GLOUCESTER PUBLICATIONS LTD. v. FRANCE EDITIONS ET PUBLICATIONS

1991 No. A2259

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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D E C I S I O N

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1. In this action, the Plaintiff who I shall also refer to as "GPL" sues the Defendant who I shall also refer to as "FEP" in respect of an alleged breach of a Joint Venture Agreement which was entered into on the 1st August 1987.

2. The agreement is a long one and has a number of annexes. The purpose of the agreement was to provide for the publication of a local edition of a well-known French magazine called "Elle". In the recital clause of the agreement, it was provided that FEP and GPL wish to enter a Joint Venture Agreement and for that purpose they have agreed to subscribe for shares in a company and to operate the company in accordance with the Joint Venture Agreement. That company was eventually named International Magazines Limited - or more shortly "IML" by which name I shall refer to it hereafter.

3. Under paragraph 5 of the Joint Venture Agreement, it was provided that:

"The parties shall procure that the company shall carry on the business of publishing and printing a Chinese (or Chinese/English) edition of "Elle" magazine initially in Hong Kong, Singapore and/or Malaysia for distribution in Hong Kong and in such other territories and on such terms as the Board may from time to time determine. Subject to sub-clause 8.02 below, it is hereby expressly agreed that this Deed is without prejudice to the rights of either of the parties to enter into any other publishing and/or printing arrangements within or out of Hong Kong."

4. Under Clause 6.02 of the Joint Venture Agreement, FEP had to use its best efforts to "provide the Company, as the company", namely IML "may require with existing editorial material" which would be paid for at cost. That material would come from the French or other editions of the "Elle" magazine. There were a number of other requirements and responsibilities of FEP which were also set out in Clause 6 of the agreement.

For example, in Clause 6.04, FEP was required to provide the company with editorial marketing and technical assistance as IML may require at cost.

5. The responsibilities of GPL were set out in Clause 7 of the Agreement. One of those responsibilities to which I shall refer is that contained in Clause 7.03:-

"GPL hereby agrees to abide by and shall use its best efforts to procure the Company to abide by the terms of the Licence Agreement for so long as the Licence Agreement shall remain in force and shall, in the case GPL fails to abide by the terms of the Licence Agreement or use its best efforts as aforesaid, indemnify FEP and keep it indemnified against any costs claims expenses or other loss suffered by FEP by reason of the breach by GPL or the Company of any of the terms thereof."

6. What is more under Clause 8 of the Agreement, it was provided in Clause 8.01 that "the parties", i.e, GPL & FEP "shall procure that the company enter into the Licence Agreement with FEP with effect from the commencement of this Deed". And Clause 8.02:-.

"Each of the parties agrees that it will not, and will procure that its related companies will not, at any time during the relevant period, either individually or jointly with another or others whether as principal or agent, directly or indirectly carry on in Hong Kong or Singapore a business of publishing and printing fashion and beauty magazines (except the magazine 'Eve' which is already published by Communication Management Ltd. the holding company GPL) which may compete with that carried on by the company or have any interest (whether direct or indirect) in any such business unless an option to operate the said business is first offered to the Company in writing giving sufficient details of the proposed business and the Company has refused the option or failed to provide a response to the offer within 30 days of the date of the receipt of the offer."

Under Clause 9.01:-

"The Board shall be comprised of seven (7) Directors, four (4) of whom ("'A" Directors") shall be appointed by notice in writing by FEP, and three (3) (""B" Directors") by notice in writing by the holder of the "B" shares referred to in Clause 13, provided that if there shall be two (2) holders of the B shares, the "B" Directors shall be appointed as follows:

Percentage of GPL's shareholding in the "B" shares	Number of "B" Directors to be appointed by GPL	Number of "B" Directors to be appointed by the other shareholder of the "B" shares
50% or above	2	1
below 50%	1	2

The party appointing a Director may remove such Director and appoint another person to act in his place by like notice."

Clause 9.04:-

"No business shall be transacted at any meeting of the Board unless there shall be present throughout the meeting a quorum of Directors being at least two Directors or their alternates which include at least one "A" Director and one "B" Director."

