GOLDEN MILES GROUP HOLDINGS LTD v. JACOB & CO LTD

HCA 2453/2017

[2018] HKCFI 441

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2453 OF 2017

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D E C I S I O N

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APPLICATIONS BEFORE COURT

Plaintiff’s application for interlocutory injunction

1.  By an agreement dated 18 November 2016 (“Agreement”), the defendant, the manufacturer of luxurious watches and jewellery (“Products”) under the brand “Jacob & Co” (“Brand”), appointed the plaintiff as the exclusive distributor of the Products in Hong Kong, Macau and the PRC (“Territory” collectively) for a term of 10 years.

2.  On 29 September 2017, by a letter from Deacons to the plaintiff, the defendant terminated the Agreement with immediate effect (“Termination”)

(1)  pursuant to clause 7.2 of the Agreement on the ground that the plaintiff had continued to fail to pay a sum of US$470,198.15 (“Disputed Sum”) over 30 days after the defendant’s written notice under clause 7.2(a); and/or

(2)  under the common law as the plaintiff’s failure to pay the defendant sums owed pursuant to the Agreement despite repeated reminders amounted to a material breach of the Agreement.

3.  The plaintiff considered the Termination wrongful and issued the writ of summons herein on 24 October 2017, seeking inter alia a declaration as to the subsistence of the Agreement and the plaintiff’s status as the exclusive distributor of the Products in the Territory as well as an injunction restraining the defendant from inter alia marketing or selling any Products under the Brand anywhere in the Territory other than through the plaintiff until the expiry of the Agreement.

4.  By a summons issued on 21 November 2017 (“Summons”), the plaintiff applied for an interlocutory injunction restraining the defendant (whether by itself, its directors, officers, employees or agents or in any other way) from

(1)  marketing or selling any Products whether directly or indirectly anywhere in the Territory other than through the plaintiff; or

(2)  representing to anyone that:

(a)  the Agreement has been terminated or that the plaintiff has ceased to be the defendant’s exclusive distributor in the Territory; or

(b)  anyone other than the plaintiff is the defendant’s sales representative, agent or distributor for marketing or selling the Products in the Territory

until the final determination of this action or further order of the court.

5.  On 24 November 2017, upon the evidence then filed by the plaintiff in support of the Summons, I adjourned the substantive hearing of the Summons to 16 January 2018 for further evidence and preparation and granted an interim injunction in terms of that sought by the Summons until the final determination of the Summons or further order of the court (“Interim Injunction Order”).

6.  The plaintiff wishes to have the Interim Injunction Order continued until trial whereas the defendant presses for its discharge.

Plaintiff’s application to adduce further evidence after hearing

7.  Prior to the hearing on 16 January 2018, the parties have between them filed 151 pages in affidavits to which documents running to 730 pages were exhibited. 

8.  At the hearing, the plaintiff sought leave to rely on the 3^rd affirmation of Madam Ho Ming Yuk Winnie (“Ho”) made on 15 January 2018.  I allowed the application but gave the defendant leave to file and serve an affidavit, within 3 days after the hearing, limited to responding to paragraphs 16 to 21 of Ho’s 3^rd affirmation by deposing to the instructions that Mr Benjamin Yu SC (leading Mr Anthony Chan) informed the court that he had obtained from the defendant on those paragraphs.  On 19 January 2018, the defendant filed and served the 2^nd affidavit of Richard David Hudson of the same date to exhibit a copy of the 2^nd affidavit of Marianne Wong Mun Wai (“Wong”) made on 18 January 2018 in Geneva, Switzerland.

9.  After the hearing, by a letter dated 26 February 2018 from its solicitors Reed Smith Richards Butler (“RSRB”) to the court, the plaintiff applied for leave to adduce the 2^nd affirmation of Cheng Charl (“Cheng”) dated 26 February 2018 to refute Wong’s 2^nd affidavit.  Pursuant to my directions, the defendant has by Deacons’ letter dated 28 February 2018 made submission in opposition to such application, to which the plaintiff has by RSRB’s letter dated 2 March 2018 replied.

UNDERLYING DISPUTE

10.  The short-lived collaboration between the plaintiff and the defendant from November 2016 to September 2017 has generated numerous allegations and cross-allegations.  By the affidavits and exhibits they adduce (and seek to further adduce) in support of / in opposition to the Summons, the parties give the court their respective recollection and perception of all aspects of their relationship and dealings.  There is a vast amount of details, closely analysed by each side to show why the other side’s version of events and propositions should be dismissed.  It is neither possible nor necessary for present purposes to set out all the parties’ evidence.  What I aim to do under this heading is to identify the matters in dispute and outline the parties’ respective position thereon.  However, I have read and considered all the materials placed before me.

The parties and their key personnel

11.  The plaintiff is a Hong Kong company with an issued share capital of HK$1.  There is no information as to its date of incorporation but there is evidence that the person behind it (i.e. Ho) acquired the single issued share in the plaintiff only shortly before the Agreement on 1 August 2016.  Ho is also the plaintiff’s sole director.  Ho portrays herself as having many personal relationships and connections in the luxury goods market in the Territory.

12.  The defendant is a Swiss company founded, owned and controlled by Mr Jacob Arabo (“Arabo”) who started to produce jewellery and bespoke gem-set watches using the motif “Jacob & Co” since 1986 and 2002 respectively, even before the incorporation of the defendant on 12 May 2003.

13.  Apart from Arabo, the defendant dealt with the plaintiff also through inter alia the following personnel:

(1)  Mr Maurizio Mazzocchi (“Mazzocchi”), director and Managing Chief Executive Officer;

(2)  Mr Caquim Gomis (“Gomis”), Chief Financial Officer; and

(3)  Mr Lam Yen Er Lawrence (“Lam”) whose business card bears the title “Head of Asia-Pacific, Jacob & Co, SA” but who is described by the defendant as an independent consultant to the defendant in the Southeast Asian region.

Sale of Product in Territory prior to Agreement

14.  According to Mazzocchi, products of the Brand are sold around the world at almost 40 points of sale with 2 flagship boutiques in New York and Dubai.

15.  Insofar as the Territory is concerned, prior to the Agreement:

(1)  King Fook Jewellery Group Limited (“King Fook”) acted as the distributor of watches under the Brand in Hong Kong (but not Macau or the PRC) between 2005 and late 2013, during which King Fook advertised watches of the Brand in Hong Kong and sold them at 3 retail locations in Hong Kong.

(2)  Since 2003, Jacob & Co Watches Inc also sold jewellery and gemstones (which were not covered by the King Fook distributorship) in the Territory.

(3)  Following the end of the King Fook distributorship, the defendant itself continued to advertise and sell watches and jewellery under the Brand in the Territory with sales totalling just under CHF6 million (yielding almost CHF3 million in profits) from 2014 to 2016 (up to the execution of the Agreement).

Agreement

16.  Insofar as it is material, the Agreement included the following clauses:

(1)  Definition:

“Business”: “The promotion and sale of the Products by the [plaintiff] in the Territory”

“Net Profit”:   “The actual price received by the [plaintiff] for Products (excluding sales taxes), less the Purchase Price for such Product, and less the [plaintiff]’s cost of sales in respect of such Products”

“Products”: “Watch and jewellery in the brand name of “Jacob & Co” and other brand names as designated by the [defendant]”

“Rights: “the sole and exclusive right of the [plaintiff] to carry on the Business for the term as set out in this Agreement unless earlier determined as provided for in this Agreement using the intellectual property of the Products.”

“Territory”: “[Hong Kong], [Macau] and the [PRC].”

(2)  Clause 1.1:

“The [defendant] hereby grants the Rights to the [plaintiff] and appoints and engages the [plaintiff] as its sole and exclusive distributor in the Territory for the purpose of marketing and selling the Products in the Territory and the [plaintiff] hereby accepts such appointment and engagement subject to the terms and conditions as hereinafter stated.”

(3)  Clause 1.2:

“The [defendant] hereby undertakes not to:

(a) sell or attempt to sell the Product (whether directly or indirectly) in to or for the Territory during the term of the Agreement; or

(b) appoint or engage any other or additional sales representatives, agents or distributors to do so.”

(4)  Clause 2.1:

“The [plaintiff] hereby agrees with the [defendant] throughout the term of this Agreement to:

(a) promote the Products in the Territory;

(b) promote and procure sales of the Products in the Territory by appropriate means which the [plaintiff] shall consider as appropriate;

(c) act loyally and faithfully towards the [defendant] in relation to the Business;

(d) conduct the Business in an orderly and business-like manner;

…

(h) spend no less than 10% of the Net Profit arising from the sale of the Products in the Territory on marketing and promoting the Products;

(k) submit written reports at regular intervals to the [defendant], showing levels of sales, and orders placed by the [plaintiff] with the [defendant] that are still outstanding, and any other information relating to the performance of its obligations under this agreement that the [defendant] may reasonably require from time to time.”

