ASIA TELEVISION LTD AND ANOTHER v. LUXLAND TRADING LTD AND ANOTHER

HCA 1830/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1830 OF 2000

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J U D G M E N T

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1.  The 1^st Plaintiff (“ATV”) is a well-known free television broadcaster in Hong Kong.  It also produces television programmes and is the copyright owner of the same.  The 2^nd Plaintiff (“ATVE”) is a wholly owned subsidiary of ATV.  It distributes the programmes produced by ATV and others.

2.  By two written agreements (“the Agreements”) both dated 27.7.99 and made between ATVE and the 1^st Defendant (“Luxland”), ATVE agreed to license to Luxland the right to manufacture and sell video compact discs (“VCD”) of five ATV programmes (“the Programmes”) subject to the terms therein contained[1].  The Programmes were “The Eight Fairies” (“A”), “The Legend Continues” (“B”), “Legendary Fok” (“C”), “The Boy Fighter From Heaven” (“D”) and “The Fist” (“E”).  The licence period was 3 years from 1.8.99 to 31.7.02.  The Agreements are practically identical save that (i) one of them covered the territories of Hong Kong and Macau and the other one covered China and (ii) the licence fees were different.  The Agreements were produced by ATVE.

3.  Subsequent to the making of the Agreements, the first two instalments of the licence fee were paid and the Master Tapes for A, B and C were delivered to Luxland.  The third instalment was paid by two cheques dated 12.8.99 and drawn by the 2^nd Defendant (“Lawson”) in favour of respectively ATV and ATVE.  Those cheques were not honoured.  No further payment of licence fee had been made and the Master Tapes for D and E were not delivered under the Agreements as a result.  According to the Defendants’ case, the said cheques were not honoured because of the discovery of a large quantity of parallel imported VCD of some of the Programmes for sale in Hong Kong shortly after the cheques were delivered to the Plaintiffs.

4.  In this action, ATVE seeks to enforce its right under the Agreements in respect of (i) payment of outstanding licence fee and (ii) the destruction of the Master Tapes of A, B and C by Luxland.  ATV and Lawson are involved in this action by reason of the dishonoured cheques in relation to the 3^rd instalment.

5.  Ms Tsui, who appears for the Defendants, has submitted that the defence is two-fold:

(i)      ATVE was in breach of an oral contractual term that it would grant to Luxland exclusive licences;

(ii)     ATVE had in fact granted licences to third parties to distribute VCD of some of the Programmes in breach of the Agreements.

6.  Ms Tsui further submits that Luxland had accepted the repudiatory breach by ATVE of the Agreements by a letter from its solicitors dated 16.2.00.  Consequently, Luxland is not liable to pay the balance of the licence fee and is entitled to counterclaim for the return of the licence fee paid on the ground of total failure of consideration.

7.  There is also an issue as to whether the Standard Conditions of ATVE (“SC”), which were meant to be part of the Agreements, were brought to the attention of Luxland prior to or at the time of the signing of the Agreements.  The SC are relevant on two matters, namely, ATVE’s claim for interest as provided therein and its claim for conversion in respect of the Master Tapes of A, B and C (the SC provide for the return of the Master Tapes to ATVE at the end of the licence period).

The Terms of the Agreements

8.  The controversy in the evidence of this case is not extensive.  It is common ground that the Agreements were negotiated between Mr Alfred Ng, Marketing Manager of ATVE (“PW1”) and Ms Aries Law of Lawson (“DW2”).  DW2 was involved because Mr Lo Kin Wing of Luxland (“DW1”) did not understand English and it was the first time that Luxland ventured into distributing Hong Kong programmes.  Lawson was a business partner of Luxland in that it manufactured VCD for Luxland.  Therefore, DW2 had an interest in helping Luxland in the negotiations.  Plainly, DW2 was at all material times acting as the agent of Luxland.

9.  It is also common ground that the licences which were agreed upon were exclusive licences.  PW1 confirmed that it was his understanding that once the exclusive licences were granted to Luxland, neither ATV nor ATVE could distribute any VCD of the Programmes in Hong Kong, Macau and the PRC during the licence period.  When asked in cross-examination: “At the meeting, it was agreed that you would sign an agreement to reflect the terms agreed?” to which  PW1 answered: “Yes, we need to sign a formal agreement”.  It is also PW1’s evidence that “It was merely out of inadvertence that [ATV] (sic.) did not specify in the said Agreements that the licences granted thereunder were meant to be exclusive” [B/5-6/para.16].  PW1 said that, had a request been made to rectify the Agreements, ATVE would have been willing to add the word “exclusive” to the same because that was the agreement.

