MGA ENTERTAINMENT INC. v. TOYS & TRENDS (HONG KONG) LTD AND OTHERS

CACV 104/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 104 OF 2011

(ON APPEAL FROM HCA NO. 2152 OF 2002)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the reasons for judgment of the Court):

The application

1.  This is an application for stay of execution of a judgment pending appeal.

2.  On 19 May 2011, after a five-day hearing on an enquiry as to damages upon the plaintiff’s cross-undertaking on damages as a result of the granting of an interlocutory injunction in July 2002, Deputy Judge Seagroatt awarded damages to the defendants of US$7.25 million with interest. The total amount of the judgment sum with interest calculated up to date is about US$9.79 million, which is over HK$76 million.

3.  The plaintiff filed a Notice of Appeal against the judgment on 15 June 2011. This appeal is to be heard in June next year.

4.  Other than a sum of HK$1,802,075 which was paid into court by the plaintiff on 17 March 2010 and was paid out on 27 May 2011 pursuant to an order of the judge, the plaintiff has not paid any part of the judgment debt to date. The sum of HK$1.8 million is less than 3% of the judgment sum and accrued interest.

5.  On 24 August 2011, the plaintiff issued a summons for stay of execution pending appeal. The grounds relied on in its supporting evidence were that there are very strong grounds of appeal as the judge had erred on “numerous grounds in findings on fact and law”, and there is very real danger that it will not be able to recover the amount in excess of any just award once it succeeds on appeal. There was no hint in its evidence of its inability or difficulty in paying the judgment debt.

6.  The stay application was heard by Deputy Judge G Lam, SC on 18 October 2011. The judge was prepared to accept that the plaintiff’s appeal is clearly arguable, but was not convinced there is a sufficiently strong likelihood of the plaintiff being able to show an error which would result in the damages being reduced to the sum paid into court of HK$1.8 million and was paid out to the defendants. The judge proceeded on the basis there is an arguable appeal, which, if successful, would lead to a reduction in the quantum of damages. That alone is not sufficient for a stay of execution pending appeal. The judge then considered the second ground relied on by the plaintiff, which was that the appeal would be rendered nugatory if a stay was not ordered in that there is a real risk the plaintiff would not be able to recover the judgment sum from the defendants if the sum were to be paid immediately. He was satisfied there is an appreciable risk and a legitimate fear that the plaintiff would not be able to recover the money paid. He ordered that a stay pending appeal was to be granted on condition that the plaintiff was to pay into court within 28 days the entire judgment sum (less the amount paid out of HK$1.8 million odd) with interest or provide an acceptable bank guarantee for the said sum within 28 days.

7.  The condition for stay of execution was not complied with. Instead, on 2 November 2011, the plaintiff issued a summons in the Court of Appeal for stay of execution. It filed further evidence raising for the first time that it is unable to pay the judgment debt and is unable to meet the condition for stay imposed by Deputy Judge Lam “without serious financial consequences”.

8.  Mr McCoy, SC, who appeared for the plaintiff in this application, submitted that an appropriate sum the plaintiff should pay into court as condition for a stay is US$1 million, approximately one-seventh of the damages awarded. He cited Order 59 rule 13 of the Rules of the High Court, by which the Court of Appeal has concurrent jurisdiction with the Court of First Instance to grant stay of execution pending appeal, so his application for a stay of execution “on much better terms” than those ordered by Deputy Judge Lam is not an appeal from the decision of the judge and no leave is required for the plaintiff to put in further evidence before this court. The defendants’ position is that the application before this court is in the nature of an appeal, and hence leave is required for the plaintiff to file further evidence in support of its application.

Admission of further evidence

9.  Regardless of whether leave is required from this court, both parties have filed further evidence in this application. On the plaintiff’s part, its solicitor Mr Chu has made three further affirmations. The defendants filed one affirmation in response, made by their solicitor Mr Danny Yu. In addition, the plaintiff proposed to file an affidavit made by its Chief Financial Officer, Mr Dennis Roland Jolicoeur. This affidavit was exhibited to one of the affirmations of Mr Chu but was placed in a sealed envelope and was not served on the defendants as the defendants’ solicitors were not willing to give an undertaking in the terms proposed by the plaintiff. Mr Jolicoeur’s affidavit with exhibits ran to 638 pages. It was concerned mostly with the financial position of the plaintiff.