(5)  Clause 2.3:

“The [plaintiff] may operate branded Product boutiques or flagship stores for the Products within the Territory, provided that the [defendant] provides its consent to the location and presentation of such boutiques/stores (such consent not to be unreasonably withheld).”

(6)  Clause 3.1:

“The [defendant] hereby agrees with the [plaintiff] throughout the term of this Agreement to:

…

(d)  pay 50% of the cost of all advertisements, promotional activities or otherwise incurred by the [plaintiff] and the [plaintiff] may set off such cost owing to it by the [defendant] against any amount payable to the [defendant] by the [plaintiff] from time to time.”

…

(p)  agree in advance with the [plaintiff] any advertising, marketing and promotional activities conducted by the [defendant] in the Territory;”

(7)  Clause 3.2:

“In consideration of the [plaintiff]’s obligations set out herein, the [defendant] shall not, directly or indirectly, sell or export or permit or authorise the sale or export of the Products to customers in the Territory through any channels other than the [plaintiff]. …”

(8)  Clause 4.5:

“…, the [plaintiff] shall pay 10% of purchase price of the Products … upon the receipt of the [defendant]’s invoice and the [plaintiff] agrees to pay and settle the outstanding balance of the [defendant]’s invoices … within thirty (30) days of receipt of the Products by the [plaintiff].”

(9)  Clause 7.1:

“Subject to clause 7.2 herein, this Agreement … shall be valid for a period of ten (10) years. The [plaintiff] will target to achieve the purchase in aggregate US$1.8 million of Products in the fourth year of this Agreement.”

(10)  Clause 7.2:

“Either party hereto may terminate this Agreement without prior notice and having immediate effect in the following circumstances:

(a)   if the other party does not cure any breach or default within thirty (30) days after written notification thereof;”

In this decision, references to numbered clauses are to clauses of the Agreement.

Plaintiff’s operation after Agreement

17.  Apart from the distribution and sale of the Products under the Agreement, the plaintiff does not appear to have any other business undertaking.  Such business was run by Ho herself who claims to have ceased all her other key business ventures in order to focus on developing and marketing the Brand. 

18.  Ho was initially assisted by just one full-time staff whose primary duty was to attend to the accounts and orders and one part-time evening employee who had no involvement in the business side of the plaintiff’s operation and only helped Ho handle the plaintiff’s correspondence in English (including by email and WhatsApp) as Ho’s command of English is limited.

19.  In about May/June 2017, the plaintiff entered into a 3-year dealership arrangement (“Prince Dealership”) with Prince Jewellery Prince and Watch Company Limited (“Prince Jewellery”), a prominent retailer of luxurious watches and jewellery in Hong Kong.  Under the Prince Dealership, Prince Jewellery agreed to purchase a specified quantity of watches of the Brand from the plaintiff.  After the conclusion of the Prince Dealership, according to Ho, Prince Jewellery became the plaintiff’s major retail outlet, selling most of the watches it purchased from the defendant. 

20.  Before the Prince Dealership, the plaintiff seemed to have made one-off arrangements with Prince Jewellery and others such as Wong and her husband’s company, Time Concept Holdings Limited (“Time Concept”), a brand management consultancy, on a project basis to market and promote watches of the Brand in Hong Kong.  (The arrangement with Wong’s said company in February 2017, however, came to a premature end on bad terms for different reasons depending on who one asks.)

21.  It was not until about mid September 2017 that the plaintiff recruited 3 marketing personnel, including a Marketing Manager (namely, Cheng) who is said to have extensive experience in promoting, and arranging high-end marketing events for, luxury watch brands.

22.  According to the plaintiff’s reckoning, the Plaintiff’s total purchases from the defendant up-to-date added up to US$12,046,967 (US$11,986,592 as at 29 September 2017, i.e. the date of the Termination) which, the plaintiff says, exceeded the projected sales target of US$1.8 million in the 4^th year of co-operation under clause 7.1 by over 6 times and 3 years ahead of schedule.  The plaintiff’s purchases included the Billionaire watch which was first introduced into the market by the defendant in 2015 with a published retail price of US$18 million and which was sold at US$4.3 million by the defendant to the plaintiff who then resold it through Prince Jewellery just a few months after the Agreement.

Dispute after Agreement

23.  Despite the volume of the plaintiff’s purchase, the parties soon got into difficulties in their collaboration.

24.  First, there was disparity between the defendant’s expectation as to how the plaintiff should promote and market the Brand and the Products in the Territory and account for the associated costs and expenses and the manner in which the plaintiff actually did so.

25.  It is the plaintiff’s case that, before the Agreement, the Brand was virtually unknown in the PRC and very rarely talked about in Hong Kong.  Ho has drawn my attention to the marketing campaigns and activities that the plaintiff arranged, and the publicity generated thereby, for the Brand since 2016:

(1)  the display of prominent billboards at different prime locations in Hong Kong;

(2)  the launch of joint tailor-made advertising campaigns with Prince Jewellery in February, April and June 2017;

(3)  the attendance at, and organisation of, various charitable auctions and events in both Hong Kong and PRC by Ho;

(4)  the placement of advertisements in mainstream media in Hong Kong; and

(5)  the procurement of Poly Auction (Hong Kong) Ltd to place the Brand’s watches onto its Prestigious Watch Auction List for their 2017 Spring and Autumn auctions including the full page back cover and to include the Brand’s watch as the only timepiece on its massive billboard at the Hong Kong International Airport next to a painting that is worth over HK$100 million.

26.  On promotion and marketing, the parties have put in evidence numerous exchanges by email and WhatsApp by which the defendant

(1)  reminded the plaintiff of the need for uniformity of its marketing efforts (including private events and dinners for connoisseurs) with those made by the defendant and its other distributors;

(2)  urged the plaintiff to share marketing plans and budgets in advance for discussion and agreement with the defendant and to seek the defendant’s prior approval before participating in, or incurring expenses for, promotional activities;

(3)  sought from the plaintiff details about marketing activities in which the plaintiff had participated or wished to participate and the expenses associated therewith;

(4)  turned down specific promotional events put forward by the plaintiff; and

(5)  asked and chased the plaintiff for a marketing activity report for events from January 2017.

27.  The defendant takes the view that the global presence of the Brand and the Products makes it important to co-ordinate the marketing campaigns and sales strategies of the defendant and its distributors all over the world to ensure that the materials put out, using the defendant’s intellectual property researched and developed at its own costs, are coherent and consistent with the image and quality of the Brand that the defendant seeks to promote.  To that end, the defendant expects its distributors to work closely with it on marketing and promotional matters and materials through regular reporting from the distributors to the defendant and prior discussion between the defendant and the distributors on issues concerning the timing, contents and costs of marketing and promotional materials, advertisements, campaigns and projects. The defendant was therefore anticipating from the plaintiff, as it does from its other distributors, marketing plans and reports with detailed information and budgetary estimates at regular intervals for discussion with the defendant and prior approval by the defendant, before implementation. 

28.  However:

(1)  The plaintiff does not consider itself bound by the Agreement to consult or coordinate with the defendant or seek the defendant’s prior approval before conducting any marketing activities.

(2)  As stated above, the plaintiff did not engage any marketing personnel until the latter half of 2017.  It promoted the Brand and the Products, especially in the initial stage, largely by making use of Ho’s personal connections and relationships in the luxury goods market and by having her attended different marketing and promotional activities and functions where she would get to meet distinguished guests and VIPs, as and when opportunities arose.

(3)  While the plaintiff did from time to time inform the defendant of its broad marketing plan and costs position, according to Ho, the plaintiff did so out of courtesy and in the spirit of good co-operation, rather than to honour any contractual obligation.

(4)  When the voluntary provision of information was returned with more and more questions and requests for details and supporting documents from the defendant, with its limited manpower, the plaintiff could only respond to the defendant as and when Ho and its staff were free to do so, which explains why there were admittedly occasions when the defendant’s requests for details and documents regarding the plaintiff’s marketing activities remained unanswered.

(5)  Further, according to Ho, the consequences of the plaintiff’s said approach to marketing and the nature of the promotional activities conducted or attended by the plaintiff, not all expenses were supported by invoices or receipts bearing references to the Brand or to the plaintiff, eg payments were made and official receipts were issued in Ho’s own name for many charitable events or auctions attended by Ho though she acted as representative of the Brand.

29.  These differences resulted in mutual dissatisfaction.  While the plaintiff saw the defendant as being unduly intervening in matters of marketing by the plaintiff when it had no contractual right to do so, the defendant became more and more dissatisfied with the plaintiff’s marketing style.  From the defendant’s point of view, the plaintiff

(1)  saw itself as having a free hand in the promotion of the Brand and the Products in the Territory;

(2)  had no coherent marketing strategy to speak of;

(3)  only advised the defendant of marketing events in a piecemeal manner, often giving very short notice (or even no notice); and

(4)  in any event provided very little basic information (such as the costs of the event or its relevance) to the defendant even when it did notify the defendant;

(5)  often refused or failed to provide such information or any further details even when chased by the defendant;

(6)  saw and treated the defendant’s requests for marketing reports and information as an annoyance. 

