TAIWAN FU HSING INDUSTRIAL CO. LTD. v. E. BON BUILDING MATERIALS CO. LTD.

HCA849/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.849 OF 2004

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REASONS FOR JUDGMENT

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1. The defendant is appealing the decision of the Master in refusing security for costs under Order 23, rule 1(a) of the Rules of High Court (Cap.4A).  I have allowed the appeal and ordered security of costs against the plaintiff.  I now give my reasons.

Background

2. The plaintiff is the manufacturer of “Leado” brand door closers in Taiwan.  In 1989, the plaintiff’s predecessor Leado Enterprise Co., Ltd (“Leado Enterprise”) and the defendant entered into an agreement in writing for the exclusive distribution by the defendant of Leado door closers in Hong Kong (“1989 Agreement”).  In 1990, Leado Enterprise assigned the rights for the registration of the Leado trade mark in, inter alia, Hong Kong to the defendant.  In 1995, the plaintiff acquired the business of Leado Enterprise, and as a matter of fact, the exclusive 1989 Agreement continued.  In 1998, the defendant became the registered owner of the Leado trade mark in respect of door closers in Hong Kong.  In 1999, the plaintiff confirmed in writing that the defendant was the sole distribution agent of Leado door closers in Hong Kong and the Mainland.

3. In November 1999, the plaintiff demanded the defendant to assign the Leado trade mark to it.  On 28 January 2000, the defendant executed an assignment in writing to the plaintiff in the following terms (“the 2000 Assignment”) :

“	(The defendant), the owner of the right, title and interest under the trade mark ‘Leado LD’ registered in Hong Kong … hereby assigns and transfers the entire right, title and interest to (the plaintiff).
	(The defendant hereby affirms the assignment and hereafter executes all lawful documents and papers which may be necessary to complete the assignment to the (plaintiff).”

4. In June 2000, the plaintiff terminated the distributorship under the 1989 Agreement pursuant to the provisions therein by reason of the sales falling below 10,000 sets per year.

5. Thereafter, the plaintiff attempted to procure the transfer of the trade mark at the Trade Mark Registry in Hong Kong but was unable to do so because the 2000 Assignment did not include the transfer of the goodwill of the business.

6. In February 2001, the plaintiff demanded the defendant to execute a formal assignment (backdated to 28 January 2000) for the trade mark together with the entire goodwill of the business relating to the subject goods.  The defendant never executed this.

7. In September 2003, the defendant alleged for the first time that the assignment of the trade mark in Hong Kong was subject to an oral agreement that the plaintiff would continue to recognize the defendant as its exclusive distributor in Hong Kong.

8. The plaintiff claims against the defendant two primary relief :

(1)	rectification of the Trade Mark Register by replacing the defendant’s name with the plaintiff’s name;
(2)	passing off by the defendant.

Relevant principles

9. The relevant principleson security of costs are set out in the judgment of Peter Gibson LJ in Keary Development Ltd v. Tarmac Construction Ltd [1995] BCLC 395, 400g to 401h, [1995] 3 ALL ER 534, 539-540, as adopted and summarized in Wing Hing Provision, Wine & Spirits Trading Co. v. Hanjin Shipping Co. Ltd [1998] 2 HKC 461 per Godfrey JA (as he then was) at 539-540 :

“	1.	The court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.
	2.	The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.
	3.	The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.
	4.	In considering all the circumstances, the court will have regard to the plaintiff company’s prospects of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.
	5.	The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.
	6.	Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.”

10. In Porzelack KG v. Porzelack (UK) Ltd [1987] 1 WLR 420, Sir Nicholas Browne-Wilkinson VC stated at 423 D to F :

“	This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action.  I do not think that is a right course to adopt on an application for security for costs.  The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence.  A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.
	Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance.  Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed.  But for myself I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.”

11. In the present case, there is common ground that :

(1)	the plaintiff is ordinarily resident in Taiwan;
(2)	there is no asset within the jurisdiction;
(3)	there is no evidence that the plaintiff’s claim will be stifled by an order of security for costs.

12. Hence, I shall consider whether the plaintiff can clearly demonstrate that it stands a high degree of probability of success.

Defendant’s argument

13.  Mr Pao for the defendant submitted that in order to succeed on either rectification or passing off, the defendant needs to prove that it has goodwill over the subject goods in Hong Kong.

