CALIFORNIA RED LTD v. NEWAY KARAOKE BOX LTD AND OTHERS

HCA 748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 748 OF 2008

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J U D G M E N T

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Introduction

1.  This is an application for interlocutory injunctions.

2.  The plaintiff and the 1^st defendant belong to the California Red and Neway groups of companies respectively.  California Red and Neway are the two largest karaoke operators in Hong Kong.  They are competitors and to a limited extent, joint venturers.  Essential to their operations is the obtaining of copyright licences from record companies for playing karaoke music videos and songs (“songs”) in the karaoke “outlets” operated by the groups.  In particular, exclusive licences, albeit for a finite period of time (say three months), to play newly released songs are of great commercial importance to attracting and keeping customers.

3.  Since 2000, the two groups have joined forces in negotiating with record companies for securing licences for songs owned by the companies.  For that purpose, the two groups, through the plaintiff and the 1^st defendant, have entered into two joint venture agreements, one in 2000 and the succeeding one in 2001, and formed a joint venture company, namely, the 2^nd defendant, for use as the vehicle to obtain the licences from the record companies.

4.  Under both joint venture agreements, the term of the joint venture was for one year (subject to renewal in writing) and it could be terminated on one month’s notice.  After expiry of the term of the 2001 agreement, there was no formal renewal and no new joint venture agreement was signed.  However, it is common ground that both parties have continued with the joint venture via the 2^nd defendant “much as before”.

5.  The co-operation is said to have been smooth and successful.  The 2^nd defendant has managed to sign “joint promotion agreements” with a number of record companies in Hong Kong to secure licences for songs released by these companies.  Invariably, the licences are exclusive for an initial period and thereafter they become non-exclusive and, very often, perpetual at no extra cost.  For present purposes, the important thing to note about these joint promotion agreements is that they do not cover individual songs as such.  Rather, a joint promotion agreement typically covers a term of several years, during which the 2^nd defendant may select from songs released by the record company during the term for the grant of (exclusive and then non-exclusive) licences for use at the karaoke outlets of the two groups.  Licence fees are calculated by reference to the selections.

6.  As of the present, there are 9 extant joint promotion agreements between the 2^nd defendant and a number of record companies.  The terms of two of these joint promotion agreements are due to expire this year, five will expire in 2009, one in 2010 and one in 2011.

7.  There is no dispute that these joint promotion agreements are valuable assets.  Given the nature of pop music, the ability to secure the licences for playing newly released songs from active record companies in Hong Kong, particularly on an exclusive basis during the initial period, ensures the two groups of companies an unassailable edge over all possible competitors.

8.  The present dispute arose following the receipt of a letter from the 1^st defendant to the plaintiff dated 31 March 2008, which sought to terminate the joint venture agreement by giving one month’s notice.  On 19 April 2008, the 1^st defendant issued a further letter to the plaintiff saying that the 2^nd defendant should be wound up.  On 22 April 2008, the 1^st defendant issued 7 letters to record companies which have on-going joint promotion agreements with the 2^nd defendant to inform them that the joint venture between the plaintiff and the 1^st defendant (namely, the 2^nd defendant) would be terminated effective on 31 April 2008, the 2^nd defendant would cease to serve its purpose and would therefore be wound up in due course, and the 1^st defendant would be in touch shortly with the record companies with regard to “follow up further co-operation”.  The letters were signed by the 3^rd defendant as director of the 1^st defendant.

Proceedings and injunctions

9.  This led to the commencement of proceedings and application for interlocutory injunctions by the plaintiff against the 1^st and 3^rd defendants.  Holding injunctions have been granted and this judgment deals with the application for injunctions on an inter partes basis.

10.  Grant of prohibitory interlocutory injunction is of course governed by the American Cyanamid principles ([1975] AC 396), and one has to consider whether there is a serious question to be tried and if the answer is in the affirmative, questions of adequacy of damages and balance of convenience come into play.