30.  Second:

(1)  The defendant says it also became concerned that the plaintiff was not adhering to its payment obligation under clause 4.5 so much so that the plaintiff owed the defendant more than US$4.5 million for more than 30 days at the time of the meeting to be mentioned in paragraph 33 below.

(2)  The plaintiff denies owing any money to the defendant at the relevant time, saying that the 21 invoices issued by the defendant to the plaintiff between October 2016 and March 2017 had either been fully settled or not yet become due.

(3)  Also, the plaintiff suggests that the defendant had waived the 10% deposit requirement by often not issuing an invoice therefor.

31.  Third, the defendant provided the plaintiff with the proforma monthly sales report used by the defendant’s distributors via Lam’s emails dated 30 December 2016 and 23 January 2017. However, the plaintiff failed to submit to the defendant any such monthly sales report, or otherwise provide the defendant with any sales figures.  While the defendant knew how much stock the plaintiff had purchased from it, it had no idea what sales turnover the plaintiff had actually achieved.  Without the sales figures, the defendant could not calculate the plaintiff’s net profit, which was required for the operation of clause 2.1(h) which obliged the plaintiff to spend no less than 10% of its net profit on marketing, which the defendant had to share equally with the plaintiff under clause 3.1(d).  (It was not until 9 October 2017 that the plaintiff sent the defendant a report on the Products that it had sold since the commencement of the Agreement.  The defendant was not satisfied with such report as it did not state the price at which each watch had been sold which, the plaintiff however retorts, was not required even in the proforma monthly sales report supplied by the defendant.)

32.  Fourth, in the midst of such differences, beginning from early 2017, the plaintiff proposed to enter into the Prince Dealership.  Ho had shown Lam a spreadsheet showing the proposed split of profits between the plaintiff and Prince Jewellery.  In response, Lam (who had consulted Mazzocchi) had expressed to Ho the view that the proposed terms were too harsh for the plaintiff and that it would be risky for the plaintiff to enter into such an arrangement at that early stage of its distributorship.  According to Mazzocchi, the plaintiff’s solution was to ask for greater financial support from the defendant in order to make the Prince Dealership work. 

Meeting in March 2017

33.  The differences that developed after the Agreement culminated in a meeting between Ho and Mazzocchi (with Lam acting as interpreter) in late March 2017 in Geneva during BaselWorld 2017 (“March Meeting”). 

34.  There is significant disagreement as to what was said or agreed (if at all) at the March Meeting.

35.  On one hand, the plaintiff claims that the parties reached what it calls the “March Agreement” whereby:

(1)  The parties agreed on what the plaintiff calls the “Fixed Percentage Mechanism”, ie that instead of the fixed 5% mechanism provided for in clause 3.1(d), the defendant’s contribution to the plaintiff’s marketing expenses would be revised to and fixed at 10% of the plaintiff’s purchases from the defendant.

(2)  Of this 10% contribution, 5% would be labelled as the defendant’s marketing contribution whilst the other 5% would be labelled as a bonus from the defendant to the plaintiff.

(3)  The 10% deduction would be implemented immediately, and retrospectively, to all of the plaintiff’s purchases since 2016.

(4)  The first deduction would be applied to all purchases made in 2016 up to the end of the first quarter of 2017, and thereafter the deduction would be applied after each quarter.

(5)  In view of the Fixed Percentage Mechanism, the plaintiff would not be required to furnish to the defendant any details or documentary proof in relation to its marketing activities or expenses.

36.  On the other hand, according to Mazzocchi, no binding agreement was concluded at the March Meeting.  He merely told Ho that:

(1)  The defendant would in principle be prepared to agree to an arrangement where it would allocate a sum equivalent to 5% of the plaintiff’s gross purchases from the defendant as the defendant’s contribution to the plaintiff’s marketing expenses, with the plaintiff contributing the same amount, provided that the defendant would receive receipts for all marketing expenses so it could be sure that it was paying for legitimate expenses.

(2)  The defendant may further be prepared to give the plaintiff a bonus to be based on achievement of an annual sales target to be agreed and contingent on the defendant being provided with the final Prince Dealership agreement so as to give the defendant an idea of the quantity of watches likely to be sold thereunder to see if a bonus would be warranted and, if so, to fix the size of the bonus.  The main reason this bonus arose for discussion was that the plaintiff needed more credit from the defendant because its expected profit margin under the Prince Dealership was likely to be thin.

37.  It is not in dispute that, after the March Meeting, the plaintiff did not submit any receipts of its marketing expenses to the defendant until August 2017.  It is also common ground that the plaintiff has never provided the defendant with the agreement in respect of the Prince Dealership.[i]

Escalation of dispute after March Meeting

38.  The plaintiff has adduced the correspondence between the parties after the March Meeting on the state of accounts between them, from which it appears that:

(1)  The parties did proceed on the basis that the plaintiff was entitled to be credited with or to deduct from the price of its purchases from 2016 a 5% sum described as the defendant’s marketing contribution.

(2)  Until early May 2017, any disagreement appeared to be focused upon whether the plaintiff was also entitled to be immediately credited with, or to immediately deduct, another 5% as a bonus, with the defendant maintaining the position that no bonus of any form would be allowed by its auditors before the year end financial results were known.

(3)  On about 9 May 2017, the defendant softened over the deduction of the 5% bonus insofar as the years of 2016 and 2017 were concerned, but making it clear that there would be no advance bonus for 2018.

(4)  The defendant budged in respect of a bonus for 2018 on 10 May 2017 by Lam’s WhatsApp message to Ho that “[Mazzocchi] agrees that we will also support you for 2018” and that “[a]s long as you are in business agreement with Prince, we will support you”.

(5)  On about 10 July 2017, the defendant allowed the plaintiff to settle 4 invoices by netting off inter alia 10% of the plaintiff’s purchases for the second quarter of 2017.

39.  The plaintiff relies on the correspondence from April to early July 2017 as showing the repeated acknowledgment and implementation of the March Agreement by the defendant which, the plaintiff says, tends to support the existence of such agreement.

40.  On the other hand, the defendant explains the correspondence as part of its difficult effort in obtaining payment of long overdue invoices from the plaintiff.  The references to and deduction of a 5% marketing contribution and later a 5% bonus were made (i) on the assumption that the plaintiff would provide the information and material that the defendant needed to allow it to reach an agreement along the lines discussed at the March Meeting namely, information and documents concerning the plaintiff’s marketing expenses and the Prince Dealership agreement; (ii) under anxiety to obtain some payment from the plaintiff as soon as possible and (iii) under the pressure being put on Lam by Ho.

41.  Anyway, on 21 July 2017, the defendant sent to the plaintiff a statement of account which showed that the plaintiff owed the defendant the sum of US$1,949,751 and demanded payment.  This sum was arrived at by including, as unpaid, invoices previously settled by the plaintiff by adopting the Fixed Percentage Mechanism, ie with a 10% deduction.

42.  By Gomis’ email to Ho dated 15 August 2017, the defendant demanded the plaintiff to settle outstanding payment in the total sum of US$953,371.50. 

43.  To disagree a little, Gomis’ email of 15 August 2017 ended with this statement: “As no report has been sent despite many mails requesting them to justify your expenses, no Marketing deduction has been applied on regular invoices.”

44.  In this regard, the defendant had since the March Meeting continued to press the plaintiff for marketing reports and documentary proof of marketing activities and expenses. 

45.  On 15 August 2017, the plaintiff sent the defendant by email 3 documents respectively entitled “Marketing Activity Report (11/2016 – 05/2017)”, “Physical Resources for Promotion and Advertisement (estimated)” and “Human Resources for Promotion and Advertisement (estimated)” which together showed how marketing expenses totalling US$1,824,965 were spent.

46.  Updated versions of these 3 documents showing a revised total marketing expenses of US$1,850,975 were sent on 17 August 2017.

47.  Further revised versions giving total marketing expenses at US$1,712,520 were provided by the plaintiff to the defendant on 24 August 2017.

48.  Coming back to the question of payment, apart from the dispute over their state of account, beginning from early August 2017, the defendant pressed the plaintiff for full payment on all purchases before arranging delivery.  The plaintiff saw this as a departure from clause 4.5 whereas the defendant explains this as a protective reaction to the plaintiff’s failure to follow clause 4.5 and refusal to provide information concerning marketing plans and expenses which caused the defendant to gradually lose trust in, and good faith towards, the plaintiff.

49.  The plaintiff also perceived an increasingly slow, or lack of, response on the part of the defendant to the plaintiff’s operational needs, for example, when the plaintiff made enquiries about watches, placed orders or asked for support to the plaintiff’s marketing events etc, which the defendant denies.

Meeting in late August 2017

50.  In late August 2017, Ho (accompanied by a Mr Terry Yeung as her interpreter) and Arabo met in Geneva.  Not surprisingly, the parties’ accounts of this meeting differ.  It is safe to say that no consensus was reached from either party’s point of view.

