CALIFORNIA RED LTD v. NEWAY KARAOKE BOX LTD AND OTHERS

HCA748/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 748 OF 2008

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R U L I N G

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1. The plaintiff and the 1st defendant had together established a joint venture through the 2nd defendant.  This was done by means of two joint venture agreements in writing; the first dated 18 July 2000, which lasted for a year, and then they entered into another, dated 17 November 2001, which was also expressed to be for a further year.  Under the terms of both agreements each party had a right to terminate the agreement by giving the other one month’s notice in writing after which the 2nd defendant would be wound up.  Notwithstanding the expiry of the second agreement the plaintiff and the 1st defendant continued their joint venture on the terms of the second agreement.  This state of affairs continued until 31 March this year when the 1st defendant sent the plaintiff a letter purporting to terminate the joint venture after the expiry of one month.

2. On 19 April the 1st defendant sent another letter informing the plaintiff that the 2nd defendant would be wound up.  The business of the joint venture company, the 2nd defendant, is that of a karaoke box, as is that of the plaintiff and the 1st defendant.  In this line of business, companies such as these obtain licences to use popular songs which can then be played at karaoke establishments.  These licences are obtained and paid for from record companies who own the recording rights.

3. During the course of the conduct of the joint venture the 2nd defendant had entered into a number of joint promotion agreements (“JPA’s”) securing the rights to recordings of popular songs for which the 2nd defendant would pay substantial fees during the currency of each of the JPA’s.  It has contracted with seven record production companies to secure these rights.  These JPA’s have been obtained since the establishment of the 2nd defendant in 2000 and now some of these agreements are set to run until 2011. 

4. The effect of the purported termination by the 1st defendant of the joint venture and its intention to see to it that the 2nd defendant is to be wound up in accordance with the terms of the second joint venture agreement - the same terms having also appeared in the first joint venture agreement - is that the fate of the JPA’s remain to be resolved. 

5. The plaintiff is unwilling to see the joint venture agreement terminated.  I am told by Miss Wong, who appears for the plaintiff, that the joint venture has been a financially successful one and much goodwill has been obtained from this relationship to the benefit of the 2nd defendant. 

6. A deadlock has been arrived at.  The 3rd defendant, who is the 1st defendant’s director and who controls it, wishes to take a different direction for the 1st defendant.  His position is that the terms of the joint venture agreement must take effect; the joint venture agreement is now at an end, the termination period having run its course and the 2nd defendant must now be wound up.  

7. The plaintiff does not accept this interpretation.  Key to its argument is that with the various JPA’s still current, the reasonable expectation of both joint venture parties must have been that the joint venture would continue, presumably until the last of the JPA’s expired.  The 1st defendant has written to the recording companies, with whom the 2nd defendant has entered into the JPA’s, informing them of these events with a view to securing the termination of the JPA’s as soon as can be achieved. 

8. In these circumstances the plaintiff obtained an ex parte injunction from Barnes J on 30 April 2008 restraining the 1st defendant and the 3rd defendant from - and these are the terms of the learned judge’s order:

“directly or indirectly negotiating, entering into, proceeding on any licensing agreement(s), licensing contract(s) and/or any arrangement involving the right to use any musical work(s) and/or karaoke music video(s) with any record company in respect of any work(s) or any karaoke music video(s) the subject of any agreements or arrangement(s) in respect of which the 2nd defendant has secured rights or otherwise, causing enabling or assisting others so to do.  For the avoidance of doubt, this injunction applies only to rights already secured by the 2nd defendant.”

9. The purpose of this order was to prevent the 1st and 3rd defendants from harming the 2nd defendant’s current JPA’s.  On the return date, which was 9 May, these two defendants gave undertakings in those terms and the matter has been adjourned to 17 July, before me, for the matter to be substantively argued, when it will be said on behalf of the 1st and 3rd defendants that the undertakings should be discharged because the plaintiff will not be able to demonstrate that there is a serious issue to be tried between the parties.  The evidence, it will be said, is all one way; the joint venture agreement gives either party a right to termination and provides for a winding up of the 2nd defendant. 

10. Since the undertakings were given on 9 May, the 3rd defendant has caused further letters to be written to the recording companies who still have current JPA’s with the 2nd defendant, the effect of which correspondence has also been to further inform them of the termination of the joint venture agreement.  It is these letters, which, whilst not breaching the terms of the undertakings of 9 May, have caused the plaintiff to come again with this application for an injunction to prevent a repetition of such letters being sent to these parties, which are said to be causing alarm and confusion amongst the recording companies.

11. This is a short-term measure to hold the ground until 17 July when the availability or otherwise of the interlocutory relief that has already been obtained will be decided.  The terms of the injunction now sought are these:

(1) That the 1st and 3rd defendants, in the case of the 1st defendant whether acting by itself, its directors, officers, servants, agents, employees or any of them or otherwise howsoever and in the case of the 3rd defendant whether acting by himself, his servants, agents, employees or any of them or otherwise howsoever be restrained until the determination of the plaintiff’s summons issued herein on 5 May 2008 or further from directly or indirectly terminating or otherwise announcing the termination of any contract entered into by the 2nd defendant which has not been terminated by approval and consent of the board of directors of the 2nd defendant or otherwise causing, enabling or assisting others so to do.

(2) That the 1st and 3rd defendants in the case of the 1st defendant whether acting by itself, its directors, officers, officers, servants, agents, employees or any of them or otherwise howsoever, in the case of the 3rd defendant whether acting by himself, his servants, agents, employees or any of them or otherwise howsoever, be restrained until the determination of the plaintiff’s summons issued herein on 5 May 2008 or further order from directly or indirectly terminating, ceasing or otherwise announcing the termination or cessation of the business of the 2nd defendant or otherwise causing, enabling or assisting others so to do.

12. Mr Burns, SC, for the 1st and 3rd defendants, submits that where the plaintiff is unable to get its case for an injunction off the ground because it cannot demonstrate a serious issue to be tried, to now attempt to stop the 1st or 3rd defendants from communicating with the recording companies to inform them of what is going on between these disputing parties is simply not right.  This has not caused alarm or confusion, as the plaintiff suggests, and it appears that in any event the plaintiff, through a subsidiary company, is also taking steps to move on from its relationship with the 1st defendant in the joint venture arrangements, which is evidenced by a draft sponsorship agreement entered into by one of the plaintiff’s subsidiaries.  This interpretation is not accepted by the plaintiff and will no doubt be further argued over on 17 July.

13. So far as this application is concerned, it seems to me that where there are now in place undertakings, the purpose of which is to hold the fort until proper time can be provided for the substantive argument, I should grant this injunction as well.  I regret that the court’s lists have not been able to provide an earlier date for the substantive argument, nevertheless it strikes me that this type of correspondence may well have the effect of undermining the whole purpose of the injunction granted by Barnes J and reproduced in the undertakings of 9 May.  The intention was to preserve, as best as could be devised, the contractual status quo and letters of this sort do run counter or at least may run counter to the intention of the injunction and the undertakings whilst not in fact amounting to a breach of those undertakings. This order and the undertakings will form a package of measures to preserve what is now left of the joint venture until I am able to decide on the fate of the undertakings and whether they should be discharged.  If they are, then there can be no possible justification for the injunction.  This will be decided on 17 July and an order will therefore now go in terms of the summons, but I will give the parties liberty to apply as to any amendment of the terms which may be considered appropriate.

14. I will reserve the costs of the summons to 17 July.