THE HONG KONG SCHOOL NET LTD v. E-EDUCATION PUBLISHING LTD

HCA 1177/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1177 OF 2011

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Introduction

1. In this case the plaintiff, The Hong Kong School Net Ltd, claims loss of profit in the sum of $3,976,523.27 from the defendant, E-Education Publishing Ltd, in that under various cooperation agreements between them, the plaintiff shared equally the profit of various projects they had undertaken after the deduction of certain agreed sums, but the defendant included sums that it should have borne, and not shared with the plaintiff.

2. The hearing was conducted in the absence of the defendant after it had been established that it had terminated the services of its solicitors which ceased to act on 1 February 2013[1], and that relevant papers in relation to the proceedings, including notification of the hearing, had been served at the registered address of the defendant with no response.  The defendant had filed a defence and counterclaim but ceased to contest the proceedings when it came to exchange evidence and mutual discovery. The plaintiff submitted company records in relation to the defendant which revealed that the previous shareholders and the persons who appeared to be running the company had transferred their shares to two British Virgin Islands companies.

Background

3. The plaintiff is a company incorporated in Hong Kong and a subsidiary of The Chinese University of Hong Kong Foundation Ltd held by The Chinese University of Hong Kong.  It operates a business involved in designing and writing computer programs and websites for online education and providing online tutoring services and online courses to students.  The defendant is also a company incorporated in Hong Kong and is involved in the business of providing online tutoring services and online courses to students.

4. Since about 2003, the parties entered into various agreements to cooperate on projects for providing online tutoring courses and selling related learning materials, such as books and compact discs.  The cooperation agreements were in writing and basically in the same terms and conditions but for different trading products.  The plaintiff’s main obligations under the agreements were to write and provide software programs and websites for publishing the tutorial courses on the Internet, to design web pages of websites, and to provide maintenance of websites.  Whilst the defendant’s main obligations were to provide the learning materials to be featured on websites, to promote the online tutoring courses to schools, to handle the subscription of the online courses by the students and to perform the related administration.  It was agreed between them that they would share the profits generated from the projects equally.  They agreed, however, that they would be responsible for their own part of the production of the product and bear their own production costs. The defendant would collect the payments for the courses and after deducting the promotion, operation and administration costs incurred would pay the plaintiff its share.  These later costs were subject to agreement between them. (I will refer to the written cooperation agreements as “the 50/50 projects”.)

5. The defendant would also prepare and sell products as an associated project in relation to certain projects.  These agreements were made orally between representatives of the plaintiff and the defendant who agreed that the sales profits, after deduction of expenses, would be distributed as to 15% to the plaintiff and 85% to the defendant. (I will refer to the oral agreements as “the 15/85 projects”.)

The plaintiff’s claim

6. It is claimed by the plaintiff that in various Statements of Account issued by the defendant in relation to the sharing of the profit of certain projects that they had undertaken, the defendant included costs which were not properly or accurately stated, or supported by records, or agreed to by it.  The plaintiff claims it suffered loss of profit as a result. According to the plaintiff, on its calculation, the total costs which were wrongfully included in the Statements of Account amounted to $7,953,046.54.  On the basis of an equal share of the profit from the projects that they undertook, this meant that the plaintiff incurred a loss of profit of $3,976,523.27. This amount was revised to $3,801,636.03 in the plaintiff’s closing submissions to address a readjustment in respect of the 15/85 projects. 

7. In the original claim, it was alleged that the defendant had also infringed the copyright owned by the plaintiff in relation to various program works and original works.  By the time the case came on for trial, the defendant had refrained from infringing the copyright works of the plaintiff, and accordingly the plaintiff did not pursue its claim in relation to the infringement of copyright and the injunctive relief and damages it sought in relation to it.  The only claim that the plaintiff pursued at trial was the inaccurate and improper inclusion of the defendant’s costs in the Statements of Account which were shared equally by the plaintiff.

The plaintiff’s case

8. The relevant projects under consideration in this dispute are as follows.

(1) MAP

(2) IQ Book

(3) 中學MAP(SMAP)

(4) I-Exercise

(5) Si-Exercise

(6) 常識Ready Go!(GS/General Study)

(7) Easy Phonics (English Speaking Adventure)

(8) Phonics Books

(9) Phonics CD

(10) CD-ROM Exercise

(11) A+ Maths

(12) 躍進科學營

9. The following lists the projects which were evidenced by a written cooperation agreement between the parties and the date of it.

(1) A+ Maths dated 20 November 2003;

(2) I-Exercise dated 15 April 2005;

(3) MAP dated 13 December 2005;

(4) Easy Phonics (English Speaking Adventure) dated 20 June 2006;

(5) 常識Ready Go! (GS/General Study) dated 20 June 2006;

(6) 中學MAP (SMAP) dated 1 February 2007; and

(7) 躍進科學營various agreements dated between 26 April 2007 and 13 May 2007.

