SINA HONG KONG LTD v. PIXEL MEDIA HK LTD

HCA 1400/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1400 OF 2013

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D E C I S I O N
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1.  This is an appeal from a decision of Master M Wong dated 8 December 2014.  The plaintiff’s summons under Order 14A sought:

(1) determination by the court of a point of construction arising under an agreement dated 29 January 2010 (“the agreement”) made between Sina Hong Kong Ltd (“the plaintiff”) and Pixel Media HK Ltd (“the defendant”);

(2) if answered in favour of the plaintiff, summary judgment on the amount claimed in the statement of claim; and

(3) under Order 18, rule 19, an order striking out the defence and counterclaim. 

The master dismissed the plaintiff’s summons.  My decision appears below. 

Factual background

2.  The plaintiff is an online media company and operates a number of websites including several based in Hong Kong.  The defendant is a company that carries out internet advertising.

3.  The agreement provided, inter alia, that for a period of three years (“the term”) four of the plaintiff’s websites (“the HK websites”) would join the defendant’s advertising network.  The defendant would be responsible for selling advertising spots on the HK websites to advertisers, receive revenue from them and manage the technical aspects of the advertising software system and the plaintiff would maximise user traffic to the HK websites. 

4.  The plaintiff would receive a portion of the revenue ranging from 63% to 78% depending on the amount of revenue generated in accordance with Exhibit B to the agreement. If it achieved the agreed level of traffic, it would receive a guaranteed minimum revenue payment in accordance with Exhibit C to the agreement (“the minimum revenue guarantee”). 

5.  The parties agreed that for the minimum revenue guarantee to apply there had to be at least 50 million page views a month and unique users of 1.7 million per month (“the minimum amount” or “the minimum traffic”).  “Page views” means the number of times a particular web page is visited and “unique users” refers to how many (different) individual users visit a website or group of websites that month, irrespective of the number of times each user visits a website(s) in question. 

6.  The agreement set out how site traffic should be measured (“site performance”).  The dispute concerned how those provisions should be construed.

7.  It is common ground that the plaintiff has been paid its share of the revenue in accordance with Exhibit B and that the defendant has paid the plaintiff the minimum revenue guarantee for the period from February 2010 to November 2011. 

8.  The dispute is whether the plaintiff was entitled to be paid the minimum revenue guarantee from December 2011 to January 2013.  That turns entirely on whether the minimum traffic was achieved during that period.  In practical terms, the difference amounts to a sum in excess of $8.7 million.

9.  The plaintiff claimed that it did.  The defendant disagreed and in June 2012 the defendant sought to invoke the right to have an independent audit of the plaintiff’s user traffic figures that is contained in the provision dealing with site performance.  The principal issue is whether, in the events that have happened, the defendant is entitled to exercise that right.

10.  It is common ground that at the time of the agreement Nielsen/Netratings (“Nielsen”) was the industry leading software in Hong Kong for measuring user traffic of websites.  According to the plaintiff, it has been using Nielsen’s software to measure its website traffic since October 2005.  Nonetheless it is accepted that all software had its own shortcomings.

11.  The notice of appeal seeks a determination under Order 14A that, on a proper construction of the agreement, the defendant is not entitled to an independent audit of the plaintiff’s user traffic figures and final judgment accordingly; further or alternatively summary judgment under Order 14 and an order striking out the defence and counterclaim.

12.  The defendant’s position is that the Order 14A procedure is inappropriate because the question of construction cannot be determined without also determining factual disputes between the parties.  Accordingly the plaintiff’s application for summary judgment must fail irrespective of the outcome of the Order 14A application.  In any event the plaintiff’s construction is wrong. 

Overview of the construction issue

13.  The plaintiff seeks a determination under Order 14A.

14.  The starting point must be the actual provisions relating to “site performance”.  The agreement contained the following provisions for compensation:

“Revenue Share. … The parties agree that in consideration for Pixel Media’s performing its services as described in this Agreement, Pixel Media shall remit to Company the net revenues generated from the sale of Spot on the Web Site for the display of Advertisements according to the Advertising Revenue Sharing Scheme (the ‘Scheme’) listed in Exhibit B hereto.

