KADOKAWA SHOTEN PUBLISHING CO., LTD. v. GOLDEN SCENE CO., LTD.

HCA 3784/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3784 OF 2001

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J U D G M E N T

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1. This is an appeal brought by the plaintiff against the decision of a Master in an Order 14 RHC application for summary judgment when he gave the defendant conditional leave to defend the action.

Background

2. The plaintiff is a company incorporated and carrying on business in Japan. That business includes the production, publication and distribution of motion pictures worldwide.

3. At the relevant time it was the owner of three movies called 'Ring', 'Rasen' and 'Sleepless Town'. (Rasen's name was subsequently changed to 'Spiral'). Looking to find a distributor for these movies in Hong Kong and Macau, the plaintiff in June 1998 began negotiating to that end with a company in Hong Kong called Panasia Films Limited (Panasia). The plaintiff's manager of its licensing division, called Shiko Daida (Mr Daida) represented the plaintiff. Panasia's interests were looked after by a Miss Winnie Tsang (Miss Tsang), then the general manager of Panasia and a director of Golden Harvest Entertainment (Holdings) Limited (Golden Harvest), the parent company. The parties reached a settlement of the material terms but when, in September 1998, the plaintiff sent a draft distribution agreement for signing, there was no response. Then it was that in November 1998 Miss Tsang faxed the plaintiff, apologised for the delay and explained that as a result of a dramatic downturn in box office receipts in the theatre industry in the region Panasia was no longer interested in acquiring the distribution rights in the three movies. But she went on to state that a company she controlled, the defendant, was prepared to do so on like terms. The upshot of that was that a distribution agreement dated 12 November 1998 was signed by the parties.

4. Pertinent terms included the following:-

(a) exclusive rights of distribution in the three movies were vested in the defendant for the territories of Hong Kong and Macau from the date of the agreement, with delivery of the films and promotional material, the term to expire on 31 July 2005;

(b) all other rights were expressly reserved to the plaintiff;

(c) the receipts net of expenses were to be divided 50/50 between the parties;

(d) the defendant was required to calculate the income and expenditure for each 1/2 yearly period to the end of June and December each year and report to the plaintiff within 30 days;

(e) the defendant was required to pay to the plaintiff within a week of the signing of the agreement the sum of US$100,000 (called a minimum guarantee) being US$85,000 in respect of Sleepless Town, US$10,000 in respect of Ring and US$5,000 in respect of Rasen, non- refundable but to be set-off against the first payments due to the plaintiff up to such figure;

(f) during the term of the agreement the defendant was required to maintain accounting records and to make its books available for inspection when the plaintiff reasonably requested;

(g) in case of breach by one party the other was entitled to terminate the agreement on written notice.

5. The defendant paid to the plaintiff the minimum guarantee of US$100,000 and took delivery of the films and related material. The movies came to be shown in theatres in Hong Kong and Macau from December 1998 and April and June 1999 respectively. The defendant also caused them to be marketed in the forms of VCD's, video tapes and other authorised formats. The returns for Sleepless Town and Rasen (Spiral) were modest. However by all accounts Ring was a box office success.

6. But there were to be no further payments made to the plaintiff and no submission of half-annual financial reports. Purporting thus to exercise its rights the plaintiff wrote to the defendant by letter of 24 July 2001 terminating the agreement, calling for the return of the films and other material and otherwise reserving it rights. When there was no response it issued a writ in August 2001.

The Proceedings

7. The plaintiff claims breach by the defendant of the terms of the distribution agreement causing it to suffer loss of the income it was entitled to receive. Its prayer was for the following relief:-

(1) An account by the defendant of the receipts and/or the portion of the receipts receivable by the plaintiff

(2) An order for payment by the defendant of the amount found to be due on the taking of such account

(3) An order for delivery up by the defendant to the plaintiff of all copies of the movies reproduced in whatever forms and the materials relating to the movies that are in the defendant's possession, custody, power or control

(4) Damages

(5) Interest at such rate, on such sum and for such period as this Honourable Court shall think fit

(6) Costs

(7) Further and/or other relief.