14. Mr Pao submitted that as at the date of the 2000 Assignment, the applicable law was the now repealed Trade Marks Ordinance (Cap.43).  Under section 41 of Cap.43 :

“	(1)	Notwithstanding any rule of law or equity to the contrary, a registered trade mark relating to goods shall be, and shall be deemed always to have been, assignable and transmissible either in connection with goodwill of a business or not.
		…
	(4)	Notwithstanding anything in subsections (1), (2), (3), a trade mark shall not be, or be deemed to have been, assignable or transmissible in a case in which as a result of an assignment or transmission there would in the circumstances subsist, or have subsisted, whether under the common law or by registration, exclusive rights in more than one of the persons concerned to the use, in relation to ―
		(a)	the same goods;
		(b)	the same description of goods; or
		(c)	goods and services or descriptions of goods and services which are associated with each other,
		of trade marks nearly resembling each other or of identical trade marks, if, having regard to the similarity of the goods or the association of the goods and services or descriptions of goods and services, and to the similarity of the trade marks, the use of the trade marks in exercise of those rights would be, or have been, likely to deceive or cause confusion: Provided that, where a trade mark is, or has been, assigned or transmitted in such a case as aforesaid, the assignment or transmission shall not be deemed to be, or to have been, invalid under this subsection if the exclusive rights subsisting as a result thereof in the persons concerned respectively are, or were, having regard to limitations imposed thereon, such as not to be exercisable by two or more of those persons in relation to goods to be sold, or otherwise traded in, within Hong Kong (otherwise than for export therefrom), or in relation to goods to be exported to the same market outside Hong Kong.
		…
	(6)	Where an assignment in respect of any goods of a trade mark that is at the time of the assignment used in a business in those goods is made on or after the commencement of this Ordinance otherwise than in connexion with the goodwill of that business, the assignment shall not take effect until the following requirements have been satisfied, that is to say, the assignee must, not later than the expiration of 6 months from the date on which the assignment is made or within such extended period, if any, as the Registrar may allow, apply to him for directions with respect to the advertisement of the assignment, and must advertise it in such form and manner and within such period as the Registrar may direct.”

15. Mr Pao referred to Kerly’s Law of Trade Marks (12^th Ed., 1986) at 13-13 on section 22(4) of the Trade Mark Act 1984 (UK), which is in pari materia with our section 41(4) :

“

Section 22(4) invalidates all transactions which would result in concurrent exclusive rights for two or more of those concerned in the transaction to use in the United Kingdom similar or identical marks, on the same or similar goods or services, if the exercise of those rights would be likely to deceive or cause confusion.  No doubt the primary function of the subsection is to exclude assignments to different assignees of confusingly similar marks, or assignments of a mark to different assignees for different but similar things; but it also serves to prevent an assignment which would leave the assignor with an exclusive common law right to the use of the mark…”

16. Mr Pao submitted that the 2000 Assignment was invalid in law to assign the trade mark to the plaintiff because it does not assign the goodwill of the business relating to the subject goods.  Also, the assignment shall not take effect by reason of the lack of advertisement.  Mr Pao pointed out that in the 2000 Assignment and all the correspondence up to February 2001, the plaintiff never referred to the assignment of the goodwill.

17. Further, even after the assignment, the defendant still has concurrent right, at least in the form of contractual right under the 1989 Agreement, to use the trade mark in Hong Kong.  The distribution agreement was only terminated in June 2000.  The situation was exactly what section 44(4) sought to exclude.

18. Mr Pao referred to Scandecor Development AB v.  Scandecor Marketing AB & anor [1990] FSR 26, 38-39 on the vexed problem of the ownership of goodwill where the relationship between an overseas manufacturer and the local distributor comes to an end :

“	The local company may use the same marks in the territory as the foreign company uses in other territories both in its corporate name and in relation to its products and services.  No problems are likely to occur while the local subsidiary, distributor, agent or licensee company is a member of the same group or is bound by a contractual arrangement containing provisions governing the use of the mark.  Difficulties, like those in the present case, are likely to arise when the corporate or the contractual connection is severed and there are no express post-termination contractual provisions designed specifically to regulate the future use of the mark in the local territory.  Who is then entitled to use the mark in relation to goods or services or in the corporate or trading name?
	The legal response is that this problem, if not solved by agreements, is ultimately soluble only by a factual inquiry with all the disadvantages of the length of its duration, the cost of its conduct and the uncertainty of its outcome.  There are no quick, cheap or easy answers to be found in hard and fast legal rules, in binding precedents or in clear-cut factual and legal presumptions.”