Under Clause 13.02:-

"(a) each party shall subscribe for cash at par (HK$1.00 per share) the number and class of shares in the capital of the Company set opposite the name of such party below and the name of each party shall be entered in the register of members of the Company as the holder of such shares:

FEP - 5098 "A" Shares
GPL - 4900 "B" Shares

(b) the parties shall procure that the two subscribers' shares in the Company be transferred to FEP as "A" shares and that FEP shall be entered in the register of members of the Company as the holder of such shares."

7. The Licence Agreement or a draft of the Licence Agreement was an annex to the Joint Venture Agreement and the Licence Agreement was duly entered into. The Licence Agreement was simple in its terms to the extent that for a consideration of 1,000 French Francs, the permission was granted which included the exclusive right to print and publish the magazine in Hong Kong, Malaysia and Singapore using the marks which of course is the trademark "Elle" and additionally its Chinese counterpart or either them as the title and trademark for the magazine and the non exclusive right to distribute and sell the magazine in Hong Kong, Singapore, the United States of America, Japan, Taiwan, People's Republic of China, Macau, Australia, Canada, Malaysia, Indonesia, Philippines, Thailand and so forth.

8. There was a termination clause in this Licence Agreement about which this case really revolves. In Clause 9.2 and 9.3 it is provided:-

"9.2 FEP may terminate this Agreement and the licence granted hereunder forthwith by the service of written notice of termination upon the User by properly prepaid post if the User shall commit any irremediable breach of this Agreement or shall fail to remedy any other breach of this agreement within one month of the despatch by FEP of notice requiring it to do by properly prepaid airmail post and in particular but without limitation if the User shall not adhere to the Standard of Quality in the Magazine.

9.3 Without prejudice to the generality of clause 9.2 above, the following shall be deemed to be non remediable breaches of this agreement:

(a) ........

(b) ........

(c) the number of copies of the Magazine sold or distributed at full market price does not exceed 3000 in respect of three successive issues;"

By a letter dated the 5th March 1991, the Defendant served upon IML, a notice of termination of the Licence Agreement in the following terms:-

"We hereby give notice of our immediate termination of the Agreement under clause 9.3(c) thereof. Clause 9.3(c) states that if "the number of copies of [ELLE] Magazine sold or distributed at full market price does not exceed 3,000 in respect of three successive issues" then there shall be a non-remediable breach of the Agreement. During the months of July to September (inclusive) 1990 the total number of copies of ELLE Magazine sold or distributed in each of these months was below 3,000 per month. This constitutes a non- remediable breach under clause 9.3(c) of the Agreement giving us the right to terminate the Agreement forthwith upon notice in accordance with clause 9.2 of the Agreement.

We refer you to clause 8 of the Agreement regarding your obligations following termination of the Agreement, and request that you forthwith comply with such restrictions. In particular and without limitation, you should cease all preparation, production, printing and distribution of an ELLE magazine with immediate effect. Failure to do so will cause us to take whatever steps we deem necessary to enforce our legal rights in this regard without further reference to you."

9. In a covering letter written to the Plaintiff, the Defendant said, inter alia, that:-

"The Deed of Joint Venture between us relating to the company (namely IML) does not provide for its termination following termination of the Licence Agreement but in view of the fact that the company's sole business is the publication of "Elle" and it is no longer in a position to continue this business, we must review the arrangements between us, particularly in view of the fact that the company no longer has any source of income with which to meet its expenses and the company has almost reached the limit of its available credit."

10. The Plaintiff contends that that notice of termination was wrongful and was unjustified. The Plaintiff goes on to contend that it was an implied term of the Joint Venture Agreement that FEP would not wrongfully terminate or withdraw the licence so granted to IML, pursuant of course to Clause 6 of the Joint Venture Agreement, and it is about that which the first dispute in this case turns.

11. The Defendant says that the term such as is pleaded in paragraph 7 of the Statement of Claim could only be implied, if it were reasonable and necessary. The primary contention is, that it is not necessary because there are adequate rights of action in IML and the Plaintiff if it is so minded could use those rights either directly, or if IML would not take the matter up and the Plaintiff was not in a position to force IML to because it only had a 49% shareholding and three out of seven directors, then it could use its minority rights to take an action to enforce those minority rights to obtain relief. It is said that indeed the only loss which has been pleaded in this case is a loss which is suffered by reason of the loss to IML. I am not directly concerned with the matter of loss today, of course, because it has been agreed between the parties that the question of any enquiry as to damages should be decided after the decision on liability which has been tried today.

