Asia Television Ltd v Yau's Entertainment Pty Ltd

Option 8 The option to renew was conditioned upon the giving of "written notice of not less than six months prior to the expiration" of the licence. Yau's were thus required to provide written notice to exercise the option no later than 30 November 1999. No notice, either written or oral, was provided by Yau's in purported performance of that condition. It is submitted for ATV/ATVE that, given Yau's election to treat the licence as continuing, Yau's remained under an obligation to carry out the agreement if it wished to avail itself of the option, but it did not do so. 9 Counsel for Yau's submitted that Yau's were excused from performing the condition because ATV/ATVE had expressly or impliedly intimated that performance of the condition would be futile, citing RM Stonham, The Law of Vendor and Purchaser, Law Book, Sydney, 1964, at 692 footnote 55; Mahoney v Lindsay (1981) 55 ALJR 118, (1980) 33 ALR 601; Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 246-247; Foran v Wight (1989) 168 CLR 385 at 395-396, 419-422, 433-434 and 456-457; and CFA Group Services Pty Ltd v Mars Trading Pty Ltd [2001] NSWSC 112 (Rolfe J, 8 March 2001), unreported, pars 127-161. 10 It is submitted in reply to this, on behalf of ATV/ATVE, that those authorities are distinguishable. In Turnbull, the defendant refused to supply the product which was the subject of the agreement, whereupon the plaintiff accepted that repudiation and terminated the agreement. In CFA, the plaintiffs issued a notice of termination, thereby accepting that the contract was at an end. Failing to turn up to a settlement of a conveyancing transaction to evidence readiness and willingness to complete (as in Mahoney v Lindsay and Foran v Wight) is not to be likened to the failure to fulfil a mandatory condition precedent. 11 In the present case, there was no evidence that the issue was adverted to between the parties, notwithstanding that there was an interim regime agreed between them. In circumstances where ATV/ATVE were steadfastly maintaining the position that the licence had been terminated, and had entered into a licence with another licensee, it seems to me that it did impliedly indicate to Yau's that it was useless for it to purport to exercise an option contained in an agreement which was said to have been terminated and where ATV/ATVE clearly would not enter into the renewed term. The authorities relied upon by Yau's, particularly Mahoney v Lindsay, are in point. 12 The option to renew included the following: 'The Licence Fee for the renewed term shall be increased by not more than 10% of the License Fee for the 3rd Licence Year and shall be agreed upon at least four months before the expiration of this Agreement.' 13 It is submitted by ATV/ATVE that this was an essential term of the licence, and that there could be no valid exercise of the option until the licence fee to be paid had been agreed. This was never done. This was either a condition precedent to the formation of a binding agreement (Masters v Cameron (1954) 91 CLR 353 at 360) or amounted to an unenforceable agreement to agree (Stocks & Holdings (Constructors) Pty Ltd v Arrowsmith (1964) 112 CLR 646 at 650; Randazzo v Goulding (1968) Qd R 433; and Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604). 14 Yau's first answer was that the substance of the clause, upon its proper construction, was that there would be an increase of ten per cent in licence fee absent an agreement for a lesser increase, and that the opportunity to negotiate the increase down was a contractual right which operated solely for the benefit of Yau's, which could be waived by it. Counsel for Yau's referred to a line of cases, most of which are referred by Young CJ in Eq in Bedroff Pty Ltd v Rennie [2002] NSWSC 928 at [25]-[32]. I agree that the proper construction of the clause is that, in the absence of agreement to an increase of less than ten per cent, then the licensee could renew on the basis of a ten per cent increase. 15 The evidence on behalf of Yau's was that it would have exercised the option. The evidence did not expressly deal with renewal at the increased rate of licence fee. In a sense, the issue is hypothetical. I am satisfied that the importance of the licence to Yau's was such that it would have exercised the option to renew even if the licence fee for the renewed period were increased by ten per cent. 16 The second basis which was put forward on behalf of Yau's for overcoming the argument was that there was an agreement to negotiate in good faith which was binding. I need not deal with that rather more ambitious argument. 17 The result is that damages should be assessed upon the basis that the licence would have run its full term and would then have been renewed for one year, the renewal being on the basis of a ten per cent increase in the licence fee.