Termination

51.  On 29 August 2017, Gomis sent Ho another email (“29.8.2017 Email”) demanding for payment of US$540,198.15.  As the 29.8.2017 was relied upon by the defendant as constituting the notice required by clause 7.2(a) in effecting the Termination pursuant to clause 7.2, I shall set out the whole of this email:

“After discussion with Mr. Jacob, both watches will be shipped to you. My colleagues will provide you with the shipping documents as soon as possible.

However, please wire USD 540’198.15 when you return:

USD470’198.15 with regards to the open balance as per the statement discussed and approved yesterday with Mr. Jacob

USD70’000 regarding the open balance of the Solar timepiece sn: YANG46

Thank you for your confirmation.”

52.  The sum of US$470,198.15 mentioned in this email is the Disputed Sum.

53.  The plaintiff did not pay the Disputed Sum, giving the reason that the plaintiff was entitled to deduct the same pursuant to the March Agreement (though, according to Mazzocchi, there was at one stage talks about Ho paying this amount from her personal account.  It is unnecessary to go into the parties’ competing explanations as to why this was not pursued).

54.  On 29 August 2017, the defendant effected the Termination.  In this regard, paragraphs 6(d), (e), 8, 9 and 10 of Deacons’ letter to the plaintiff read as follows:

“6. We are instructed that:

…

(d) At a meeting at our client’s offices in Switzerland on 28 August 2017 attended by our client’s Mr. Jacob Arabo and your Ms. Ho, your Ms. Ho agreed on your behalf with our client that upon receipt and approval of supporting documents relating to your various marketing expenses, our client would grant credit of US$572,773.35 to you, leaving you within (sic) an open balance of US$470,198.15 which you would settle immediately.

(e) Our client’s Mr. Gomis gave written notice on behalf of our client via an email to Ms. Ho on 29 August 2017 stating that you were to make payment of the outstanding open balance.

…

8.  Notwithstanding further reminders from our client, including emails from Mr. Mazzocchi to your Ms. Ho dated 6 and 11 September 2017, no payment has been made.  In addition, despite reminders from our client, the further documentation an information concerning marketing expenses has also not been forthcoming at the time of writing.

9.  In light of your failure to make payment following Mr. Gomis’ email of 29 August 2017 reminding you of your default in payment, and in light of the fact that over 30 days have elapsed since Mr. Gomis’ email was sent, please treat this letter as notice on behalf of our client of termination of the Agreement pursuant to clause 7.2 of the Agreement.

10.  Further or alternatively, your failure to pay our client the sums owed pursuant to the Agreement despite repeated reminders amounts to a material breach of the Agreement, and our client accepts the breach and treats the Agreement as terminated as at the date of this letter.”

55.  The plaintiff maintains the position that it did not owe the defendant any money as at 29 September 2017:

(1)  As at 29 September 2017, the plaintiff had purchased US$11,986,592 worth of stock from the defendant.

(2)  Under the March Agreement, the plaintiff was entitled to have 10% of its purchases deducted and treated as the defendant’s contribution to the plaintiff’s marketing expenses, so that the plaintiff only had to pay 90% of US$11,986,592, ie US$10,787,932.80.

(3)  By 29 September 2017, the plaintiff had already paid US$10,943,277.  That is to say, instead of owing the defendant money, the plaintiff should actually have a credit balance of US$155,344.20 (i.e. US$10,943,277 less US$10,787,932.80).

56.  The plaintiff is convinced that the defendant was motivated to terminate the Agreement by its desire to bypass the plaintiff and directly deal with Prince Jewellery so as to reap the rewards of the plaintiff’s marketing efforts and maximise its profit.

Post-writ events

Payment of Disputed Sum under protest

57.  Upon the commencement of this action, on 24 October 2017, the plaintiff tendered payment of the Disputed Sum “under protest” “solely to prevent [the defendant] from manufacturing any further artificial complaint in its attempt to unilaterally and unfairly repudiate the Agreement” and with the caveat that it would claim for the return of the money with interest in this action.

Voluntary undertaking by defendant until 1 December 2017

58.  At the plaintiff’s request by RSRB’s letter dated 24 October 2017 to Deacons, the defendant by Deacons’ reply dated 27 October 2017 to RSRB gave the plaintiff an undertaking (“Undertaking”) in terms of paragraphs 2 to 4 of the Endorsement of Claim until 1 December 2017. Paragraphs 2 and 3 were the same as the Interim Injunction Order.  Paragraph 4 required the defendant not to do any act which would cause or procure a breach or breaches by the plaintiff’s dealers, distributors or retailers (including but not limited to Prince Jewellery) of agreements already made or to be made between the plaintiff and such retailers for the distribution or sale of the Products anywhere within the Territory.  The defendant agreed to undertake in terms of paragraph 4 but, to “ensure compliance” by the defendant, requested for copies of the agreements which the defendant was required not to cause a breach, in particular, the Prince Dealership agreement.

59.  The request for the Undertaking appears to have been prompted, at least partly, by Ho learning from Prince Jewellery that Lam had on 18 October 2017 visited Prince Jewellery’s main store and suggested to Prince Jewellery:

(1)  that the Agreement had already been terminated as the plaintiff had failed to pay a sum of around US$500,000;

(2)  that the defendant was eager to maintain a business relationship with Prince Jewellery and that Prince Jewellery could, from then on, directly order watches from the defendant; and

(3)  that the defendant would like to continue cooperation with Prince Jewellery and did not want to cease its Hong Kong business.

60.  The defendant agrees that Lam informed Prince Jewellery executives during a meeting on 18 October 2017 that the Agreement had been terminated (without explaining the reasons behind the termination) and that Prince Jewellery could contact him if they needed assistance (and not that watches could be ordered direct from the defendant).  According to the defendant, subject to the resolution of this action, its plan is to operate in the Territory via a distributorship arrangement as in other regions for strategic reasons.

61.  The Undertaking, however, did not ease the tension between the plaintiff and the defendant.

62.  To begin with, the defendant considers that no undertaking was ultimately effected in terms of paragraph 4 of the Endorsement of Claim due to the plaintiff’s refusal to provide copies of the relevant agreements which the defendant was to undertake not to cause a breach (particularly the Prince Dealership agreement).

63.  Further, it is the plaintiff’s case that the defendant had breached the Undertaking right after it was given by selling directly to Prince Jewellery,which the defendant disputes.  More particularly:

(1)  First, on 27 October 2017, the defendant (through Wong) sent Prince Jewellery drawings of a special counter to be set up at the Prince Tower store of Prince Jewellery for the sale of the Products which, the plaintiff says, suggests that the defendant had been taking steps to directly supply the Products to Prince Jewellery.  The defendant argues that the supply of drawings did not fall within the Undertaking.  It has no intention of selling direct to Prince Jewellery.  The counter was to showcase the Products.  Such showcase project was arranged between the plaintiff, the defendant and Prince Jewellery before the Termination.  The plaintiff had asked the defendant to supply the drawings to Prince Jewellery but the defendant had not yet done so.  The defendant asked Wong to do so as Prince Jewellery was accustomed to dealing with Wong.  The plaintiff does not accept this explanation for a number of reasons.  First, it denies having asked the defendant to supply any drawings to Prince Jewellery.  Second,the defendant has been aware of the breakdown of relationship between the plaintiff and Wong and should therefore not have instructed or allowed Wong to liaise with Prince Jewellery on the plaintiff’s behalf.

(2)  Second, the defendant’s website no longer shows the plaintiff as the distributor of the Brand in the Territory but mentions the name and contact details of Prince Jewellery insofar as the Hong Kong market is concerned.

(3)  Third, according to Ho, Prince Jewellery had in early November 2017 informed the manager in charge of the luxury goods sector of the Suncity Group in Macau that Prince Jewellery was the “main distributor” (總代理) of the Brand.

(4)  Fourth, on around 14 November 2017, the shopkeeper of the Tsim Sha Tsui store of Prince Jewellery informed a friend of Ho that Prince Jewellery had become the main distributor of the Brand and that there would soon be a boutique opened for the Brand in Shanghai at Shanghai Xiantiandi (上海新天地).

(5)  Fifth, Cheng learnt on 20 and 21 November 2017 that an advertisement for the Brand had been placed (but not by the plaintiff) with “Spiral” (游絲腕錶雜誌), one of the leading watch magazines published and circulating in Hong Kong, with the cover of the January 2018 issue featuring the watch of the Brand referred to as “九星連珠".

Defendant’s investigation of claims for marketing expenses submitted by plaintiff

64.  The 3 tranches of marketing expenses reports provided by the plaintiff to the defendant on 15, 17 and 24 August 2017 were accompanied by some receipts.  However, the defendant considered such documents inadequate in supporting the expenses claimed and continued to press for documentation proving that the marketing expenses that the plaintiff claimed to have incurred were legitimate, even after the commencement of this action.  The solicitors’ correspondence ended with RSRB’s letter dated 7 December 2017 reiterating that the plaintiff has no obligation to provide documentation concerning marketing expenses.

