried.

63. However, the Court should look very carefully at the alleged contractual restriction and should not extend it any further than necessary. The July Agreement was for the production of commemorative coins in a set of 3, to include a coin bearing the portrait of President Jiang, said to be the Plaintiffs' novel concept. Further, the contract was with the 1st Defendant only, not the 2nd Defendant in his personal capacity.

64. Consequently, any injunction against the 1st Defendant should only be to restrain it from producing or promoting sets of commemorative coins which include coins bearing the portrait of President Jiang or individual coins bearing that portrait, as a collector could then combine such individual coins with other individual coins bearing the portraits of the other 2 leaders. There is no reason why commemorative coins produced or promoted by the 1st Defendant bearing portraits of Mao Ze Dong and Deng Xiao Ping (whether in a set or individually) should be the subject of any injunction based on the alleged breach of the July Agreement.

Alleged breach of the duty of confidence

65. As for the alleged `confidentiality' clause, that can be considered together with the Plaintiffs' other cause of action of breach of the duty of confidence.

66. It is clear from legal principles that the duty of confidence has a limited `shelf-life'. Once the matter which has the quality of confidence has become part of the public domain, others are free to adopt the same concept.

67. However, in a situation where it takes time for an idea to become realized as a product, such as in this case the minting of coins, an injunction can be granted against someone who is in breach even after the idea has been publicized, but only for the period during which there is an unfair advantage.

68. The issue is what was the period required from the publication of the idea for the production of such a coin. Counsel for the Plaintiffs submitted that it took the Plaintiffs some 51/2 months (June to 11 November) from inception of the idea to the production of the medallions, so that the `shelf-life' of the duty of confidence should be 51/2 months from 11 November. But if one takes 6 October as the day when the concept of a `Jiang coin' was first published, that period would expire at the end of March 2000.

69. Counsel for the 1st and 2nd Defendants submitted that the period of unfair advantage has expired. The 51/2 months taken by the Plaintiffs was due to the various complications that arose in this project (as is evidenced by the Singapore Mint's requirement that there should be authorization from the Government of the Kingdom of Tonga and various changes to the face value, etc.) .

70. The evidence from the minting companies themselves was that Singapore Mint would take 68 days from delivery of artwork to the production of the coins, and the Sunshine Mint would take 45 days.

71. A hundred days have now elapsed since 6 October 1999. Even if one takes the longer delivery time of 68 days, that would mean that any competitor would have had a balance `lead time' of 32 days to choose a mint, do the relevant negotiations and supply artwork. Counsel for the 1st and 2nd Defendants submit that if one looks at the time table on the progress of production of the Plaintiffs' medallions (Table A'), but deducts the time wasted because of the complications in the Plaintiffs' project, that lead time would be sufficient - in other words, that any competitor, starting its own project from the day when the Plaintiffs' idea became part of the public domain, would have been able to produce similar medallions by today.

72. Attractive though that submission may be, it would be wrong, in my view, for a court at this stage of proceedings to determine as a fact (whether binding on a trial judge or not) whether a competitor starting on 6 October would have been able to produce similar coins by today. The 1st and 2nd Defendants have not been able to show the Court that their artwork was supplied to the Sunshine Mint only after 6 October, so the Plaintiffs still have an arguable case that a competitor would not be in a position to produce `Jiang coins' after the Plaintiffs' idea fell into the public domain on 6 October.

73. Production of coins bearing the portraits of Mao Ze Dong and Deng Xiao Ping should of course not be restrained because it is not alleged that there was any quality of confidence in the production of coins bearing their portraits. As can be seen from the evidence, there have already been a number of commemorative items including coins bearing their portraits.

74. Further in relation to the scope of the injunction, I see no reason why the 2nd Defendant should be the subject of an injunction in his own right. There is no evidence that he has been involved in any activities other than as an officer of the 1st Defendant. An injunction in the usual terms, restraining a defendant "whether by its servants or agents, etc." would be sufficient.

(b) Are damages an adequate remedy?

75. The Plaintiffs having shown that there is a serious issue to be tried, the next step is to see if damages would be an adequate remedy for the Plaintiffs and whether the 1st Defendant would be able to pay such damages if no injunction is given.

76. It would appear from the evidence that the Plaintiffs have not been able to sell all their medallion as yet, even though their initial expectation was to sell them all off by 31 December 1999. It seems to be common ground that the approach of the Chinese New Year may provide an opportunity for further sales.

77. I note that the Plaintiffs have failed to adduce any evidence to the Court as to how many medallions have been left unsold. Instead, they have focussed on the status of the 1st Defendant and submitted that it may not have the financial backing of the Kingdom of Tonga. In my view, that is putting the cart before the horse. If the Plaintiffs choose not to disclose the extent of damages that they might suffer now, they could not expect the Court to make any proper assessment of the 1st Defendant's ability to pay such unspecified damages.

78. However, the restricted terms of the injunction which is to be granted (i..e. restraining the 1st Defendant from producing or promoting sets of commemorative coins which include coins bearing the portrait of President Jiang or individual coins bearing that portrait) would not cause the 1st Defendant any damages, because it has through Counsel informed the Court that it has no intention of selling any `Jiang coins', which is not surprising as there has not even been a trial strike of the `Jiang coin' yet.

79. Therefore, the result is that even though the Plaintiffs have not been able to show that it would suffer damages which the 1st Defendant would not be able to pay, there would still be some damages, whereas the 1st Defendant has not been able to show that it would suffer any damages if it were restrained from producing and promoting `Jiang coins' which it has no intention of producing or promoting anyway.

(c) Where does the balance of convenience lie?

80. Given that the 1st Defendant has no intention of producing or promoting `Jiang coins', it is clear that the balance of convenience lies with the grant of an injunction in the limited terms set out above.

Order

81. Accordingly I would order that the 1st Defendant whether acting by itself, its servants or agents or otherwise howsoever, be restrained until trial or further order from selling, supplying, distributing, promoting, offering and advertising for sale in any manner or otherwise engaging in any dealing with coins bearing the portrait of President Jiang Ze Min whether in a set or individually.

82. In view of the fact that the matters argued in this case were finely balanced, I would in the exercise of my discretion give an order nisi that the costs of the Inter Partes Summons be in the cause.