UNLIMITED PRODUCTION LTD v. FILMKO PICTURES LTD

HCA4219/2002
HCA4568/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4219 OF 2002

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BETWEEN

(by original action)

AND BETWEEN

(by counterclaim)

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AND

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4568 OF 2002

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(TRIED TOGETHER)

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JUDGMENT

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I.  Introduction

1. Mr Derek Yee Tung Sing (“Mr Yee”) is an experienced and well-known film director and producer.  Since 1975, he has been working in the film and entertainment industry as actor, director, scriptwriter and producer.  He also served the industry as the president of the Hong Kong Film Directors’ Guild between 2000 and 2004, the vice-chairman of the Hong Kong Film Awards between 2001 and 2003, member of the Film Services Advisory Committee between 2001 and 2004, panel member of the Appeal Board under the Entertainment Special Effects Ordinance, Cap. 560 and member of the Entertainment Industry Advisory Committee of the Trade Development Council.

2. In 1993, Mr Yee established two companies :

(1) Unlimited Production Limited (“UPL”), which provides services as a production house for making films; and

(2) Film Unlimited Production Company Limited (“FUPL”), a corporate vehicle for holding various intellectual property rights relating to production of films.

The companies’ shareholders and directors are Mr Yee and Mr Cheung Cheong.  Mr Cheung holds the shares on trust for Mr Yee.

3. Mr Wong Hoi Fung (“Mr Wong”) is the major shareholder and director of Filmko Pictures Limited (“Filmko”) (formerly known as Alexander Entertainment Production Limited), which engages in the film and entertainment business.

4. In early 2000, Mr Yee and Mr Wong came to know each other.  Impressed by Mr Yee’s experience and reputation in the industry, Mr Wong invited Mr Yee to assist him in his company’s business.  After discussions, Mr Wong agreed verbally with Mr Yee in about July 2000 that Filmko would start to engage Mr Yee in 2001.  The oral agreement was later in December 2000 formalized and reduced into writing in the form of a Chinese Contract (“the Engagement Contract”) whereby UPL agreed to assign Mr Yee to act as Filmko’s administration and production supervisor under (A) the Production Part and film director under (B) the Direction Part for a period of two years between 1 January 2001 and 31 December 2002 for a total consideration of HK$6,000,000.

5. The relationship between Mr Wong and Mr Yee turned sour in about October 2002.  By a letter dated 16 October 2002 from its solicitors, Filmko alleged that UPL and Mr Yee were in repudiatory breach of the Engagement Contract, which Filmko accepted.  Filmko then stopped all further payments under the Contract.  By then Filmko had already paid a total remuneration of HK$5,400,000 to UPL.

6. This led UPL to commence HCA4219/2002 on 7 November 2002 against Filmko, claiming for the balance of the remuneration of HK$600,000.  Filmko counterclaimed against UPL and Mr Yee for breach of the Engagement Contract in the sum of HK$1,542,857.14 under the Production part and HK$2,700,000 under the Direction part.

7. On 4 December 2002, Filmko commenced HCA4568/2002 against UPL and Mr Yee in connection with an alleged oral agreement (“the TMS Agreement”) for the sale of the film and television production rights (“the Underlying Rights”) in a novel entitled “The Third Master’s Sword” (“the Novel”).  It claimed for, inter alia, damages in the sum of HK$1,293,394.80.

8. The actions were tried together before me.  By consent, the evidence, both documentary and oral, adduced in one action can be used in another.  The oral evidence came from Mr Yee, his witness Mr Sham Kin Fun (“Mr Sham”) and Mr Wong, whose witness statements stood as their evidence-in-chief.  UPL and Mr Yee were represented by Mr Martin Lee, SC leading Mr Hectar Pun, Filmko by Mr Gerald McCoy, SC leading Mr Hylas Chung and Mr Peter Wong.  In this judgment, I will not deal with every single point taken by counsel.  Suffice it to say that I have already considered all their submissions with care.

II.  HCA4568/2002

9. I will first look at HCA4568/2002.  The background circumstances leading to the parties’ dispute may be summarized as follows.

A.  Background

10. Mr Hung Yiu Wah, writing under the pseudonym Gu Long (“Gu Long”), was a very famous martial arts novelist.  He died some years ago.  One of the novels that he wrote was the Novel.  In the mid 1970s, Shaw Brothers (Hong Kong) Limited (“Shaw Brothers”) produced a movie based on the Novel with the same title, casting Mr Yee in the leading role, the Third Master.

11. In 1999, Mr Yee became interested in shooting a film based on the Novel.  He approached Mr Zhang Yi Peng (“Mr Zhang”) who, according to Mr Yee’s case, was the attorney/representative of Mr Hung Ching Tat (“Mr Hung”), Gu Long’s son.  After discussions, Mr Yee acting on behalf of FUPL entered into a Chinese agreement dated 30 November 1999 with Mr Zhang (“the Zhang Agreement”) under which Mr Zhang purported to sell to FUPL for HK$140,000 the Underlying Rights in the Novel for a limited duration (3 years for producing a film and 5 years for producing a television series respectively).  Clause 3 of the Zhang Agreement prohibited FUPL from re-selling and transferring the Underlying Rights in the Novel to a third party during the limitation period without consent and if FUPL defaulted, the agreement would cease to have effect automatically forthwith on the day of transfer.

12. Mr Yee then involved Golden Harvest Film Productions Limited (“Golden Harvest”) in the production of a film based on the Novel.  Golden Harvest incurred a sum of about HK$61,800 in connection therewith but eventually did not proceed with the production.

13. In mid 2000, Mr Yee discussed with Mr Wong about making a film based on the Novel with the same title (“TMS”).

B.  Filmko’s pleaded case

14. Filmko pleaded in the Amended Statement of Claim that the parties entered into the TMS Agreement in or about July 2000, under which Mr Yee and UPL agreed to sell to Filmko the Underlying Rights in the Novel for HK$201,776.99, of which HK$140,000 was for the purchase of the said Underlying Rights and HK$61,776.99 was for the payment to Golden Harvest for rescission of the sale and purchase of the Underlying Rights in the Novel between Mr Yee and UPL on one part and Golden Harvest on the other.