10. The plaintiff makes no claim in relation to the A+ Maths or the Yeuk Jin Science Camp (躍進科學營) agreements.  The plaintiff relies on the agreements with respect to I-Exercise; MAP; Easy Phonics; Ready Go! and MAP (SMAP) which were 50/50 projects.  The remaining projects IQ Book, Phonics Books, Phonics CD and CD-ROM Exercise were 15/85 projects.

11. The terms of the written agreements had the same format and contained the same clauses with some slight variations.[2]  They provide under Clause 3.1 that each party would be responsible for their part of the production and bear their “production costs” which would not be deducted from the profit to be shared between them.

12. It is therefore necessary to determine what the parties meant by the term “production costs” that each was responsible for under the agreement.  In my view, this can be gauged by the responsibilities each had as set out under the agreement.  Clause 4.2 listed the responsibilities each party had under the headings of “Initial Stage”, “Development”, and “Operational Stage”.  Whilst the responsibilities listed varied slightly from agreement to agreement, they were essentially the same.  In my judgment, the responsibilities under the headings of “Initial Stage” and “Development” concern production and this is what the parties intended to mean by the term “production costs” and what they agreed each had to bear by way of costs.

13. Clause 5 provides that the profits were to be shared equally by the parties. This clause has different iterations in the agreements.  In the A+ Maths agreement, it is only mentioned that profits shall be shared equally.  There is no mention of the deduction of costs.  In the I-Exercise, Map, Easy Phonics, and Ready Go! agreements, provision is made for the deduction of agreed expenses.  In the MAP (SMAP) agreement, provision is made for the deduction of agreed expenses that are verified in writing.

14. In relation to IQ Book, Phonics Books, Phonics CD and CD-ROM Exercise, these were, as already mentioned, 15/85 projects, where the defendant prepared and sold products as associated projects.  They were oral agreements, and there was no direct evidence from anyone as to what was exactly agreed.  All that was known were the key terms of the agreements.

The defendant’s case

15. The defendant in its pleadings claimed that only in some of the projects did the parties execute a written cooperation agreement and that in others, it entered into oral agreements with the then managing director of the plaintiff and the director of the defendant.  According to the defendant, the parties agreed orally to undertake the following projects: IQ Book; Phonics Books; Phonics CD; CD-ROM Exercise; and 躍進科學營 on a distribution of 15% to the plaintiff and 85% to the defendant after all expenses were deducted. The defendant claimed that the profits generated from the projects would be shared after deducting the promotion, operation and administration costs incurred by the defendant.  The defendant also claimed that any consultancy fees incurred by the defendant would also be deducted from the profits generated.

16. The defendant explained that after the enrollments of the students were completed in each time period, the plaintiff and the defendant would commence calculating the distribution of the profit.  The plaintiff would report to the defendant the number of students enrolled on its website, and the defendant would then send a sales statement with all necessary information including, the agreed unit price, the quantity for each unit and the consultancy fee, if applicable, to the plaintiff for its verification and checking.  If there were any errors, the plaintiff would return the sales statement to the defendant for its correction.  If the plaintiff found the statement did not require amendment, the plaintiff would then issue the invoices with respect to the relevant payment for the defendant’s settlement. The whole verification and payment process would be completed within 2 months after the relevant online course commenced.

17. I have noted the defence as raised by the defendant in its pleadings even though it chose not to defend these proceedings. Where the defence is contrary to the plaintiff’s case, it has been treated by me as simply representing the defendant’s stated position with no evidential support for it.

The plaintiff’s evidence

18. The plaintiff called one witness to support its claim. He was Mr Kenneth Chiu Kin Chung (“Mr Chiu”), the Chief Executive of the plaintiff.  He joined the company in October 2010.  As a consequence, he could not give direct evidence about the past transactions referred to in the plaintiff’s claim.  He produced the relevant records and explained that since about 2003, the plaintiff and the defendant entered into various cooperation agreements on projects for providing online tutoring courses and selling related learning materials such as books and compact discs.  He stated that under the cooperation agreements, the plaintiff and the defendant would share the profits generated from the projects equally.  He referred to the projects that the parties had undertaken where he claimed there had been false accounting.  He said the defendant had submitted in the Statements of Account to the plaintiff items that were deducted from the profits which should not have been borne by the plaintiff in equal share with the defendant.  It was soon after joining the company that he noticed some irregularity with the Statements of Account.  He spoke to two representatives of the defendant company about it.  They held a meeting in November 2010 with respect to the items that he suspected to have been improperly incurred by the plaintiff.  He requested documentary proof of the items claimed to have been incurred by the defendant and also whether there was any evidence of any agreement from the plaintiff to share the cost of them.  The representatives of the defendant did not provide the material or information requested.