10.  The undertaking requested by the plaintiff was in these terms: Mr Jolicoeur’s affidavit and exhibits would not be shown to the defendants or anyone else save for Mr Paul Stephenson, counsel for the defendants at this hearing; it would only be for use in these proceedings; it would not be copied in whole or in part; and it would be handed back and the information would not be used after the hearing of the application.

11.  In seeking this undertaking, the plaintiff relied on the practice adopted by Le Pichon JA in Jebsen & Co. Ltd. v. Watfield Technology Ltd., CACV 117/2007, see the Reasons for Decision handed down on 24 August 2007 paras. 13 to 15. In that case, during the hearing of an application for stay of execution pending appeal, the defendant indicated to the court that it was willing to produce its audited accounts for the court’s perusal. Given the confidential nature of the accounts, at the suggestion of the court, the defendant’s counsel took instructions from client and agreement was reached by the parties that the defendant’s audited accounts would be shown to the plaintiff’s legal advisers only and upon their respective undertakings (which were given) that the accounts would only be for use in the proceedings, and that copies were to be handed back and the information would not be used thereafter.

12.  The measure taken in Jebsen was exceptional, and was done by consent. The documents which the defendant in Jebsen chose to adduce, and the affidavit of Mr Jolicoeur in the present case, were not documents that a party to proceedings is obliged by law to disclose, as in the process of discovery under Order 24. In the case where discovery is compulsory, the other party would be subject to an implied undertaking not to use the documents disclosed for a collateral or ulterior purpose. As the defendants are not subject to any implied undertaking at law in respect of Mr Jolicoeur’s affidavit, it does not appear to us that the court would have power to impose terms on the defendants along the lines of the undertaking sought by the plaintiff. Mr McCoy was unable to refer us to any authority giving such power to the court. On any view, it would be extraordinary that an affidavit with exhibits running to over 600 pages is to be disclosed only to a party’s counsel so that he is unable to take instructions from his solicitors or lay clients.

13.  It was a matter for the plaintiff to decide whether it would wish to rely on Mr Jolicoeur’s affidavit in these circumstances. In the end, Mr McCoy informed us that the plaintiff would not use this affidavit in the application.

14.  As to whether the application before us is in the nature of an appeal, we were prepared to proceed on the basis it is not strictly an appeal and that this court is entitled to consider the application in the light of additional evidence placed before us.

Merits of the appeal

15.  Mr McCoy submitted there is a strong likelihood that the appeal would very largely succeed on quantum. The plaintiff will contend that the proper measure of damages is nowhere near the US$7.25 million awarded by Deputy Judge Seagroatt.

16.  The plaintiff’s main argument is that the defendants’ alleged loss of sales was not due to the imposition of the interlocutory injunction against them in the Hong Kong proceedings but was due to other causes, such as legal proceedings threatened against the defendants’ customers in their respective jurisdictions. Further, in accepting the annual figure of 450,000 dolls for 2002 put forward by the defendants’ expert as a core figure for the quantification of damages, the judge had failed to have regard to the fact that only one-seventh of quantities involved in the expressions of interest were converted into actual sales or purchase orders which were cancelled. Purchase orders were not placed after the expressions of interest by some of the potential customers because they had received the “cease and desist” letters sent by the plaintiff, and that was prior to the first interim injunction granted in July 2002. Mr McCoy contended there is high prospect of success that the damages awarded would be reduced by about one-seventh, so US$1 million was offered as an appropriate security to seek a stay of execution.

17.  We have been referred by counsel on both sides to the relevant authorities (Air Express Ltd. v. Ansett Transport Industries (Operations) Proprietary Ltd. (1979-1981) 146 CLR 249; Les Laboratoires Servier v. Apotex Inc. [2008] EWHC 2347 (Ch); Lilly Icos LLC v. 8 pm Chemists Ltd. [2009] EWHC 1905 (Ch)). In his written and oral submissions, Mr McCoy has gone into the documentary evidence, the expert reports and the transcript of evidence in some detail, to underline his point that the defendants’ customers had decided not to buy the defendants’ products not because of the injunction. He submitted that in the light of this evidence, the only logical conclusion that a reasonable tribunal could have reached, applying the “but for” causation test (that the damage claimed would not have been sustained but for the injunction), was that the defendants had failed to satisfy that test. He attacked the judge’s conclusions as “wholly perverse and incorrect”.