15. The TMS Agreement is evinced by the presentation and production of an alleged invoice ref. UPL001 dated 28 July 2000 issued by UPL to Filmko for the said sum of HK$201,776.99 (“the Record”).

16. In order to induce Filmko to enter into the TMS Agreement, Mr Yee and UPL represented to Filmko that UPL and Yee had acquired and owned the said Underlying Rights and they were entitled to sell it to Filmko; and that they had returned HK$61,776.99 to Golden Harvest for the rescission of the sale and purchase of the said Underlying Rights between Golden Harvest and them.  Acting on those representations, Filmko entered into the TMS Agreement and accordingly paid Mr Yee and UPL the said sum of HK$201,776.99 on 21 September 2000.  In about November 2002, Filmko, having been caused to read a copy of the Zhang Agreement, discovered that the above representations were all false and made by Mr Yee and UPL fraudulently, recklessly or negligently.

17. Filmko also took issue on the ownership of the Underlying Rights in the Novel.  It first pleaded that the said Underlying Rights vested with Golden Harvest.  In about November 2002, a Mr T.T. Chan of Golden Harvest called Mr Wong telling him that Mr Yee and UPL owed a sum of HK$61,847.10 to Golden Harvest for their failure to return the monies paid by Golden Harvest for the rescission of the sale and purchase of the Underlying Rights in the Novel.  Thus Golden Harvest is and was at all material times the owner of the said Underlying Rights.  Alternatively, Filmko asserted that the Underlying Rights in the Novel vested with Shaw Brothers by virtue of an agreement made between Gu Long and Shaw Brothers dated 27 July 1976 whereby Gu Long purported to permanently sell the Underlying Rights in the Novel to Shaw Brothers for HK$4,000 (“the Gu Agreement”).  Shaw Brothers subsequently sold the said Underlying Rights to Celestial Pictures Limited (“Celestial”), who then became the permanent sole and exclusive owner.

18. Because of the misrepresentations and since ownership of the Underlying Rights in the Novel did not vest with UPL, the consideration of the TMS Agreement had wholly accordingly failed.  Filmko had incurred a total of HK$1,293,394.80 on production works of TMS.  It claimed for recission of the TMS Agreement, return of HK$201,776.99 and damages in the sum of HK$1,293,394.80.

C.  Defence of Mr Yee and UPL

19. UPL and Mr Yee, in their Defence, denied that they had agreed to sell the Underlying Rights in the Novel to Filmko.  Filmko merely agreed to be an investor to finance the production of TMS and that Filmko would be the owner of the copyright of TMS upon completion of its production.  Filmko’s payment of HK$201,776.99 was reimbursement and did not amount to any transfer of the said Underling Rights to Filmko.  They did not make any misrepresentations as alleged.

20. On ownership of the Underlying Rights in the Novel, Mr Yee and UPL maintained that FUPL is by virtue of the Zhang Agreement the lawful owner.  They were not aware of any transfer of the said Underlying Rights to Shaw Brothers as alleged.  They denied that Shaw Brothers or Celestial owned the said Underlying Rights.  Alternatively, they were not aware that Shaw Brothers or Celestial was the owner and they honestly and on reasonable grounds believed that Mr Hung owned the Underlying Rights in the Novel.

21. They further pleaded that Filmko did not proceed with the production of TMS because it did not have or did not provide sufficient funding for the production.

D.  The primary issue : did the TMS Agreement exist?

22. As couched in the pleadings, the questions pertaining to misrepresentation and ownership of the Underlying Rights in the Novel arise only if the parties did enter into the TMS Agreement as alleged by Filmko.  So the first and foremost issue is : did the TMS Agreement exist?

23. Mr Wong’s evidence is that the parties did enter into the TMS Agreement.  His evidence in his witness statement is more or less a reproduction of Filmko’s pleadings, which I have already summarized above.  Under cross-examination, Mr Wong remained adamant that Mr Yee had agreed to sell the Underlying Rights in the Novel to Filmko.  He said he needed the Underlying Rights to “sell it”, referring to TMS.  Without the right to sell TMS, “What is the purpose of buying this underlying rights?” he asked.  The thrust of his evidence is that Filmko needed the Underlying Rights in the Novel so that it could acquire the copyrights in TMS without which Filmko would not be able to commercially exploit the movie.

24. Mr Yee’s evidence is that in or about December 1999 he approached and invited Golden Harvest to invest in the production of a movie based on the Novel, which invitation was accepted by Golden Harvest.  FUPL then engaged a scriptwriter, Mr Chun Tin Nam, to write a script based upon the underlying idea of the Novel.  However, after the first draft of the script was completed in about May/June 2000, Golden Harvest suspended the project due to casting problems.  FUPL had incurred expenses in the sum of HK$61,847.01 in connection with the preparation of the film.  Golden Harvest reimbursed FUPL for the same amount subsequently.

25. When Mr Yee told Mr Wong that Golden Harvest did not proceed with the production of TMS, Mr Wong said that he would make it.  Mr Wong agreed to invest in the production of TMS and reimburse Mr Yee for the payment for the Underlying Rights in the Novel under the Zhang Agreement and the expenses that Golden Harvest had incurred.  What he did was in fact his practice, which in brief is this.  Having acquired the Underlying Rights in the Novel under the Zhang Agreement, he then looked for investors who would be interested in making the film based on the Novel.  Mr Yee explained that there is no need for an investor to acquire ownership or assignment of the right to produce the movie.  The objective of the investor would be to obtain a return for his investment by exploiting the end product, which is the movie.  The important thing for the investor would be to obtain the relevant intellectual property rights in the film, rather than to obtain the right to make the movie.  It would be part of the agreement between the investor and the producer that the producer would assign the relevant rights in the film to the investor.  Mr Yee said it was in fact the trade practice in the film industry.  His evidence on trade practice is corroborated by Mr Sham.

