XCHRX WING COPORATION AND ANOTHER v. DENSITY INDUSTRIAL LTD.

HCA6203/98

HEADNOTE

Interlocutory injunction. Balance of convenience.

Governing principle. If an award of damages were to provide adequate compensation to the plaintiffs for the loss the plaintiffs would sustain as a result of the defendant continuing to do what was sought to be restrained between the time of the application and the trial and the defendant is in a financial position to pay them, that is an end of the matter. Interlocutory injunction should be refused.

HCA 6203/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6203 OF 1998

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J U D G M E N T

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1. This is an application by the Plaintiffs by an inter partes summons dated 28th April 1998 for an interlocutory injunction against the Defendant and for interim delivery up and discovery.

2. The Plaintiffs' claim against the Defendant is in respect of infringement of copyright in artistic works, namely drawings of certain toys and for the packaging of the toys. There are altogether four series of toys involved known as the "F-1 Rider", "Train-Former", "Sky Jet" and "Robo Racer" series.

3. For the purpose of these proceedings, the Defendant does not dispute the subsistence and ownership of copyright in the artistic works. The 1st Plaintiff claims to be the copyright owner in the drawings relating to the "F-1 Rider" series whilst the 2nd Plaintiff claims to be the copyright owner in the drawings relating to the "Train-Former", "Sky Jet" and the "Robo Racer" series.

4. The 1st Plaintiff is a Japanese corporation whilst the 2nd Plaintiff is a company incorporated in Hong Kong. By way of background, the 1st Plaintiff was in March 1995 looking for a suitable manufacturer in Hong Kong to manufacture a series of toys. The Defendant was regarded by the 1st Plaintiff as a suitable candidate for this purpose. In or about April 1995, Mr. Ryotara Tanaka ("Mr. Tanaka") and his father, as representatives of the 1st Plaintiff, approached the Defendant and agreed terms with the Defendant whereby the Defendant would manufacture toys for the 1st Plaintiff on an OEM basis, i.e. as an original equipment manufacturer. This meant that the Defendant would manufacture toys from the 1st Plaintiff's moulds in respect of orders the 1st Plaintiff would receive for the toys.

5. There is a dispute between the parties as to when this arrangement began. However, as a result of this arrangement, the 1st Plaintiff's moulds for the "F-1 Rider" series of toys were delivered to the Defendant. The other three series of toys were developed between 1995 and 1996.

6. The 2nd Plaintiff was incorporated in Hong Kong in February 1996. This was done so that the 2nd Plaintiff could act as the purchasing and shipping agent for the 1st Plaintiff in Hong Kong, overlook the production and exercise quality control over the orders placed with the Defendant and exploit other markets outside Japan in respect of the four series of toys and other new products.

7. The relationship between Mr. Tanaka, his father and Mr. Wong Wah Fai of the Defendant developed into a friendly and cordial one and the arrangement between the parties seemed to be running smoothly. However, according to the Plaintiffs' evidence, which is disputed by the Defendant, in about March 1996, the sales representative of the Defendant informed Mr. Tanaka that the Defendant had sold 30 cartons of "Train-Former" toys to one of their customers in Brazil. Under the OEM arrangement, the Defendant was not permitted to sell the toys to their own customers or to anyone else other than to the order of the copyright owner.

8. The Plaintiffs in order to maintain good business relations with the Defendant then permitted the Defendant to sell the Plaintiff's said four series of toys provided such sales were to markets outside Japan. The Defendant was also to pay the 2nd Plaintiff a licence fee and keep records of all such sales and provide the same on a weekly basis to the 2nd Plaintiff. The Plaintiffs say that this licence arrangement lasted until October 1996 but this is disputed by the Defendant whose case is that this licence arrangement lasted until the time settlement negotiations between the parties started in October 1997.

9. The Plaintiffs say that the reason for termination of the licence arrangement in October 1996 was due to the fact that the quality of the toys manufactured to the order of the 2nd Plaintiff was usually sub-standard and it was suspected that the Defendant spent their efforts in producing toys for their own customers under the licence arrangement. Also, the Defendant had subcontracted the manufacture of the four series of toys to another factory which, according to the Plaintiffs, lacked proper quality control and the Defendant was asked to shift the production line back to the Defendant's factory at Huado City in China. This again is disputed by the Defendant.

10. There is some evidence from the Plaintiffs showing that from October 1996 onwards when, according to the Plaintiffs, the licence arrangement having been terminated, the Defendant was still selling to its own customers the Plaintiffs' series of toys without paying any licence fee or without submitting weekly reports in respect of these later sales. The Plaintiffs say that these were therefore unauthorised sales and were acts of infringement of the Plaintiffs' copyrights after October 1996. I should also mention that the OEM arrangement continued notwithstanding the alleged termination in October 1996 of the licence arrangement. As I have said, the Defendant denies that the licence arrangement terminated in October 1996.