Further Renewal 18 The next question is what assumption should be made as to renewal of the licence beyond that period. Counsel for Yau's submits that the chance of further renewals must be evaluated, and, in doing so, ATV must be presumed to behave as a rational, economic actor. It is submitted that as it would have been to ATV's commercial advantage to have agreed to such renewals, the chances of that happening must be evaluated as strong (Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 especially at 94) as since 1988 ATV/ATVE had no reasonable alternative to Yau's as its Australasian distributor, particularly having in mind its established distribution network. Chinatown would not have been a rational economic choice, given the previous findings (see [2001] FCA 254 at [19]-[22]). 19 Counsel for Yau's relied heavily upon the decision of the High Court in Amann Aviation in support of that submission. In my view, that decision does not assist Yau's in the present case. The basis of the High Court decision was a grant of reliance damages, rather than expectation damages. This made a fundamental difference to the onus of proof (per Mason CJ and Dawson J at 86-94, per Brennan J at 108, 111-112, 115, per Deane J at 130-131 and per Gaudron J at 155-156). Furthermore, the facts in Amann Aviation were most unusual. An extract from the judgment of Brennan J (at 111) will indicate the general nature of those facts: 'A contract for coastal surveillance had been let by the Commonwealth from time to time and there was nothing to suggest that the Commonwealth had any intention of undertaking itself the task of coastal surveillance. It was a specialized service calling for costly capital equipment, notably aircraft, with little remainder value for any other use. Amann had tendered in competition with Skywest Airlines Pty Ltd ("Skywest") and Skywest had threatened to dispose of its aircraft if Amann were permitted to continue the surveillance service after 12 September 1987. Skywest would probably have carried out its threat if the Commonwealth had not given Amann notice of termination on 12 September 1987. The commercial position was such that any successful tenderer who performed the contract for the stipulated period (three years) would be in a strong, if not unassailable, position to become the successful tenderer for a surveillance contract for the following period. Indeed, the pressure which Skywest was able to bring to bear to secure re-engagement despite having failed in its tender demonstrates the commercial advantage possessed by a contractor who is equipped to provide and has been providing the service.' 20 In the Full Court (Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527) Burchett J (who examined the facts most closely) said (at 573-574): 'While the contract was for a quite short term (three years of operations), it required a vast expenditure on highly specialised equipment, as well as on the setting up of bases, a great proportion of which, as the valuation evidence convincingly demonstrated, could never be recovered unless further coast watch contracts were obtained. Failing a further contract, what would be required to show a profit would be the amortisation of over 80 per cent of the cost of the aircraft in three years. Plainly, the parties did not contemplate that. The arithmetic of the contract is conclusive. What made the contract a commercial venture, though quite apparently one not without risks, was the prospect of renewal at the end of three years. The very uniqueness of the operations, and of the aircraft required for their performance, would confer a great advantage, in any tendering process in three years' time, upon an operator with the appropriate experience, organisation, aircraft and other equipment. The events which led to the present case, and the ultimate triumph of the former contractor, only serve to underline what was in any event obvious. Had the appellant succeeded in replacing that contractor, it would have been in an extremely strong position.' Indeed, it is difficult to discern the shape of the case as it was on appeal from what appears to be a careful account of the trial (Amann Aviation Pty Ltd v Commonwealth (1988) 100 ALR 267). In my opinion, it is unsafe to generalise from the very special facts in Amann Aviation to the present case. 21 The evidence on behalf of ATV/ATVE is that it would not have renewed or extended the licence on any basis. Although evidence of that character has to be viewed with caution because of its ex post facto nature, it clearly accords with the commercial realities of the situation. There is no doubt that trust and the commercial relationship between the parties had broken down. In [2000] FCA 254 I sketched the history of dealings between the parties from December 1997 onwards ([10]-[40]; see also [44]-[46], [55]). By the time of the purported termination, Yau's view was that ATV/ATVE was not properly carrying out its obligations under the agreement in relation to the supply of programmes, but rather than test the matter legally, resorted to what amounted to pirating as a response. ATV/ATVE clearly wished to replace Yau's with Chinatown, and did so shortly after the purported termination. It will be borne in mind that Chinatown had been a licensee in relation to the Fee Tang product since at least March 1998. ATV/ATVE had failed to co-operate with Yau's in restraining apparent breaches by Chinatown of intellectual property rights licensed to Yau's. As appears from [75] and [77] of [2000] FCA 254, I was satisfied that, although the breaches were not a pretext for terminating the relationship in order to install Chinatown Entertainment as licensee, ATV had had an eye to that possibility for some time. 22 In addition, it is also relevant to take account of the change of production policy on the part of ATVE discussed at [47]-[65] in [2000] FCA 254. Whilst I found that this policy involved a breach of the then current licence agreement, it may be safely concluded that any renewed licence would have been offered on terms which accorded with that policy. Both the contemporaneous correspondence and the evidence led by Yau's was to the effect that a licence on terms of that policy would not be economically viable. Thus, even if, contrary to my view, there was a real chance that there would be a renewal of the licence, there is no basis for concluding that it would have been offered on terms acceptable to Yau's. In my opinion, there was no real chance of renewal of the licence beyond the period for which ATV/ATVE was bound. It was determined to end the relationship, and there was no reason why it could and would not do so as soon as it was free to do so. In my view, this leg of the argument has no merit.