26. I have carefully considered all the evidence, both oral and documentary, pertaining to the primary issue whether the TMS Agreement existed.  In particular, I take into account the following matters.

(1) Oral agreement not reduced into writing

27. I first look at the form of the TMS Agreement.  It is common ground that TMS was going to be a major movie.  Filmko intended to invest tens of millions in it and cast famous stars in the leading roles.  The TMS Agreement was obviously an important agreement.  But as a purported assignment of copyright, it has to be in writing : see section 101 of the Copyright Ordinance, Cap. 528 (“CO”).  Mr Wong said that he did not know that there is such a requirement.  I cannot accept his evidence.  Mr Wong had past experience in making movies before Mr Yee joined Filmko.  Although Mr Wong said that his experience was limited, I do not think he would be wholly ignorant of the obvious requirement for a written assignment to effect the transfer of the Underlying Rights in the Novel.  Further, Mr Wong had the assistance from other experienced people in the industry like Mr Jacob Cheung and Stanley Kwan and could seek their advice if necessary.  In the circumstances, I find it inconceivable that Mr Wong had not caused the TMS Agreement, despite its huge importance, to be reduced into writing.  This defies commercial sense if the TMS Agreement did exist.

(2) The commercial reason for the TMS Agreement

28. I next look at the alleged commercial reason for the TMS Agreement.  To recap, Mr Wong said that Filmko needed the TMS Agreement in order to acquire the copyrights in TMS for later commercial exploitation.  This assertion does not withstand a closer scrutiny.

29. It is common ground that Filmko had initially engaged Mr Tsui Hark, a famous director, to direct TMS.  Filmko had in fact paid a deposit of HK$850,000 to Mr Tsui.  And Mr Yee would be the producer.  Sometime in 2002, Mr Yee told Mr Wong that Mr Tsui would not direct TMS.  Mr Yee said he would direct it and would ask Mr Tusi to be the producer.  There is no evidence to suggest that Mr Wong disagreed with the switch in roles.  Under section 11(2)(b) of CO, the author, in the case of a film, is the producer and the principal director.  Section 12 provides that a film is treated as a work of joint authorship unless the producer and the principal director are the same person.  And under section 13, the first owner of any copyright in a film is the author, that is the director and the producer.  Accordingly, the first copyright owner in TMS would be Mr Yee and Mr Tsui, whether before or after the switch in roles.  If Filmko wished to acquire the copyright in TMS, it needed an assignment from Mr Yee and Mr Tsui for that purpose.  In other words, the TMS Agreement would not give what Filmko wanted.  Only an assignment by Mr Yee and Mr Tsui would.

30. Despite his limited experience in the film industry before Mr Yee joined Filmko as alleged, I do not believe that Mr Wong would be ignorant of the obvious and important requirement of an assignment of the copyrights in the movie from its producer and director in favour of Filmko.  My observation is fortified by Clause 7 of Part C of the Engagement Contract, which required Mr Yee to sign a “Certificate of Employment” for each of the movies that he produced or directed.  The Certificate of Employment is in substance an assignment signed by Mr Yee to assign as author, among other things, any copyright in the movie to Filmko.  Mr Yee had in fact already signed the copy attached to the Engagement Contract.  (The title of the movie was left blank.)  For these reasons, I find that Mr Wong was fully aware of the need for an assignment for Filmko to acquire the copyright in TMS from Mr Tsui and Mr Yee.  His allegation that Filmko needed the TMS Agreement in order to acquire the copyright in TMS is plainly untrue andmust be rejected.

(3) Trade practice

31. This brings me to the trade practice of adapting an original novel into a film in the film industry in Hong Kong.  Mr Yee has touched upon it in his witness statements filed in both actions.  But the evidence on the trade practice mainly came from Mr Sham.  Mr Sham is well-known in the film industry and has vast experience of over 25 years.  In his witness statement dated 16 May 2006, he said :

“3. I have personally supervised the production of a number of films which is based on original material to which the rights must be acquired from the original copyright owner.

4. Typically, where the production of a film is based on some other works for instance, novel, the first stage in the production of a film in Hong Kong is the acquisition of the necessary legal rights in the works.  Such rights are usually referred to in the film industry as the ‘underlying rights’ and generally consist of literary, dramatic, musical or artistic works.

5. In general, a producer will at the outset acquire a right to adapt the work into a dramatic work by way of screenplay, as in the case of ‘The Sword of the Third Master’(三少爺的劍).  The screenplay will then be available to the producer to enable him to solicit finance for the production of the film.

6. Having acquired the right of adaptation, a producer will generally, either by himself or by commissioning a scriptwriter, prepare an outline or treatment of the work on which it is proposed to base the film.  An outline is, as its name implies, a short document giving a brief guide to the proposed film, whereas a treatment generally comprises a summary of the plot, sample dialogue and character analyses.  Such documents are generally prepared for the purpose of raising finance for the next stage of the film production process or, where a theatrical film is concerned, to attract a star name who will make it easier to obtain financing for the film.

7. Where the producer does not finance the screenplay himself he will generally approach a film investor, for the initial finance to commission the screenplay and ‘develop’ the acquired underlying rights.  Where such funds are forthcoming, ‘development’ will comprise the commissioning from a scriptwriter of a screenplay based upon the underlying idea or material, and the preparation of a production schedule and budget based upon the screenplay for the film.

8. Such underlying rights need not be ‘sold’ to the investor(s).  The investor(s) is only investing in the film’s production and need not have ownership to the underlying rights of the original material.  The investor(s) of the film would only own the copyright to the film which is made as a result.