19. It was not until about April 2011 that Mr Chiu performed an overall check of the Statements of Account that had been provided by the defendant over time.  It was during this exercise that he found that the Statements of Account issued by the defendant, included costs which were not properly or accurately stated, or not supported by evidence or agreed to by the plaintiff.   The costs alleged to have been wrongfully included in the Statements of Account were stipulated and listed by way of items.

20. As mentioned, these items had been identified by Mr Chiu after he had taken over as Chief Executive.  The previous person responsible for the plaintiff had left at about the time Mr Chiu had joined.  This meant there was no one to speak about the various projects and the arrangements or agreements that may have been struck between representatives of the plaintiff and the defendant.  The plaintiff’s claim seeks repayment of the half share of the defendant’s production costs and costs it did not agree to which were deducted from the profits.  The “production costs” are clear enough from the written cooperation agreements.  An examination of the records can readily identify whether they have been improperly charged to the plaintiff.  The “costs not agreed” by the plaintiff poses a greater difficulty.  The allegation that the costs were not agreed by the plaintiff is essentially based on the nature and the sum involved.  While they may appear on their face to be questionable, I have no evidence as to what was discussed or agreed, if anything at all, about them.  I was informed by Mr Chiu that his understanding was that the Statements of Account in draft would be submitted to the plaintiff and if no objection was raised, it would be issued and payment would be made.  In these circumstances, it is difficult for the plaintiff, without more, to complain about costs it shared with the defendant which it claims were not agreed.

Production costs and costs not agreed

21. Mr Derek Hu, counsel for the plaintiff, has very helpfully submitted a schedule listing the items in each invoice under each agreement that were “costs not agreed” or “production costs” which I have used to assess the items and sums involved. 

22. The wrongfully deducted items were classified as follows: (1) Print promotion materials; (2) Print barcodes; (3) Shipping fees to schools; (4) Part-time collecting reply slips from schools and travelling expenses; (5) Costs to scan barcode; (6) Member Notices; (7) Postage of member notices; (8) Reply slips and cheque processing centre; (9) FTP, create CSV and upload; (10) Ng Sir and Kenny salary; (11) John LoàMaths textbook establishment fee; (12) Cost of Grand Prix competition–reply slip and notice expenses; (13) CD ROM-duplication  (14) CD ROM-packing fee; (15) CD ROM-cost of label; (16) CD ROM-delivery fee; (17)  Book-printing; (18) Book-delivery fee; (19) Book-label printing; (20) GS Poster (printing film, packing); (21) Post office stamp; (22) Award to students-gifts; (23) Cost of freelance to listen to student’s recordings; (24) Cost of freelance translator; and (25) Principal lunch meeting. 

23. Mr Chiu in his evidence addressed whether the listed items were a production cost as set out in the agreements.  He acknowledged that items (8)-(15), (17), (19), (23) and (24) were “production costs”, whilst the rest were “costs not agreed”.  I accept his evidence as to the items he said were “production costs”.  As to the other items which were “costs not agreed”, even though there may be good reasons to suspect that these items were wrongly or improperly included in the relevant invoices, the evidence does not satisfy me to the requisite standard of proof that they were not agreed to by the plaintiff.  Unfortunately, there was no one on behalf of the plaintiff that could testify as to what had been agreed to by the parties as to costs outside the terms of the agreements.  Whilst Mr Chiu raised queries about certain costs, they amount to no more than suspicion or supposition.  He acknowledged in his testimony, except for “production costs”, that there were no written records in relation to the arrangement between the parties as to what was agreed or not agreed with respect to the costs that were incurred. 

24. I am satisfied on a balance of probabilities that the production costs identified should have been borne solely by the defendant and were wrongly or improperly included in the relevant invoices to the plaintiff which resulted in it suffering loss of profit.  I disallow the production costs, however, identified by Mr Chiu in relation to the 15/85 projects as these were pursuant to oral agreements, the exact terms of which we do not know. 

Conclusion

25. Accordingly, I find that the defendant included in various Statements of Account submitted for the 50/50 projects to the plaintiff, items that were the defendant’s production costs in the sum of $2,355,239.13 which should not have been included and resulted in the plaintiff bearing half of these costs. The plaintiff is entitled to be reimbursed by the defendant for half of this amount.

26. As it was raised by the defendant in its pleadings, I will address the issue of the 6 year limitation period for a claim under a contract.  The “production costs” that I have found to have been wrongly or improperly levied on the plaintiff in Statements of Account were submitted from January 2006 onwards.  This was within the 6 year period.

27. In light of the foregoing reasons, I therefore enter judgment for the plaintiff against the defendant in the sum of $1,177,619.57.  There shall be interest at judgment rate from the date of the writ to the date of the payment.  I also order that the defendant pay the plaintiff’s costs, to be taxed if not agreed.