WARNER MUSIC HONG KONG LTD v. SOLITON (HK) LTD

DCCJ 4/2018

[2019] HKDC 192

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4 OF 2018

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DECISION

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1.  By an agreement titled “Warner Sales Agreement” dated 31 August 2017 (“the Agreement”), the plaintiff agreed to make available copies of specified music recordings and related materials forming part of three music labels (“Licensed Materials”) and grant copyright licences for the use of the Licensed Materials to the defendant for a term of 1 year from 18 August 2017 to 17 August 2018. The defendant was engaged in the business of providing digital copies of music recordings on website for streaming and tethered downloading by customers. A digital music service platform provided by the defendant is hmv PLAY.

2.  Pursuant to the Agreement, the defendant shall pay to the plaintiff a “non-refundable but fully recoupable pre-payment” (“the Prepayment”) in the sum of HK$850,000.  The defendant has not made the Prepayment.  After repeated demands from the plaintiff, the defendant sought to pay the monthly revenue instead.  This was not accepted by the plaintiff, and eventually the Agreement was terminated.

3.  This was the hearing of the plaintiff’s application for a summary judgment under Order 14 rule 1 of the Rules of District Court against the defendant for (1) the sum of HK$850,000; and (2) a mandatory injunction requiring the defendant to destroy and remove all Licensed Materials in the defendant’s possession or subject to its control.

4.  At the hearing, the plaintiff confirmed that the alternative claim for damages for breach of the Agreement was not pursued in this application.

LEGAL PRINCIPLES ON SUMMARY JUDGMENT APPLICATION

5.  The legal principles on summary judgment application are well established and are not in dispute.  The relevant principles can be summarised as follows:-

(1)  The underlying reason of the summary procedure is to prevent the defendant from delaying the plaintiff from obtaining judgment in a case in which the defendant clearly has no defence, and the summary procedure enables the plaintiff to obtain an expeditious judgment without delay. 

(2)  The plaintiff shall establish a prima facie case. 

(3)  The defendant may show cause by proving that:

(a) the plaintiff’s application was not in compliance with the preliminary or technical requirements under Order 14; or

(b) it has a good defence on merits; or

(c) there is an issue or question in dispute which ought to be tried; or

(d) there is some other reason that a trial ought to be heard.

(4)  In assessing the merits of the defence, the court shall not embark on a mini-trial on affirmations.  The court shall consider whether the defendant’s assertions are capable of being believed, not whether they are to be believed.  The defendant’s assertions shall be tested against contemporaneous documents and other pertinent circumstances.  The defendant’s stated defence will not be taken on its face value.  Judgment shall be granted if the defence put forward is “frivolous and practically moonshine”.

(5)  If it is considered that leave shall be given to the defendant to defend the claim, the court may grant leave to defend unconditionally or subject to such terms that the court considers appropriate.

[See: Hong Kong Civil Procedures 2019 §§14/4/1–14/4/10; Man Earn Ltd v Wing Ting Fong [1996] 1 HKC 225; Manciple Ltd v Chan On Man [1995] 3 HKC 459]

THE PLAINTIFF’S CASE

6.  The plaintiff’s case is that the Prepayment is a minimum guarantee payment payable by the defendant under Clause 6 of the Agreement, which reads,

“6. Pre-Payments & Minimum Guarantee. [Defendant] shall remit to [plaintiff] a non-refundable but fully recoupable pre-payment of Hong Kong dollars Eight Hundred & Fifty Thousand (HK$850,000) (net, exclusive of all taxes) which shall be payable immediately upon the signing of this Agreement and in any event no later than 30 days after receiving the invoice, all to be applied and recouped against future proceeds payable to [plaintiff] hereunder.”

7.  The Prepayment is a non-refundable payment, it shall be payable immediately upon the signing of the Agreement and in any event no later than 30 days after receiving the invoice.  The Prepayment can be applied and recouped against future proceeds that the defendant shall pay under the Agreement calculated by a formula with reference to the defendant’s sales of the Licensed Materials.  The defendant shall settle the Prepayment, which is a minimum payment, irrespective of the revenue or proceeds it may receive.  The plaintiff is pursuing this claim as an action in debt.

8.  A similar agreement had been made between the parties for the year of 2016. There was the same arrangement for the pre-payment.

9.  During the negotiations, the parties agreed that the Prepayment was to be settled in two equal instalments on or before 31 August 2017 and 30 September 2017 respectively. 

10.  The plaintiff therefore issued two invoices on 15 August 2017 (“Invoices”) to the defendant, each in the sum of HK$425,000.  The first invoice was marked payable on or before 31 August 2017. The second invoice was marked payable on or before 30 September 2017.