11.  On the facts of the present case, the major fight is over the licences to the so-called new songs.  And they are divided into two categories – those that, when released, will be covered by the extant joint promotion agreements and those that will not.  It is the plaintiff’s application, in essence, that in relation to the first category of new songs, the 1^st and 3^rd defendants cannot “touch” the joint promotion agreements, which have already secured the right for the licences to these songs in favour of the 2^nd defendant and thus the two groups of companies.  In relation to the second category of songs, the plaintiff’s application is basically that the 1^st and 3^rd defendants must obtain the licences to those songs via the joint venture vehicle, the 2^nd defendant.

Serious question to be tried

12.  It is in that context that I propose to deal with the question of whether there is a serious question to be tried.  In my view, there are two crucial issues here, namely (1) whether the 1^st defendant is entitled to terminate the joint venture agreement on one month’s notice; and (2) the effect of clause 17.4 of the 2001 joint venture agreement.

13.  On the first question, the plaintiff seeks to argue, and this is its only pleaded case, that because the parties have entered into joint promotion agreements with terms extending to 2011, neither side has intended the joint venture between them to be terminated before 2011.  In those circumstances, the provision in the 2001 agreement (clause 17.1) giving either side the right to terminate the agreement by one month’s notice has been superseded by the parties’ subsequent intention and implied agreement, after they have by conduct extended the original term of the 2001 agreement.  As I say, this is the plaintiff’s only pleaded case on termination.

14.  I reject the argument as being unarguable.  First, it is contrary to the express provision in the 2001 agreement, namely, clause 17.1.  It would require an extremely strong case, in the absence of any subsequent express agreement between the parties, for the plaintiff to argue successfully that notwithstanding the express term, in continuing the 2001 agreement by conduct, they have impliedly agreed to vary the express provision to the one contended for by the plaintiff now.

15.  Secondly, this argument is contradicted by the facts.  The simple fact is that both during the term of the original 2000 agreement and the term of the subsequent 2001 agreement, there were joint promotion agreements signed, the terms of which went beyond the respective terms of the 2000 and 2001 agreements.  Yet, those two agreements expressly provided for the right to terminate the agreements upon one month’s notice.

16.  Thirdly, the plaintiff’s argument is quite contrary to clause 17.4 of the 2001 agreement which clearly envisages that there may be subsisting licences notwithstanding the termination of the joint venture agreement.  Clause 17.4, which I will return to, reads:

“  For the avoidance of doubt, termination of this Agreement in accordance with this clause will not affect or prejudice the rights and obligations of either [the plaintiff] or [the 1^st defendant] under this Agreement nor will it affect or absolve the parties’ obligation and commitment in respect of the Licenses and/or the Projects and/or any promotional plans prior to such termination.”

17.  Fourthly, I find the suggestion that because a joint venture has acquired an asset that will or is expected to last for a substantial period of time, the joint venturers must have intended and impliedly agreed that their joint venture is not to be terminated until after expiry of the expected life of that asset despite an express agreement in their joint venture agreement that it can be terminated by giving one month’s notice, rather unattractive as a matter of common sense.

18.  Since the plaintiff has not run any alternative case on the pleadings or at the hearing that the joint venture agreement can be terminated by a reasonable notice and such notice exceeds one month, I need not consider that possibility.  So far as this first issue identified by me is concerned, I am of the view that there is no serious question to be tried.

19.  But that is not the end of the matter, and I must come to the second issue, namely, the effect of clause 17.4.

20.  In my view, it is at least arguable that clause 17.4 requires the 1^st defendant to honour subsisting licences that the 2^nd defendant has obtained before the termination of the joint venture agreement.  Here, it should be noted that “licences” have been defined in the 2001 agreement to mean exclusive licences with record companies.  Although the joint promotion agreements are not licences for individual songs as such, I take the view that it is arguable that they are “licences” within the meaning of the 2001 agreement and are covered by clause 17.4.

