QB Net Co Ltd v Earnson Management (S) Pte Ltd and Others

• Jurisdiction: Singapore
• Judge: Lai Siu Chiu J
• Judgment Date: 17 October 2006
• Neutral Citation: [2006] SGHC 183
• Docket Number: Suit No 653 of 2005
• Date: 17 October 2006
• Published date: 19 October 2006
• Year: 2006
• Plaintiff Counsel: Andy Leck, Daniel Chia and Geoffrey Liem (Wong & Leow LLC)
• Citation: [2006] SGHC 183
• Defendant Counsel: Sukumar Karuppiah and Adrian Kwong (Ravindran & Associates),Alban Kang, Koh Chia Ling and Joyce Ang (Alban Tay Mahtani & de Silva),Mark Lim and Leong Kit Wan (Tan Peng Chin LLC)
• Court: High Court (Singapore)
• Subject Matter: Tort,Whether conspiracy existing,Whether goodwill attaching to plaintiff's services,Whether breach of confidence existing,Whether use of information by defendants unauthorised,Whether defendants misrepresenting themselves as commercial source of services in question,Conspiracy,Whether information communicated in instances importing obligation of confidence,Whether plaintiff's information in question confidential nature,Whether intent to injure existing,Whether plaintiff's goodwill damaged as consequence,Whether inverse passing off taking place,Confidence,Passing off,Whether damage to plaintiff existing,Whether combination or agreement between two or more defendants existing

17 October 2006 Judgment reserved.

Lai Siu Chiu J:

Introduction

1 This case concerned an action brought by the plaintiff against three defendants for inverse passing off, breach of confidence and a conspiracy to injure the plaintiff.

2 The plaintiff, QB Net & Co Ltd, is a Japanese company which operates and offers licences to operate ten-minute haircut salons trading as “QB House”, “QB Shell” and “QB Shell-type” in a few countries worldwide (including Singapore). The plaintiff first commenced its chain of ten-minute haircut salons in Japan in 1996, and appeared to be the first in the world to introduce a “no-frills” salon where a customer could get a quick haircut in ten minutes and at a low cost of ¥1,000. The plaintiff had achieved this by analysing each step in the process of cutting hair, and eliminating the time or resource-consuming steps. Thus, for instance, the plaintiff’s hairdressers did not take reservations or accept cash. Instead, payment was made via a ticket-vending machine. The plaintiff also did not shampoo customers’ hair after a haircut, preferring to use a special vacuum cleaner (called the “Air Wash”). Additionally, the plaintiff monitored traffic at each of its outlets in real time over the Internet.

3 In mid-2000, the second defendant, Koki Matsuda, came across “QB House” haircut salons while on a trip to Tokyo. He was intrigued by the plaintiff’s “no-frills” concept and decided to obtain a franchise from the plaintiff to operate “QB House” haircut salons in Singapore.

4 QB House Pte Ltd (“QBHPL”) was thus set up to operate the “QB House” outlets in Singapore, and QBHPL entered into a licence agreement with the plaintiff on 7 December 2001 (“the First Licence Agreement”). The directors of QBHPL were the second defendant, Masao Konno and Suwandi Kojodjojo. Under the First Licence Agreement, the plaintiff granted QBHPL the right to operate haircut salons in Singapore and Malaysia under the trade names “QB House” and “QB Shell”, and to adopt the plaintiff’s QB House system, QB House get-up and QB House marks. In return for such rights under the licence, QBHPL paid royalties and licence fees to the plaintiff.

5 The first “QB House” outlet in Singapore was opened at Hitachi Towers in April 2002. Subsequently, QB House Sdn Bhd, a related company of QBHPL, was incorporated on 4 October 2002 to operate haircut salons in Malaysia under an implied sub-licence from QBHPL. The plaintiff also established a fully-owned subsidiary in Singapore on 20 December 2002, known as QB Shell Pte Ltd (now known as QB Net International Pte Ltd).

6 The plaintiff and QBHPL subsequently entered into a Second Licence Agreement on 1 January 2004 (“the Second Licence Agreement”) thereby allowing the latter to operate haircut salons in Singapore and Malaysia under the trade names “QB House” and “QB Shell”. Under cl 8 of the Second Licence Agreement, when QBHPL opened QB House in Singapore, it agreed to pay the plaintiff an initial licence fee of ¥600,000 per shop which would be increased to ¥700,000 per shop between April 2005 and March 2006 followed by a further increase to ¥800,000 per shop from April 2006 onwards. In addition, under cl 9 of the Second Licence Agreement, when QBHPL opened QB Shell in Singapore, it agreed to pay the plaintiff an initial licence fee of S$2,000 per shop which sum would be increased to S$2,250 for the period April 2004 to March 2005 and further increased to S$2,750 from April 2006 onwards. Further, under cl 10 of the Second Licence Agreement, QBHPL agreed to pay the plaintiff a monthly royalty of S$800 per shop which would be reduced to S$400 per shop when the Second Licence Agreement was renewed.

7 The second defendant had acted for QBHPL in the negotiations for both licence agreements. As such, it was common ground that the second defendant was the de facto mind and will of QBHPL at all material times.