8. The defence, in summary form, is as follows:-

(a) the contents of Ring and Spiral are connected;

(b) by the date of the distribution agreement, the plaintiff had either finished or was producing two further movies called 'Ring 2' (a sequel to Ring) and 'Shikoku', which was of the same genre as Ring, Ring 2 and Spiral;

(c) it was and remains a custom, worldwide, in the motion picture distribution industry that a distributor having the exclusive rights to a movie shall be given the right of first refusal to its sequel, upon the same terms save as to the provision for payment of the minimum guarantee;

(d) it was an implied term of the distribution agreement that the defendant would be entitled to the right of first refusal to Ring 2;

(e) by exchange of faxes dated 6 May 1999 the parties agreed that the defendant be given the rights to Ring 2 and Shikoku in consideration of minimum guarantees totalling US$160,000, otherwise on terms to accord with those in the distribution agreement;

(f) wrongfully and in breach of the implied term of the distribution agreement the plaintiff granted the rights to distribute Ring 2 and Shikoku in Hong Kong to a distributor not being the defendant thereby causing the defendant loss;

(g) it was and remains a custom as aforesaid that in the event that the distributor of the original movie declines to accept the right to distribute the sequel and that right is granted to another the owner shall ensure that the sequel is not released prior to completion of the screening of the original;

(h) it was an implied term of the distribution agreement that the plaintiff would not permit the release of Ring 2 before the screening of Ring and Spiral had been completed;

(i) wrongfully and in breach of such implied term the plaintiff permitted the release of Ring 2 in cinemas in Hong Kong before the screening of Ring and Spiral had been completed, thereby causing the defendant loss.

9. The defendant whilst denying it is liable for any damages to the plaintiff counterclaims for damages it claims to have suffered as particularised in a schedule attached.

10. In its reply the plaintiff takes issue with the defence and in particular the allegation that there exists a custom to give a distributor of a movie first right of refusal to its sequel or that there was an implied term to this effect in the distribution agreement. It denies being in breach or that it is liable to the defendant.

The Order 14 RHC Application

11. Following the filing and service of the pleadings the plaintiff, in December 2001, filed its application for summary judgment. By its terms it sought judgment on liability, an account of the defendant's income and expenditure in respect of the three movies, the return of the films and other material, damages, an order for payment of all moneys found to be due and the interim payment of $6,643,750.83.

12. The matter came before Master J Wong on 18 March 2002. After the hearing he gave the defendant conditional leave to defend, the condition being that it was required to pay into court the equivalent of the amount sought by the plaintiff as an interim payment on or by 13 May 2002, failing which the plaintiff was given liberty to enter judgment.

13. It is against that order that the plaintiff now appeals. The defendant also appeals, inviting the court to dismiss the summons or alternatively give unconditional leave to defend.

14. The appeal being by way of a rehearing, I come now to consider the evidence filed.

The Evidence

15. For the plaintiff Mr Daida recounted the history that I have already recorded and the material terms of the distribution agreement. After the expiration of the first half year of the distribution agreement, that is since June 1999, the plaintiff persistently requested the report and accounting due by the defendant to the plaintiff and its share of the receipts to which it was entitled. The defendant failed to comply, resulting in the plaintiff terminating the agreement and calling for a return of the films and other material.

16. He said that in his experience there was no custom giving first refusal of a sequel to the distributor of the original movie and thus an implied term to that effect in any distribution agreement. Further, he denied that the parties had, by the exchange of faxes of 6 May, committed themselves in a distribution agreement in respect of Ring 2 and Shikoku. That exchange merely settled the quantum of the minimum guarantee in that case, the parties yet to negotiate the remaining terms. And in any event, by a fax of 7 May the plaintiff gave notice that it intended to put on hold the distribution of the movies in question, and there was no further correspondence and, in particular, no protest from the defendant, thereafter.

17. At a meeting between representatives of each side held in Hong Kong in September 1999, the defendant submitted a document dated 23 September 1999 headed 'Consolidated Account'. This purported to be the defendant's assessment of the net income due to the parties under the distribution agreement together with the loss suffered by the defendant because of the plaintiff's alleged breach. The document was handed over 'without prejudice'. But it was referred to by the defendant in the pleadings in support of its counterclaim. In the circumstance he was advised that privilege had been waived.