21.  In those circumstances, notwithstanding (as per the 1^st defendant’s case) the termination of the joint venture agreement, under clause 17.4, the 1^st defendant would still need to honour the licences obtained by the 2^nd defendant from record companies, for so long as they are still subsisting (after the termination).  And in this regard, although technically, with the exception of one joint promotion agreement, the plaintiff and the 1^st defendant are not parties to these agreements, I take the view that it is at least arguable that the 1^st defendant is still caught by clause 17.4 in the sense that it must, via the 2^nd defendant, honour the joint promotion agreements so as not to jeopardise the right for the licences obtained thereunder.

22.  In my view, to that limited extent, the plaintiff has shown a serious question to be tried.  However, it is important to note that clause 17.4 only applies to the subsisting joint promotion agreements.  Moreover, it does not apply, given the definition of “licences” in the joint venture agreement, beyond the period of time when the songs in question are to be exclusively licensed to the 2^nd defendant pursuant to the joint promotion agreements.

23.  In other words, it does not apply to new songs that are not covered by any subsisting joint promotion agreements, ie the second category of songs I have identified above.  Nor am I concerned with songs to which the 2^nd defendant’s right is only limited to non-exclusive licences.

24.  Clause 17.4 has not been specifically pleaded by the plaintiff.  But its implications have been fully explored at the hearing and no pleading point has been taken.  In any event, it is a matter of amendment and does not affect the substance of the matter.

Specific performance and injunction

25.  Before I move on to deal with the questions of adequacy of damages and balance of convenience, I need to deal with one matter.  It is the plaintiff’s own pleaded case that the joint venture between the parties is in fact a quasi partnership and the parties owe to each other duties of good faith and duties as partners.  Both parties have co-operated in the conduct of the joint venture’s quasi partnership business “in a close and smooth fashion and with mutual confidence”.

26.  I take the view that the joint venture agreement is an agreement which the court would not decree specific performance of.  Nor would the court grant a prohibitory injunction if the effect of which would be to force the parties to co-operate with each other against their wishes.  That would be to decree specific performance through the backdoor.  See Spry, Equitable Remedies (7^th ed) 122-125, 598 et seq; Hummingbird Music Ltd v Acconci [2007] 4 HKLRD 79; Worth Achieve Associates Ltd v Huang Sheng Yi [2007] 3 HKLRD 797.

27.  Applying the general principles to the present case, it is quite plain to me that regardless of the defendants’ argument on the notice point, the plaintiff’s application for interlocutory injunction regarding new songs that, when released, will not be covered by any existing joint promotion agreements must fail.  In order to secure those songs through the 2^nd defendant, which is the effect of the injunction the plaintiff is seeking against the 1^st defendant, the 1^st defendant will be forced to co-operate with the plaintiff against its wish.  On the materials before me, I do not accept the argument that securing the licences to those songs or entering into a new joint promotion agreement regarding those songs would require minimal co-operation between the parties.  A quick look at a typical joint promotion agreement would immediately reveal that it contains many terms that require not only the agreement between the record company and the 2^nd defendant, but also the agreement between the plaintiff and the 1^st defendant amongst themselves.  Matters requiring agreement include the term of the joint promotion agreement, the terms of the licences including the fees and duration, the selection of songs, etc.  They require mutual trust and confidence as well as co-operation between the parties, and from what has happened, these important elements are simply lacking, at least on the part of the 1^st defendant.  This is despite the apparent willingness, if not eagerness, on the part of the plaintiff to carry on with the joint venture with the 1^st defendant as before.

28.  This being the case, in relation to this category of new songs that will not be covered by any existing joint promotion agreements, I am of the view that there really is no chance of the plaintiff obtaining a permanent injunction at trial to force the 1^st defendant, in effect, to use the 2^nd defendant to obtain the licences.  That being the case, and in the absence of exceptional circumstances, I do not see how an interlocutory injunction to that effect can be granted against the 1^st defendant, pending trial: Hummingbird, supra, para 19.

29.  This is therefore an additional reason for refusing any interlocutory injunction in favour of the plaintiff in relation to those new songs that, when released, will not be covered by the existing joint promotion agreements.

