Cautionary tale involving letters of undertaking: Gap’s woes in Hong Kong

In a recent copyright infringement claim brought by Morn Creations Limited (MCL) against Gap Limited, the Hong Kong High Court examined the proper relief in copyright infringement cases where liability has been established. Gap initially filed a defence, which was subsequently withdrawn. Gap also acknowledged that MCL was at liberty to enter default judgment but reserved the right to contest applications for specific orders, including injunctive relief, damages and costs.

Gap relied on a letter of undertaking to argue that an injunction should not be granted. Gap argued that the letter of undertaking had offered everything that MCL sought by way of injunction. The letter of undertaking was issued around two-and-a-half months after Gap withdrew its defence. Notwithstanding the withdrawal of the defence (which effectively amounted to the admission of MCL’s claims), the letter of undertaking offered was expressed to be issued on a 'without admission of liability' basis. The terms 'alleged copyright' and 'alleged infringement' were also used to qualify the allegations of subsistence of copyright and copyright infringement.

The court held that the letter of undertaking was insufficient to resist the injunction application. The court took the view that the letter of undertaking was intentionally drafted in order to reserve arguments of MCL’s copyright and Gap’s infringement. Therefore, it did not amount to a clear and unequivocal offer to MCL. The court also considered that the letter of undertaking was too late, as it was provided only in response to MCL’s default judgment application, and 15 months after the issue of the writ by MCL.

Comment
This case highlights the importance of having a well-thought-out and consistent strategy in trying to negotiate for settlement. Once a party decides to admit liability, it should not put forward any offer which qualifies the liability after the liability has been admitted or established. Such offer is unlikely to be regarded as an unequivocal offer, and does not help to resist formal penalties being granted against the liable party.

The case is also a reminder of the practical implications of using without prejudice correspondence, which must be considered when negotiating a settlement. In this case, Gap also tried to rely on various offers of undertaking made in the form of without prejudice correspondence to resist injunction applications. However, given that the correspondence was issued on without prejudice basis, it was privileged and inadmissible, and could not be relied on to show that reasonable offers had been made. While without prejudice correspondence facilitates the open and frank settlement negotiations, using it blindly may have an undesirable adverse effect. In appropriate circumstances, settlement offers may have to be communicated through the use of open letters in order to protect its position.