18. Whilst not accepting the accuracy of the figures presented, for the defendant withheld the books of account and provided nothing else to support the figures, he noted that the amount due to the plaintiff as at 23 September 1999, allowing for reimbursement of the minimum guarantee, was recorded as $6,643,750.83. The counterclaim being wholly unmeritorious, this amount even on the defendant's calculations must be the minimum that the plaintiff would be entitled to in damages; hence the claim for this amount on account.

19. Mr Daida's evidence refuting the existence of a custom in the motion picture industry giving the distributor of a movie the right of first refusal to the distribution rights of a sequel was supported by the deponents of two more affidavits. The first was made by Sartoru Izeki, (Mr Izeki), a director of a movie production and distribution company in Japan with 35 years' experience. The second was by Thomas Leung (Mr Leung), the director of a similar company in Hong Kong. He has been in the movie industry for 8 years. Both said that neither they nor the companies that employed them had any connection with the plaintiff or any interest in the outcome of these proceedings. Both said that if it was the intention of the parties to a distribution agreement that the distributor should have first right of refusal to a sequel this needed to be an express provision in the agreement.

20. I come now to the evidence adduced for the defendant; first, by Miss Tsang. Having recited her history with Panasia and its parent Golden Harvest she went on to say the she has comprehensive, hands-on experience in bringing foreign films for distribution into Hong Kong under distribution agreements personally negotiated by her. Then she said at paragraph 17:-

"17. It is in fact an embedded practice in the worldwide film distribution industry that, with the exception of the term providing for the minimum guarantee, the right to exploit a motion picture which was a sequel to another would be granted to the same distributor on terms and conditions identical to those upon which the right to exploit the first motion picture was granted save as otherwise specified by either party prior to agreeing the minimum guarantee."

21. She said in accordance with that practice the parties reached agreement for the distribution of Ring 2 and Shikoku by the exchange of faxes of 6 May 1999; that no proposal to change any of the terms of the original distribution agreement having been made, the parties by virtue of the terms implied by custom were thus bound by the same terms. The plaintiff however reneged on its obligations because in the meantime it was offered a better minimum guarantee for Ring 2 and Shikoku. In effect, therefore, the plaintiff was in breach of both the original distribution agreement for failing to comply with the implied terms of offering the distribution rights to the sequel of Ring to the defendant on the same terms save as to the quantum of the minimum guarantee, and the subsequent agreement achieved by the exchange of faxes.

22. She said there is a further term implicit in a contract for the distribution of a movie and that is that if the distributor declines to take up the rights to its sequel the producer in contracting with another must ensure that the release of the sequel will be delayed until after the original's run has been completed. In breach of that implied term the plaintiff permitted Ring 2 to be released in Hong Kong before Ring's season was over.

23. These breaches resulted in substantial loss to the defendant which it should be entitled to establish at trial. Accordingly it should be given unconditional leave to defend the plaintiff's claim.

24. Miss Tsang's evidence that there is a custom or practice in the motion picture industry that a distributor of a movie has the first right of refusal to distribute sequels to that movie on the same terms as originally agreed save as to the amount of the minimum guarantee was supported by Hung Cho Sing (Mr Hung). Mr Hung said he was the founder of Delon Film Corporation in 1969 and has been engaged in the industry including the distribution of foreign films ever since. He also said he was not a director or shareholder of the defendant and has no interest in the outcome of these proceedings. He stated at paragraphs 8 and 9:-

"8. I confirm that, amongst others, the business has developed the set of practices which may be described along the following lines:-

(a) a distributor of a motion picture had the first right of refusal in respect of a sequel to a motion picture for the same region;

(b) the right to exploit a motion picture being a sequel to another would be granted to another distributor if and only if the distributor of the first motion picture was not ready willing and able to take up such right;

(c) with the exception of the term providing for the minimum guarantee, the right to exploit a motion picture which was a sequel to another would be granted to the same distributor on terms and conditions identical to those upon which the right to exploit the first motion picture was granted save as otherwise specified by either party prior to agreeing the minimum guarantee.

9. In obliging the producers to distribute the sequels to the same distributors of original titles, the trade customs are set out to bless the original distributors with the fruits of their earlier efforts in promoting the original films. There is nothing so peculiar about the rationale of such rule. It is just a fair play."