9. This practice is to :

(a) prevent the film production company from ‘trading’ in film rights by buying at a lower cost and selling at a higher cost with no intention of producing the film; or

(b) ensure that the film production company is accountable to the original copyright owner in making the film according to the ideas of the original material.

10. The above is a very standard procedure which is recognized in the film industry.”

32. Filmko has adduced no evidence to contradict Mr Sham.  Mr McCoy took a point of admissibility.  He submitted that Mr Sham’s evidence amounts to opinion evidence.  Since Mr Sham is not giving evidence as an expert, his evidence cannot be admitted.  Mr Lee submitted that a business usage as distinguished from a common law custom can be proved by the direct evidence of witnesses which must be positive and not amount to mere opinion : Phipson on Evidence (16^th Edn), para.7-26 at p.171.  It is Mr Sham’s repeated evidence that what he had stated in his witness statements were matters of general practice or common practice of the film industry in Hong Kong.  Mr Sham’s evidence can and in the absence of any contradictory evidence should be admitted.  I agree and accept his evidence in its entirety.

33. In my view, the trade practice makes very good commercial sense for an investor.  He does not need to bother himself with acquiring the right to produce the movie.  For he can utilize the right through the collaboration of the producer.  And for the copyrights in the movie which are his prime concern, as noted, the investor will be able to acquire the rights by assignments from the director and producer.

34. Mr Yee’s case on how he dealt with the Underlying Rights in the Novel is entirely consistent with the trade practice while Mr Wong’s case on the TMS Agreement is not.

(4) Not making any profit

35. According to Filmko’s case, the price for the Underlying Rights in the Novel is HK$140,000, the same amount as Mr Yee paid under the Zhang Agreement.  In other words, Mr Yee did not make any profit out of the sale.  It is very odd indeed.

(5) Filmko’s payment of HK$140,000

36. So what is the payment of HK$140,000 made by Filmko for?

37. Filmko’s case is that it had paid HK$140,000 for the purchase of the Underlying Rights in the Novel.  Filmko relied heavily on the Record, which it referred to as an invoice, to support its case.  The Record contained a breakdown of as follows :

“Film title ‘三少爺的劍’

Payment to:	Description	Cheque#	Amount
1) 李勤益創作中心	編劇費	396194	20,000.00
2) Entertainment – Film Director	籌備費用	396195	3,547.50
3) 李勤益創作中心	編劇費	396197	30,000.00
4) 扣買‘三少爺的劍’	籌備費用	396198	170.00
5) 長途電話費	籌備費用	396202	698.59
6) 禤嘉珍實支	籌備費用	396208	5,155.92
7) Entertainment – Film Director	籌備費用	396212	1,200.00
8) Entertainment – Film Director	籌備費用	396213	300.00
Research	籌備費用	396213	705.00
9) 扣買‘三少爺的劍’小說版權			140,000.00
10)  Film Workshop Co Ltd. (徐克導演)	制作費	545922KBC001	875,000.00	←峰哥已付
			1,076,777.01	”

It was received by Filmko on 29 August 2000.  (The characters “峰哥已付” were hand written.)

38. Mr Yee’s evidence that the Record is not an invoice as such.  He said in his witness statement dated 29 November 2004 thus :

“38. In or about late July 2000, I instructed my secretary, Freebe Fong, [(‘Ms Fong’)] to send a list of expenditure in respect of the production of the Film to Filmko for reimbursement.  There is now produced and shown to me marked ‘YTSD-9’ a copy of the said list.  The list included the sum of $61,777.01 representing the expenses incurred in the production of the Film (and reimbursed by Golden Harvest) and the sum of HK$140,000.00 (paid by FUPL pursuant to the Agreement).

39. On or about 29^th August 2000, Freebe sent the list of expenditure to Filmko again for the purpose of following up on payment, together with a copy of the Agreement (exhibit ‘YTSD-2’) and original copies of various receipts incurred for the production of the Film (exhibit ‘YTSD-5’) to a staff member at the accounts department of Filmko called Alice Yim.

40. I Understand that Freebe had made a number of attempts to ask Alice Yim by phone to issue cheques of the requisite amounts for reimbursement in the following weeks after 28^th August 2000.

41. Eventually, on or about 21^st September 2000, UPL received a cheque from Filmko in the sum of HK$201,776.99, being the total of HK$61,776.90 and HK$140,000.00.  There is now produced and shown to me marked ‘YTSD-10’ a copy of the said cheque.

42. The payment of HK$140,000 by Filmko was not the price for the purchase of the Rights by Filmko.  As I said above, it was part of the financing arrangement between UPL and Filmko that Filmko would pay HK$140,000 to cover the price paid pursuant to the Agreement.  If the intention had been to ‘sell’ whatever rights were conferred by the Agreement, I would have sought to do so at a profit.  That did not happen.  In fact Filmko’s payment of the HK$140,000 formed a relatively insignificant part of its overall financial commitment under its arrangement with UPL.  To me, it was more in the nature of a gesture of sincerity rather than anything else.”

39. Mr Yee was cross-examined on the Record.  He was particularly asked questions about item 9 (扣買“三少爺的劍”小說版權) (“Item 9”).  Mr Yee said that the Record was sent to Mr Wong to “remind him of the promise that he gave, that is, to pay HK$140,000 for the copyright as well expenses incurred by Golden Harvest”.

40. Mr Yee was also cross-examined on the documents pertaining to the application for payment for the said sum of HK$140,000 signed by Mr Yee in August 2000.  They also referred to扣買“三少爺的劍”故事版權費用.  Mr Yee said that he did not prepare the documents himself.  He re-iterated that the payment of HK$140,000 was not for Filmko’s purchase of the Underlying Rights in the Novel but for reimbursing his expenditure in acquiring the Underlying Rights under the Zhang Agreement.

41. Mr McCoy submitted that Mr Yee had admitted in cross-examination that the payment of HK$140,000 was for Filmko’s purchase of the Underlying Rights in the Novel.

