LEE SENG HENG FISH’S GRAVY & CANNING FACTORY LTD v. ADJECTIVE LTD

HCA 1348/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1348 OF 2003

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J U D G M E N T

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1.  The plaintiff is a Hong Kong based company whose primary activity is to make and export food sauces.  The defendant is a Hong Kong company carrying on the business of graphics design.  The defendant contracted to create a number of artistic works for the plaintiff for the purpose of providing for the plaintiff distinctive labels, packaging and promotional material and the like.  These artistic works were produced and stored on computer, from which could be generated hard copy versions for the plaintiff.  During the course of their contractual relationship a number of different works were created and hard copy end results were delivered, bought and paid for.

2.  In due course the defendant brought the relationship to a close, at which time the plaintiff called for delivery of workable and editable copies of the computer files that the defendant had made in the course of undertaking its contractual duties to the plaintiff.  The defendant refused to comply on the basis that it is under no obligation to part with the same.  This refusal persisted.  The plaintiff was obliged to look elsewhere for design work begun from scratch because of the defendant’s refusal to release its computer files, incurring expense.

3.  This claim is for delivery of workable and editable copies of the computer files and damages to recoup the loss the plaintiff has suffered meanwhile.

Background

4.  The plaintiff has been in business for a number of years.  From modest beginnings serving the local community only, it now has markets in Australia, South Africa, Europe and Indonesia.  As its market base expanded, the promotional and packaging material became a hotchpot of different designs and format.

5.  Mrs Christine Barros came to join the plaintiff in 2001 and is now the CEO of the company.  She took it upon herself to co-ordinate the logo and promotional and packaging material of the company under a unified design, but with flexibility to cope with different regulations and market variations given the company’s diverse customer base.  To this end, she began talking to representatives of the defendant.

6.  The defendant is described as a small graphics design house, founded by a director called Ms Carol Yeung about 13 years ago.  She headed a team of six, including her senior designer called Michael Fung.

7.  Mrs Barros met and discussed the plaintiff’s needs with Ms Yeung and Mr Fung in October 2001.  The upshot of that was that she began to utilize the defendant’s services as from February 2002.  No formal contract was entered into.  But as from that date the defendant provided at the plaintiff’s request graphic designs of a new logo and labels.  Each time the plaintiff needed some artistic work to be carried out it briefed the defendant, the parties agreed on a price, the defendant delivered and the invoiced price was paid.  So far so good.

8.  The defendant having created the designs contracted for, these were then stored on computer in editable form, to enable adjustments such as size, variation and incorporation of printed matter (in whatever language) and so on.

9.  A feature of the relationship between the parties was that until things soured between them the defendant freely made available to the plaintiff, on request, editable digital copies of designs it had been commissioned by the plaintiff to create.  One such example was a digital file delivered on request on 28 February 2003, which the plaintiff has retained.

10.  At some time in early 2003 the relationship between the parties became unstable.  How this came about is not material.

11.  Matters came to a head on 19 March 2003 when a staff member of the defendant, called Becky Wong, turned up at the plaintiff’s office unannounced with commissioned works and design materials supplied by the plaintiff contained on 3 CDs.  The clear message was that the defendant would undertake no more work, and was handing over the artwork and other material to the plaintiff.  But she was not prepared to release them until a delivery note receipt was signed to confirm that what she was handing over contained all the plaintiff’s files.  Unable to check the contents, a representative of the plaintiff called Chu Bo King was not prepared to sign.  Miss Wong left, taking the CDs with her.

12.  On 20 March Ms Chu faxed to Ms Yeung a list of the artwork so far commissioned, as a means of ensuring that all of it would be handed over.  Ms Yeung responded with an agreement to comply.  This meant there was one more CD to deliver, which comprised digital files of the board logos.

13.  On 24 March Miss Wong showed up again this time with 4 CDs, once again requiring a full receipt before she would release them.  Attempts to compromise, including a 14 day inspection period, failed to resolve the impasse.  Again Miss Wong left with the CDs.

14.  On the following day Miss Wong telephoned to say that the defendant was no longer prepared to release the digital design files to the plaintiff after all.

15.  Thereafter without the benefit of the files now denied it, the plaintiff was obliged to take other steps to reproduce its logo and promotional and packaging material by scanning and other means, expending funds for the purpose.

16.  Meanwhile in April 2003 the plaintiff issued its writ, claiming delivery of workable and editable files and damages being reimbursement of the expenditure consequent upon the remedial steps it was obliged to undertake.

17.  During the course of the trial 4 CDs came to be produced as defence exhibits.  A question arose as to whether these were copies made, rather than the originals.  In the event an inspection was carried out under supervision when it came to be established that they were editable discs comprising designs created for the plaintiff; in short, the material the plaintiff was suing to recover.

The Issues

18.  From the pleadings and the background summary emerges the following issues: Was there a term in the contract between the parties that upon request the defendant was required to release a complete set of workable and editable files?  If so, by virtue of its failing to deliver such files on such request, what has the plaintiff suffered?

19.  The plaintiff’s pleaded case is that the parties were bound by an express contractual term; in the alternative, an implied term.  Ms Tam for the plaintiff at trial relied solely on there being an implied term.

The Law

20.  A term can be implied in a contract:

(a)     where it is to give effect to the common intention of the parties, or

(b)    to give business efficacy to the contract, or

(c)     by virtue of custom of trade, or

(d)    by implication of law;

see Liverpool City Council v Irwin [1977] AC 239.

21.  I shall deal with these in term.

Custom of Trade

22.  I shall deal with this first; Ms Tam indicated in her closing submissions that she no longer intended to rely on this ground; for good reason.

23.  Both parties engaged experienced graphic designers for their opinions on whether or not there was a trade practice upon which the Court could rely.