65.  According to Mazzocchi, having received no further information from the plaintiff concerning its claimed marketing expenses, the defendant and its solicitors have carried out their own investigations, including making inquiries with various third parties involved in the events or matters concerned, in an attempt to determine the legitimacy of the marketing expenses claimed by the plaintiff. 

66.  The defendant presents the results of its investigation in the form of a 15-page table included in exhibit “MM-1” to Mazzocchi’s affidavit dated 14 December 2017.  In short, the defendant concludes that some of the expenses have not been incurred at all or have been exaggerated and others appear to be dubious at best.  Mazzocchi has in paragraph 86 of his affidavit highlighted, and explained why, certain claims are problematic.  In summary, according to the defendant:

(1)  Under claims 1, 3, 19 and 28 (Part 2), the expenses claimed as marketing expenses were in fact paid or incurred by the defendant itself or third parties including Prince Jewellery, and not the plaintiff;

(2)  Under claims 2, there is no evidence of promotion of the Brand by the blogger said to have been paid commission of US$51,000 for 6 months.

(3)  Under claim 4, there is no evidence of the donation in question being referable to the Brand or the Products.

(4)  Claims 5, 9, 11, 13 and 38 were supported only by invoices issued by the plaintiff itself and not any evidence of actual payment by the plaintiff.

(5)  Under claims 6, 16 and 34, the expenses had been grossly exaggerated or not actually been paid by the plaintiff.  Further, claims 16 and 34 were in respect of participation in an event called Hainan Rendez-Vous which the defendant had told the plaintiff not to proceed with.

(6)  Under claims 7 and 12, the invoices were issued by a business called “Watch & Jewellery” operated by a company wholly owned by Ho on dates after the operation of such business had ceased according to its business registration records.

(7)  Claims 17 and 34 duplicates the same expenditure.

(8)  Claim 32 was in respect of works that had not taken place.

67.  The defendant sees a strong case that many of the plaintiff’s claimed expenses were extremely problematic at best or disingenuous or fraudulent at worst.  Claims 1, 2, 3, 4, 6, 7, 12, 16, 17, 19, 28 (part 2), 31, 32 and 34 (leaving out claims 5, 9, 11, 13 and 38 which were unsupported by any evidence of actual payment by the plaintiff) total about US$896,556.99.  It is the defendant’s case that such discoveries about the plaintiff’s claims for marketing expenses have made it impossible for the defendant to trust the plaintiff.

After Interim Injunction Order

Impasse

68.  Following the grant of the Interim Injunction Order, the parties did for a while entered into negotiation of terms for purchase of the Products by the plaintiff from the defendant outside of the Agreement.  While the parties could agree on payment by the plaintiff of 50% of the purchase price upfront and 50% within 30 days, there was eventually no transaction (save for the sale and purchase of 2 Astronomia Solar watches for the plaintiff to honour pre-existing orders) because the parties could not agree on giving the plaintiff the option of returning some or all of the watches and setting them off against the 50% balance payable and, if appropriate, even seeking a refund from the defendant.  The defendant says it did not want to run the risk (which it considered real) of finding itself with few or no sales and holding excess stock of unsold watches should the plaintiff elect to return most or all of the watches it received.

Plaintiff’s complaint of breaches of Interim Injunction Order by defendant

69.  After the grant of the Interim Injunction Order, there have been 3 advertisements published for the Brand, the first one in the “World Wrist Watch Annual Book 2017/18” published on around 30 November 2017; the second one in the “TimeSquare Watch Calendar 2017-18” published on around 21 December 2017; and the third one in “Spiral” published on 14 January 2018.

70.  According to Mazzocchi, arrangements for the first and second-mentioned advertisements had been made before 24 November 2017 and could not be undone.

71.  The plaintiff makes the point that the placement of these advertisements was plainly an act of marketing in breach of the Undertaking as well as the Interim Injunction Order and the defendant could and should have cancelled or recalled the advertisements since 27 October 2017 (when the Undertaking was given) or 24 November 2017 (when the Interim Injunction Order was made) but chose not to do so.

72.  Paragraphs 16 to 21 of Ho’s 3^rd affirmation raised the third-mentioned advertisement.  In short, according to inquiries by the plaintiff made with the managing editor of “Spiral” on 21 November 2017 (see paragraph 63(5) above), the product photoshoot for the January cover had not yet been arranged, nor has the magazine been provided with any product information for the featured cover story. Ho therefore surmised that the product photoshoot was arranged and the product information was supplied to the magazine after the Interim Injunction Order. 

73.  In answer, according to the 2^nd affidavit of Wong (who was the person liaising with “Spiral” on the January 2018 issue cover feature story on the Brand since late October or early November 2017), the article was written on the magazine’s own initiative in exercise of the freedom of the press despite having been told of the Interim Injunction Order against the defendant.

74.  By Cheng’s 2^nd affirmation, the plaintiff seeks to show that the editor-in-chief of “Spiral” has confirmed to Cheng that the magazine did not publish the advertisement on the Brand for free; that the magazine had no reason to publish such advertisement but for Time Concept’s insistence; and the magazine required full payment upfront from Time Concept before confirming the placement of the advertisement and that such editor has confirmed these points by a letter dated 21 February 2018 to RSRB.

75.  There are also miscellaneous complaints by the plaintiff, for example, about an invitation issued by the defendant in early December 2017 to various Hong Kong media to attend the annual “Salon International de la Haute Horlogerie Genève”, a major international watch-exhibition, in mid-January 2018 in Geneva;[ii] and the use of Taiwan as a transit for sale into Hong Kong via the grant of the Taiwan distributorship to a company of Wong’s husband, etc.

Miscellaneous matters

76.  As said earlier, the affidavit evidence before me raises numerous factual disputes.  For example, there are issues as to whether the plaintiff had sought the defendant’s prior consent to the opening of a Brand boutique in Macau, as required by clause 2.3, and whether the plaintiff has as requested by the defendant abandoned the plan to open such boutique; whether the plaintiff had the defendant’s authority to represent itself as “Jacob & Co China”.  It is unnecessary for me to go into these other matters.

PRINCIPLES FOR GRANT OR REFUSAL OF INTERLOCUTORY INJUNCTIONS

77.  The legal tests governing the grant or refusal of interlocutory injunctive relief are well settled.  I start with Lord Diplock’s speech in American Cyanamid Co v Eithicon Ltd [1975] AC 396 (HL) at 407F-409D which, as explained by the Hong Kong Court of Appeal in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118, per Ribeiro JA (as he then was) at [28]-[32], guides the court to ask the following questions in deciding whether it is just or convenient to grant an interlocutory injunction:

(1)  whether there is a “serious question to be tried” which means that the claim must not be frivolous or vexatious;

(2)  if so, whether, if the plaintiff were to succeed in obtaining a permanent injunction at trial, it could adequately be compensated by an award of damages in respect of any loss which it might suffer by reason of the defendant continuing to act unrestrained pending the trial;

(3)  if not, whether the defendant would be adequately protected by the plaintiff’s cross-undertaking in damages should it be later found that the plaintiff should not have been granted an interlocutory injunction; and

(4)  if there is doubt as to the adequacy of the respective remedies of damages, where the balance of convenience lies.

78.  The demonstration of a serious issue to be tried is not a high threshold.  All that is required is the plaintiff has prospects of success which, in substance and reality, exist.  Odds against success do not defeat him, unless they are so long that the plaintiff can have no expectation of success, but only a hope:Hong Kong Civil Procedure 2018, Volume 1,§29/1/10.

79.  In considering the adequacy of damages and then weighing the balance of convenience:

(1)  If damages would be an adequate remedy for the plaintiff, and the defendant would be in a position to pay them, no injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.

(2)   If the defendant would be adequately compensated by the plaintiff’s undertaking as to damages and the plaintiff would be in a position to pay them, there would be no reason on this ground to refuse the injunction.

(3)   Where the question of balance of convenience arises:

(a) Where other matters are evenly balanced it is a counsel of prudence to take such measures as are calculated to preserve the status quo.

(b) The extent to which the disadvantages to each party would be incapable of being compensated if he succeeds at the trial is always a significant factor in assessing where the balance of compensation lies.

(c) If the extent of the uncompensatable disadvantage to each party would not differ widely, it may not be improper to take into account in tipping the balance the relative strength of each party’s case as revealed by the affidavit evidence adduced on application.  This however should be done only where it is apparent upon the facts disclosed by evidence to which there is no credible dispute that the strength of one party’s case is disproportionate to that of the other party.

See Fellowes & Son v Fisher [1976] 1 QB 122 CA at 137 (Browne LJ as he then was).

SERIOUS ISSUE TO BE TRIED

80.  The broad questions arising on the evidence and in submission as to whether is a serious issue to be tried in favour of the plaintiff are:

(1)  whether the Termination was valid;

(2)  even if the Termination was valid, whether the plaintiff has prospect of obtaining the permanent injunction sought.