25. There was additional evidence filed by both sides estimating gross and net incomes received by the distributor who won the rights to Ring 2 and Shikoku. There is a significant disparity. But as the figures produced are uncertified and not backed by accounts and are, in any event, not relevant to the outcome of this appeal I shall not refer to them further.

26. Finally there has been exhibited and produced correspondence between the parties at various stages of the history.

The Law

27. The Order 14 RHC procedure is available to the plaintiff to pursue judgment without the cost and delay of going to trial where his opponent has no defence to his claim.

28. I quote from the White Book, 2002, at 14/4/1:-

"The underlying policy of the summary procedure is to prevent a defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence to the plaintiff's claim: Man Earn Ltd v. Wing Ting Fong [1996] 1 H.K.C. 225. "Order 14 proceedings for summary judgment when there is no defence to a claim are an important feature of the legal process. It enable plaintiffs in cases where there is no defence to obtain expeditous summary judgment to avoid unnecessary delay. When applied for, it is for the defendant to show that there is a triable issue or an arguable defence if he is to be allowed his day in court. To deny him his day in court, if he shows a triable issue or an arguable defence, is indeed a fearful injustice. On the other hand, if he has no defence and he obtains leave to defend, equally, there is injustice to the plaintiff." per Mortimer J.A. in Manciple Ltd v. Chan On Man [1995] 3 H.K.C. 459 at 466. The machinery of O.14 works on the basis that if the plaintiff's application is properly constituted, he is prima facie entitled to judgment unless the defendant shows cause to the contrary or the application is dismissed."

At 14/4/4:-

"Defendant's affidavit - The defendant's affidavit must "condescend upon particulars," and should, as far as possible, deal specifically with the plaintiff's claim and affidavit, and state clearly and concisely what the defence is, and what facts are relied on to support it. It should also state whether the defence goes to the whole or part of the claim, and in the latter case it should specify the part."

And at 14/4/9:-

"Leave to defend - unconditional leave - "It is appropriate to be reminded of the principles applicable to an O.14 application. They are well-known and in fact not disputed by the parties. The plaintiff (a defendant to the second defendant's counterclaim) must show that there are triable issues. He has to satisfy the court that he has a 'real or bona fide defence' (see Ackner L.J. in Banque de Paris et des pays-bas (Suisse) SA v. Costa de Naray [1984] I Lloyd's Rep. 21 at 23). If he makes an allegation, it must be credible or believable in the light of the evidence placed before the court. As Bokhary J.A. said in Re Safe Rich Industries Ltd ([1994] H.K.L.Y. 115):

'The test at the summary stage is indeed as simple as whether the defendant's assertions are believable. But it must be recognized - because failure to recognize it would create a debt-dodger's charter - that whether the defendant's assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as either undisputed or beyond reasonable dispute.'

On the other hand, it must also be borne in mind that for an application like the present, the court must not embark on a mini trial on affidavits": per P. Chan J. in Mass International Ltd v. Hillis Industries Ltd [1996] 1 H.K.C. 434 at 439.

"Unless it is obvious that the defence put forward by the defendant is 'frivolous and practically moonshine, O.14 ought not to be applied': see Codd v. Delap (1905) 92 L.T. 510, per Lord Lindley at 511. For those who may believe that these sentiments are outdated, a salutary reminder is provided in Crown House Engineering v. Amec Projects Ltd (1990) 6 Const. L.J. 141, where at 154, Bingham L.J. says this:

'... Order 14 is for clear cases; that is, cases in which there is no serious material factual dispute and, if a legal issue, then no more than a crisp legal question as well decided summarily as otherwise .... The procedure is entirely inappropriate where the plaintiff's entitlement to recover any sum is the subject of any serious dispute, whether of law or fact. This is not to say ... that a defendant with no or no more than a partial defence can cheat a plaintiff of his just desserts by producing hefty affidavits and voluminous exhibits to create an illusion of complexity where none exists. Where the point at issue is at heart a short one the court will recognize the fact and act accordingly no matter how bulky its outer garments. But it does mean that where there are substantial issues of genuine complexity the parties should prepare for trial ... rather than dissipate their energy and resources on deceptively attractive short-cuts.'"