19. Mr Pao submitted that the goodwill concerning Leado door closers was built up by the hard work of the defendant for over 10 years.  It is not inconceivable that the defendant would not give it up for nothing.

20. As a fall back, Mr Pao also referred to the oral agreement which makes it inequitable for the plaintiff to enforce the 2000 Assignment without honouring the oral agreement.

Plaintiff’s argument

21. Mr Wong for the plaintiff submitted that, upon its proper construction, the 2000 Assignment was an assignment of the registered trade mark with the accompanying goodwill.

22. Mr Wong referred to Wadlow on The law of Passing-off (3^rd Ed., 2004) at 3-155 :

“

An assignment of goodwill does not have to be in writing or any particular form, and need not mention goodwill by name.  A transaction intended to assign a business as a whole necessarily passes the goodwill to the assignee.  A transaction which purports to deal with specific brands or marks may be interpreted as dealing with the goodwill of the business in which they are used.  It should be remembered that in construing commercial agreements the golden rule is to give effect to the common intention of the parties as expressed in the words they have chosen to use, and to that extent, words such as ‘goodwill’ may be used in a variety of ways at variance with their strict legal meaning…”

23. Mr Wong pointed out that the words used in the 2000 Assignment are “the entire right, title and interest of the trade mark”, and the defendant agreed to “execute all lawful documents and papers which may be necessary to complete the assignment to (the plaintiff).”  Although it might not be couched in strict legal terms, it was good enough in layman’s terms.

24. Mr Wong submitted that the intention of the parties must have been to give full legal effect to the assignment but not for it to be invalid, and if goodwill on the part of the plaintiff were required for the transfer of registration, the intention must be that goodwill be also assigned.

25. As for the situation that after the purported assignment, the fact that the defendant remained the sole distributor in Hong Kong must mean that there was an implied licence granted by the plaintiff to the defendant to deal with the trade mark in Hong Kong for so long as the 1989 Agreement were on foot and not otherwise terminated pursuant.

26. Mr Wong submitted that the situation here is different from the one envisaged in Scandecor because there was the 2000 Assignment.  The plaintiff stands a high probability of the court interpreting the 2000 Assignment as including the assignment of the goodwill, and ordering the transfer of the registration.  By the same token, the plaintiff has the requisite goodwill to commence a passing off action.

Consideration

27. Both parties proceeded on the basis that that assignment of goodwill to the plaintiff is necessary for both registration and passing off, and there is otherwise no evidence of the relevant goodwill being reposed in the plaintiff.

28. I will first deal with the oral agreement.  Mr Wong seek to attack it as a belated invention and inconsistent with contemporaneous documents.  Be that as it may, as clarified by Mr Pao, the oral agreement was no more than continuation of the 1989 Agreement, which is liable to be terminated.  The termination was pursuant to the mechanism in the 1989 Agreement.  Hence, it seems that the oral agreement does not really amount to any agreement not to terminate the 1989 Agreement.

29. I note that in the 2000 Assignment, the defendant agreed to execute all lawful documents and papers which may be necessary to complete the assignment.

30. If the parties had been properly advised as to the effect of section 41(4) of Cap.43, then they must have intended to assign the goodwill of the business as well in order to give effect to the 2000 Assignment in transferring the registration.  On the other hand, they might have been ill advised and only intended the assignment of the trade mark without the goodwill, which would then unbeknown to themselves render the 2000 Assignment ineffectual.  I note that the 2000 Agreement on its face was not handled by lawyers.

31. Further, the 2000 Assignment did not seem to come as a clean break for the parties, which might otherwise suggest the defendant giving everything back to the plaintiff.  The 1989 Agreement was just confirmed in 1999, and was only terminated six months after the 2000 Assignment for reasons of falling sales.

32. Without evidence forming the factual matrix at the relevant time, it is difficult to determine the relevant state of mind of the parties.  At any rate I am not conducting a mini trial on incomplete evidence.  Perhaps the plaintiff might eventually succeed at the trial, but at this stage, I fail to see it being clearly demonstrably so.

Conclusion

33. In the premises, I have allowed the appeal.  The amount of $140,000 up to discovery was agreed and allowed.

34. I have made an order that costs here and below be to the defendant in any event.

35. I thank Mr Wong & Mr Pao for their helpful submissions.