11. Needless to say, the relationship between the parties deteriorated and matters came to a head when the 2nd Plaintiff decided in October 1997 to withhold payment which was due to the Defendant of approximately HK$1,000,000 for toys the Defendant had manufactured pursuant to orders placed by the 2nd Plaintiff. Because of this, the Defendant refused to carry on production under the OEM arrangement and refused to surrender the moulds and films held in its custody. There were then negotiations between the parties and the Settlement Agreement in writing was signed on 13th October 1997 ("the Settlement Agreement"). This was between the 2nd Plaintiff and the Defendant. The 1st Plaintiff was not a party to this but no point is taken on that.

12. By the Settlement Agreement the disputes between the parties were settled. The gist of the Settlement Agreement was that the 2nd Plaintiff and the Defendant would release each other from all existing claims upon payment of HK$1,031,514.60 by the 2nd Plaintiff to the Defendant and the release of moulds and films in the Defendant's custody to the 2nd Plaintiff.

13. Clause 7 of the Settlement Agreement provided that if the 2nd Plaintiff and the Defendant abided by the terms of the agreement "both parties agree to take no further action in respect of the damage resulted from the disputes happened during the period of their co-operation". This was, of course, subject to the parties abiding by the terms of the agreement.

14. Clause 2(1) of the Settlement Agreement made it plain that from the date of the agreement, the Defendant was "no longer allowed to produce and sell" any of the products without the 2nd Plaintiff's written consent or authorization.

15. Clause 3 also provided, inter alia, that in respect of the damage incurred, the 2nd Plaintiff waived its claims against the Defendant but that if the Defendant did not observe Clauses 1 & 2 of the agreement, the 2nd Plaintiff was at liberty to take "further drastic action to avoid further damage being incurred".

16. Mr. Shipp for the Plaintiffs submitted that on a construction of the Settlement Agreement in particular Clause 7, the 2nd Plaintiff and the Defendant had agreed that if they abided by the terms of the agreement, no further action would be taken in respect of the damage which had occurred. However, if the Defendant did not abide by the terms of the Settlement Agreement, then the Defendant could be sued for past infringements as well as for future infringements. On this construction of the Settlement Agreement, I am satisfied that there is a serious question to be tried.

17. Mr. Shipp also submitted that on the evidence there was at least a serious question to be tried in respect of two acts of infringement by the Defendant after the Settlement Agreement was entered into and that this showed that the Defendant had not abided by Clause 2(1) of the Settlement Agreement. The first act of infringement relied on occurred on or about 24th November 1997 when a sales lady of the 2nd Plaintiff, Ms. Sary Chan, went to the offices of a client and met one of the Defendant's salesmen there. According to her, that salesman was carrying a bag which was white in colour and translucent and she could distinctly see a sample in that bag of each of the said 4 series of toys. She said that she confronted that salesman as to why the Defendant was still selling the Plaintiffs' product notwithstanding the Settlement Agreement. His response was that he also felt that it was morally wrong for Mr. Wong of the Defendant to do so although he said that there was nothing he could do.

18. The Defendant denies this and denies that it has sold or offered to sell any of the said four series of toys after the Settlement Agreement. I cannot, of course, resolve this issue of fact at this stage. There is, in my judgment, a serious question to be tried.

19. The second act of infringement relied on relates to a sale to a company called Bestwell Fareast Limited ("Bestwell"). Originally, the Plaintiffs in their evidence relied on the fact that the Defendant had entered into a purchase contract dated 25th February 1998 with Bestwell to supply Bestwell with one of the four series of toys in breach of the Settlement Agreement. This in fact turned out to be a mistake. The evidence of Mr. Wong Wah Fai of the Defendant shows that the Defendant never entered into a purchase contract with Bestwell in February 1998. The Defendant was approached by Bestwell in 1998 for a repeat order of a previous purchase contract which was placed in September 1997. The Defendant was unable to accept the February 1998 purchase contract because of the Settlement Agreement and informed Bestwell of the Defendant's position. This evidence of Mr. Wong Wah Fai is uncontradicted. The Plaintiffs then shifted their case on the Bestwell purchase contract and relied on the earlier Bestwell purchase contract dated 19th September 1997 with a delivery date of 20th October 1997 stipulated therein. 20th October 1997 was after the Settlement Agreement and it was said that they were prohibited from delivering the goods under that purchase contract because of Clause 2(1) of the Settlement Agreement.

20. Mr. Shipp relied on paragraph 1-028 of Benjamin's 'Sale of Goods' 5th Edition where it is stated as follows: -

"... an agreement to sell is purely a contract, while a sale is both a contract and a conveyance, under which the property in the goods is transferred to the buyer."