Validity of Termination

81.  On the validity of the Termination, the plaintiff says that it was wrongful for these reasons:

(1)  The demand for the Disputed Sum was unfounded.  By virtue of the March Agreement, the plaintiff did not owe the defendant any money as at 29 September 2017.

(2)  Even if the plaintiff did owe the defendant the Disputed Sum (or any sum) as at 29 September 2017, the defendant nevertheless could not terminate the Agreement whether pursuant to clause 7.2(a) or under the common law.  More particularly:

(a)  Clause 7.2(a) entitles the innocent party to immediately terminate the Agreement without prior notice if“the other party does not cure any breach or default within thirty (30) days after written notification thereof”.  A unilateral notice served under or pursuant to a contractual right must be clear and unambiguous (see Mannai Ltd v Eagle Star Life Assurance [1997] AC 749 at 768G (Lord Steyn); Stannard & Capper: Termination for Breach of Contract (2014), §§8.07–8.09. A “notification” by the defendant for the purpose of clause 7.2(a) should therefore clearly set out (i) the basis for alleging that the plaintiff was in breach; (ii) that the plaintiff is given 30 days to remedy the breach; and (iii) that if the plaintiff does not remedy the breach, the defendant would terminate the Agreement without further notice.  The 29.8.2017 Email, relied upon by the defendant as constituting the written notification required by clause 7.2(a), fell short of such requirements so that the defendant had omitted to serve on the plaintiff any written notification within the meaning of clause 7.2(a) to cure the non-payment of the Disputed Sum.

(b) The defendant has by the termination provisions of the Agreement including clause 7.2(a) contracted out of its common law right to terminate the Agreement by acceptance of a repudiation.

(c)  Alternatively, the existence of clause 7.2(a) providing for a contractual right to terminate only where the party in default fails to remedy the breach within a certain period of time from his being notified in writing constitutes as an exception to the general rule that the provision of a contractual right of termination does not exclude the right to terminate at common law for breach of condition so that the defendant purporting to serve such a notice must at least give the plaintiff a reasonable opportunity to comply with it.  In support, Mr Horace Wong SC (leading Mr Norman Nip and Mr Thomas Wong) refers to and relies on Stannard & Capper, supra, §8.23.  The first time the defendant can be said to have served a written notification in respect of the non-payment of the Disputed Sum was when Deacons issued their letter of 29 September 2017.

82.  While the defendant has strenuously refuted the plaintiff’s said case on the invalidity of the Termination for non-payment of the Disputed Sum in evidence, counsel for the defendant have not wasted time to contradict this part of the plaintiff’s case in submission (of course, without prejudice to the defendant’s right to do so at trial).  This is wise in my view.  Given the relatively low threshold for a serious issue to be tried and given the nature of the dispute about, and the state of the evidence on, the March Meeting and the March Agreement, it would be impractical to expect the court to find no serious issue to be tried as to whether the defendant could terminate, and had validly terminated, the Agreement for non-payment of the Disputed Sum.

83.  Instead, the defendant invites the court to hold that this is no serious issue that the plaintiff will succeed in its claim for wrongful termination of the Agreement or for a permanent injunction. More specifically:

(1)  The plaintiff has provided the defendant with fraudulent, bogus or exaggerated claims for marketing expenses to attempt to extract payment from, or deny payment due from it to, the defendant.  Such dishonest conduct constituted a repudiation of the Agreement.[iii]

(2)  The defendant was entitled to, and did by Deacons’ letter of 29 September 2017, exercise its common law right to terminate the Agreement.

(3)  Even if the Termination could not be justified on this alternative ground, the plaintiff and the defendant have now fallen out irretrievably.  The parties are no longer able, and do not wish, to work together any further.  There is thus no prospect of the plaintiff obtaining the permanent injunction sought as its effect would be to either compel hostile parties to work closely for a long period or to force the defendant out of the Mainland, Macau and Hong Kong markets for the duration of the Agreement.

84.  Dealing first with the allegation that the plaintiff has made false marketing expenses claims, given the serious nature and materiality of the allegation, I have taken care in reviewing the defendant’s bases and evidence for challenging the veracity of the claims mentioned in paragraph 66 above.  And I note that the problems identified in respect of some claims do prima facie appear to be supported by direct objective evidence (e.g. claims 7 and 12 by “Watch & Jewellery”’s public business registration record which shows a date of cessation of business before the dates of the supporting documents supposedly issued by it).  Where the defendant has to rely on information from third parties, the relevant inquiries were made by Deacons’ solicitor and trainee solicitor, Ms Cathy Tsz Yan Wu and Ms Chan Tsz Wai Michelle, who verified their inquiries and the results thereof on oath. 

85.  In contrast, save for the claim numbered 4 which concerned a donation of RMB600,000 (or US$90,281.22) to the China Charity Foundation,[iv] Ho has not in her 35-page long 2^nd affirmation filed on 5 January 2018 dealt with, in substance, the other marketing expenses claims challenged in paragraph 86 of Mazzaocchi’s affidavit (as summarised in paragraph 66 above) notwithstanding that her 2^nd affidavit was made to respond to Mazzocchi’s affidavit. 

86.  On the other claims, there is no specific contradictory evidence.  Indeed, it is worthy of note that Ho has not even once made express reference to paragraph 86 of Mazzocchi’s affidavit.  The court is left with these general statements in paragraph 3 of Ho’s 2^nd affirmation:

“I have been provided with, and have considered, a Chinese translation of the Affirmation of Maurice Mazzocchi (“Mr. Mazzocchi”) and note that the same contains numerous unfounded and unsubstantiated allegations made against both the Plaintiff and myself.  I have been advised and understand that it is unnecessary for me or the Plaintiff to respond to each and every of such allegations, and to the extent that there is / are allegations that I have not specifically responded and/or objected to hereinbelow, the same shall not be construed as an admission by me or the Plaintiff.”

87.  The defendant’s allegation of submission of false marketing expenses claims by the plaintiff has likewise received little attention in the plaintiff’s written submission though Mr Wong SC has in his oral submission in court attacked the quality of the defendant’s evidence on this allegation as being “filmsy”, “based on hearsay from unidentified sources” etc.

88.  I would not describe the defendant’s allegation that the plaintiff has made false marketing expenses claims as “unfounded” or “unsubstantiated” on the present state of the evidence.  I repeat paragraph 84 above.  The plaintiff has not provided the court with any material of substance to question the defendant’s evidence in this connection.

89.  While the court hearing an interlocutory application on affidavit discourages parties from dwelling incessantly on disputes of fact that cannot be resolved on paper, for the purpose of demonstrating a serious issue to be tried of a factual nature as the threshold for the grant of an interlocutory injunction, of which the question whether the plaintiff submitted to the defendant claims for marketing expenses that were false is one, it is in my view insufficient for the plaintiff to just barely deny the defendant’s allegation and expect the court to be prepared to assume that it would at the trial be in a position to adduce some substantive evidence that might tend to give credence to its denial.  In short, a serious issue to be tried need to be raised / dismissed by concrete evidence, not just a bare allegation or denial.

90.  This is particularly so in the instant case.  The marketing expenses were said to have been incurred, and the claims therefor were made, by the plaintiff.  The submission of false marketing expenses claims is a serious charge.  The plaintiff should do (and should be able to do) more to support such claims than just making the bare and general denial in paragraph 3 of Ho’s 2^nd affirmation.

91.  Hence, while being mindful that it is not the court’s function in this type of application to conduct a mini-trial on affidavits, I am entitled to doubt whether the evidence placed before me discloses a serious issue that the plaintiff has submitted false marketing expenses claims to the defendant.  (Out of abundance of caution and for the avoidance of doubt, I am not making any final finding of fraud or dishonesty against the plaintiff.  I am merely assessing the sufficiency of the evidence for the threshold question before me.)

92.  I do not agree with Mr Wong SC that the issue whether the plaintiff has made false claims for marketing expenses is a red herring because the March Agreement dispensed with the need for the plaintiff to submit documentary proof for marketing expenses in order to claim contribution towards such expenses from the defendant.  On the plaintiff’s own case, the March Agreement (even if made) would not affect the plaintiff’s obligations under clause 2.1 including the duty under clause 2.1(h) to spend no less than 10% of its net profit on marketing and promoting the Products.  I find it hard to see how the defendant could monitor the plaintiff’s performance of this duty unless it was put in the position to know and verify, inter alia, the amount spent on marketing by the plaintiff.

93.  In any event, the plaintiff did submit information on its marketing expenses to the defendant in August 2017.  It must be implicit that the plaintiff presented such information to be true and correct.