10.  In respect of the SC, PW1 (the only factual witness for the Plaintiffs) relied upon a facsimile cover sheet dated 24.7.99 [B/35] to show that a set of SC was sent to DW2.  That document states the following:

(a)     “Enclosed please find the License Agreements … with the [SC] for your perusal”;

(b)    “Please confirm your acceptance … by signing … each License Agreement …”.

11.  However, PW1 accepted that he did not handle the facsimile himself and he was unable to say what precisely was sent with B/35.  Although PW1 said that the SC would normally be attached to the back of the contract, there is no evidence as to whether a set of SC was or was not attached to the back of the Agreements.

12.  It is suggested on B/35 that a total number of 21 pages, including the cover sheet, had been transmitted to DW2.  At this juncture, I should point out that the Agreements may be seen to be comprised of two parts.  The first part consists of 5 pages which set out the Special Conditions and Schedules A to C.  The second part is the SC made up of 16 pages.  The term “Standard Conditions” is referred to three times in the Special Conditions.  On two occasions the term is used with the word “attached”.

13.  On the other hand, DW1’s evidence-in-chief is that he was not aware of the SC prior to the signing of the Agreements.  However, his evidence is that he was relying completely on DW2 by reason of his lack of understanding of English.  Before he signed the Agreements, he merely asked DW2 about the duration of the licences, whether the same were exclusive and the licence fees.  In cross-examination, DW1 fairly accepted that he was not able to tell if DW2 had received a copy of B/35.  Further, when pressed, DW1 said that he could not remember if he had received the SC, the events having taken place some 7 or 8 years ago.

14.  DW2’s evidence is that she did not remember whether she had seen a copy of B/35.  However, in respect of the documents which were faxed to her by PW1, she would either explain them or fax them over to DW1.  DW2 said that she was sure that she had never explained the SC to DW1 because the length of the document meant that the explanation would have taken very long and she would remember such an event.

15.  Mr Wong, who appears for the Plaintiffs, accepts that the burden of establishing that the SC were brought to the attention of Luxland rests with ATVE, and unless it can discharge that burden, it would not be able to rely on them and its case on contractual interest and conversion would fail.

16.  Although the evidence of DW1 and DW2 on the SC is not entirely satisfactory, it does not mean that ATVE has proved its case.  The most powerful circumstantial evidence here is B/35, but that document is inconclusive as to what was sent.  Given that the SC for both Agreements were identical, it would not have made much sense to have two sets of SC sent over by facsimile to DW2.  However, the numbers of pages do not tally.  The closest one gets to 21 pages is for one set of Special Conditions and Schedules A to C (5 pages in total) plus one set of SC (16 pages) to be sent with the cover sheet, making a total of 22 pages.  However, the cover sheet actually refers to two agreements, which means that two sets of Special Conditions and Schedules A to C (10 pages) should have been sent, which leaves 10 pages (excluding the cover sheet) unaccounted for.

17.  I do not believe the evidence that the SC were generally attached to the back of the contract takes the matter further.  As to the references to the SC contained in the Special Conditions, DW1 was not able to read them.  Although DW2 was able to read English, her unchallenged evidence is that she was not experienced in those matters.  I cannot say that a person inexperienced in dealing with contractual documents of the kind in question would have been alerted to the fact that there should be another set of contractual terms by looking at the Special Conditions and the Schedules.  It is possible that such a person might have thought that “the attached SC” meant the terms set out under Schedule C.

18.  In the circumstances, I am not satisfied on a balance of probabilities that a set of SC was in fact sent to DW2 prior to the signing of the Agreements.  It follows that ATVE’s claims for contractual interest and conversion must fail.

Exclusive Licences

19.  There is a dispute as to whether the Agreements had the effect of granting exclusive licences to Luxland as agreed.  Mr Wong seeks to argue that the Agreements had such an effect.  This is somewhat surprising in light of PW1’s evidence that it was out of inadvertence that the Agreements did not specify the exclusivity.  Further, Clause 3.3 of the SC (despite my finding that the SC are not part of the Agreements, the provisions thereof can shed some light on the construction of the Agreements) provides that:

“If it is not expressly stated in Clause B(i) or any other part of this Agreement that the Licensing Right is exclusive, it means that ATVE is entitled to exploit the Licensing Right of the Programme by whatever means concurrently during the License Period within the Territory.”

20.  Mr Wong’s contention is, in truth, entirely based upon Clause 1.7 of Schedule C which provides that:

“Any other party manufacturing the VCD of the Programme within the Territory during the License Period shall obtain prior written approval from ATVE and the Licensee.  Otherwise, such VCD shall be deemed to be illegal copies.”