Relying on that passage, Mr. Shipp submitted that until delivery, property in the goods was not transferred and the Defendant was prohibited by Clause 2(1) of the Settlement Agreement from delivering the goods under the Bestwell purchase contract dated 19th September 1997. I find that this construction of Clause 2(1) of the Settlement Agreement is arguable. The Defendant's evidence, however, is that the goods under the Bestwell purchase contract of 19th September 1997 were delivered before the Settlement Agreement was signed, but this is disputed by the Plaintiff. There is, in my judgment, a serious question to be tried as to this.

21. Apart from those two acts of infringement relied on by the Plaintiffs, there is no other evidence before me that the Defendant has been acting in breach of the Settlement Agreement by selling any of the four series of toys after the Settlement Agreement without the consent or authorization of the Plaintiffs.

22. I turn to the balance of convenience.

23. I remind myself of Lord Diplock's classic formulation in his speech in American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396. When dealing with the balance of convenience, Lord Diplock at 408 said this:

"As to that, the governing principle is that the court should first consider whether if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant's continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff's claim appeared to be at that stage."

24. That being the governing principle, if an award of damages were to provide adequate compensation to the Plaintiffs for the loss the Plaintiffs would sustain as a result of the Defendant continuing to do what was sought to be restrained between the time of the application and the trial and the Defendant is in a financial position to pay them, that is an end to the matter. No interlocutory injunction should, in my judgment, be granted to the Plaintiffs.

25. The Plaintiffs say that damages would not be an adequate remedy. I observe that until their relationship deteriorated, the Plaintiffs were content to let the Defendant to sell the four series of toys to the Defendant's customers in return for a licence fee. The Plaintiffs also say that the Defendant must be restrained to stifle complaints from the Plaintiffs' customers but that is not based on any evidence. There is no evidence before me to show that after the Settlement Agreement was entered into any of the Plaintiffs' customers have complained about the Defendant's activities.

26. It is also said that it is important that infringements by the Defendant do not find their way to Japan where the 1st Plaintiff has a long standing reputation. Again, there is no evidence whatsoever that any infringement by the Defendant has ever found its way to Japan. It is also said that the Plaintiffs have no control over the quality of the infringements and any complaint in quality of the infringements leads to damage which an award of damages would not provide adequate compensation to the Plaintiffs. There is again no evidence to show that after the Settlement Agreement there have been any complaints as regard quality in respect of infringements. There is, as I have already said, apart from the two specific infringements relied on by the Plaintiffs, no evidence that the Defendant has been embarking on infringing activities after the Settlement Agreement.

27. Although the Plaintiffs had the information on who the Defendant's customers were as they had been supplied with sales' reports from the Defendant, they do not appear to have contacted them to put them on notice of the Defendant's infringing activities after the Settlement Agreement. Also, notwithstanding the fact that the Plaintiffs discovered on the 24th November 1997 that a salesman of the Defendant was still offering the four series of toys for sale to a customer in breach of the Settlement Agreement, the Plaintiffs only took out this application on 28th April 1998, some 5 months later. It is also pertinent to note that the writ of summons and the application for interlocutory relief was only launched after the Defendant had instituted separate proceedings in the High Court in Action 2302 of 1998 against the 2nd Plaintiff in respect of a dishonoured cheque and also for goods sold and delivered to the 2nd Plaintiff.

28. Mr. Shipp submitted that the Plaintiffs wanted to get documentary evidence first before launching their proceedings and it also took some time to get the copyrights assigned to the Plaintiffs. The evidence shows that the copyright assignments were only executed in the Plaintiffs' favour in April 1998. However, of the four series of toys, the artistic works for three of them were created in recent years in 1995 and 1996 and it should not have been difficult to obtain the copyright assignments for these much earlier.

29. The impression given is that the Plaintiffs were certainly not in a hurry to launch their application for interlocutory relief. In my judgment, if the Plaintiffs had themselves apprehended irreparable harm from the continued conduct of the Defendant they would not have proceeded in such a leisurely way. I am satisfied that an award of damages would adequately compensate the Plaintiffs.

30. The Defendant's evidence is that the Defendant is a respectable company having a firm root and long standing in the toy industry in Hong Kong. It has been in business for 8 years with a steady turnover and a sound reputation. Indeed, it was the 1st Plaintiff who sought out and recruited the Defendant to produce its goods on an OEM basis at the outset. The Plaintiffs rely on the fact that another writ has been issued against the Defendant for copyright infringement. That is not, in my view, relevant. Those are proceedings which are being defended and no findings have been made. I am satisfied that the Defendant will be able to pay an award of damages.

31. In all the circumstances, I am not prepared to grant an interlocutory injunction in the Plaintiffs' favour. I also do not think it is appropriate to grant the other interlocutory relief sought and I dismiss the Plaintiffs' summons dated 28th April 1998. Costs in the cause.