42. In my view, what Mr Yee had said under cross-examination about the Record and the payment documents must be considered in the totality of the evidence.  Mr Yee was adamant throughout his oral testimony that the payment of HK$140,000 was not for Filmko’s purchase of the Underlying Rights in the Novel.  He repeatedly said that it was for reimbursing him for the expenditure that he had incurred in acquiring the Underlying Rights under the Zhang Agreement.  Further, Item 9 must be understood in the context of the Record.  Items 1 to 9 are plainly expenditure previously incurred by UPL in the course of preparing the shooting of the film (when Golden Harvest was involved).  Item 4 of the Record stated扣買“三少爺的劍”.  The relevant receipt of this item is a receipt of two sets of the Novel purchased on 10 January 2000.  The application for payment of this item was made on 20 January 2000 for HK$170 covering two sets of the Novels (HK$135) and a VDC (HK$35).  The application was approved on 24 January 2000 with cheque no.396198, which also appeared against item 4 on the Record.  Plainly, item 4 represents the sum incurred by UPL for buying (扣買) two sets of the Novel.  The words “扣買” in Item 9 must be understood in the same manner.  By so describing the amount of HK$140,000, Item 9 clearly means that it is the amount incurred by Mr Yee in acquiring “三少爺的劍”小說版權.  It does not refer to the sum of HK$140,000 as payment made by Filmko to purchase the Underlying Rights in the Novel, as now contended.  And I accept Mr Yee’s evidence that if the TMS Agreement existed, then Item 9 should state “transfer” or “resale” of the Underlying Rights.  The payment documents in relation to the payment of HK$140,000, which were also prepared by Mr Yee’s secretary, must also be understood in the same manner.

43. For these reasons, I am unable to accept that Mr Yee had admitted that the payment of HK$140,000 was for Filmko’s purchase of the Underlying Rights in the Novel.  I am also unable to accept that the Record or the payment documents in relation to the payment of HK$140,000 supports Filmko’s case.  On the contrary, they support Mr Yee’s case.  In my view, the fact that Filmko saw fit to resort to the Record and twist the clear meaning of Item 9 demonstrates how weak its case on the TMS Agreement is.

44. For these reasons, I accept Mr Yee’s evidence and find that the payment of HK$140,000 by Filmko is for reimbursing him for his expenditure for acquiring purchasing the Underlying Rights in the Novel under the Zhang Agreement.

(6) The payment of HK$61,776.99

45. I accept Mr Yee’s evidence that he had not sold the Underlying Rights in the Novel to Golden Harvest.  The alleged sale to Golden Harvest does not accord with Mr Yee’s general practice and the trade practice.  I also accept his evidence he did not tell Mr Wong that he had sold the Underlying Rights in the Novel to Golden Harvest and could cause Golden Harvest to transfer the Rights to Filmko.  I do not accept Mr Wong’s evidencethat the payment of HK$61,776.99 was to enable Mr Yee to settle with Golden Harvest for the recission the alleged sale and purchase of the Underlying Rights with Golden Harvest.

(7) Mr Yee providing Filmko a copy of the Zhang Agreement in 2000

46. It is Mr Yee’s evidence that he had instructed Ms Fong to send a copy of the Zhang Agreement to Filmko in mid 2000.  When payment was yet to be made by Filmko, he asked Ms Fong to chase Filmko many times.  She told Mr Yee that she had sent the whole set of documents including the copy Zhang Agreement and the Record to Mr Wong and had followed up the matter.  This is consistent with the chop of the Record which bore the date 29 August 2000.  The copy Zhang Agreement produced by Filmko had the date “9 Dec 2001” inserted to the chop “RECEIVED DATE/BY” at the top right hand corner and “Albert” written there.  Mr Wong did not rule out the possibility that the copy Zhang Agreement was shown to Albert Chow, Filmko’s financial controller at the time, in 2001.  Mr Wong also admitted that since Filmko had made payment, Filmko would have had looked at the Zhang Agreement and possessed a copy in August 2000.  He finally agreed that a copy of the Zhang Agreement would have been made available to Filmko more than a year earlier than 6 December 2001.

47. The significance of the above evidence is this.  As noted above, Clause 3 of the Zhang Agreement prohibited Mr Yee from on-selling the Underlying Rights in the Novel to a third party without Mr Zhang’s consent and if Mr Yee acted in breach, the Zhang Agreement would become null and void.  If TMS Agreement did exist, Mr Yee must have acted in flagrant breach of the Zhang Agreement.  By providing a copy of the Zhang Agreement to Filmko, Mr Yee had exposed himself to the considerable risk (if not the inevitable eventuality) that Filmko would soon find out that he could not sell the Underlying Rights in the Novel to Filmko without breaching the Zhang Agreement.  This defies common sense and points against the existence of the TMS Agreement.  Further, Filmko did not, until the present proceedings, make any complaint about Mr Yee acting in breach of Clause 3 of the Zhang Agreement by making the TMS Agreement with Filmko although it had been in possession and Mr Albert Chow would have seen since it in 2001.  This again defies common sense.

(8) Mr Yee’s letter dated 7 October 2002

48. For completeness, there is a document that I need to deal with.  It is a letter written by Mr Yee to Mr Wong dated 7 October 2002.  By that time disputes between the parties had already arisen.  In that letter, Mr Yee stated that “本人亦將購得該片之版權讓給Filmko”.  However, Mr Chung, who conducted the cross-examination, has not cross-examined Mr Yee on this letter.  And Mr McCoy, in his closing submissions, made no reference to or placed any reliance on it either.  In such special circumstances, I am not going to place any weight on this letter.

(9) Conclusion

49. The burden rests on Filmko to prove the TMS Agreement.  I am not satisfied that it has discharged the burden.  So I find that, on a balance of probabilities, the TMS Agreement did not exist.