11.  The defendant had not settled the Prepayment despite repeated demands from the plaintiff.

12.  Clause 8 of the Agreement stipulated that the provisions of the Warner Standard Terms were incorporated by reference, and formed part of the Agreement.

13.  Under Clause 8(b)(i) of the Warner Standard Terms, the plaintiff may terminate the Agreement upon written notice to the defendant if the defendant fails to comply with, inter alia, the payment obligations under the Agreement and fails to cure the non-compliance within 30 working days after notice.

14.  Pursuant to Clause 8(c) of the Warner Standard Terms, upon termination of the Agreement, (1) all rights and authorisations granted by the plaintiff to the defendant under the Agreement shall automatically terminate and immediately revert to the plaintiff; and (2) the defendant shall, at the options of the plaintiff and in accordance with the plaintiff’s instructions immediately return to the plaintiff or destroy all Licensed Materials in the possession of the defendant or subject to its control.

15.  The defendant has not settled the Prepayment by the due dates in August and September 2017 respectively.  In September and October 2017, the plaintiff sent various email notices to the defendant demanding for payments.

16.  By an email dated 4 October 2017, the plaintiff requested the defendant to immediately take down the plaintiff’s contents by close of business on 13 October 2017.

17.  On 6 October 2017, the defendant replied that they were having internal discussion, and would try their best to settle the payment in their earliest possible way and time.  In the same email, they also said that they would have their staff to start the take down procedure step by step.

18.  No update on the payment or the take down procedures were received from the defendant.  The plaintiff gave a notice to the defendant by email dated 12 October 2017 that it would commence the action on 13 October 2017 to take down the contents made available to the defendant.

19.  The defendant wrote to the plaintiff on 26 October 2017 proposing the payment of the monthly revenue shares instead of the entire sum of the Prepayment.  The defendant delivered two cheques to the plaintiff representing the monthly revenue shares.

20.  This proposal to settle only the monthly revenue shares instead of the Prepayment was not accepted to the plaintiff. The two cheques were returned to the defendant.  The plaintiff considered this act of the defendant was a unilateral variation of the terms of the Agreement, and constituted a further breach of the Agreement that entitled it to terminate the Agreement.

21.  On 2 November 2017, the plaintiff exercised its right of termination under Clause 8(b)(i) of the Standard Terms and gave the defendant a written notice to terminate the Agreement and demanded the destruction and removal of the Licensed Materials.

THE DEFENCE

22.  In the Amended Defence, the defendant put forward the following defences:-

(1)  The defendant’s obligations to make payment under the Agreement only arises after the receipt of invoices from the plaintiff issued pursuant to and after the execution of the Agreement.  The Invoices issued by the plaintiff pre-dated the Agreement, the due dates specified in the Invoices did not correspond with the 30 days period stated in Clause 6 and there was no reference to the Agreement in the Invoices.  The defendant contended that the Invoices are not related to the Prepayment.

(2)  Clause 6 is a penalty clause and is not enforceable.

(3)  The plaintiff terminated the Agreement before the obligation to pay had arisen as no invoices were issued under the Agreement.  The defendant was deprived of the opportunity to earn future revenue that it was entitled under the Agreement to recoup the Prepayment.  The plaintiff committed repudiatory breach and the defendant accepted the plaintiff’s repudiation.

(4)  The plaintiff failed to provide notice of termination in compliance with Clause 13 of the Warner Standard Terms because the notice was sent by email without confirmation by registered or certified mail.

23.  The defendant counterclaimed for loss and damages resulted from the plaintiff’s repudiatory breach and/or the cessation of service since about 13 October 2017.

24.  At the hearing, the defendant put forward further arguments as follows:-

(1)  There was an implied term in the Agreement that the plaintiff shall provide new content updates.  The plaintiff was in breach of this implied term by ceasing to provide the updates since 13 October 2017.

(2)  The defendant is entitled to a set off by its counterclaim.

THE CLAIM FOR THE PREPAYMENT

Clause 6 of the Agreement and the defendant’s obligation to pay

25.  To determine the nature of the Prepayment and when the defendant’s obligation to pay arises, the starting point is the construction of Clause 6. 

26.  In approaching the construction of contractual provisions, it was held by the Court of Final Appeal in Fully Profit (Asia) Limited v The Secretary for Justice for and on behalf of the Director of Lands (2013) 16 HKCFAR 351 that context is the starting point and the surer guide.