‘Net Revenues’ means the gross billings earned from Advertisers by Pixel Media for the sale of Spot on the Web Site for the display of Advertisements less volume discounts and agency commissions …

Revenue Guarantee. Pixel Media agrees that the Company’s share of Net Revenues referred to above shall be no less than the Minimum Revenue Guarantee as stated in Exhibit C …

Site Performance.  (1) The site performance metrics shall be based on the Company’s monthly pageview report or by third party site traffic verification software [Nielsen] or an industry recognised equivalent.  (2) Company shall provide a pageview report to Pixel Media on a monthly basis.  (3) The agreed minimum monthly page views for the Web Site is 50 million and the agreed monthly unique users is 1.7 million in accordance to a third party site traffic verification software from [Nielsen] or an industry recognised equivalent.  (4) In the event of any dispute in regard to the Company’s monthly pageview report, independent auditors may be appointed to give second opinion in relation to pageview of the Web Sites and Pixel Media shall bear the sole costs and expenses of this exercise.  (5) Company must continue to maintain the minimum monthly page views at 50 million and unique users of at least 1.7 million per month in order to retain marketability to Advertisers.  (6) If in any one month the site performance drops below the minimum amount, the minimum revenue guarantee will be void and actual revenues share shall apply.”

(Note: The bracketed numbers have been inserted for ease of reference and do not appear in the original document.)

15.  In summary, Mr Chong, counsel for the plaintiff, submitted that sentence 1 allowed the plaintiff to base the site performance metrics on: (a) its own report; or (b) results generated from a third party site traffic verification software.  If the plaintiff opted for (b), then it had a further choice of using (i) Nielsen; or (ii) an industry recognised equivalent. 

16.  By the time of the agreement, not only had the parties agreed to use Nielsen, they also agreed to share the setup and subscription costs as provided in Appendix 1 to the agreement.

17.  Sentence 4 gave the defendant the right to appoint an auditor only in the event of any dispute in regard to “the Company’s monthly pageview report”.  As sentences 1 and 4 used identical phraseology, Mr Chong submitted they should be given a consistent meaning. Therefore it is only when there is a dispute in regard to the “Company’s monthly pageview report” (in the plaintiff’s view meaning cases where the Company’s records as opposed to an independent third party software had been used) that the parties agreed that independent auditors may be appointed.

18.  It was submitted that had the plaintiff elected to use its own records as opposed to a third party software, it would be fair that independent auditors be allowed to carry out an audit.  But as the parties had elected to use Nielsen (which at the time of the agreement was the leader in the field), they could not have intended to have those results audited.  By electing to use Nielsen it was no different from appointing an umpire and its results were final and conclusive.

19.  But in determining the correct construction, it is necessary to have regard, inter alia, to the entire text of the site performance provision comprising six sentences and the agreement as a whole.

20.  I would observe that as a matter of syntax, sentence 1 is awkward if not also incorrect.  I will return to this point later.  For present purposes, I will proceed on the basis of the construction put forward by the plaintiff, that sentence 1 gave the plaintiff an option to provide a self generated report.

21.  It is clear from sentence 2 that the obligation to provide a monthly page view report is on the plaintiff.  The use of the indefinite article is to be noted.  That is not controversial. 

22.  The significance of the monthly page view report is obvious: it is critical to the determination of the amount payable by the defendant to the plaintiff under the agreement for the particular month: whether it is just the revenue share or the greater amount payable under the minimum revenue guarantee.  That is self evident from the present claim.

23.  Assuming the plaintiff had opted to use self generated reports, upon what would such page view report be based?  Would it be entirely within the plaintiff’s discretion to decide how it goes about measuring user traffic?

24.  Sentence 3 would suggest not because it requires that the number of monthly page views and monthly unique users stipulated be “in accordance to a third party site traffic verification software”, from Nielsen or an industry recognised equivalent.  Nielsen or its industry recognised equivalent would be third party providers of user traffic analytics.

25.  The monthly page view report that is required from the plaintiff not only has to be derived from a third party verification software but also that that software is recognised and accepted in the industry.  Those requirements have some significance: third party normally means a party not connected or related to the parties; it bears connotations of impartiality and independence.  The provider also has to be someone whose expertise is accepted and recognised in the industry for traffic verification.

26.  Those requirements would rule out the possibility of the plaintiff producing monthly page view reports that are based on its own system that is to say self generated reports.  It also would rule out reports that are derived from a system or software that does not possess the attributes set out in the preceding paragraph. 

27.  It will be apparent that the inevitable and practical consequence of complying with sentence 3 is that on the plaintiff’s reading of sentence 1 it would have the effect of neutralizing the self reporting option and rendering it meaningless.