30.  The situation is different in relation to those new songs that will be covered by the existing joint promotion agreements.  In relation to these songs, the joint promotion agreements are already in place.  All that remains for the parties to do is to select the songs by agreement.  Of course, if the parties cannot come to any agreement, no song is selected.  But as a matter of practical reality, given that the 2^nd defendant has through these joint promotion agreements secured the exclusive rights to these new songs, commercial considerations would dictate the parties’ reaching reasonable agreement on the selection of these new songs.

31.  For that reason, I am not troubled by the degree of co-operation that will be required from the parties in order for them to honour clause 17.4 in terms of the new songs that will be covered by the existing joint promotion agreements. That is not an absolute bar to granting the interlocutory injunction prayed for.  It is really a matter of degree, to be considered in conjunction with all other relevant discretionary considerations.

Adequacy of damages and balance of convenience

32.  I now move on to the questions of adequacy of damages and balance of convenience.

33.  Given my analysis above, I am only concerned with a possible interlocutory injunction relating to those new songs that, when released, will be covered by the existing joint promotion agreements.

34.  I take the view that damages will not be an adequate remedy to the plaintiff.  The short reason is that it will be extremely difficult, if not impossible, to assess the effect of allowing the 1^st defendant to approach the record companies for the exclusive licences to these new songs, to the business and income of the plaintiff.  Putting aside the fact that the plaintiff does not operate the karaoke outlets by itself which are operated by its associated companies – the plaintiff being a provider of management and administrative services to the karaoke outlets (including the provision of the requisite licences), it is difficult to perceive how one can correlate, with any degree of accuracy, the loss of the exclusive licence for, say, one new song, with the diminution in revenue (if any) of a particular karaoke outlet or maybe more importantly, with the long-term effect (if any) on the business.  Incidentally, I do not accept for one moment the argument that since the plaintiff does not run a karaoke outlet by itself, the loss of exclusive licences would not cause the plaintiff any loss.  That argument overlooks the commercial reality of the matter.  And as I said, it is difficult to accurately correlate the loss of an exclusive licence for a particular song with the loss of revenue in an outlet. 

35.  Quantum is difficult to assess and damages is not an adequate remedy.

36.  By the same token, I am prepared to proceed on the basis that damages will likewise not be an adequate remedy to the 1^st defendant, which obviously wishes to sever all relationships of co-operation with the plaintiff and to engage in an all-out competition with the plaintiff.  It is difficult to assess how the inability to exclusively acquire the licences for the new songs will impact on the 1^st defendant’s plan to outgun the plaintiff in the unlimited competition to come.

37.  So far as balance of convenience is concerned, given that there are already in existence subsisting joint promotion agreements which will, by definition, cover the new songs under consideration, practical considerations plainly favour maintaining the existing arrangement pending trial.

38.  Maintaining the status quo is doubly attractive in the present case given my view that there should be a speedy trial of the action.  The limited injunctions that I am prepared to grant are only for a relatively short period of time and the prejudice to the 1^st defendant would be kept to a minimum. 

39.  One other factor I take into account is the question of whether the plaintiff is good for the cross undertaking as to damages – although as I said, damages is not an adequate remedy to either side.  The plaintiff has made a loss in the year 2006 and its current assets, according to the financial statements for that year, comprised to a large extent amounts due from related companies.

40.  This cannot be overlooked but is not an insurmountable obstacle.  I would require fortification of the cross undertaking as to damages.  On the very limited materials before me, I believe a payment-in of $500,000, or a bank guarantee for that amount, is adequate, subject to liberty to both sides to apply to vary the same as future circumstances may warrant.

41.  Subject to that being forthcoming, I am minded to grant an interlocutory injunction to restrain the 1^st defendant from obtaining or seeking to obtain the exclusive licences for any karaoke music videos of songs that, when released, will be covered by the existing joint promotion agreements, other than through the 2^nd defendant under those existing joint promotion agreements, pending trial.