27.  The heading of Clause 6 is “Pre-payments & Minimum Guarantee".  In Clause 6, the Prepayment was described as “non-refundable but fully recoupable … which shall be payable immediately upon the signing of this Agreement and in any event no later than 30 days after receiving the invoice …”

28.  The defendant’s contention that its obligation to pay only arose after issuance of invoice under the Agreement was in contradiction with the clear provision that the Prepayment shall be “payable immediately upon signing of the Agreement”.

29.  The plain meaning of Clause 6 in the context was that the Prepayment was payable upon the signing of the Agreement, and it was a non-refundable minimum payment that the defendant shall make irrespective of the actual proceeds.  In any event, the defendant shall settle the Prepayment within 30 days after the invoice.  The date on which the invoices were issued did not affect the defendant’s obligation to settle the Prepayment under the Agreement.

30.  This arrangement was not new to the parties as they had the same arrangement under an agreement in 2016 in similar terms. 

31.  In the correspondences between the parties in September and October 2017 when the plaintiff demanded for the settlement of the Prepayment, the defendant had actually acknowledged its obligation to pay.

The Invoices

32.  The defendant complained about the date and the contents of the Invoices.

33.  The parties negotiated the terms of the Agreement by emails in the period between 13 June 2017 and 15 August 2017.  On 8 August 2017, the plaintiff sent the draft agreement to the defendant by email.  Various emails dated 11 August 2017 recorded the defendant’s confirmation of its agreement to settle the Prepayment in two equal instalments by 31 August and 30 September 2017.  The plaintiff then issued the Invoices on 15 August 2017. 

34.  Each of the Invoices was marked for 50% of the non-refundable and recoupable pre-payment for three music labels (which are the three music labels stated in the Agreement) for the period from 18 August 2017 to 17 August 2018.  The period matched with the term of the Agreement provided in Clause 4. The stipulated due dates matched with the agreed payment due dates between the parties as shown in the correspondences.  It was stated in the Invoices the words “Details as per agreement”.  The defendant was not suggesting that there are other agreements between the parties at the material times to which the Invoices relate.

35.  The Invoices are related to the Agreement.

The common law rule on unenforceability of penalty provision is not engaged

36.  The plaintiff’s right to sue for the Prepayment arises when the defendant did not pay the same in accordance with Clause 6.  This right is independent of any loss that the plaintiff suffered from the defendant’s breach.

37.  The common law rule that a contractual term which constituted a penalty is unenforceable does not extend to contingencies which did not involve a breach of contract.  The obligation to make the Prepayment is a primary obligation under the Agreement.  The common law rule on unenforceability of penalty provision is not engaged in the present claim. (Cavendish Square Holding BV v Makdessi [2016] AC 1172). 

Termination of the Agreement

38.  The defendant contended that the plaintiff committed repudiatory breach by terminating the Agreement and ceasing to provide further music contents.

39.  As stated above, under Clause 8(b)(i) of the Warner Standard Terms, the plaintiff may terminate the Agreement upon written notice to the defendant if the defendant failed to comply with the payment obligation under the Agreement and failed to cure the non-compliance within 30 working days after notice.

40.  The defendant has failed to settle the Prepayment.  Emails were sent to the defendant in September 2017 chasing for payment.  On 4 October 2017, the plaintiff gave notice requiring the take down of the music contents if the payment was not settled by 13 October 2017.  The defendant acknowledged by email dated 6 October 2017 that it would try their best to settle the Prepayment at its earliest possible time and it would start the take down procedure step by step in parallel. On 12 October 2017, in the absence of payment, the plaintiff gave further notice of the take down procedure.  The defendant replied on the same date asking for more time.

41.  On 26 October 2017, the defendant wrote to the plaintiff stating that hmv PLAY was “facing difficulty in business and serious loss of main management”, the defendant proposed to only settle the monthly revenue share “as a first step to resolve the situation”.

42.  This proposal was not accepted by the plaintiff. By a notice dated 2 November 2017 (“Termination Notice”), the plaintiff terminated the Agreement and demanded the immediate take down of all the music contents of the plaintiff.  The Termination Notice was marked to be sent by fax, by email and by hand.

43.  The defendant complained that the emails were not confirmed by registered or certified mail.  However, the defendant did not dispute the receipt of the Termination Notice by hand, which is an agreed mode of service under Clause 13 of the Warner Standard Terms.

44.  By reason of the defendant’s failure to make the Prepayment, the plaintiff was entitled to terminate the Agreement.  The Termination Notice was sent in compliance with the requirements under Clause 13 of the Warner Standard Terms.

45.  The defendant’s allegation that the plaintiff has deprived it of the opportunity to earn future revenue for recoupment was without merit. The termination was a result of its failure to make the Prepayment.