12. It seems to me that Clauses 7.03 and 8.01 to which I have referred above put a direct liability on GPL. GPL is under an obligation to use best efforts in the manner set out there; first of all to procure that the company enters into the Licence Agreement; secondly, to procure that the company abides by the terms of the Licence Agreement; and thirdly, it undertakes that neither it nor any of its related companies will publish a competing magazine without giving IML the option to publish it as set out in Clause 8.02.

13. How it can be said, in those circumstances that it would not be at once obvious that having taken a primary responsibility and liability under the contract, that FEP could at whim withdraw that licence which was fundamental to the whole Joint Venture Agreement escapes me. It seems to me that if the officious bystander were brought into action and he said to the parties when they signed the agreement "Well, of course, could FEP withdraw the licence at whim?" The parties would be bound to say "You must be joking. How can we expect GPL to enter these onerous obligations, on the basis that FEP at its whim could wrongfully withdraw the licence?" To use the vernacular which I have used in the course of argument, I would imagine the parties to say "Don't talk soft".

14. Even on the basis that a right of action, and it is conceded by the Defendant that a right of action in IML arises, it seems to me that the Plaintiff is correct when it says that the exceptions to the rule in Foss v. Harbottle which are designed to prevent injustice should not be used in these circumstances to work an injustice. There is no doubt that for minorities in companies to enforce their rights through the courts is a matter which is fraught with difficulty. It is by no means a certainty in each case that they will succeed. I see that it is plain and obvious and in my view necessary that the Court should in these circumstances imply a term such as is set out in para. 7 of the Statement of Claim.

15. Then it is said on behalf of the Defendant that even if the purported termination were wrongful, it was ineffective, because this was a contractual licence and that remained in force and in effect.

16. The practical reality of the matter seems to me to be this. It was FEP who gave the licence and purported to revoke it and they in essence controlled IML. It was quite clear that they would not operate IML with a view to its continuing to publish the "Elle" magazine, that is after the notice of termination on the 5th March. It is quite clear that IML could not carry on with the licence because they needed the editorial input and logistical support and so forth and that was withdrawn by the majority partner. If more were needed, one only has to consider the terms of the Defendant's solicitors letter written on the 8th March, some three days after the notice of termination, where at one stage they say when it is suggested that a second trademark Licence Agreement should be executed in favour of GPL "the Joint Venture Agreement will ultimately terminate because of termination of the Licence Agreement". It seems to me abundantly clear when one looks at the minutes of the meeting and the correspondence between the parties and their respective solicitors at the time, that it was a matter of a fait accompli that the whole arrangement had come to an end because of the termination of the Licence Agreement and it was useless for the Plaintiff to use their minority position in IML to try and reverse that position. I think that what Dr. Mohindar says in para. 14 of his Statement where he says that "Notwithstanding I was firmly of the view that FEP's notice purporting to terminate the Licence Agreement was wrongful, I realised that it was futile to attempt to procure IML either to complain about the notice or to take action in respect of it;" is simple reality.

17. The Defendant attempts to rely on the case of Errington v. Erringtonwhich showed that a person with the licence who remained in possession was able to rely on that licence. It is, of course, perfectly correct in a situation like that. But in this case insofar as one can have an equivalent, the Plaintiff was clearly ousted from that licence. Again, as a matter of practical reality, as I indicated in the course of argument, I find it unattractive that a party who had purported to terminate a licence could come to Court and then argue that his wrongful termination was ineffective and should have been disregarded. I should also mention that FEP commenced printing and publishing "Elle" magazine immediately after termination and it seems to me that again is a clear indication in view particularly of Clause 8.02 that as regards the parties' approach to this matter the licence agreement had been terminated. I consider that the Court must look carefully at any such argument as has been advanced. In my view it fails not simply because of a lack of merit but because as a matter of reality it is clearly wrong.

18. I then turn to consider the question of the termination itself of the Licence Agreement. That really turns on the question of what is the meaning of Clause 9.3(c) to which I have referred above. The Plaintiff's first argument was that the 3,000 copies which is referred to should be treated as an aggregate of 3,000 over the 3 months or the three successive issues. Simply as a matter of construction I cannot see that that can be correct. In my view what the clause clearly says is that the number of copies must exceed 3,000 in respect of each of the three successive issues.

