SATELLITE TELEVISION ASIAN REGION LTD. v. MEDIA ASIA DISTRIBUTION LTD.

HCCL44/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.44 OF 2002

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J U D G M E N T

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Introduction

1) There are before the court cross-summonses. By its summons issued on 31 July 2002 the plaintiff seeks summary judgment against the defendant, whilst by its summons dated 17 September 2002 the defendant seeks injunctive relief against the plaintiff.

2) The factual background giving rise to these applications can be briefly stated. The defendant, which I shall call 'Media Asia', is a film production and distribution company, and in the distribution side of its business it earns commission and sales revenue from distributing film and video under licence.

3) The plaintiff, 'Star', is also in the media business and is the owner of the rights to a large number of Chinese language motion pictures.

4) The plaintiff and the defendant have entered into a number of agreements, and it is the unravelling of the financial obligations arising therefrom which constitutes the subject-matter of the present dispute between them.

5) On 12 July 1994 the plaintiff and the defendant entered into a Licensing Agreement ("the 1st Agreement") whereunder Star agreed to grant Media Asia the sole and exclusive licence to exploit all distribution rights for a catalogue of motion pictures owned and controlled by Star.

6) This 1st Agreement, which was due to expire on 31 August 1999, was superseded by a 2nd Agreement entered into on 18 May 1999 and which commenced as from 1 September 1999. The idea appears to have been to provide a seamless continuation of the film distribution which was ongoing pursuant to the arrangements between Media Asia and Star. The 2nd Agreement was for a period of five years, and was scheduled to expire on 31 August 2004, subject to a right of termination exercisable by either party.

7) The 1st and 2nd Agreements had as their counterparts agreements granting licencing rights in the other direction. By a 1st Output Agreement, entered into on 1 January 1999, Media Asia granted a licence to Star to distribute certain motion pictures produced or co-produced by an associate company of Media Asia, and to show these films on the movie television services operated by Star. This agreement, which was for a period of seven years, covered the PRC, Philippines and Taiwan, and on 1 January 2000 the parties entered into a 2nd Output Agreement for a period of five years covering other countries.

8) The result of these two sets of agreements being in place was that there were money flows from the defendant to the plaintiff and vice versa, flows which were subject to periodic reconciliation.

9) However, the commercial relationship between the parties apparently did not proceed smoothly, and this was the genesis for what has been termed the 'Supplemental Agreement', entered into on 9 November 2001 and supplemental to the 2nd Agreement, whereby Media Asia gave certain undertakings and paid Star a sum of $5 million, which sum was to be available to set-off against any amounts owed to Star by Media Asia at the expiration or termination of the 2nd Agreement.

10) On 16 January 2002 Star issued a written notice pursuant to the terms of the 2nd Agreement whereby the 2nd Agreement and the Supplemental Agreement were terminated with immediate effect. Within the termination notice Star asked Media Asia for the return of all materials in the latter's possession pursuant to clause 6 of the 2nd Agreement.

11) Pre-writ negotiations between the parties failed to resolve outstanding issues, and on 5 July 2002 Star issued proceedings in the Commercial Court claiming a total of $32,755,229.00 which it alleged it was owed by Media Asia.

12) On 31 July 2002 Star issued its present summons for summary judgment, which application is one of the applications with which this court presently is asked to deal.

13) Media Asia's application for injunctive relief, the other application requiring adjudication, was filed on 17 September 2002, the same day as Media Asia filed its Defence and Counterclaim. This claim for the grant of an injunction, a claim which is mirrored in the first prayer for final relief in the Counterclaim, had as its catalyst the sending on 10 September by the solicitors acting for Star, Messrs Clifford Chance, of standard form letters of demand to Media Asia's sub- and sub-sub-licencees, letters which Media Asia maintain tended to misrepresent and to intimidate parties to legitimate ongoing sub-licence agreements which had been entered into 'down the chain' from the head agreements between Star and Media Asia.