21.  With respect, the reference in Clause 1.7 to “any other party” must mean parties other than ATVE and Luxland.  Plainly, that provision does not inhibit ATVE from exploiting the copyright over the Programmes.  Ms Tsui submits, relying upon s.103(1) of the Copyright Ordinance, Cap. 528, that an exclusive licence must be one which entitles the licensee to exploit the copyright to the exclusion of even the copyright owner.  The said section provides as follows:

“(1)  In this Part an "exclusive licence" (專用特許) means a licence in writing signed by or on behalf of the copyright owner authorizing the licensee to the exclusion of all other persons, including the person granting the licence, to exercise a right which would otherwise be exercisable exclusively by the copyright owner.”

22.  Mr Wong does not seek to argue with Ms Tsui on what is meant by an exclusive licence.  In the premises, I hold that the Agreements did not have the effect of granting exclusive licences to Luxland.

23.  However, I am unable to accept Ms Tsui’s submission that by reason of the deficiency in the Agreements (in effect, the lack of the word “exclusive”), ATVE was in breach of the oral agreement that the licences were exclusive.  In answer to my question, Ms Tsui accepts that there was in fact only one agreement between the parties.  It was intended that the agreement be reduced into two written documents and by inadvertence (not challenged by the Defendants) the exclusivity was not specified in the written documents (the Agreements).  In Ms Tsui’s second Written Submissions (dated 13.4.07), she appears to have shifted her ground somewhat by submitting that “[ATVE] was under an obligation not only to grant exclusive licences of the Programmes to [Luxland] but also to enter into written agreements which on their face would confer such exclusive licences” (para. 8(i)).

24.  In my judgment, it would be taking a blinkered view of the facts to hold that ATVE was in breach of contract when it was (and is) common ground that the licences granted were exclusive licences.  Indeed, after the dispute had arisen between the parties, ATV wrote to Luxland on 21.10.99 acknowledging that the licences were exclusive in nature [B/171-2].  Certainly, it cannot be said that ATVE was in repudiatory breach of the Agreements.

25.  Insofar as there were deficiencies with the Agreements as aforesaid, it appears to me on matured reflection that it was not even a case for rectification of the Agreements.  Both sides have referred me to the general principles set out in Chitty on Contracts, 29^th ed., para. 5-092 which provides as follows:

“It has long been an established rule of equity that where a contract has by reason of a mistake common to the contracting parties been drawn up so as to militate against the terms intended by both as revealed in their previous oral understanding, the court will rectify the contract so as to carry out such intentions so long as there is an issue between the parties as to their legal rights inter se.  If there is no such issue or if no substantive relief is sought and no practical purpose will be achieved rectification may be refused.” [emphasis added]

26.  I do not see any issue between the parties here – exclusivity was and is common ground.  I am unable to see why, if thought necessary, the parties could not have simply amended the Agreements or enter into replacement agreements so as to spell out the exclusive nature of the licences.  Ms Tsui accepts that ATVE was never asked to rectify the Agreements and she has not challenged PW1’s evidence that ATVE was willing to do so.

27.  However, it is the evidence of both DW1 and DW2 that they had complained to PW1 about the non-exclusive nature of the licences and asked PW1 to do something about the “parallel imports”.  On the other hand, the Plaintiffs maintained that the licences were exclusive and that they had not granted any similar right to anybody in respect of the Programmes.  Further, various actions (including legal proceedings) were taken by the Plaintiffs against a number of parties who they believed, based on information provided by Luxland, had infringed the copyright in respect of the Programmes.  Such actions have been set out in a Table provided to this court by Mr Wong.  Ms Tsui does not take issue with the contents of that Table and I do not propose to set out the same herein.  The Defendants were evidently dissatisfied with the adequacy of the Plaintiffs’ actions.  However, I do not believe that the evidence of what transpired after the discovery of “parallel imports” assists the Defendants’ case on breach of contract concerning the grant of exclusive licences (see para. 5 (i) above).

28.  In respect of Ms Tsui’s modified argument (see para. 23 above), it is based on the evidence that the parties had agreed to sign an agreement to reflect what was agreed (see para. 9 above).  The argument appears to be one based on a collateral warranty [see Chitty on Contracts, supra, paras.12-004 and 12-033].  There is no such plea in the Defence and I am not satisfied that a case of collateral warranty has been made out.

29.  For these reasons, I reject the Defendants’ case on breach of contract by ATVE concerning the grant of exclusive licences and I proceed to consider the remaining issue.

Licences granted to Third Parties?