Mortimer JA said in Manciple Limited v Chas On Man (supra) at p.466:-

"There is a difficulty because the court cannot resolve issues of fact on affidavits. However, there are some cases in which the defendant's own case, although apparently it raises issues which, if found in his favour, would provide him with a defence, are so incredible or so contradicted by contemporaneous documents or circumstances that it becomes clear that his defence is a sham."

It has been said two tests are appropriate, namely "Is what the defendant say credible?" and, if the answer is yes, "Is there a fair or reasonable probability of the defendant having a real or bona fide defence?"

29. The defence in this case relies upon there being implied terms from usage or custom in all contracts for the distribution of motion picture rights and, in particular, in the distribution agreement between the parties.

30. On this aspect I quote from Chitty on Contracts, 28th edition Volume 1, at paragraph 13-018:-

"13-018

When implied from usage or custom. If there is an invariable, certain and general usage or custom of any particular trade or place, the law will imply on the part of one who contracts or employs another to contract for him upon a matter to which such usage or custom has reference a promise for the benefit of the other party in conformity with such usage or custom; provided there is no inconsistency between the usage and the terms of the contract. To be binding, however, the usage must be notorious, certain and reasonable, and not contrary to law, and it must also be something more than a mere trade practice. But when such usage is proved, it will form the basis of the contract between the parties, and their respective rights and liabilities are precisely the same as if without any usage they had entered into a special agreement to the like effect. These usages are incorporated on the presumption that the parties did not mean to express in writing the whole of the contract by which they intended to be bound, but a contract with reference to those known usages or on the ground that the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain. However, even in cases where the party alleged to be liable upon an implied promise, arising solely from the usage of a particular trade, is not shown to have been cognisant of the usage, he can still be held to be liable by virtue of it."

And at paragraph 13-022:-

"13-022

Express terms prevail. A custom or usage can only be incorporated into a contract if there is nothing in the express or necessary implied terms of the contract to prevent such inclusion, and it can only be incorporated if it is not inconsistent with the tenor of the contract as a whole."

31. It is apparent from these statements of principle that a court should be slow to react to an assertion that a contract apparently complete is nevertheless added to or varied by a term which is not part of the contract except by implication. That is in my view, a matter requiring a high degree of certainty.

32. So, are the defendant's assertions sufficient to show there is a reasonable prospect it can prove them?

33. I come to deal with that next.

Application of the Law

34. The defendant's assertion that there was impliedly a right of first refusal to the rights to Ring 2 is a bare one made by Miss Tsang and repeated by Mr Hung. There is no documentary evidence supporting the existence of such term on the world stage as both depose. There was no reference to it in correspondence between the parties; in particular, no howl of protest, or indeed any response at all from the defendant, when the plaintiff by its fax of 7 May 1999 purported to terminate negotiations, conduct which the defendant was later to plead was in breach of such implied term. That thus is a difficulty for the defence. But there is a further more pressing one. The distribution agreement by clause 1.1 having granted rights to the defendant in the three movies limited as already referred to expressly reserved to itself at clause 1.2: 'all rights other than those provided in the foregoing 1.1'. That in my view encompasses any rights to any other movie, including any sequel, putting the so called implied term at odds with clause 1.2.

35. The same applies to the defendant's assertion that there is an implied term that the release of Ring 2 be deferred until after the season for Ring had been completed. Again this is a bare assertion, this time by Miss Tsang alone; Mr Hung gave no evidence to this effect. The same difficulties arise as before; no documentary evidence, no protest and a term of the distribution agreement, namely 1.2, materially inconsistent with it.

36. Taking its case at the highest, the defence has fallen well short of the necessary threshold; there is in my view no prospect of it proving the existence of the implied terms were the matter permitted to go to trial.

37. There remains the defence that by the exchange of faxes the parties became contractually bound. In light of my conclusion that the defendant is incapable of proving the existence of the implied terms that defence must fail also. The parties in the course of negotiations settled only on the terms of the minimum guarantee. All other matters were at large; then the discussions were terminated.

38. So, there is no defence to the plaintiff's application for judgment on liability and damages to be assessed, nor to the claim for payment of an interim sum and to the other matters sought.

39. The appeal is allowed. The order of 18 March 2002 is set aside and an order in terms of the plaintiff's summons of 21 December 2001 stands in its stead, including an order for costs here and below. (The costs order is nisi at first instance).