14) So much for the history of events. What of the merits of these applications? I take them in the order in which they were argued.

Summary Judgment

15) This summons first came on for hearing on 18 September 2002, but upon the defendant's application it was adjourned to permit Media Asia to file further evidence. Full argument was heard on 4 October 2002, by which point leading counsel had been instructed to argue Media Asia's case.

16) The curious aspect about this application for summary judgment is that argument therein primarily focuses not on whether certain sums of money are payable, but when. Viewed thus, and given that there appears to be no disagreement about the computation of the various sums in question, it is difficult realistically to envisage any necessity for ultimate trial of these indebtedness issues; put simply, the monies in question may be adjudged due now, as the plaintiff submits is the case, or certain of the sums may properly be due only at some future date (in certain instances after set-off), as the defendant now asserts.

17) The broad shape of the summary judgment dispute is tolerably clear. By its Points of Claim dated 31 July 2002 Star claims payment of three specific sums totaling $32,755,229. Of these sums, and subject to the set-offs asserted by Media Asia, the first amount (of $26,420,681.50 covering conventional licencing income due to Star up to December 2001) and the third (of $347,557.65 for printing charges) are not the subject of dispute.

18) It is the second sum so claimed, namely that of the payment due for conventional licencing covering the period between January 2002 and April 2002, which is the subject of argument as to whether such sum is yet due and payable. This is the amount of $5,986,989.85.

19) At the outset of this summary judgment application this amount was specifically admitted to be due by Media Asia, the skeleton argument then prepared by junior counsel for Media Asia accepting that "the Net Revenue payable by D for the period ended April 2002 was HK$32,407,671.35", a statement that had as its foundation the sworn evidence of Mr Jerry Leung on behalf of the defendant, who stated in terms (at para. 2e of his affirmation dated 13 September 2002) that the Distribution Report for Period ended 2002 indicated that the Net Revenue payable by the defendant comprised the sums of HK$26,420,681.50 + HK$5,986,989.85 that is, the initial two sums claimed by the plaintiff.

20) At this stage, therefore, given the additional acceptance by Mr Jerry Liu, a director of Media Asia, of the validity of 12 outstanding debit notes issued by Star in relation to film print costs, such unpaid notes amounting to $347,557.65, the position was that Star's monetary claim in itself was not contested, although against this Media Asia wished to set-off in dimunition of the claim two sums amounting in total to some $14.5 million.

21) This position had altered by the time of the second hearing of the Order 14 application, Mr Wong SC for the defendant then seeking to withdraw the prior admission that the sum of HK$5,986,989.85 was presently due and payable, and submitting in its stead that payment of this figure should be deferred until 30 January 2003 pursuant to the provisions of clause 3(d) of the 2nd Agreement which provided, inter alia, that "Net Revenues for each calendar year shall be payable on an annual basis within thirty days from the end of such calendar year."

22) For the plaintiff Mr Rogers firmly opposed the attempt belatedly to withdraw the earlier admission which apparently was consequent upon, as Mr Liu stated in his further evidence, "receiving proper legal advice ... and reviewing all the relevant documents again". In this connection Mr Rogers submitted that in an attempt to be consistent with his new position Mr Liu had sought to re-characterise factual events which took place prior to the receipt of such advice. In any event he further argued that clause 3(d), which addressed payment of accounts by the defendant to the plaintiff and the payment of revenues during the "Term" of the 2nd Agreement, must be read in the context of the "Term" (as defined in clause 3(g)), and that as such the "Term" had come to an end upon the taking effect of a notice of termination, which it is common ground occurred in this case on 16 January 2002. Mr Rogers further asserted that the conduct of the parties for the nine months since the termination of the 2nd Agreement plainly and obviously pointed to a common belief that the Agreement provided for the immediate payment of all revenue due as at the date of termination.