30.  The Defendants allege that ATVE had granted licences to third parties based on the following evidence:

(a)     DW1 was aware of the availability of “parallel imported” VCD of A, B, C and E in the market.  It is not entirely clear from the Defendants’ evidence whether the VCD (and which ones) were found in the Hong Kong market or the PRC market or both.  I shall assume for the present purpose that they were all found in both markets;

(b)    DW1 was told by Luxland’s PRC Agent, which it used to register programmes with the relevant PRC authority, that A and B had already been registered with the PRC authority by respectively Shangdong Video Publisher (“SVP”) and Long River Cultural and Video Publisher;

(c)     DW1 had called up SVP and was told that it had the right to distribute VCD of A.

31.  In addition to the above, there is expert evidence from PRC lawyers adduced by the parties.  Broadly speaking, such evidence covers the necessary permits/approvals (including “Contract Approval” (see below)) which were required from PRC authorities before imported VCD programmes could be legitimately sold in the PRC.  In addition, such products should bear an ISRC number from which the publisher could be traced.  However, it is common ground that the absence of any indication on the packaging of the “parallel imported” VCD of the approvals and/or the presence of an ISRC number is no conclusive indication as to whether the publisher in question had or had not obtained a licence from the copyright owner.

32.  The only controversial part of the expert evidence concerns the suggestion by the Defendants’ expert, Mr Wang Zheng Zhi (“DW3”) that, based on his internet research with a website called China Copyright Centre which was closely connected with the Copyright Bureau of the PRC, A and C had received the necessary Contract Approval.  He inferred that the publishers in question had been granted the necessary licences by the copyright owner because in order to obtain the Contract Approvals, the publishers were required to produce to the authority the relevant licensing contracts.  DW3 said that the result of his internet research was consistent with the inability of Luxland to register A with the relevant authority.

33.  Mr Wong challenges the expertise of DW3.  I do not agree with Mr Wong.  Whether DW3 has been practising Intellectual Property Law for 4 years (as contended by Mr Wong) or 6 ½ years (as submitted by Ms Tsui) matters little.  The fact is that the area of law in question is straightforward.  The complexity rests in the volume of relevant legislations and regulations.  Further, there is little difference in the Opinions produced by the experts.  As to the controversial issue set out in the preceding paragraph, it is a matter of inference which is ultimately for this court to decide once it has been educated by the experts on what was required in order to obtain a Contract Approval (over which there is no dispute).

34.  I should also say that I reject Mr Wong’s allegation of fabrication in respect of DW3’s evidence.  Whilst DW3 is not an impressive witness given the inconsistencies in his evidence, e.g., what he meant by “prior registration” on C/30, para. (3), second sentence, I have no reason to doubt that DW3 did carry out the internet research and found that there were Contract Approvals in respect of A and C.

35.  On the other side of the scale, PW1 is adamant that at no time did ATVE grant any licence to anyone other than Luxland over the Programmes.  Further, given the various actions taken by the Plaintiffs over the infringement of copyright in respect of some of the Programmes, it would have been extremely devious for them to have done so if in truth there was no infringement.

36.  Given PW1’s firm denial, I am unable to accept the Defendants’ contrary evidence.  Such evidence is far from cogent.  In respect of DW1’s evidence (para. 30 above), it is largely hearsay and/or of little probative value.  As regard DW3’s internet research, it is also hearsay.  DW3 accepted that such evidence would not be admissible as evidence in the PRC in the absence of notarisation.  Further, DW3 could not rule out the possibility that the Approvals, if existed, were not properly obtained.  There is evidence before this court that authorisation documents may be forged.  There are two Letters of Authorisation [B/94 and 95] which had been obtained by Luxland and produced to ATVE in August 1999.  They suggest that VCD right over E had been granted by Monitor Video & Audio Co Ltd to Le Ka Video & Audio Ltd and then to Jilin Culture Music and Image Publisher.  PW1’s unchallenged evidence is that these documents are forged.

37.  In the premises, I reject also this part of the defence.  However, I have no reason to doubt that the Defendants (including DW1 and DW2) conduct their business in an honest manner and it is clear they have fallen victim to unscrupulous copyright infringers.

Relief

38.  The counterclaim must be dismissed.  ATVE is entitled to judgment against Luxland in the sum of HK$870,000, which is the balance of the licence fee under the Agreements, subject to credit being given to any recovery against Lawson in respect of the two dishonoured cheques.

39.  In respect of the said dishonoured cheques, ATV and ATVE are respectively entitled to judgment against Lawson in the sums of HK$192,500 and HK$387,500.

40.  There is no issue that interest should be awarded for the aforesaid judgment sums at Prime Rate plus 1% from the date of the Writ herein to date of Judgment and thereafter at Judgment Rate until payment.

41.  The costs of this action and the counterclaim be to the Plaintiffs to be taxed if not agreed.

[1]       There is no evidence as to how ATVE was entitled to grant such rights.  On the other hand, there is no argument by the parties over the same.