19. The next question which has to be determined is what is the meaning of the clause in two different aspects. The clause talks about the magazine sold or distributed at full market price. Of course IML did not itself normally sell to the end consumers except to subscribers. IML were primarily responsible for supplying the magazines to distributors. The Plaintiff's first argument is that distribution means precisely what it says and that means putting magazines into distribution. I might say this was not the first meaning of the clause which struck me. It struck me that this clause was really there to provide for a minimum level of success of the magazine in terms of sales at what might be regarded as full price. The words "sold or distributed" were put in as a recognition of the fact that IML itself would not be selling to end users. But as was pointed out, in fact the more magazines you have on distribution, the better. They act when they are on the news stands as some kind of advertisement. Their availability to the end sellers is of course an important factor. Distributors would not take more magazines than was reasonable in the circumstances and it was said that if two equally viable meanings of the contractual term were present, the one which was against the party relying on the clause should be preferred. As I say, I have an uneasy feeling that what the parties intended was to limit themselves to a narrow construction namely magazines for which the public had paid the full price. Had this case turned upon this, I might have considered the matter for longer, but at the end of the day for the reasons which I will come to, I do not think that this point makes any difference to the outcome of the case. I have to say however, that I feel that if I were to restrict this phrase to magazines which were sold on the retail market or through subscription at full price and give it the restricted meaning which I think was intended, it would in fact mean rewriting the contract and inserting words which are not there and that I would be reluctant to do. If the broad construction of the term "distributed" to include magazines distributed but not sold is correct the Plaintiff clearly succeeds, but I proceed to consider the matter on the basis of the narrower construction of the phrase "sold or distributed".

20. I turn then to the words "Full Market Price". The Defendant says that this has to be read in the light of the business plan, which is also annexed to the Joint Venture Agreement, and in the context of the logistical support agreement. But, of course, the terms which are contained in Clause 9.3(c) do not appear in those documents and I really find it difficult to use those documents as a lever for interpretation of Clause 9.3(c).

21. I consider that full market price must be, and the term the sale or distribution at full market price must be, viewed in the context of sale other than at a discount price, a discount price intended to affect the distribution and sale, in the light that of course with regard to subscriptions, subscriptions are generally expected to be given at some sort of discount. I appreciate that the subscription price is also printed in the magazine itself. I see no reason however why somebody who wants a large number of copies should not be given a bulk discount or discount for his bulk purchase. I consider that that still really is full market price, because that is the market price for a bulk purchase I have in mind here the fact that there were 84 copies of this magazine which were purchased directly from IML in September of 1990. That is the month in which the magazine was published. It is true that the people who purchased those copies of the magazine were apparently primarily 3 advertisers in the magazine. That however does not seem to me to make any difference. They might just as well have gone to the distributors and obtained their copies from the distributors. They were buying the current magazine at the full price and they got a discount for the bulk purchase but no more than that.

22. I do however exclude from this phrase the sales to Peace Books. Those sales it seems to me do not constitute sales at full market price. In short, what happened there was that after the magazines had been out for distribution in Hong Kong, they were returned and they were sold in bulk to Peace Books, who would consolidate them with a large number of other magazines in a container and eventually they would use them for shipment up to China. There did not seem to be very much urgency in getting the magazines to China and they would arrive there months if not longer after the magazines were published. The difference in distribution via Peace Books was this that Peace Books paid a very much reduced set price for the magazines and Peace Books were unable to return the magazines as were the Hong Kong distributors if the magazines remained unsold. The price at which the magazines were sold to Peace Books and the fact they were sold much later than the original publication date seems to me to show clearly that those were the sort of sales which were intended to be excluded by this phrase "sold or distributed full market price" and I therefore exclude those.

23. There then arises for consideration matters relating to the subscriptions. No issue is made on the bulk of the subscribers for the magazine. There were however three categories of subscribers in respect of which issue was taken by the Defendant.

24. There first remained 31 subscribers who at the date their subscriptions were accepted by the IML, the subscription price had already risen. However their subscriptions were applied for on forms which apparently had been taken out of old magazines and the subscription that they paid was the subscription price on those forms. GPL, and their policy was transferred also to IML, had the policy to honour forms if they were submitted within 6 months of their publication. IML and GPL might have had no legal obligation to take those forms. The forms themselves might be considered an invitation to treat. But it seems to me it is a matter of honour, just the same as someone selling a house who makes an oral contract might be under no legal obligation to honour what he says, but it is a moral obligation and one of honour, it seems to me it is a perfectly reasonable attitude on the part of GPL and IML to take, that they will accept those forms provided they appear to be genuinely submitted. Of course, there is no question that somebody got a later form and crossed out the price and put an earlier price. Those people have come along and paid the price which IML said it was prepared to take and provided it was not well out of date, it seems to me perfectly normal and proper company policy to accept those subscriptions at that rate. The Court should not take the attitude that if a man has honour that should be taken against him.

