The plaintiff, a web portal operator, applied for a summary judgment in Hong Kong against its advertising sales agent, the defendant, in respect of unpaid share of advertising revenues. The revenues were calculated by reference to the level of site traffic computed by certain third party site traffic verification software. The defendant pointed to the apparent inaccuracies in such computations and claimed that it was entitled to an independent audit to verify the site traffic figures and calculate its payment obligation.
The court dismissed the application and opined that on a proper construction of the written agreement between the parties, the defendant was entitled to an audit.
The plaintiff (Sina) entered into an agreement with the defendant (Pixel Media), appointing Pixel Media as its exclusive advertising sales representative for four of its websites, namely www.sina.com.hk, www.sinahk.net, www.mysinablog.com and www.eladies.hk (the Websites) for a period of three years. Pixel Media was to arrange for advertisements to be placed on the Websites, whereas Sina was to maximise user traffic to the Websites. Sina would receive:
- a portion of the gross billings earned from Pixel Media's advertisers; and
- a guaranteed minimum revenue payment (Guaranteed Minimum Payment), if traffic to the Websites achieved 50 million page views a month and unique users of at least 1.7 million a month (Minimum Traffic).
Pixel Media had been making Guaranteed Minimum Payment to Sina for some time, but stopped making payment from December 2011 to January 2013, contending that Sina did not achieve the required Minimum Traffic. Relying on the terms of the agreement, Pixel Media also requested an independent audit to verify the actual user traffic to the Websites. Sina denied the request and applied to the Hong Kong court for, among other things, an order that a summary judgment (without a full trial) in respect of the outstanding Guaranteed Minimum Payment be given in its favour.
In considering the application, the court discussed a number of issues which are of particular relevance to the e-commerce sector: (a) whether under the terms of the agreement, the user traffic figures calculated by a third party software were final and conclusive, and if not, (b) whether Pixel Media had the right to an independent audit of those figures.
The relevant clause
The clause in the agreement relating to the appointment of an independent auditor reads as follows:
" The site performance metrics shall be based on [Sina's] monthly pageview report or by third party site traffic verification software Nielsen/Netratings Site Census or an industry recognized equivalent.  [Sina] shall provide a pageview report to [Pixel Media] on a monthly basis.  The agreed minimum monthly page views for the [Websites] is 50 million and the agreed monthly unique users is 1.7 million in accordance to a third party site traffic verification software from Nielsen/Netratings Site Census or an industry recognized equivalent.  In the event of any dispute in regard to [Sina's] monthly pageview report, independent auditors may be appointed to give second opinion in relation to pageview of the [Websites] and [Pixel Media] shall bear the sole costs and expenses of this exercise.  [Sina] must continue to maintain the monthly page views at 50 million and unique users of at least 1.7 million per month in order to retain marketability to Advertisers.  If in any one month the site performance drops below the minimum amount, the minimum revenue guarantee will be void and actual revenues share shall apply." (underline added) (Relevant Clause)
Arguments of the parties and the court's determination
Pixel Media contended that according to the second sentence of the Relevant Clause and in construing the agreement as a whole, where there was any dispute with any monthly page view report self-produced by Sina or with any site traffic figures calculated by third party software, Pixel Media was entitled to appoint an independent auditor to verify the volume of the actual site traffic.
Sina said that Pixel Media had no such entitlement. It argued that an independent audit only applied to verifying the monthly page view report self-produced by Sina, not report on the site traffic figures produced by Nielsen, a third party software. This was particularly so when the use of such software was agreed by the parties in advance.
Having considered the matter, the court considered Pixel Media's interpretation to be more proper or arguable and rejected Sina's arguments with the following main reasons:
- Sina's interpretation of the Clause was internally inconsistent. It was plain that the page view report referred to in the second sentence of the Relevant Clause could be a report self-produced by Sina, or a report produced by Nielsen or a Nielsen equivalent. Such construction was corroborated by the evidence of Sina's general manager who said that the monthly page view report provided by Sina could be one the three options just described. The reference to "[Sina's] monthly pageview report" in the underlined sentence of the Clause should therefore refer to any of these options.
- Sina's interpretation ignored the commercial object and factual matrix of the agreement. The court took the view that it could not be the intention of the parties in reaching the agreement that Pixel Media would have no right to ask for an audit even when Nielsen's figures were demonstrably flawed or only had such right when the audit was of Sina's own report. On the deficiencies of Nielsen's methodology, the court observed that: (a) there was the inherent weakness of machines that simply blindly did the counting. Even Nielsen itself, back in 2002, had acknowledged that its methodology was becoming unreliable and it overcounted vastly due to "cookie inflation"; (b) there was the possibility of error when tags were placed onto the websites being measured, e.g. by placing tags onto the wrong pages, or by wrongly coding the tag; and (c) there was the possibility of manipulation, e.g. by the use of robots to generate false user traffic, or deliberate modification of the computer code. The court opined that the intention behind the Relevant Clause must have been to confer protection on Pixel Media, which had the payment obligation but not the ability to measure the site traffic itself, by enabling it to seek an independent audit in case it disputed the site traffic claimed by Sina.
- Sina's interpretation wrongly treated Nielsen's figures as final and conclusive against Pixel Media. Absent express wording to that effect in the agreement, the court considered such interpretation to be commercially absurd as it proposed that Sina would be entitled to be paid no matter what the actual site traffic was, and no matter whether Nielsen's figures were demonstrably flawed.
Since the determination of Sina's entitlement to the outstanding Guaranteed Minimum Payment involved consideration of various disputed factual issues, the court considered the case to be inapt for the summary judgment procedure, in addition to the above reasons. It therefore dismissed the application, with the consequence that the case has to go through a full trial.
The case highlights the risk of adopting site traffic figures measured by third party software (or indeed third party service providers) and the importance of having an unambiguous workable contractual mechanism to resolve any dispute over website traffic.
Revenues calculated by reference to website traffic are often the bread and butter of website operators offering advertising services. The volume of website traffic is also a critical yardstick for measuring the respective payment obligations of the parties involved. Unambiguous drafting and careful consideration on the reliability of any third party software or reports are therefore critical in ensuring that the parties' commercial understanding is properly reflected.
In addition, where a party's payment obligations are dependent on figures or reports generated by the other party or a third party over which it has limited over, an independent audit right, coupled with a good understanding on how traffic would be calculated by the other party or the third party software, including any potential deficiencies and shortcomings, would be equally important.