Terms of Settlement 23 Another issue of principle which arises is the effect of the interim arrangement during the litigation. The terms of settlement, dated 21 May 1999, were as follows: 1. From today and until the final resolution of these proceedings at first instance (the interim period), ATV Enterprises Ltd will simultaneously supply to Yau's Entertainment Pty Ltd and Chinatown Entertainment (Australia) Pty Ltd all video programs that are the subject of Chinatown Entertainment's licence. 2. Chinatown Entertainment shall be liable to ATV Enterprises for the payment of all instalments of the licence fee that fall due under Chinatown Entertainment's licence during the interim period. 3. During the interim period, Yau's Entertainment will not distribute, or authorise or allow the distribution of: 3.1 any ATV or ATVE video programs; or 3.2 any video programs, cases, inserts, labels, posters or other visual or graphic materials using the name ATV or ATVE, whether in English or Chinese, or the ATV logo unless the video programs are or have been supplied by ATVE to Yau's Entertainment and the other items referred to are associated with such programs. 4. The parties will not make any claim or bring any proceedings in respect of anything done during the interim period pursuant to these terms or in respect of any right or entitlement they might have had in respect of the interim period if they had not entered into these terms; but this does not prevent them from making claims or bringing proceedings to enforce these terms. 5. Any party may terminate the agreement contained in these terms by written notice if any other party seeks to vacate the proposed hearing, seeks an adjournment of it or if, in the first-mentioned party's reasonable opinion, any other party is causing unreasonable delay to the prompt hearing and determination of these proceedings. 6. Costs of the interlocutory proceedings to date to be costs in the cause.' 24 It is submitted for ATV that par 4 of the terms of settlement bars any claim for the period between 21 May 1999 and 10 March 2000 (inclusive). It is submitted for Yau's that the language of par 4 is not sufficiently explicit to deny recovery of profits lost during the period. It is submitted that par 4 of the terms of settlement speaks prospectively, and that the then existing cross-claim was wide enough to encompass the claims for loss of profits now made and so is not barred. 25 In my opinion, when the terms of settlement are construed as a whole, it is quite clear that par 4 is intended to bar claims for damages flowing from the disputed termination of the licence agreement during the interim period, the principal example of which would be the claim for loss of profits now pursued. The agreement was, after all, an interim compromise at an early stage of litigation. Yau's surreptitious conduct had been detected and used as the basis for termination. Yau's could not have been over-confident of success. The compromise involved Yau's obtaining a continued supply of product during the interim period without charge which it otherwise would not have obtained, albeit with competition from Chinatown.