18.  Mr Stephenson, who was trial counsel for the defendants, reminded this court that the arguments of Mr McCoy were the same arguments advanced unsuccessfully by the plaintiff’s counsel at trial (see para. 45 of the judgment on 19 May 2011) and that the trial judge was well aware of the evidence that Mr McCoy had quoted to us and its effect and purport. Mr Stephenson submitted that it is inappropriate in this case to draw the distinction between loss caused by the injunction and loss caused by the litigation, as the injunction was the litigation in this case. Here, the injunction and the “cease and desist” letters associated with it was the fundamental reason why customers and potential customers would not deal with the defendants. He emphasized that the enquiry as to damages is a proceeding of an equitable nature and it is proper to adopt a view which is just and equitable, or fair and reasonable, in all the circumstances rather than to apply a rigid rule (Air Express Ltd., supra. at 266 to 7).

19.  In paras. 46 to 48 of his judgment, the judge referred to the relevant evidence. He had regard to the “real purpose” of the plaintiff’s “cease and desist” letters sent to the defendants’ customers before the injunction, which was to restrain any trade in the defendants’ dolls, and looked at the defendants’ reaction to the plaintiff’s actions. He was of the view “it may be artificial in the circumstances of this case to draw a distinction between the effect of the litigation and threatened litigation, and that of the interlocutory injunction”, and concluded that he has “no doubt that the overwhelming factor was the injunction and that loss directly flowed from it”.

20.  The crucial question is whether by establishing the sequence of events, the defendants had done enough to discharge the onus of showing that the making of the injunction was a cause without which the damage would not have been suffered. Whether the making of the interlocutory injunction did cause the loss is a question of fact.

21.  It is well established that in dealing with a stay application, it is impractical and even undesirable for the court to go deeply into the merits and strengths of an appeal. What the court has to do is to form a preliminary view of these aspects. The preliminary view we formed at this stage is that there would appear to be good grounds to think that the figure of US$7.25 million awarded by the judge might not be entirely sustainable on appeal and there might well be some reduction to this award. It is not necessary for us to say what that reduction might be, save to say that we have reservations if the extent of the reduction would be as great as that suggested by Mr McCoy.

22.  Mr McCoy has not contended before us that the stay of execution should be unconditional. The question is how much the amount of security to be provided as condition for a stay should be reduced, in the light of our preliminary view on the merits of the appeal.

The plaintiff’s financial position

23.  The plaintiff’s financial position may be dealt with shortly as this was not strongly argued by its counsel although it was covered in the further affirmation of Mr Chu. He deposed that for the plaintiff, which has been embroiled in substantial litigation in the United States with its main competitor Mattel Inc in which the plaintiff has only very recently prevailed, but has yet to be paid its judgment sum of US$310 million (against which Mattel is appealing), and has seen a substantial decline in its sales in recent years, the plaintiff is unable to meet the condition imposed by Deputy Judge Lam of paying the entire judgment sum into court “without serious financial consequences and would seriously affect its ability to carry on its business and operations.”

24.  The plaintiff operates a substantial, multi-national business, with Mattel as its main competitor. As submitted by Mr Stephenson, it has been involved in litigation with the defendants for nearly a decade, and should have created a contingency reserve to cover the award of damages and costs that might be made against it on its cross-undertaking on damage, when the injunction was discharged three years ago. If it had not done so and finds itself in difficulty in providing security to obtain a stay of execution, it would only have itself to blame.

Conclusion

25.  Taking a broad-brush approach on the evidence before this court, and conducting a balancing exercise, we think it appropriate to reduce the amount the plaintiff should provide as security for obtaining a stay pending appeal to US$5 million and that the order of Deputy Judge Lam should be varied accordingly. We order that as a condition for stay of execution pending appeal, the plaintiff is to pay into court US$5 million, or provide an acceptable bank guarantee for the said sum, within six weeks hereof. We order the costs of this application to be in the cause of the appeal.