42.  The injunction is subject to the rider that it shall not apply to those new songs, even though covered by the existing joint promotion agreements, that the plaintiff shall have decided not to select, nor shall it cover any new song the exclusive licence to which pursuant to a joint promotion agreement shall have expired – in either of which events the 1^st defendant shall be at full liberty to approach the record companies for the exclusive licences to the songs.

43.  I am further prepared to grant an interlocutory injunction to restrain the 1^st defendant from representing to the record companies involved in the existing joint promotion agreements that the 2^nd defendant will in any way refuse or fail to honour those agreements, pending trial.

44.  Beyond these two limited injunctions, I am not prepared to grant any further relief in favour of the plaintiff.

45.  In particular, in relation to the specific discovery sought, given the general discovery to be made after the close of pleadings, I do not find the discovery sought to be necessary.

Position of the 3^rd defendant

46.  As regards the position of the 3^rd defendant, the only basis for making a claim against him is that he is a director of the 2^nd defendant. 

47.  It is of course trite that as a director of the 2^nd defendant, he owes fiduciary duties to the 2^nd defendant, and amongst other things, he must not allow himself to be in a position of potential conflict.  However, speaking realistically, if he should decide to resign from the board of the 2^nd defendant tomorrow (with or without appointing a replacement director), his fiduciary duties towards the company would cease.  This is, of course, relevant in considering whether the court should grant an injunction against him pending trial.

48.  Having given the matter some thought, I am of the view that the balance lies against granting any injunction against the 3^rd defendant personally, given the limited injunctions that I have indicated I am prepared to grant against the 1^st defendant.  I believe those limited injunctions will be sufficient to protect the plaintiff’s position. 

49.  In any event, since the 3^rd defendant is a director of the 1^st defendant, an injunction against the 1^st defendant is, for all practical purposes, good against the 3^rd defendant as director provided that the necessary penal notice is endorsed on the injunction order.

Speedy trial

50.  As far as the question of speedy trial is concerned, the plaintiff is eager to have a speedy trial whereas the 1^st and 3^rd defendants have been silent on the matter thus far. 

51.  I have considered the suggested directions proposed by the plaintiff as well as the issues raised between the parties.  The plaintiff’s statement of claim is not perfect and there is room for improvement.  But looking at the matter in the round, and bearing in mind the current state of the court’s diary, I take the view that it is possible to hold a speedy trial in January or February next year.  (As at the time of writing, earlier dates are not available).

52.  I give the following directions nisi:

(1)    there be a speedy trial of the action and counterclaim;

(2)    the plaintiff do file and serve its reply and defence to counterclaim within 14 days from the date of this judgment;

(3)    the parties do file and serve their respective lists of documents within 14 days thereafter, and there be mutual inspection of documents within 7 days thereafter;

(4)    the parties do file and serve their signed witness statements as to fact within 21 days thereafter, and save where otherwise directed by the trial judge, they shall stand as their makers’ respective evidence-in-chief at trial;

(5)    the parties shall set down the case for a speedy trial within 7 days thereafter, with an estimate of 8 days (which shall be confirmed in writing by the parties’ counsel at the time of setting down), and convenience of counsel shall not be considered in fixing dates;

(6)    the trial shall not commence earlier than two months after setting down and there shall be a pre-trial review before the trial judge (if possible) not later than 21 days before the commencement of trial;

(7)    the parties must inform each other and the court forthwith if they or any of them should become aware of any matter or development that may affect the above estimate of trial or the holding of the speedy trial on the dates fixed;

(8)    time shall run during the summer vacation;

(9)    the parties shall within 5 days from the date of this judgment approach the listing clerk of the court to pencil-mark the available trial dates, which shall be formally confirmed upon setting down as provided in (5) above;

(10)   liberty to apply for further or other directions generally.

53.  Any application to vary the directions nisi must be made within 3 days after this judgment is handed down, failing which the same shall become absolute upon the expiry of the 3-day period.

Costs

54.  I make a costs order nisi that the costs of this application be in the cause.  I grant a certificate for two counsel.

55.  I thank counsel for their assistance.