94.  Leaving aside claim 4 which Ho has dealt with, the submission of the other false marketing expenses claims, especially at the scale said to have been discovered by the defendant, would in my opinion amount to a repudiation of the Agreement by the plaintiff, more particularly, of its duties under clause 2.1(c) to act loyally and faithfully towards the defendant in relation to its business under the Agreement and to conduct such business in an orderly and business-like manner under clause 2.1(d).[v]

95.  However, the defendant did not mention or rely on the plaintiff’s repudiation by submission of false marketing expenses claims in effecting the Termination, from which fact the following questions are raised:

(1)  whether the defendant retains the common law right of termination by acceptance of the plaintiff’s repudiation, it being suggested that the defendant has contracted out of such right by agreeing to the contractual termination provisions in the Agreement (i.e. clauses 7.2 to 7.4);[vi] and

(2)  whether the defendant can now rely on the plaintiff’s repudiation by submission of false marketing expenses claims when it did not use such ground to effect the Termination.

96.  On the first question, the common law right by one contractual party to terminate the contract by acceptance of the other party’s repudiation is presumed not to be excluded unless there are clear, express and unambiguous words to that effect. See Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717G-H (Lord Diplock); Stannard & Capper, supra, §8.19.

97.  In the present case, the contractual termination provisions clearly contain no such “clear”, “express” or “unambiguous” words and therefore do not displace this presumption.

98.  For the sake of completeness, as stated above, Mr Wong SC argues, in the context of the Termination for non-payment of the Disputed Sum being invalid, that the existence of a contractual right to terminate only where the party in default fails to remedy the breach within a certain period of time from his being notified in writing, such as clause 7.2(a), constitutes as an exception so that the defendant must either serve notice or at least give the plaintiff a reasonable opportunity to remedy the breach.  In support, Mr Wong SC refers to the following underlined statement in Stannard & Capper, supra, §8.23 which I set out in full for proper context:

“As has been seen, the exercise of a common law right of termination requires no more than the doing of some act inconsistent with the continuation of the contract; no actual notice of termination need be served on the party in default, still less a notice in any particular form. There is nothing to prevent the parties to a contract from drafting an express right of termination in such terms, but more often, as previously seen, the exercise of such rights requires at least the giving of notice to the party in default, and quite possibly the chance to remedy the breach as well. The question then arises of whether a party who serves such a notice can then turn round and rely on his or her common law rights. In principle, the law does seem to allow this. In L Schuler AG v Wickman Machine Tool Sales Ltd the contract gave the defendant the sole selling rigths in relation to the claimants’ machinery. The contract further provided: (1) a clause described as a ‘condition’ stating that the defendant should send representatives to key customers on a weekly basis, and (2) a clause allowing termination in relation to ‘material’ breaches which the defendants failed to remedy within sixty days. Following numerous breaches of the former, the claimants sought to exercise their right of termination under the letter, and when this was rejected by the arbitrators sought to argue that in any event they could terminate for breach of condition as common law. In the event it was held by the House of Lords that the term in question was not a condition at all, but there was no suggestion that if it had been the common law right of termination would have been excluded merely by the purported exercise of the contractual right. However, an innocent party who serves a notice of this sort must at least give the party in default a reasonable opportunity to comply with it; and to that extent the exercise of the contractual right will exclude the common law right. If, however, the attempt to invoke the express right is unsuccessful, there is nothing to stop the innocent party then falling back on the common law right.”

99.  I have 2 observations:

(1)  The learned authors have not supported the underlined statement with authority.

(2)  Anyway, I do not understand them to be saying that notice must be served and an opportunity to remedy given whenever there is a contractual provision for termination upon lapse of a notice to remedy.  As I read it, the point that is being made is that if notice is indeed served (and therefore the contractual right of termination is invoked), a reasonable opportunity for compliance should be accorded.  In this case, the defendant did not serve upon the plaintiff any notice in respect of the false claims for marketing expenses.

100.  I am also inclined to agree with Mr Yu SC that the termination provisions in the Agreement would be inapplicable, as they did not cater, to a repudiation by the submission of false marketing expenses claims.  Take clause 7.2(a).  Such dishonest conduct, once committed, was not something capable of cure as the damage (loss of trust, confidence and good faith) was done and cannot be undone.  See L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 249G-250D (Lord Reid); Stannard & Capper, supra, §§8.14 to 8.15.

101.  To conclude, the defendant has not lost its common law right of termination.

102.  Turning to the second question, a party who terminated a contract for a wrong or inadequate reason or no reason at all may rely on another valid reason to justify the termination, even if he did not know of the valid reason at the time of termination, so long as (a) the valid reason existed at the time of the termination and could not have been put right by the counter-party and (b) the terminating party is not precluded by waiver or estoppel from relying on the valid reason.  See Boston Deep Sea Fishing and Ice v Ansell (1888) 39 Ch D 339 at 352 (Cotton LJ) and 364 (Bowen LJ); British & Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 at 71-72 (Lord Sumner); Heisler v Anglo-Dal Ld [1954] 1 WLR 1273 at 1278 (Somervell LJ); Chitty on Contracts (32^nd Ed., 2015), §24-014.

103.  In the present case:

(1)  The plaintiff submitted the claims for marketing expenses in August 2017 before the Termination on 29 September 2017.

(2)  I have already indicated in paragraph 100 above my view that a repudiation by the submission of false marketing expenses claims was not capable of remedy.  I certainly do not think it is an answer for the plaintiff to say in paragraph 39.2(b) of its written submission that it could simply have foregone any claim for marketing expenses which the defendant did not find satisfactory.

(3)  There can be no suggestion that the defendant has waived or is otherwise estopped from relying on, the dishonest conduct.

Prospect of permanent injunction

104.  The basis now raised by the defendant against the prospect of a permanent injunction in the terms sought by the plaintiff (i.e. irretrievable breakdown of relationship and complete loss of mutual trust confidence and good faith between parties to a contract the performance of which requires co-operation) did not seem to arise in Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361; Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349; and Tech Garden Asia Ltd v Yuneec International Co Ltd, HCMP 2421/2015, unreported (Madam Justice Bebe Chu on 20 November 2015), which are relied upon by the plaintiff in support of the grant of an interlocutory injunction on the bases that it would be difficult to quantify the profits that an innocent distributor like the plaintiff would have made had the distribution agreement subsisted and that the defaulting supplier would otherwise be left to take advantage of its breach and enjoy the fruits of the time, effort and money expended by the distributor in building up the market.

105.  In support, Mr Yu SC has drawn my attention to the following authorities:

(1)  Vertex Data Science Ltd v Powergen Retail Ltd [2006] 2 Lloyd’s Rep 591 at [5], [36]-[46] (Tomlinson J) in which an interlocutory injunction was sought to restrain the defendant from terminating an outsourcing contract;

(2)  Atlas Steels (Australia) Pty Ltd v Atlas Steels Ltd (1948) 49 SR (NSW) 157 at 158, 161-167 (Sugarman J) in which the plaintiff sole distributor applied for an interlocutory injunction to restrain the defendant supplier from breaching the distributorship agreement;

(3)  Ericsson AB v EADS Defence & Security Systems Ltd [2010] BLR 131 at [43]-[47] (Akenhead J) in which an interlocutory injunction was applied for to prevent the defendant from terminating a contract to develop and supply software; and

(4)  Astor Electronics Pty Ltd v Japan Electron Optis Laboratory Co Ltd [1966] 2 NSWR 419 at 428 (MacFarlan J), in which a distributor applied for an injunction to restrain a supplier from selling its goods otherwise than through the distributor.

106.  In all such cases, the court refused the application because it would be inappropriate as a matter of policy to grant injunctive relief which would have the effect of compelling parties between whom mutual trust and confidence had broken down to work together, especially under a contract that requires a degree of co-operation and mutual understanding to carry out.

107.  The same consideration seems applicable to this case.

108.  The affidavit evidence speaks for the present dysfunctional relationship between the plaintiff and the defendant, as does the deadlock after the Termination.

109.  Mr Wong SC seeks to distinguish these authorities with reference to the nature and contents of the Agreement and the parties’ relationship thereunder.  However, on my reading, the Agreement provides for, not just the mechanical sale and purchase of the Products between the parties thereto, but also the promotion of the Brand and the Products by the plaintiff in the Territory with the defendant’s support in different aspects; the use of the defendant’s intellectual property by the plaintiff; the regular supply of general, business and sales information by the plaintiff to the defendant; the opening and maintenance by the plaintiff of flagship stores and/or boutiques for the Brand and the Products in the Territory; the provision of training, updated product information, technical support and “value added” services on the Product by the defendant to the plaintiff, etc.  In short, the performance of the Agreement would call for a significant degree of co-operation and mutual understanding between the parties, as I have gleaned from the constant correspondence by email and WhatsApp before the Termination.

110.  Mr Wong SC then suggests that the Interim Injunction Order has been deliberately couched in terms that would not compel the defendant to sell any Products to the plaintiff.  This may be correct literally.  However, taking a realistic view, the Interim Injunction Order, if continued (or a permanent injunction in the same terms, if granted) would have the practical effect of forcing upon the defendant a choice between dealing with the plaintiff with whom it does not get along and in whom it says it has completely lost trust and confidence and abandoning the markets in the Territory which are agreed by all to be full of commercial potentials.  Indeed, I note that the interlocutory injunction sought and refused in Astor Electronics Pty Ltd v Japan Electron Optis Laboratory Co Ltd was similar in terms to the Interim Injunction Order.

