DRACCO NETHERLANDS B.V. v. SIMBA TOYS GMBH & CO. KG

HCA 304/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 304 OF 2014

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R E A S O N S   F O R   D E C I S I O N

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Introduction

1. At the end of the inter partes hearing of the plaintiff’s application for interlocutory injunction, the application was refused.  Below are the reasons for the decision.

2. The plaintiff commenced this action in February 2014.  The indorsement of claim alleges in effect that the defendant has breached an agreement dated 10 February 2011 (“the 2011 agreement”) and seeks (among other things):

(a) damages;

(b) the delivery up of the plaintiff’s properties (intellectual property rights, materials and the like);

(c) an injunction to restrain the defendant from selling or distributing the plaintiff’s products without the plaintiff’s consent, knowledge or approval;

(d) an injunction to compel the defendant to allow its business records and documents relating to the plaintiff’s products to be inspected by an auditor appointed by the plaintiff.

3. The plaintiff’s said interlocutory injunction application (taken out also in February 2014) sought an order similar to the relief set out in para 2(c) and (d) above.  It was opposed by the defendant.

Background

4. The plaintiff was incorporated in the Netherlands.  It is a company which licences (and manages the licensing) of the “Filly” brand across Europe.  The plaintiff says this is a well-known brand of toys and has been placed at the top of the list of best-selling toys in Germany.

5. The defendant was incorporated in Germany.  It carries on the business of toy production and distribution.

6. The 2011 agreement concerned in gist the grant by the plaintiff of a licence to the defendant to produce and distribute certain of the “Filly” brand of toys.

7. The governing law of the 2011 agreement was Hong Kong; it also provided Hong Kong court to have exclusive jurisdiction.  No issue arose out of this aspect in this application.

8. The plaintiff alleges that the defendant breached the 2011 agreement by failing to pay licence fee as agreed therein.  Further, the plaintiff also alleges that the defendant has in its possession some of the “Filly” brand products despite the 2011 agreement having been brought to an end by the plaintiff in January 2014.

Application to deliver up products

9. This part of this application was premised on clause 7c of the 2011 agreement which provided:

“[The defendant] shall be entitled to distribute any Products he still has in stock for the Sell-off Period [which was defined as a period of up to 90 days after the expiry of the 2011 agreement (clause 1k)], however this may not exceed 10% of the total number of each such specific Product sold during the term of [the 2011 agreement]. [The plaintiff] may require [the defendant] to destroy any Products which are not sold … during the Sell-Off Period … ”.

10. The plaintiff alleged in this application that the defendant had been selling the plaintiff’s products after the 2011 agreement had been terminated and exceeding the above sale limit.

11. In letters respectively dated 18 February and 26 February 2014, the defendant informed the plaintiff the plaintiff’s products had already been disposed of. Further, at the hearing of 28 February 2014, the defendant indicated (albeit with some prompting by the court) to file evidence to verify the said disposal.

12. At the hearing of 10 March 2014, after having sight of the defendant’s affidavit confirming the disposal of all of the plaintiff’s products, the plaintiff no longer pursued this part of this application.

Application to inspect business records and documents

13. This part of this application was premised on clause 11d of the 2011 agreement:

“[The plaintiff or the plaintiff’s agent] shall be entitled at any time to have [the defendant’s] business records and documents relating to the Products Inspected by an auditor who is under an obligation of secrecy … Moreover [the plaintiff] may at all times request an inventory report showing current inventory of Products”.

14. It is important to put clause 11d, the 2011 agreement in its proper context:

(1) clause 10a of the 2011 agreement stipulated that the defendant shall pay licence fee to the plaintiff;

(2) the amount payable was defined principally by clauses 1f, 10a and 10b thereof;

(3) further, clause 11a thereof mandated the licence fee to be accounted for quarterly and clause 11b specified the deadline for licence fee payment;

(4) finally, clause 11c provided that the defendant shall submit accounting statements regarding the sales effected.

15. So understood, it is clear the inspection right conferred by clause 11d was intended for ascertaining the amount of licence fee payable (and not for other purposes (the plaintiff did not contend it was for other purposes either)).

16. Upon the termination of the 2011 agreement, any monetary sum which was contractually payable but which remains unpaid becomes the subject-matter of a claim for damages.  See, for example, Chitty on Contracts (2012) 31^st Ed, Vol 1, para 24-049 to 24-050 and 24-052 and 24-053.  In other words, licence fee payable thereunder (if any), and which is still unpaid, should be recovered by way of damages (as the plaintiff has done in its indorsement of claim) (see para 2(a) above). 

17. It is thus doubtful if clause 11d was a contractual term which was intended to “survive” the termination of the 2011 agreement.  But even assuming (in the plaintiff’s favour) that the clause did “survive” it, the balance of convenience is against the grant of an interlocutory injunction.

18. First, it is not contended that the inspection should be “on-site” (it is here noted that, in any event, the plaintiff is only seeking a domestic injunction, whereas the defendant is out of the jurisdiction).  Secondly, the plaintiff has not adduced evidence to show (nor has it argued) that there was an urgent need for inspection (and that it would suffer irreparable damage if such inspection was denied at this stage).

19. Such being the case, there is no valid reason why an interlocutory injunction should be granted when inspection of documents could be available in the normal course of this action pursuant to RHC Ord 24 (discovery of documents).  Despite the plaintiff’s attempt to argue otherwise, there is no reason to think that the ambit of discovery of documents will be any less comprehensive than the inspection provided for by clause 11d.  See, for example, Hong Kong Civil Procedure 2014, Vol 1, para 24/2/10 (referring to the well-known Peruvian Guano test, which the learned editors said “… Hong Kong courts have accepted as the appropriate test to determine relevance … ” (p 543)).

20. Finally, as the defendant correctly pointed out, to grant an interlocutory injunction now would in effect be to give the plaintiff part of final relief sought in this action (para 2(d) above).

Conclusion

21. By reason of the above, this application was refused.

Other matters

22. The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the reasons for decision and its comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.

Costs order

23. The defendant seeks the costs of this application, contending it is the successful party.

24. On the other hand, the plaintiff argues that it is the successful party in relation to the part of this application concerning the sale of its products.  The plaintiff further argues that, notwithstanding its products having been sold by the defendant by now, the defendant was still acting in breach of the 2011 agreement in doing so.

25. The last-mentioned matter cannot be satisfactorily resolved in this application.  If necessary, it may be a more appropriate matter to be determined at trial (for example, for the purpose of determining costs liability).  In any event, it is not entirely correct the plaintiff was the successful party in this application because it has been informed of the defendant’s disposal of its products as early as on 18 February 2014.

26. A substantial part of the hearing (especially on 10 March 2014) has been used for discussing the part of this application concerning the inspection of business records and documents.  Because of this, the defendant should be treated as substantially the successful party.

27. However, it is common in interlocutory injunction applications for costs to be made the successful party’s costs in the cause (instead of costs being awarded to that party immediately): Hong Kong Civil Procedure 2014, Vol 1, para 29/1/55.  I do not consider there to be sufficient reason to depart from that practice.

28. Accordingly, the costs of this application should be the defendant’s costs in the cause.