25. In respect of 24 of those subscriptions, they were all subscribed for before the 12th April and since the subscription price went up in April, it seems to me it would probably have been churlish in the extreme for IML to have refused those subscriptions. Six of those came later but none after June of 1990.

26. Then there was the matter of 13 subscriptions which had been extended or rather delayed to a period to include the September 1990 issue of the "Elle" magazine. The evidence was that IML would extend the subscriptions which, of course, were in yearly batches in two circumstances. Either if the subscriber had asked for there to be a hold on the magazine either because he was going away on holiday, moving or whatever, and he rang up and made a specific request. In those circumstances, there would be an 'H' which would be entered in the relevant part of the computer record against the subscriber. Or if the magazines had been sent to the subscribers but had been returned by post in which case the subscription clerk would put an 'R' in the relevant record and then if the subscriber could not be contacted they would wait till the subscriber rang up and complained about not receiving the magazine and then steps would be taken to ensure that it was sent to the correct address. Now the subscription clerk was under orders not to extend the subscription in any other circumstances than those in which there was an 'H' or an 'R' in the computer record. On the evidence of Mr. Ramesh and Miss Kong I am satisfied that there must have been an 'H' or an 'R' in respect of the 13 subscribers.

27. Some of the subscribers were called as witnesses in this case. They all had one thing in common as far as I can see, they were not satisfactory witnesses. I am not satisfied that they really could remember very much about what happened. They were all imprecise about dates and months in which they received the magazines. That is not that surprising considering it is now some 4 years ago. Two of them seemed to me almost gave their evidence in a hostile manner. Miss Ruby Chu and Miss Wendy Ko showed their dislike for being dragged into court to give evidence in a case which did not concern them to such extent that in respect of one of them at least I had to pacify her before she started giving evidence. I felt that those two witnesses at least did not really try to remember properly what had happened. Miss Ruby Chu's evidence is consistent with her getting 12 issues and 12 issues only and in my view looking at the computer records clearly the last issue which she got was the September 1990 issue. Miss Margaret Hong who was called by the Defendant says that she does not remember calling IML. I found her too to be a very unsatisfactory witness. Her evidence changed during the course of it from not remembering to, during re- examination being sure that she never rang up or complained to IML. I found her manner and her evidence unsatisfactory and I have to say that I would not be prepared to place any reliance upon it. I would prefer in these circumstances to rely on the Plaintiff's evidence of system. But even if I were wrong about that in relation to Miss Margaret Hong's evidence it would not alter the outcome of this case nor would it alter my confidence in the rest of the evidence about the system relating to extensions because all it would show is that one person received an extension to which they were not entitled.

28. The remaining categories of subscriptions to which I must refer are seven subscriptions where due to an oversight in the IML office or for some other reason, the request for payment from the credit card company was not put through at the relevant time. I have been informed that in respect of four of those, payment has recently been received. But in my view, these were persons who had incurred liability to pay for the subscriptions by reason of request for and receipt of the magazines. The fact that IML was negligent in not following up and making them pay for it at the time does not seem to me to enter into the equation. This was a distribution or sale at full market price and what remained was for that market price to be paid and if the office system breaks down and somebody by fortune does not have the amount deducted from his or her credit card, well that is a matter of luck for him but he does not get out to the legal obligation to pay.

29. In those circumstances and using those figures, on my calculation the distribution at full market price even discounting the 50 magazines which were sold on the 11th March some 6 days after the notice of termination comes to 3,008 magazines. In those circumstances, it seems to me that the Plaintiff is correct, even on the narrow construction of Clause 9.3(c) that the number of copies of the magazine sold or distributed at full market price did exceed 3,000 in respect of one of the three successive issues, namely September 1990, Clause 9.3(c) did not come into effect.

30. As a consequence the Licence Agreement was wrongly terminated and in my view, the Plaintiff is entitled to judgment.