111.  For these reasons, there would at least be very respectable argument against the grant of the permanent injunction sought even if the Termination should be held to be wrongful.

ADEQUACY OF DAMAGES TO PLAINTIFF

112.  The plaintiff’s case on inadequacy of damages to it rests primarily on the premise that it would be difficult to quantify the profits that it would have made had the Agreement subsisted, particularly given the facts that the Agreement was in its first year of execution with 9 more years to run; the plaintiff’s efforts in promoting and marketing the Brand and the Products in Hong Kong have just begun to bear fruit; and that the plaintiff has yet to roll out its marketing plans for the markets in Macau and the PRC, the potentials of which have yet to be tested.

113.  First, on legal principle, I have already dealt with Mr Wong SC’s authorities in support of the grant of an interlocutory injunction in the terms of the Interim Injunction Order on such basis in paragraphs 104 to 111 above.

114.  Second, if damages would for this reason not be an adequate remedy for the plaintiff, the corollary, viz that damages would not be an adequate remedy for the defendant, would also be true.  In this regard, I do not see why the defendant should, as submitted by the plaintiff, be necessarily confined to its sales figures or profit margins for the years from 2014 to 2016, which were achieved by direct sales without any local distributors or any large-scale or sustained marketing and promotion within the Territory.

115.  Third, there is some force in the defendant’s observation that the plaintiff has neglected to disclose evidence concerning its sales, expenses and profits during the subsistence of the Agreement.  It has also refrained from producing the Prince Dealership agreement.  There is no evidence, other than Ho’s assertion, that the plaintiff has turned a profit or that it will do so in the future.

116.  Lastly, as noted by the plaintiff, the Interim Injunction Order does not have legal effect in compelling the defendant to sell any Products to the plaintiff (see paragraph 110 above).  Hence, there is a possibility that the plaintiff would continue to suffer loss of profit notwithstanding the continuation of the Interim Injunction Order.  Indeed, as stated above, after the Interim Injunction Order was made, the plaintiff has only been able to procure the defendant to sell 2 watches to it.

117.  Although there is some reference that the defendant is a foreign company, there is no suggestion or evidence that an award of damages for breach of the Agreement would not be enforceable in Switzerland or anywhere else where the defendant’s assets can be found.

118.  It is unnecessary to deal with the plaintiff’s other argument based on loss of goodwill and reputation (which it says cannot be compensated with damages) at length.  While Ho may enjoy goodwill and reputation in the luxury goods market (which the defendant disputes to the extent of saying that Ho’s expertise appears to be in grey market trading), I agree with Mr Yu SC that it is the plaintiff’s (and not Ho’s) goodwill and reputation that is relevant here.  The plaintiff appears to have been acquired by the plaintiff for the specific purpose of entering into the Agreement.  There is no suggestion or evidence that the plaintiff itself has any goodwill or reputation of its own in the fashion/luxury goods industry (both before and after the Agreement) or that it has any plans to carry on other businesses in the industry in future.  On the available evidence, it seems questionable whether the plaintiff itself has any or any significant goodwill or reputation so as to suffer loss of the same.  See: Maldives Airports Co Ltd v GMR Male International Airport Pte Ltd [2013] 2 SLR 449 at [57] (Menon CJ).

ADEQUACY OF DAMAGES TO DEFENDANT

119.  In contrast, I see a real risk that damages would not be an adequate remedy to the defendant because there is doubt as to whether the plaintiff is good for damages.

120.  Before I elaborate on this, I should mention Mr Wong SC’s submission that it is difficult to see how the defendant will suffer any (or any substantial) loss if the Interim Injunction Order turns out to have been wrongly granted because it will not restrain the defendant from continuing to do business in the Territory through the plaintiff.  In support, reference is made to Madam Justice Bebe Chu’s judgment in Tech Garden Asia Limited v Yuneec International Company Limited, supra,at [93].  In answer, I repeat paragraphs 104 to 111 above.  It is not the policy of the law to force parties whose relationship with each other has broken down irretrievably or who no longer enjoy mutual trust confidence and goodwill to work together.

121.  Turning back to the plaintiff’s ability to pay damages, it is a HK$1 dollar company acquired specially to sign the Agreement.  It has not adduced any evidence as to its financial ability to honour a cross-undertaking as to damages, even though it is incumbent upon it to adduce such evidence: Brigid Foley Ltd v Elliot [1982] RPC 433 at 435-436 (Sir Robert Megarry VC).  The plaintiff’s silence has continued even after the defendant has specifically pointed out that there is no evidence as to this aspect.  Mr Wong SC points to the plaintiff’s purchase of over US$12 million worth of watches from the defendant as indicative of a healthy financial situation.  The plaintiff has issued share capital of HK$1.  We do not know from where it derived its working capital or the basis upon which it obtained the necessary finance for any inference to be drawn one way or the other. 

122.  As Ribeiro J (sitting in the Court of Appeal) observed in Wah Nam Holdings Co Ltd v Excel Noble Development Ltd [2000] 3 HKC 118 at 128, for the protection given to the defendant by the cross-undertaking to be real and not illusory, the plaintiff must be able to honour it if required.  The financial position of the plaintiff is therefore a material fact which should be disclosed. 

123.  In the absence of any evidence from the plaintiff, I proceed on the basis that the plaintiff may not be good for the money.  The plaintiff’s cross-undertaking as to damages may therefore be valueless and illusory, which is a factor weighing against the continuation of the Interim Injunction Order: Lau King Ting Katie v Cheng Miu Har Stella [2008] 4 HKLRD 563 at [25]-[27] (Deputy High Court Judge Harris SC, as he then was); Maldives Airports Co Ltd at [79]-[80]; Goldrein, Commercial Litigation: Pre-emptive Remedies (2^nd Ed., 2011), pp 33-34.

124.  The plaintiff has all along maintained that it should not be required to fortify its cross-undertaking as to damages.  This position continued until the end of Mr Wong SC’s submission in court in the afternoon on 16 January 2018.  Leading counsel for the plaintiff closed his submission by indicating for the first time that the plaintiff could pay into court HK$8 million to secure its cross-undertaking as to damages in 7 to 10 days’ time.

125.  It is regrettable that this offer was not made earlier to enable the court and the defendant to properly assess its adequacy.  As it was, it was thrusted upon Mr Yu SC literally before he stood up to begin his submission.  On the evidence available, I am inclined to doubt if HK$8 million would give the defendant sufficient coverage until the trial of this action should the Interim Injunction Order be continued.  The defendant’s profit from direct sales in Hong Kong and the PRC in 2016 before the execution of the Agreement amounted to CHF1,291,506.  As I have already said above, there is no reason why the defendant should limit its estimated loss of profit to what it achieved in 2016.  In this connection, I observe that the 2016 profit margin was a leap from those of 2014 (CHF771,221) and 2015 (CHF858,323).  It seems that the Hong Kong market alone has developed positively over the past year.  The defendant has mentioned an intention to pursue business opportunities in the 3 markets within the Territory in a different manner including the use of local distributor(s).

BALANCE OF CONVENIENCE

126.  In light of the doubt as to the adequacy of damages to the defendant, I move on to consider the balance of convenience.

127.  Given my above analysis and conclusion on “serious issue to be tried”, the balance of convenience is in my view tipped in favour of the defendant, i.e. for the discharge of the Interim Injunction Order.

CHENG’S 2^ND AFFIRMATION

128.  Cheng’s 2^nd affirmation goes to the question whether the defendant has acted in breach of the Interim Injunction Order after it was made on 24 November 2017.  Such evidence would bolster the need for the continuation of the Interim Injunction Order if a case for continuation has otherwise been made out.  It cannot by itself have any significant impact on the question whether the Interim Injunction Order should be continued.

129.  In other words, Cheng’s 2^nd affirmation is or has become irrelevant.

DISPOSITION

130.  For the reasons stated above, I order

(1)  that the plaintiff’s application for leave to adduce Cheng’s 2^nd affirmation be dismissed;

(2)  that the Interim Injunction Order be discharged;

(3)  that the Summons be dismissed; and

(4)  on a nisi basis, that the plaintiff should pay the defendant’s costs of and occasioned by the Summons, including the reserved costs of the hearing on 24 November 2017, on a party and party basis, with certificate for counsel for the hearing on 24 November 2017 and certificate for two counsel for the hearing on 16 January 2018, to be taxed if not agreed.

131.  I have given further thoughts to the matter of quantification of damages.  With a view to facilitating the assessment of damages should it become necessary and picking up on the suggestion made by counsel for the defendant in paragraph 57 of their written submission, I am also minded to order the defendant to give account of its profits from now until trial.  I wish to hear parties on the terms of the account and direct the plaintiff and the defendant to file and serve written submissions on this within 14 days and 28 days respectively.

132.  Last but not least, it remains for me to thank counsel for their able assistance.