23) In my view there is much to be said for this argument, and had a clear admission not already been in place I should have accepted it. For present purposes, however, I decline to permit withdrawal of a clear and specifically stated position by a responsible officer, in this case a director, of the defendant company. Evidence was put in, on oath, and then sought to be resiled from. I decline to permit serious commercial litigants (as I assume the defendant to be) to blow hot and cold in this manner. Had the application for summary judgment not been adjourned on 18 September at the defendant's behest it would have been decided on the basis of the evidence as it then stood, and I reject the attempt now to backtrack and to withdraw a specific admission, which no doubt was made after due consideration. Indeed, the whole thrust of Media Asia's case as initially presented was that the moneys claimed by Star indeed were due, but nevertheless were subject to substantial dimunition by way of set-off.

24) It follows from the foregoing, therefore, that subject to the argument as to set-off as put forward by the defendant, I find that the plaintiff has proved its claim against the defendant in the sum of $32,755,229.00.

25) I turn now to the two significant sums which Media Asia maintains must be deducted from the claim presently made against it.

26) The first sum under this head which the defendant says that it is entitled to deduct is the amount of $5,000,000.00. This figure represents a security deposit paid by Media Asia to Star pursuant to the Supplemental Agreement of 9 November 2001. As earlier noted, the latter agreement reflected difficulties which had arisen (primarily, it seems, from Star's viewpoint) in the performance of the 2nd Agreement, and clause 3 of the Supplemental Agreement stated that Media Asia would "provide HK$5 million in cash ... to secure its compliance with" certain undertakings, two of which were that Media Asia would on request return to Star all outstanding physical inventory (if any) and other materials provided by Star, and that Media Asia continuously would observe and comply with the terms of the 2nd Agreement.

27) The battle lines here are clearly drawn, and focus upon whether this deposit may be used to secure such obligations owed to Star by Media Asia as survive the termination of the 2nd Agreement.

28) To this Mr Rogers submits that the answer undoubtedly is 'yes'. He argued that pursuant to clause 1(g), a termination notice under the 2nd Agreement is "subject to any then existing licences or agreements between Media Asia and any sub-distributors", with the result that the 2nd Agreement remains in effect for certain purposes, and that Media Asia continues to owe obligations to Star thereunder. Since it is common ground that Media Asia will continue to accrue debts to Star under those sub-distribution agreements that remain ongoing, it therefore is plain, he said, that the 1999 Agreement had not been terminated for these purposes at least, that no obligation to repay the security deposit had yet arisen, and accordingly that no right of set-off presently could exist in respect of this sum.

29) To the contrary, Mr Wong asserted, as a matter of construction of clause 3 of the Supplemental Agreement, that the undertakings secured represented interim arrangements only and were indicative of the parties' intention that the undertakings would not survive the termination of the 2nd Agreement; accordingly the deposit monies could only be used as at the termination of this Agreement, so that the defendant's right of set-off of these deposit monies had accrued since 16 January 2002.

30) On this aspect I prefer Mr Roger's argument. As a matter of construction I am not persuaded that, in effect, the plaintiff is to be left without the security of the sum so deposited during a period wherein, notwithstanding the notice of termination of the 1999 Agreement, Media Asia retains ongoing obligations to account to Star for future revenues under that Agreement (and also, possibly, fully to comply into the request for return of outstanding physical inventory).

31) It follows, therefore, that in so far as the sum of $5,000,000 is concerned, I decline to permit Media Asia to set-off this sum for the purpose of calculating the amount of money presently due and owing to Star. The obligation to repay this security deposit undoubtedly will crystallise, but in my judgment this has not yet occurred.

32) The second sum which Media Asia seeks to set-off against Star's claim is that of $8,741,169.84. This amount, out of a total of $9,517,269.84, is said to be owing to Media Asia by Star under the two Output Agreements, and is the sum which has accrued due to Media Asia as at the date of the commencement of this action, that is, 5 July 2002.