8 To support QBHPL, the plaintiff waived a substantial portion of the royalties and licence fees due from QBHPL under the Second Licence Agreement. However, despite the plaintiff’s waiver of the same between April 2002 and March 2004, QBHPL still defaulted in its payments under the Second Licence Agreement. The final payment received by the plaintiff from QBHPL for the month of June 2004 was on 9 September 2004.

9 Sometime around this period, relations between the plaintiff and QBHPL started to sour. QBHPL raised several complaints relating to the plaintiff’s performance under the Second Licence Agreement. Besides alleging that the plaintiff had given inadequate support to its operations, QBHPL felt that the licence fees and royalties under the Licence Agreements were overly high and the cost was bleeding the company.

10 Negotiations were thus conducted between the representatives of QBHPL and the plaintiff, in an attempt to resolve the parties’ differences. The plaintiff and QBHPL then entered into a settlement agreement on 17 November 2004, whereby the second defendant agreed on behalf of QBHPL to make payment of specific sums of money to the plaintiff and QB Shell Pte Ltd (“the Settlement Agreement”).

11 Matters, however, did not end there. In January 2005, Earnson Management (S) Pte Ltd, the first defendant, entered into a sale and purchase agreement with QBHPL (“the S&P Agreement”). Under the S&P Agreement, which was backdated to 1 October 2004, the first defendant acquired the business assets of QBHPL and took over the employment of its employees. The first defendant was a private limited company that had been incorporated by the third defendant in Singapore on 6 October 2004, and its business was described as “franchises of hairdressing shop (including unisex salons)”. The first defendant later commenced its ten-minute haircut business in Singapore on 1 January 2005. Since then, the first defendant has been operating haircut salons in Singapore under the trade name “EC House”.

12 The third defendant was a management consultant who provided corporate-related support, pursuant to which he would assume non-executive directorship in his clients’ companies. The third defendant had been appointed as the first defendant’s sole non-executive director, by virtue of his management consultancy business. The second defendant was appointed a consultant to the first defendant by a letter dated 1 October 2004.

13 On the basis of the above facts, the plaintiff commenced the present action against the defendants for, inter alia:

(a) a claim against only the first defendant for inverse passing off;

(b) breach of confidence by all three defendants; and

(c) conspiracy to injure the plaintiff’s interests.

14 I should point out at this juncture that QBHPL is currently being wound up. In January 2005, the plaintiff had sued QBHPL for trade mark infringement and passing off in Suit No 41 of 2005 (“the Suit”). In that action, the plaintiff obtained an ex parte injunction order against QBHPL. After finding out that the business had been sold in late 2004 to the first defendant, the plaintiff commenced contempt proceedings against the third defendant for the alleged breach of the injunction order. The plaintiff’s application for committal was dismissed with costs.

15 The Suit was brought to an end when the plaintiff brought winding-up proceedings against QBHPL in Companies Winding Up No 59 of 2005 for the unpaid licence fees. QBHPL’s application to strike out the Suit under O 18 r 19 of the Rules of Court (Cap 322, R 5, 2006 Rev Ed) was pending at the time of the winding up and was thus never heard on its merits.

Inverse passing off

16 Inverse passing off has been regarded as an actionable wrong in Singapore, as evidenced in the Court of Appeal judgment in Tessensohn t/a Clea Professional Image Consultants v John Robert Powers School Inc [1994] 3 SLR 308 (“the Tessensohn case”). Inverse passing off is not a nominate tort in its own right but is an example of an actionable misrepresentation to which the normal principles of passing off apply. This is evident from the observations of the Court of Appeal in the Tessensohn case at 316, [25]:

It is clear to us that not only is it passing-off to misrepresent that one’s goods or services were those of another, but it is also passing-off to misrepresent the inverse: that another person’s goods or services are one’s own. The three essential elements of passing-off equally apply to such passing-off as well. Therefore, to succeed in an action for inverse passing-off, a plaintiff must prove that there is goodwill attached to their goods or services; that the defendants misrepresented themselves as the commercial source of the goods or services in question; and that the plaintiff’s goodwill was damaged as a consequence.

17 It was the plaintiff’s contention that all three elements of goodwill, misrepresentation and damage have been made out on the facts. Predictably, counsel for the first defendant took the contrary view and asserted that the tort of inverse passing off was untenable in the present case.

18 Given that all three elements of the tort were the subject of serious contention between the parties, I propose to examine each of the elements in turn.

Goodwill

19 The plaintiff asserted that there was goodwill associated with its name “QB House”, as well as its QB House system and get-up. The first QB House outlet opened at Hitachi Towers in April 2002, and was the first of its kind (ie, a ten-minute express haircut salon) to operate in Singapore. The plaintiff claimed that it had incurred substantial costs in advertising and promoting its QB House system and get-up.

20 In the plaintiff’s advertisements, emphasis had been placed on the name “QB House” as well as the hygienic and efficient methods used by the plaintiff’s hairdressers. Because it was a novelty, QB House turned out to be very successful and received extensive media coverage. As a result, the plaintiff claimed that a great deal of public awareness had been created in relation to...