E.  Other issues

50. In light of my finding, the issues of misrepresentation and ownership of the Underlying Rights in the Novel do not arise.  For completeness, I will just add two observations on the evidence pertaining to those issues.

51. First, Mr Yee had been cross-examined on whether he had reasonable grounds to believe that he had acquired the Underlying Rights in the Novel from Mr Zhang/Mr Hung, why he did not call Mr Zhang and Mr Hung to come to court to testify, whether he knew of the Gu Agreement and when he repaid Golden Harvest the sum of HK$61,847.10.  I shall not repeat in detail what Mr Yee had said on these matters.  Suffice it to say that I have considered them in full and I find his answers cogent and reasonable.  I accept what he said and no criticism can be made on his credibility by reference to those matters.  On the other hand, Mr Wong said for the first time in the box that in April 2003 he received a call from Mr Lawrence Wong Ka Hee of Shaw Brothers saying that Shaw Brothers had been owning the Underlying Rights in the Novel since 1976 and asked Mr Wong not to touch the film any more.  This alleged conversation is nowhere to be found in the pleadings or Mr Wong’s witness statements.  Mr Wong was unable to give a satisfactory reason why that was so.  I accept Mr Lee’s submission that the alleged telephone conversation is a recent fabrication.  It reflects badly on Mr Wong’s credibility.

52. Second, I agree with the submission of Mr Lee that it is wholly inappropriate to determine the question of ownership of the Underlying Rights in these proceedings when some of the interested parties, namely, Shaw Brothers, Celestial and Mr Hung/Mr Zhang are not before the court: see Gutner v. Circuit & another [1968] 1 QB 587, per Lord Denning at p.595 and per Diplock LJ at pp.602-3.

F.  Credibility

53. This action is essentially dependent on the credibility of Mr Yee and Mr Wong.  So is HCA4219/2002.  It is therefore useful for me to state expressly my finding on their credibility.  I find Mr Yee a truthful and reliable witness.  On the other hand, I find Mr Wong an unsatisfactory and unreliable witness.  I will accordingly consider Mr Wong’s evidence in HCA4219/2002 with a pinch of salt.  

G.  Order

54. I will dismiss Filmko’s claim and make an order nisi that UPL and Mr Yee do have the costs of the action, to be taxed if not agreed.

III.  HCA4219/2002

55. I now turn to HCA4219/2002.

A. An overview of the parties’ primary dispute

56. The Engagement Contract envisaged that Mr Yee would produce 6 to 8 movies and direct 2 movies for Filmko.  But before Filmko terminated the Contract, Mr Yee had only produced 3 and directed none.  The question is obviously : why?  This is really the crux of the parties’ primary dispute.  Stripped to its very essence, the bone of contention between the parties is as follows.  Filmko complained that Mr Yee had failed to perform his duties under the Engagement Contract satisfactorily.  Such breaches of duties included the lack of a concrete plan to carry out his responsibilities and failure to come up with or follow up on movie proposals.  Filmko’s case is best summed up by Mr Wong’s accusation in his oral testimony – Mr Yee was lazy and irresponsible.  Mr Yee’s case is that he had fulfilled his duties.  In particular, he had made many film proposals but Filmko did not give “the green light” to Mr Yee’s many proposals and did not provide sufficient funds to Mr Yee to shoot those films.

57. The parties’ respective case is set out in greater details below.

B. UPL’s and Mr Yee’s pleaded case

58. In their pleadings, Mr Yee and UPL referred to the Engagement Contract and pleaded two implied terms (“the Implied Terms”).

59. First, before Mr Yee could act as a producer for a movie, Filmko would :

(a) instruct preparation of and approve a proposal of the movie including the script, cast, pre-production works, budget, shooting date, release date and distribution;

(b) make available financial resources and other necessary resources within a reasonable time for the filming of the movie proposed in order to enable Mr Yee to perform his duties as a producer; and

(c) give specific instructions to Mr Yee to act as a producer for the movie.

60. Second, before Mr Yee could act as a director for a movie, Filmko would :

(a) approve and make available a proposal for the shooting of the movie including the script, cast, pre-production works, budget, shooting date, release date and distribution; and

(b) make available financial resources and other necessary resources within a reasonable time for the filming of the movie proposed in order to enable Mr Yee to perform his duties as a director.

61. They went on to plead that Mr Yee at all material times worked under the instructions of Mr Wong.  Mr Yee had performed his duties so far as to the extent possible and practicable under the Engagement Contract.  Between January 2001 and September 2002, Filmko gave Mr Yee instructions to act a producer for 3 movies only and did not give any instructions to Mr Yee to act as a director for any movie.  Although Mr Yee had provided about 10 different movies making proposals and proposed to act as a producer and/or director for those movies, Filmko did not accept the proposals and did not inject the necessary finance for the filming of the movies proposed.

62. Filmko acted in breach of the Engagement Contract when it refused to make any further payment for September 2002 onwards and purported to cancel the contract.

C.  Filmko’s pleaded case

63. Filmko agreed that it would approve proposals for making movies put forth by Mr Yee and to make available funds to finance the filming of the movies proposed.  But it denied the existence of the Implied Terms and alleged that it relied on Mr Yee’s expertise in the preparation and proposal of the movies including, but not limited to, the script, casting, engaging directors, pre-production works, budgeting and shooting schedule.  Filmko further denied that Mr Yee worked under the instructions of Mr Wong.  Mr Wong would be advised by Mr Yee and Mr Yee would propose plans for starting new movies for Filmko’s consideration.

64. Filmko pleaded that Mr Yee had acted in breach of the Engagement Contract.  He had only provided administrative and production services for 3 movies under the production part and had failed and/or refused to direct any movie under the directing part.  He had failed and/or refused to propose further plans for the production of further movies or any realistic and detailed plan for the directing of any motion pictures.  (Filmko also alleged that Mr Yee had failed and/or refused to work exclusively and on a full time basis for Filmko.  But in the end, Mr McCoy did not seek to rely on this complaint.) 