Assessment of Damages 26 I reject the principal basis upon which the claim for damages was propounded, namely, that the wrongful termination of the licence had effectively destroyed the video business conducted by Yau's, and that damages should be assessed as the value of the business, including goodwill (together with certain consequential losses). Expert evidence was led in order to quantify that amount. The basis for the claim was that ATV/ATVE and Yau's would have continued to renew the licence. I have found to the contrary. 27 The result is that the claim for damages is effectively for loss of profits for the period 7 April 1999 to 20 May 1999, and 11 March 2000 to 31 May 2000, together with the twelve month option period. The proper assumption as to the supply of product by ATV/ATVE during this period is that it would be provided in accordance with the obligations under the licence agreement as I construed them in [2000] FCA 254 at [47]-[65]. 28 Yau's called evidence from Ms Jennifer Exner ("Exner"), a partner of Ernst and Young, accountants. At the time of giving evidence, she had had more than eighteen years' experience in the accounting profession, for the last thirteen of which she had specialised in providing valuation services to privately owned and operated businesses, and had considerable experience in assessing loss of profit claims, and like claims, for the purposes of litigation. She assessed the loss of profits for the balance of the licence period as $440,257 and for the option period as $486,671. She based her opinion upon books and records of Yau's, including financial statements and copy tax returns, which were provided by Joseph Leung, a chartered accountant who acted as accountant for Yau's, and who gave evidence. 29 ATV/ATVE called Mr Wayne Lonergan ("Lonergan"), also a chartered accountant, to challenge various aspects of the evidence of Exner. Lonergan at the time was an Adjunct Professor with the School of Economics and Business at the University of Sydney, having had over thirty years' experience in corporate finance and valuations. He had had extensive experience in assessment of loss of profits for litigation and other purposes. He expressed the opinion that no loss has been established, and that, even upon the most optimistic assumptions, the maximum pre-tax loss of profits would not exceed $41,000 for the licence period and $71,000 for the option period. 30 Both Exner and Lonergan are well qualified. Each was cross-examined, although the major part of each cross-examination related to the failed claim for a capital loss. Based upon the evidence of Lonergan, I am satisfied that adjustments need to be made to Exner's assessment of loss of profits to deal with at least the following: (1) The terms of settlement period. (2) The increase in licence fee for the option period. (3) Allocation of expenses between the video and cinema businesses. I cannot be satisfied that Exner's allocation was appropriate. That allocation depended upon instructions received by her which were ex post facto with the litigation on foot. There is substance to the criticisms by Lonergan. (4) The treatment of income from video sources other than ATV/ATVE. 31 On the other hand, I am not prepared to find that the business of sub-licensing the ATV/ATVE tapes was not, and would not continue to be, profitable for the relevant period. The video business had been carried on for some years, and Yau's desired to continue to do so. There was no reason to do so at a loss. It was the best judge of profitability. On the other hand, continuing to incur a loss on the cinema business can be explained for real estate and other reasons. 32 I am unable to arrive at a precise calculation for any one of these adjustments, still less for them in combination. Indeed, the competing calculations by the experts give an exaggerated view of the precision of the exercise being undertaken, which, of necessity, involves a large degree of estimation of imponderables. Taking all things into account, I estimate the pre-tax loss of profit for the unexpired portion of the licence period, less the interim period, as $75,000 and the pre-tax loss of profit for the option period as $175,000.