24.  Mr Ho for the plaintiff said that 25 years in the field persuaded him that the artwork was the property of the customer and should be returned on request.  Ms Lai for the defendant with similar experience was of the view that it remained the property of the designer unless there was agreement to the contrary.

25.  Both remained resolute in cross-examination.

26.  The result, in reality, was that neither side could properly be said to have established a custom one way or the other.

Business Efficacy and Common Intention

27.  These are grounds that I believe can be dealt with together; it is where the heart of the dispute lies.

The Defendant’s Case

28.  Ms Yeung in evidence said that it has been her practice in the 13 years plus of her experience in the field of graphic design that unless the parties contract for the release of the computer files they may not be called for by the customer.  She said this was because the integrity of the design had to be protected, for the benefit of the customer as well as the designer.

29.  She said that of the defendant’s customers by far the largest was the HSBC.  In the defendant’s contract with HSBC release of the computer files was expressly provided for and recognized in the contract price.  There being no such agreement with the plaintiff it had no cause to complain when its demand was turned down.

30.  She said that what the plaintiff contracted for was the consignment of labels, logos, promotional material and packaging material from time to time ordered and paid for.  The designs themselves remained the property of the designer, the defendant.  Any computer files that upon request were sent to the plaintiff she provided gratuitously and to maintain a good relationship.

31.  The attempt to return the CDs by delivery by Miss Wong was made to preserve good relations.  Unreasonable behaviour by the plaintiff caused her to change her mind and withhold the artwork; that all along was her entitlement.

32.  Mr Fung said that in his experience a designer will not release workable and editable files unless they are expressly contracted for at the outset.

Analysis

33.  What to a disinterested observer, would have been the underlying needs of the plaintiff that the defendant was asked to provide?  Harking back to the meeting in October 2002 which the defendant’s representatives describe as a brainstorming, Mrs Barros set out those needs.

34.  First and foremost, she was wanting to promote her company with a new logo and labelling that would unify the products under a common theme.  Secondly there was the need for flexibility because of the different sauces being promoted and the diverse markets the company was engaged in.  This was not, in short, about individual contracts for specific labelling and so on, provided and invoiced for.

35.  And this is how the parties performed.  The defendant provided the design work capable of adaptation.  The intention was for a long-term relationship.  That it proved to be short is unfortunate but cannot offset what was intended at the outset.

36.  So it is, as I find, that what the plaintiff commissioned the defendant to undertake was the design work that it did, for a while, provide.

The Experts View

37.  Mr Ho, the plaintiff’s appointed expert, conceded that there were ways and means of copying an artistic work which included scanning and retouching.  But that is expensive, somewhat unwieldy, and the result is likely to be inferior when compared with a modified original.  And this view was accepted by Ms Lai, for the defendant.

The Parties’ Conduct

38.  Unrefuted evidence points to several separate occasions when the defendant relinquished workable editable files to the plaintiff.  At no time was a request for these turned away.  There was nothing to support the proposition that this was gratuitous, or to foster good relations.

39.  But more particularly are the two occasions in March 2003 when Miss Wong showed up at the plaintiff’s door ready and willing to hand over the material the plaintiff is now suing for; this when the relationship was being terminated, when the fostering of ties was no longer relevant.

40.  Lest it be seriously suggested that these were not the files that have now been produced and which are established to be workable and editable, there is nothing to verify that they were not, and that includes the defendant’s pleaded case.

Implication of Law

41.  By adoption of this principle the Court may imply a term that has not been stated in recognition of the rights and duties of the parties grounded in reasonableness and necessity; see Liverpool CC v Irwin (supra) at p.254.

42.  In this case the plaintiff’s position is assisted by application of section 15(2) of the Copyright Ordinance, Cap 528.  There being no express agreement to the contrary, the section provides that the commissioner of artwork ordered, in this case the plaintiff, has exclusive licence to exploit that artwork for all purposes reasonably contemplated by the parties at the time of commission.  That licence is to the exclusion of all others including the author, in this case the defendant.  As a matter of commonsense that dictates that the plaintiff should be entitled to the workable editable files in which the artwork is contained.

Liability

43.  I am satisfied that the plaintiff has established an implied term in its contract with the defendant to the effect that upon request the defendant was required to hand over all artworks created for the plaintiff as were incorporated in the workable digital files the subject of this action.  The defendant by withholding the same was in breach and must be held liable and accountable accordingly.

Damages

44.  Mrs Barros gave evidence as to options left available to the plaintiff once it became apparent that the defendant was holding back the files containing the artwork.

45.  A company called Start Advertising was engaged to create new labels that matched those with which the plaintiff’s customers and the market generally were becoming familiar.  This cost $71,180.

46.  The result was not satisfactory; another designer company called Bastian Group was engaged.  This cost AUD$49,280.  (HK$300,000).

47.  The result was better, but not ideal.

48.  A third designer, called Citigate, of Singapore, undertook the task, combining photography, production mock-up and digital airbrush and imagery.  This cost S$3,400.  (HK$16,300).  A further company was engaged to print labels which within time constraints were needed of different sizes.  This cost $1,550.

49.  The defendant in cross-examination attempted to promote the idea that the artworks subsequently ordered by the plaintiff was a revamping of its designs for which the defendant could not be held responsible.

50.  I find the contrary to have been established.  The plaintiff has as I find proved its loss resulting from the defendant’s breach.  The plaintiffs are entitled to recompense, in the total sum of $389,030.

The Orders

51.  The defendant shall forthwith deliver up to the plaintiff the 4 computer files the subject of this action and is further liable in damages in the sum of $389,030.

52.  Costs, nisi at first instance, are to the plaintiff.