33) Once again, there appears to be no query as to the accuracy of the figure in itself, the dispute being confined, in effect, to the relevant cut-off date for this calculation. Star says that hitherto amounts owing to Media Asia under the Output Agreements were deducted from the amount owing by Media Asia to Star under the 2nd Agreement, with Media Asia paying the balance. However, the reckoning was done in respect of amounts owing up to the same date. Accordingly, in this instance, submitted Mr Rogers, since Star's claim had been for revenues owing as at 30 April 2002, Media Asia should be permitted to set-off only those amounts accruing due under the Output Agreements as at the same date. On this basis, therefore, the amount owing by Star as at 30 April 2002 is accepted to be $6,390,109.84.

34) For his part Mr Wong SC attacked the alleged practice of reconciliation as taking place solely at like dates, maintaining that whilst such instances may have occurred such was not set in stone and certainly did not give rise to any form of binding obligation. Accordingly, he submitted that his client should be permitted to set-off the additional amount claimed over and above that which Star conceded to be due and owing to Media Asia.

35) I confess that I find it difficult to see why this particular argument is pursued, given that there is no doubt that Star and Media Asia will continue to have a financial relationship for as long as a revenue stream continues to accrue from Media Asia's on-going sub-distribution agreements, with the consequent necessity for Media Asia to account to Star. No doubt, also, revenues will continue to accrue in the other direction under the Output Agreements, so that periodic financial reconciliations still will be required. It follows, it seems to me, that whether monies admittedly due and owing are set-off now or some months down the line is not of overriding importance; the accountants doubtless will track the money flows, and this in a case wherein, thus far at least, there appears to have been no dispute about the accuracy of the figures in themselves.

36) Against this backdrop, I do not consider a case has been made such as to preclude Media Asia from setting-off monies which undoubtedly are owed to it by Star, and wherein a portion of the sum claimed to diminish the debt is referable to a period subsequent to 30 April 2002. The implication of this finding is that this accounting element will be reflected in future reconciliations.

37) Accordingly, I allow Media Asia's claim to set-off the sum of $8,714,169.84 in dimunition of the monies adjudged due to Star.

38) The foregoing concludes the matters in issue before the court at the hearing of the plaintiff's application for summary judgment. My Order, therefore, is as follows :

(i) That there be judgment for the plaintiff against the defendant in the sum of HK$24,014,059.16 ($32,755,229 - $8,741,169.84);

(ii) There be an order nisi that interest be payable on such sum at the rate of 1% over HIBOR (to be calculated on an average monthly basis) from the date of the issue of the writ herein, that is 5 July 2002 until judgment, and thereafter upon such principal sum at the judgment rate from time to time prevailing until payment;

(iii) There be an order nisi that the costs of and occasioned by this application be to the plaintiff, to be taxed if not agreed.

The Injunction Application

39) As earlier noted, this application was made by Media Asia as the result of the solicitors for Star sending letters, on or about 10 September 2002, to Media Asia's sub-licencees and sub-sub-licencees, referring to the termination of the 1st and 2nd Agreements, requiring the identification and return of all "inventory and materials" relevant to the exploitation of the Distribution Films, threatening action for infringement of copyright for use or retention of Star materials absent Star's written consent, and requiring provision "within 7 days" of copies of relevant agreements entered into between the particular addressee and Media Asia and/or Mega Star, a related company of the defendant.

40) The injunction summons and supporting affirmation were filed on 17 September 2002, the same date upon which Media Asia filed its Defence and Counterclaim, and on 20 September 2002 Sakhrani J adjourned the injunction application with directions for the filing of further evidence, and a direction that it be heard together with the plaintiff's application for summary judgment.