65. Filmko alleged that because of Mr Yee’s repudiatory breach of the Engagement Contract, it had suffered loss and damages in the sum of HK$1,542,857.14 under the production part and HK$2,700,000 under the direction part.

66. Finally, Filmko denied that it had at the material times experienced any financial and/or cash flow difficulties.

D. The Implied Terms

67. Although an issue arose from the pleadings if the Implied Terms could be implied into the Engagement Contract, it is not necessary for me to make a finding on it.  For Filmko conceded that after reviewing Mr Yee’s proposals, Filmko had the final authority to decide whether the project would go forward or not.  If a project was given the go ahead, Filmko would make available the funds necessary for the filming of the motion proposed by Mr Yee.  As I understand Mr Lee’s submissions, he was content to run his case based on Filmko’s concession.  He accordingly made no reference to and sought no reliance on the Implied Terms in his closing submissions.

68. I will accordingly proceed to deal with the case on this footing.

E. Mr Yee’s performance generally

69. Under Clause (1) of (A) the Production Part of the Engagement Contract, Mr Yee shall provide professional knowledge, planning, development, release and promotion of Filmko’s business relating to films and television and shall be responsible for the supervisory and execution work of the production department.  Mr Yee gave evidence on how he discharged these duties and art evidence generally.  Mr Yee was also responsible for preparation of production budget and building up networks for Filmko by introducing at least 100 people in the film industry to Mr Wong, including directors, actors, actresses and people working in different areas in the film industry and by helping Filmko organise a big party in August 2000 attended by many people in the film industry.

70. Mr Yee’s evidence above is either not shaken on cross-examination or not seriously in dispute.  So I accept his evidence. 

F. Why 3 movies only?

71. I now come to the most controversial aspect of the parties’ dispute : why was it the case that Mr Yee had only produced 3 movies and directed none under the Engagement Contract before Filmko terminated it in October 2002?

72. As noted, Filmko’s complaint is that Mr Yee did not have a concrete plan for his duties and he had either failed to come up or follow up with film proposals.  Hence his failure to produce and direct the number of films as required under the Engagement Contract.  I will deal with these complaints in greater detail in a moment.  I first consider why, according to Mr Wong, Mr Yee would behave himself in this way?  Under cross-examination, when asked as to what benefits Mr Yee would gain for not producing and directing more films for Filmko, Mr Wong said Mr Yee was lazy and irresponsible.  But interestingly enough, Mr Wong said Mr Yee was not lazy in 2001 (the first year of his service) but became so after the Lunar New Year of 2002.  The reason for such a sudden change in Mr Yee’s attitude is not borne out by evidence.  In any event, such allegation does not sit well with other evidence.  Under Clause 11 of (B) the Direction Part in the Engagement Contract, Mr Yee would be entitled to 10% of the net profit of the film that he directed.  There is accordingly financial incentive for him to direct a movie and hence fulfilling his duties under the Direction Part.  Further, Mr Yee’s achievement and reputation in the film industry is beyond dispute.  That is confirmed by Mr Sham.  It would be quite unbelievable that Mr Yee would refuse to work simply because of laziness when this factor is taken into account.

73. I then turn to Mr Yee’s case.  He said that he had proposed 22 movies proposals to Mr Wong during the contract period for his approval.  Of these proposals, he had provided story outline, treatment, investment proposal in respect of 14.  (Mr Wong said Filmko had only received 8 proposals.  For present discussion, it does not matter if it is 22 or 8.)  But for various reasons, Mr Wong did not give the go ahead or “the green light” for Mr Yee to proceed.  He did chase Mr Wong on some of the proposals but Mr Wong’s response was non-committal.  In about April or May 2001, Mr Yee began to sense that Filmko might have cash flow difficulties.

74. I note that it is Mr Yee’s evidence that he was not able to prove Filmko had financial difficulties.  He repeatedly said that it was his observation or feeling about the situation.  This is quite understandable.  For there is no suggestion that Mr Yee was provided with the information about Filmko’s financial position at the time.  He could only infer from the circumstances and the responses he got from Mr Wong.

75. Mr Wong remained adamant that Filmko had no cash flow difficulties at all material times.  His evidence has to be tested against the contemporaneous evidence, which had been disclosed to court earlier in the proceedings for security for costs against Filmko.  (Incidentally, I note that Filmko was ordered to provide security.)

76. First, there is an audited account for Filmko for the year ended 31 March 2003 (“the Audited Account”).  It showed that Filmko was in very poor financial shape in 2002 indeed.  Filmko had an operating loss of HK$36,409,062 while the cash in bank was HK$269,066.  Liabilities stood at HK$67,362,721 and net liabilities at HK$39,027,160.  So poor was Filmko’s financial state that the auditor had this to say :

“… [We] have considered the validity of the going concern basis as the Company had significant capital deficiency as at March 31, 2003.

Should the Company be unable to continue in business as a going concern, adjustments would have to be made to reduce the value of assets to their recoverable amount, to provide for any further liabilities which might rise, and to reclassify non-current assets and liabilities as current assets and liabilities.

However… the shareholders of the Company indicated that continuing financial support will provide to maintain the Company as a going concern as and when necessary.  On this assurance, we consider that the going concern basis is appropriate and no adjustment to the financial statements in required.”

In my view, the Audited Account is the best objective evidence on Filmko’s financial position in 2002.

77. Second, there are the bank statements of Filmko with Wing Hang Bank between January 2001 and December 2002, which Mr Wong referred to in support of his assertion that Filmko was financially strong at the time.  The statements show that the account was quite active.  Deposits were made into the account from time to time.  Most of them were in the sums of several hundreds thousands.  But for most of the time, the balance is comparatively small when one takes into the amount of the money, usually in the region of millions, required for producing movies.  In December 2002, the balance was a meagre HK$4,524.72.  Further, the bank statements must be read together with the Audited Account, which clearly shows that Filmko was in a very bad financial situation.  I am not persuaded by Mr McCoy’s submission that the bank statements showed that Filmko was in 2002 in a very strong financial position.