Copyright Damages 33 The other contentious issue is the claim by ATV/ATVE for damages pursuant to s 115(4) of the Copyright Act 1968 (Cth). In Asia Television Ltd (No 3) [2001] FCA 811, I awarded damages of $11,700 pursuant to that section, which, when combined with other amounts, led to judgment in the sum of $24,960. In Yau's Entertainment [2002] FCAFC 78, the Full Court set aside that order and the matter was remitted to me "for determination of the quantum of ATVE's monetary claim against the appellant in the light of these reasons". 34 The relevant part of the judgment was as follows (at [87]): 'The parties argued this appeal on the implicit assumption that the resolution of the issue as to the validity of the termination of the letter agreement would resolve ATV's monetary claim, although if the termination was found to be invalid, that would leave outstanding Yau's cross claim for damages for breach of contract. In particular, counsel for ATV/ATVE did not argue on the hearing of the appeal that the finding of infringement of copyright in respect of the films "Flaming Brothers" and "Forest Cat II" could be sustained if it were found that the termination of the letter agreement was invalid. However, as the damages under s 115(2) of the Copyright Act 1968 (Cth) were assessed upon the basis of a licence fee approach, it would seem to follow that the sum of $11,700 would, in any event, be payable pursuant to the letter of agreement in relation to the reproduction of these films. The Full Court was not provided with any submissions on this question, but it is a matter which needs to be addressed and, for that reason, the amount of ATVE's monetary claim against Yau's should be remitted to the primary judge for determination in the light of these reasons. However, the award of damages pursuant to s 115(4) of the Copyright Act 1968 (Cth) should be set aside.' It is difficult to understand this passage. It is not at all clear what monetary claim was remitted. I should note that a partial practical answer seems to have been agreed between the parties which will effectively leave intact that part of the order of 29 June 2001, apart from the damages pursuant to s 115(4). However, the ordinary meaning of the passage would fairly clearly lead to the conclusion that the monetary claim which was remitted did not include any award of damages pursuant to s 115(4). 35 The difficulty arises because the breaches of copyright for which damages were awarded did not depend upon the validity of the purported termination of the licence. Yau's admitted unauthorised use of material in which copyright existed taking place side by side with receipt of the copyright material pursuant to the successive licences and which continued after the purported termination. The particular (and very limited) breaches which, in the end, were agreed to be the basis for the assessment of damages did not involve any material supplied to Yau's pursuant to the licence. It was the result of self-help by Yau's. As appears from [2001] FCA 811 at [1], that infringement was expressly claimed in relation to episodes not supplied under the licence agreement. That was consistent with the pleadings and was the foundation for the award of damages pursuant to both s 115(2) and s 115(4) of the Copyright Act. The termination, or non-termination, of the licence was irrelevant to that claim. It is difficult to understand how there could have been any implicit assumption in the Full Court to the contrary of the pleadings and of the express claim made and dealt with in [2001] FCA 811. Indeed, there was no appeal from the award of damages pursuant to s 115(2), which could only have been founded upon the identified breach of copyright. It is difficult not to conclude that the Full Court must have misunderstood the position. If so, the result is that the award of damages pursuant to s 115(4) was set aside by mistake. The immediate question is whether the issue was remitted to me for further hearing. In my opinion, it was not. As I have said, the language of the Full Court is inconsistent with that conclusion, and remission would be inconsistent with the apparent view of the Full Court that the finding of infringement of copyright was negated by the finding that the licence had not been validly terminated. In any event, this issue was taken up with the Full Court after judgment, which declined to take any further step (Yau's Entertainment Pty Ltd v Asia Television Ltd [2002] FCAFC 378 at [5]-[7]). I cannot comment upon the stated basis for that ruling. All I can say is that it is anomalous that a straightforward award of damages pursuant to s 115(4) has been set aside without any relevant reason.

Conclusion 36 The proceeding will stand over to enable minutes of order to be brought in (and debated if necessary) to give effect to these reasons, which should deal with all outstanding issues in the case and include all orders necessary to bring this proceeding to a close. Yau's should serve draft minutes of order upon ATV/ATVE within seven days of this order, and ATV/ATVE should respond within seven days after service upon it, with reasons for any disagreement. Yau's should respond to any such reasons within seven days after receipt of them. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Counsel for the Applicants: RJ Ellicott QC, JS Drummond

Solicitor for the Applicants: Allens Arthur Robinson

Solicitor for the Respondent: Frank Low Yeung & Co

Date of Hearing: 17, 18, 19 December 2002, 12, 13 February 2003