Hummingbird Music v Dino Acconci and Giulio Acconci

Out-Law Guide | 28 Jun 2010 | 9:34 am | 6 min. read

There is no restraint of trade when a contract ties the parties during the life of the contract and the negative ties are only those which are incidental. To establish a claim of restraint of trade, pleadings must set out very particular reasons.

Hummingbird Music Limited v Dino Acconci and Giulio Acconci

  • CACV No. 40 of 2009 (on appeal from HCA No. 836 / 2007)
  • Judgment of the Court of Appeal (Rogers VP, Le Pichon JA and Stone J) dated 5th January 2010

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Facts

The Plaintiff (Hummingbird) is a music production company and the Defendants are twin brothers who perform as a band called 'Soler'.

In September 2004, Chang Tan, one of the principal shareholders of Hummingbird agreed to invest $400,000 to enable Soler to make their first album, the production of which started the following month with Lupo Groinig (Lupo), another shareholder of Hummingbird, as the producer.

On 1st December 2004, Hummingbird entered into the first Artist Agreement, the first Exclusive Management Agreement and an Exclusive Writer Agreement (collectively, the First Agreements) with Soler. The terms of the First Agreements were based on standard contracts used by Sony Taiwan.

In July 2005, Soler's first album was released and was commercially successful. They received an award by the Composers and Authors Society in November 2005. Soler's second album was released in December 2005.

In April 2006, Hummingbird arranged a concert for Soler at the Hong Kong Coliseum. Although the concert was a professional success, two things happened which adversely affected the parties' relationship. First, because the organizers were required to distribute a large number of free tickets in order to fill the Coliseum, the concert did not raise as much money as anticipated and Soler claimed that they were only given HK$1,300 as opposed to HK$100,000, the amount which they were promised. Secondly, Soler claimed that while the second defendant was checking his stage outfit, Lupo went into the dressing room and told them that he looked "like a $2 whore", which was said to have affected the second defendant's confidence and self-esteem.

Nevertheless, two days after the concert, Soler entered into the second Artist Agreement which annexed an Exclusive Management Agreement (collectively, the "Second Agreements") with Hummingbird. Although the First Agreements would not expire until the end of 2007, the Second Agreements were expressed to run from 1st January 2007 until 31st December 2010. Soler alleged that they were induced to sign the Second Agreements by Hummingbird's undue influence.

After this, the parties' relationship deteriorated and Soler claimed that they had been treated in a demeaning and authoritarian manner. They were also concerned that proper accounts had not been kept for their earnings.

In August 2006, Soler employed their own personal assistant and manager and on the guidance of their manager they rejected some engagements which Hummingbird had obtained for them. In response, Hummingbird, through its solicitors, sent a letter to Soler complaining about their refusal to undertake the engagements. Solicitors' correspondence continued until 1st February 2007 when Soler's solicitors sent a letter to Hummingbird which finally put an end to the parties' co-operation.

In April 2007, Hummingbird commenced an action against Soler for breach of the Agreements. Soler disputed liability on the basis that they were no longer bound by the Agreements because:

  • the Agreements were in restraint of trade;
  • there had been undue influence and/or duress and coercion in respect of the Second Agreements;
  • Hummingbird had been in repudiatory breach of the Agreements.

Judgment

The decision of the Court of First Instance

The trial of the case came before Deputy High Court Judge Carlson on 20th August 2007 who delivered a judgment in favour of Hummingbird on 22nd January 2009.

Carlson DHCJ rejected all Soler's defences. In respect of the defence of "restraint of trade", Carlson DHCJ held that the arrangement between the parties was a joint venture and the parties
were of equal bargaining power. In concluding that the First Agreements are "as a package, fair overall and should be upheld", Carlson DHCJ ruled that the Agreements were not in restraint of trade.

Soler appealed against the decision of Carlson DHCJ on the primary ground that he should have held that the Agreements were in restraint of trade.

The decision of the Court of Appeal (as per Rogers VP)

The Court of Appeal (CA) first remarked that Soler's pleading in respect of their allegation of restraint of trade was wholly defective and should have prevented the point from being considered any further.

In response to Soler's argument that the Agreements were in restraint of trade because they restricted Soler from working for any other manager and from exploiting their works through others than Hummingbird, the CA held that "a contract is not regarded in law as being in restraint of trade simply because it ties the parties during the continuance of the contract." The CA highlighted that a distinction must be made between contracts which are, in effect, in furtherance of trade and those which are in restraint of trade.

Adopting the analysis made by Jonathan Parker J in Panayiotou & Ors v Sony Music Entertainment Ltd [1994] EMLR 229, the CA concluded that in considering whether a contract falls within the legal category of being in restraint of trade, a two stage process should be invoked. The first stage was to draw a line between those contracts which are in restraint of trade whose reasonableness could then be considered and those contracts to which merely regulate normal commercial relations between the parties and therefore were free of the doctrine.

The CA went further and quoted the speech of Lord Pearce in Esso Petroleum v Harpers Garage (Stourport) Ltd. [1968] AC 269:

"…When a contract ties the parties only during the continuance of the contract, and the negative ties are only those which are incidental and normal to the positive commercial arrangements at which the contract aims, even though those ties exclude all dealings with others, there is no restraint of trade within the meaning of the doctrine and no question of reasonableness arises…"

The CA agreed with Carlson DHCJ's finding that the arrangement between Hummingbird and Soler was a type of joint-venture and held that there is no restraint of trade in the Agreements.

In his judgment, Stone J highlighted the importance of pleading sufficient particulars for a claim on restraint of trade where he said "...the restraint of trade is one of those areas in which it is essential to set out in the relevant pleading the very particular matters which are asserted to invoke operation of the doctrine, and thus to apprise the opposing party of the specific reason(s) why it now should be said that the existing contractual obligation is unenforceable as being in restraint of trade."

Commentary

Barristers Mr CY Li and Mr Kenneth Chung, writing for OUT-LAW.COM, comment: In general, the court will not be slow in disallowing issues which have not been properly pleaded to be taken in trial. One of the examples is in relation to the doctrine of restraint of trade.

Without particulars such as which terms of the contract are in restraint of trade and how they restrain the party claiming the doctrine, the court simply cannot draw a line between those contracts in restraint of trade and those which merely regulate normal commercial relations between parties, nor can it consider moving on to the second stage of assessing the reasonableness of the terms as in the two-stage approach adopted by Jonathan Parker J in Panayiotou & Ors v Sony Music Entertainment Ltd [1994] EMLR 229.

Following the implementation of the Civil Justice Reforms in April 2009, it is expected that the importance of proper pleadings will increase.

The two-stage approach in Panayiotou provides a clear starting point for application of the doctrine of restraint of trade. The first stage is to determine whether the contract is one which attracts the doctrine at all. If the court concludes that the contract attracts the doctrine, the second stage is then to determine whether it satisfies the Nordenfelt test of reasonableness and fairness.

In applying the two-stage approach, perhaps the most controversial issue associated with the first stage is where to draw the line as to whether a contract attracts the doctrine of restraint of trade.

Not every contract which ties the parties during the continuance of the contract or requires a party to render services exclusively to another automatically falls within the ambit of the doctrine. Negative ties during the continuance of the contract, which are only incidental and normal to the positive commercial arrangements at which the contract aims, do not attract the doctrine and therefore no question of reasonableness arises.

On the other hand, if the contract ties either party on their trade activities after determination of the contract, it is a restraint of trade and the second stage test shall be applied. The same is true if during the contract one of the parties is so unilaterally fettered that the contract loses its character of regulating and promoting trade and instead acquires the character of restraining it.