78. Third, there are documents concerning loans in the total sum of HK$12,000,000 advanced by a東莞三元工貿實業總公司in the Mainland to Filmko.  The loans were originally due on various dates in 2000.  But by virtue of several extension agreements, the due date was extended to 2006.  These loans contradict Mr Wong’s assertion that Filmko was in a strong financial position in 2002.

79. I then turn to Mr Wong’s oral testimony.  He said under cross-examination that he had moneys coming from his investment in the Mainland to Filmko.  And he had never encountered any difficulty in transferring money to Hong Kong.  He had made huge profits from his investment in the Mainland and had paid a lot of tax.   All these are bare allegations without any documentary proof.  And if his evidence were true, why were the moneys not injected into Filmko?  And why was Filmko in such a bad financial position as reflected in the Audited Account?

80. In paragraph 33 of his witness statement dated 8 July 2005, Mr Wong said that immediately after Mr Yee’s departure, he had since with the aide of other able personnel, under 2 other companies, produced 10 movies.  I note that Mr Wong referred to 2 other companies and not Filmko.  Mr Wong might well be able to produce 10 movies under 2 other companies.  But I am not concerned with the financial ability of those companies.  The objective evidence before me remains that Filmko was in very bad financial shape in 2002.  And I so find.

81. Mr Lee relied on four other matters when he dealt with Filmko’s financial shape in 2002.  They are the grandiose plan discussed at the meeting of Filmko as recorded at the minutes dated 21 October 2000, the salary reduction of some members of the staff in Filmko in November 2001, the purported late payments to the film supplier, the insurance company and the leading actor in one of the films entitled “Summer I love You”, and the newspaper reports saying that Filmko did not proceed with the shooting of TMS because of funding problems.  I have already made my finding on Filmko’s financial shape in 2002.  I will only deal with these matters briefly.  The grandiose plan intended for Filmko does not prove one way or the other Filmko’s financial state in 2002.  The salary reduction is consistent with Filmko’s poor financial shape at the time.  I do not accept Mr Wong’s explanation that the salaries of the staff concerned were reduced because they were higher than the usual market rate.  The purported late payments in “Summer I love You” are not conclusive on Filmko’s financial shape at the time.  Mr Wong was cross-examined on the newspaper clippings, which purported to report what he said to the press about TMS.  His answers were unsatisfactory.  What he said to the press is consistent with Filmko’s poor financial state at the time.

82. That being my finding on Filmko’s financial shape in 2002, Filmko must have financial difficulty to proceed with the film proposals made by Mr Yee, be it 22 on Mr Yee’s case or 8 on Mr Wong’s case.  That is reason why Mr Wong did not give go ahead or “the green light” to Mr Yee’s proposals and why Mr Wong was non-committal when Mr Yee chased after him on some of the proposals.  The inability on Mr Yee’s part to produce and direct the number of movies as envisaged under the Engagement Contract is not caused by his default as alleged but by Filmko’s financial difficulty and cash flow problems at the time.

83. This is sufficient to dispose of the primary dispute between the parties.  For completeness, I will deal with Filmko’s complaints briefly as follows.

84. On the lack of planning, Filmko’s case is that Mr Yee did not have a concrete plan to carry out his responsibilities and that was a major factor in his being unable to fulfil his obligations under the Engagement Contract.  Mr Yee accepted that producing and directing movies requires a great deal of time, effort and dedications.  Careful planning and reasonable allocation of time would have been necessary for a two-year period to be divided up among the direction of 2 movies and the production of 6 to 8 movies.  He had been criticised in cross-examination that he had not come up with a two-year written consolidated plan on the allocation of time in producing 6 to 8 movies and directing 2 movies for Filmko.  The evidence however shows that the progress of various films was reported through internal memoranda, and was discussed during various meetings of Filmko.  It is Mr Yee’s undisputed evidence that Mr Wong had never asked him to submit a two-year composite plan.  If Mr Wong had asked him to do that, he would not decline Mr Wong’s request.  I have grave doubt on the veracity of this complaint.  I first note that this lack of a two-year composite plan was not pleaded in Filmko’s pleadings.  Further, if the composite plan were so important, why did Mr Wong not ask Mr Yee for that at the outset of the Contract?  I am of the view that it is an afterthought to make up such a case of breach of duty against Mr Yee.

85. On Mr Yee’s failure to make or follow up on film proposals, I will not go into details of the evidence.  Suffice it to say that I have considered them in full with care.  I accept Mr Yee’s version of the events and reject Mr Wong’s.

86. There is also a dispute as to why various films were delayed.  This is not an issue arising from the pleadings.  Assuming that it is, I will again prefer Mr Yee’s evidence to Mr Wong’s.

G.      Order

87. For the above reasons, I find that there is no substance in Filmko’s case that UPL and Mr Yee had repudiated the Engagement Contract.  Its purported termination of the same in October 2002 is wrongful.  Its counterclaim must fail.  And UPL succeeds in its claim.  On quantum, no submission has been advanced to dispute UPL’s entitlement to the full balance of the remuneration under the Engagement Contract.  Accordingly, I will enter judgment for UPL for :

(1)     A declaration that Filmko was in breach of the Engagement Contract by failing to pay the monthly aggregated remuneration of HK$150,000 and repudiating the same; and

(2)     Damages in the sum of HK$600,000 with interest at the judgment rate from the date of writ until judgment and from judgment until full payment.

88. I will further dismiss Filmko’s counterclaim and make an order nisi that Filmko do pay (a) UPL the costs of the action including the costs of the counterclaim and (b) Mr Yee the costs of the counterclaim, to be taxed if not agreed.