28.  How are sentences 1 and 3 to be reconciled if at all?

29.  If they are read in sequence and closely considered, it will be apparent that but for the word “or”, sentences 1 and 3 mirror the same requirement and are wholly consistent with each other, making perfect sense. If the word “or” were omitted, sentence 1 would also be syntactically correct (see §20 above).

30.  Mr Chong contended that what had been provided to the plaintiff were Nielsen results.  He submitted that by the time the agreement was signed, not only did the defendant know that the plaintiff would use Nielsen, it had agreed to share the cost as is apparent from Appendix 1.  Therefore sentence 3 is redundant, otiose and irrelevant in construing sentences 1 and 4.  Further, it was submitted that the parties’ agreement to use Nielsen reflected their intention that Nielsen’s figures would be final and conclusive.

31.  At this juncture it would be appropriate to consider the actual terms of Appendix 1.  It is made up of four paragraphs.  In summary they provide that:

(i) the parties would share the cost for the third party traffic verification software “provided by [Nielsen] or to any other industry accepted equivalent software” (emphasis added),

(ii) such costs had to be mutually agreed upon in writing,

(iii) the plaintiff would implement the software on its site and

(iv) the plaintiff would bill the defendant on a monthly basis with a separate invoice with description being “share of cost for [Nielsen] subscription”.

32.  Provision (iv) has the hallmarks of a provision that was agreed after the three provisions preceding it had been written and added subsequently but before the agreement was signed.  For otherwise provision (i) would not have been worded in the way in which it appears.

33.  While the effect of Appendix 1 is that the Nielsen costs are shared, that fact cannot assist the construction of the site performance provision.  Importantly, the terms of the site performance provision can only be construed as they are drawn.   

34.  What is significant is that provision (i) of Appendix 1 is entirely consistent with and supports the reading of sentences 1 and 3.  The word “or” appearing in sentence 1 must have come about as the result of some error or oversight.

35.  If Mr Chong’s construction were correct, it would follow that the parties’ agreement to use Nielsen had the effect of rendering sentences 1 and 4 otiose.  Could that really have been their intention when they could as easily have deleted those sentences from the agreement?  I do not consider that at all probable.

36.  As regards the plaintiff’s submission that the joint decision to use Nielsen rendered its results final and conclusive, it does not arise for consideration unless the plaintiff succeeds on the construction point.

37.  The main plank of the plaintiff’s contention and which the defendant challenges is the fact that it is premised on accepting (a) that because identical phraseology appears in both sentences 1 and 4, they must bear the same meaning; and (b) that the phrase “the Company’s monthly pageview report” as used in sentence 1 is only capable of referring to a self generated report.

38.  I do not accept that simply because the same phraseology is used, the words used must necessarily be referring to the same thing.  It would depend on the nature of the words in question, whether they are common everyday words (as opposed to unusual or technical or specialised words) and the context in which they are used.  I do not accept that there is any fixed rule.  The context has to be considered and one has to approach the matter with common sense.

39.  As Ms Cheng SC (who appeared for the defendant) submitted, the phrase “A’s monthly report” is itself capable of more than one meaning depending on the context.  Apart from referring to a report generated/made by A, as a matter of language, it is equally apt to describe a report provided by A but which had been prepared by a third party.

40.  Turning to the context, the obligation imposed on the plaintiff by sentence 2 is to provide a page view report on a monthly basis.  So when sentence 4 then refers to a dispute in regard to the ‘Company’s monthly pageview report’, it is a reference to the report the plaintiff has provided in discharge of its sentence 2 obligation.  I can discern nothing from the provision as a whole that would require the phrase to be construed in the manner suggested by the plaintiff.  

41.  Before reaching a conclusion on the proper construction of the agreement, it would be appropriate at this juncture to complete consideration of the remaining part of the provision and to set out the pertinent factual matrix.

42.  Sentence 5 shows that minimum traffic is linked to retaining marketability to advertisers.  It explains why the plaintiff was specifically required to maintain minimum traffic.  Sentence 6 then set out the consequences of a failure to do so and rendered the minimum revenue guarantee inapplicable for any particular month that minimum traffic is not reached.  Those matters go to the factual matrix and commercial purpose of the agreement.

Factual matrix

43.  It is apparent from the terms of the agreement itself that this was a joint enterprise by the parties to exploit the potential for obtaining advertising revenue from the HK websites to their mutual advantage.  To recap the essentials, while the defendant shouldered the responsibility of marketing to advertisers, deriving advertising revenue and being responsible for the necessary software and all the technical aspects involved, the plaintiff, apart from permitting its HK websites to be used for advertising, undertook to “dedicate the resources necessary to develop and promote the content of the [HK websites] to maximise user traffic”.  That was a positive obligation of some significance.  The level of user traffic matters to advertisers for obvious reasons and plainly that would have a direct impact on the revenue stream.