46.  For completeness, there is no provision in the Agreement divesting the plaintiff from its entitlement to the Prepayment in case of termination.  The plaintiff’s right to claim the Prepayment is not affected by the subsequent termination of the Agreement.  (Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965; Hardy v Griffiths [2015] Ch 417; Neil Andrews et al’s Contractual Performance, Breach, Termination and Remedies, 2^nd edition, §19-005)

The implied term defence

47.  At the hearing, the defendant argued that there was an implied term that the plaintiff shall provide new contents to the defendant and the plaintiff was in breach of this implied term.

48.  This implied term defence was not pleaded. Although the defendant has referred to the importance of new contents in its affirmation in opposition to this application, it has not stated nor provided any evidence in support of the existence of an implied term now alleged by the defendant.

49.  In any event, the plaintiff ceased to provide the music contents because the Agreement was terminated following the defendant’s failure to pay. 

Set off / Counterclaim

50.  At the hearing, the defendant argued that it has the defence of set off, and a summary judgment should not be granted.  Contrary to this assertion, the defendant has not pleaded any defence of set off.

51.  The defendant counterclaimed against the plaintiff for damages caused by the plaintiff’s termination of the Agreement and cessation of the services.  The defendant supported its counterclaim largely by the allegations of the invalidity of the Invoices and the failure to comply with the notice requirements. Both allegations were rejected as explained above.

52.  As decided above, the plaintiff was entitled to terminate the Agreement due to the defendant’s failure to pay.  There is no merit in the counterclaim.

DESTRUCTION OF LICENSED MATERIALS

53.  Under Clause 8(c) of the Warner Standard Terms, upon termination of the Agreement, the defendant shall destroy or return to the plaintiff the Licensed Materials in accordance with the plaintiff’s instruction.

54.  As the Agreement was terminated, it follows that the defendant shall destroy or return the Licensed Materials in accordance with the plaintiff’s instruction.

HIGH COURT ACTION

55.  At the hearing, the parties informed this court that at the same time of the Agreement, the defendant and Warner Music International had entered into an agreement (“WMI Agreement”) under which the defendant shall make a separate prepayment of $2.1 million for the provision of the music contents. The defendant has also failed to make this payment.  The WMI Agreement was currently the subject of a dispute in a separate High Court Action.

56.  The parties have not put before this court the WMI Agreement or any papers concerning the High Court Action.  At the hearing, I asked the parties the relevance of these information and documents to the determination of this application.  Both parties confirmed that the dispute relating to the WMI Agreement does not affect the determination of this application and it is not necessary for this court to consider the WMI Agreement and the matters relating to the High Court Action.  The present decision was made on this basis.

57.  The parties also informed the court at the hearing that the underlying facts and legal issues in the High Court Action are very similar, if not identical, to the present action.  There was a parallel summary judgment application in the High Court Action. In such case, the parties shall consider taking proper step to consolidate the two actions or fix the two applications to be heard together.  This will enable the same court to determine the disputes arising from the same facts with the same legal issues involved, therefore maintaining consistency in the determination of the disputes, saving time and costs of the parties and the court.  The parties have not done so.

DISPOSITION

58.  I order that a final judgment be entered summarily in favour of the plaintiff that the defendant shall pay the plaintiff the sum of HK$850,000, and shall destroy and/or return all licensed materials of the plaintiff in accordance with the provisions of the Agreement upon termination.

59.  The plaintiff is directed to lodge with the court and serve on the defendant within 7 days from this decision the proposed terms of the order in relation to the destruction and/or return of the licensed materials by the defendant.  The defendant shall lodge its comment thereon, if any, with the court and serve on the plaintiff within 7 days thereafter.  The final terms of the order will be determined on paper.

60.  There be an order nisi that the defendant shall pay the plaintiff the costs of this action, including this application, to be taxed if not agreed, with certificate for counsel.  The above order will become absolute in the absence of an application to vary the same within 14 days.

POSTSCRIPT

61.  The defendant was legally represented and has indicated its opposition to this application. The solicitor who appeared for the defendant at this hearing has not lodged any written submission and has given no explanation for his failure to do so. This is very unsatisfactory.

62.  Legal practitioners are reminded of paragraph 11 of Practice Direction 27 which stipulates that Practice Direction 5.4 applies to proceedings in the District Court with suitable adaptations.  Practice Direction 5.4 paragraph 5 provides that skeleton submissions and list of authorities must be lodged in support of or in opposition to every application. Non-compliance of the Practice Direction may result in adverse costs implication.