41) In the event, given time constraints the issue of injunctive relief was not fully canvassed at the hearing on 4 October 2002. Towards the conclusion of that hearing, at which the application had been opened but not responded to, the court indicated a provisional view to the effect that this issue could and should be addressed by an undertaking from Star to write a further letter of clarification to the sub-distributors and sub-sub-distributors in question. Shortly put, given the undoubted fact of the sending of the initial letters, which appeared on their face to be 'heavy handed' in approach, the court's primary concern was with the valid and ongoing contractual relationships 'down the chain', as is were, as opposed to the grant of the interlocutory injunction requested, the broad terms of which sought to preclude Star from further contact, by letter or "otherwise howsoever", with Media Asia's sub-distributors and sub-sub-distributors in terms of demand for return of materials or interference with the continuous performance of the sub-distribution agreements.

42) Notwithstanding an exchange of correspondence between solicitors for the parties after the adjourned hearing, the injunction issue was not able to be resolved, and the matter was further argued at the next hearing on 16 October, aided by extensive skeleton arguments. At this hearing Mr Wong SC sought relief in the slightly amended terms of paragraph 13 his solicitor's letter of 11 October to the solicitors for the defendant, maintaining that he would be satisfied with an undertaking in those terms, whilst Mr Rogers for Star took the position that the injunction application as mounted was flawed, arguing that there had been a failure to demonstrate the existence of a serious issue to be tried, and stressing in particular that damages, if suffered, manifestly were an adequate remedy in this case, and further that the balance of convenience lay heavily in favour of not granting an injunction.

43) In the event, at the conclusion of argument the court declined to make any order upon Media Asia's injunction application. The court accepted the plaintiff's undertaking, through its solicitors, that Star would issue a letter of clarification to relevant parties in the form of a draft letter originally proffered in inter-solicitor correspondence, as further amended as the result of certain concessions of detail which were made by Mr Rogers during argument at the resumed hearing. This letter, in blackline version, was subsequently sent to the court and to the solicitors for Media Asia on 18 October, and was scheduled to be sent after 4pm on that day to parties identified by Media Asia as sub- or sub-sub-distributors.

44) This undertaking to send such letter, as amended, was considered by the court, in the exercise of its discretion, as an appropriate and commercially sensible manner of resolving this element of the dispute. And whilst the undertaking proffered by Mr Rogers to send a further letter meant that it was no longer necessary for the court to grasp the injunction nettle, it is also fair to note, other issues apart, that there appeared to be a singular lack of evidence that the original letters of which complaint was made had created the serious and unquantifiable loss for which Media Star contended.

45) Be that as it may. It was eminently reasonable in my view that a letter of clarification in the terms ultimately drawn should follow that which I considered to be the 'heavy-handed' letters of 10 September, and whilst I bear in mind that on behalf of his client Mr Wong did not agree with certain other aspects of the further letter as sent - as to the validity of which ancillary objections the court expresses no view it seemed to me then, as now, that the further letter as sent remained sufficient, absent the injunctive relief sought, to address the primary concerns of Media Asia.

46) Although the matter was thus resolved, the issue of costs provoked strong argument. Mr Rogers maintained that the injunction application was misconceived, and that in any event there had been no pre-application letter which might have enabled Star to deal with concerns such as now had been addressed in court. He submitted that he should be entitled to 50% of his costs. Mr Wong retorted that Star had brought the application on itself, and that the undertaking as eventually achieved had been revised during submissions to reach the stage at which the court was prepared to accept it. For his part he said that if the court was minded to depart from the normal order of costs in the cause (see MN 29/1/44 of the 2002 White Book), he should have the "bulk" of his costs in this instance.

47) Costs issues sometimes generate more difficulty than resolution of the main issue, and this perhaps is one of those instances. I have reflected upon the circumstances surrounding this application, its genesis and the manner in which it was pursued, and have concluded that Mr Rogers probably was not far off the mark when he suggested that this really represented "a tiff between corporate heavyweights" which could and should have been sorted out without the necessity for formal legal proceedings (a sentiment which also, it seems to me, might equally be applied to the monetary dispute between these parties).

48) In my view the appropriate costs order on this application is that the costs of and occasioned by the injunction application are to be in the cause, save that the costs of the hearing on 16 October are to be plaintiff's costs in the cause, such costs to be taxed if not agreed. I so order.