44.  The advertising revenue would be shared.  The formula applicable depended on whether the minimum revenue guarantee applied. The revenue sharing arrangement was such that it was far more advantageous for the plaintiff (who would stand to receive a far greater amount) in the event of its being able to achieve the minimum traffic. 

45.  Page view numbers would be of importance not only to the parties because it directly affects how the revenue derived from the arrangement was to be shared but also to potential advertisers who are the potential source of revenue for this enterprise. Looked at objectively and from a commercial perspective, it stands to reason that not only do the numbers matter, they need also to be reliable and credible.

46.  Exhibit C to the agreement sets out the minimum revenue guarantee payable by the defendant in the event of the minimum target being reached. The monthly amount payable starts at $600,000 for the first three months of the first year, rising to $833,000 odd for the remaining nine months. There is a modest increase to just over $852,000 per month for the second year rising to almost $938,000 per month for the third year. On any view, they are substantial amounts, and annualized, range from $9.3 million to $11.253 million over the term.

47.  It is against this backdrop that the option of using the plaintiff’s self generated reports has to be gauged.

48.  The defendant has led evidence to the effect that:

“Advertisers, advertising agencies and advertising sales representatives (including Pixel Media) would generally not accept a website owner’s self-generated, unverified user traffic figures as the basis upon which to pay advertising fees, because it is fairly easy for the website owner to manipulate such self-generated figures. Self-generated user traffic figures are generally not accepted even if there is a possibility of an ex post facto audit because, for a single advertising campaign, it is rarely cost-effective to conduct an audit to check the user traffic figures. Instead, advertisers, advertising agencies, and advertising sales representatives (including Pixel Media) would want to use user traffic figures provided by a third party analytics company (such as [Nielsen] and comScore …).”

(§28 of Affirmation of Huang Kevin Jiunn Jin dated 7 August 2014)

49.  In reply, at §18 of her 2nd affirmation, So Chun Nei, the general manager of the plaintiff (but who was not its general manager at the time the agreement was entered into), merely denied the relevance of the allegations set out in the passage quoted in the preceding paragraph. No positive evidence was adduced. At the hearing, Mr Chong drew attention to the fact that the defendant did not go so far to say that the industry never accepted self reporting and therefore it cannot be ruled out that someone in the industry would accept self reporting.

50.  What is tolerably clear is that the existence of a general rule or practice is not seriously challenged. While there may be exceptions to the general rule or practice, the plaintiff has singularly failed to cite any examples.

51.  There is also the fact that the plaintiff has not put forward any explanation as to how self reporting would be done, the numbers involved being in the millions. While Mr Chong made several references which appeared to suggest that the plaintiff’s monthly page view report would come from the plaintiff’s ‘own records’, it throws no light on the process. Clearly it could not be a question of physical counting given the numbers involved. Nor could it be a question of going about measuring site user traffic in an amateurish manner since the commercial reality is that both the reliability and credibility of the reports matter.

52.  It is one thing to be in the business of creating websites; it is quite another to engage in measuring site traffic when that is an area that would appear to require some expertise or know‑how.  That specialist providers exist in the market to provide such services makes the point.

Whether Order 14A procedure is appropriate

53.  As to the proper construction of the provision, I do not consider that there are factual issues that need to be resolved before the court could reach a determination under Order 14A.  It would be pointless and a complete waste of time and resources to have a trial for the present question of construction to be resolved.

54.  Taking all of these matters into consideration and reading the agreement in its entirety, I do not accept that the plaintiff’s construction is correct.  For the reasons earlier stated, on the proper construction of the site performance provision in the agreement under Order 14A, I have little hesitation in deciding that the defendant is entitled to exercise the right to appoint an independent auditor for a second opinion at its own expense and I so determine.  

55.  In that connection, it should be mentioned that the defendant has stated it is fully willing to abide by the results of the audit and to make payments accordingly.

56.  Accordingly, the master’s order is varied to include a determination on the question raised in §1 of the summons, namely, that on the proper construction of the site performance sub‑clause in the agreement, the defendant is contractually entitled to appoint auditors to give a second opinion in relation to the page views and unique users of the HK websites.  

57.  Save as aforesaid, the appeal is dismissed.  I also make an order nisi that the costs of the appeal be to the defendant.