4WARD LTD v. PACNET INTERNET (HK) LTD

HCA 1777/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1777 OF 2008

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D E C I S I O N

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1.  The plaintiff obtained an ex parte injunction order on 17 September 2008.  It stops the defendant from switching off the power supply to the plaintiff’s servers.  This injunction is to expire today.  The plaintiff has taken out an application to continue the injunction.  The defendant has issued a summons to discharge it.  But no order needs to be made except on costs.

Background

2.  The plaintiff is in the business of internet hosting services.  The defendant is a data centre that provides server co-location service.  The plaintiff and the defendant had a contract by which the defendant provided rack space and power supply for the plaintiff’s servers.  However, the plaintiff has recently obtained the service of another data centre.  It has removed its servers from the defendant’s centre on last Saturday, 15 November, and placed them at the new data centre.  Therefore, it does not require the injunction anymore.  Hence, no order needs to be made on either summons save the issue of costs.  The defendant also refers to Kowloon-Canton Railway Corporation v Cheung Yin Tung and others HCA2222/2006 and submits that I should make final orders of costs on these summonses.

3.  The defendant says that the ex parte injunction should not have been applied for as there is no serious question to be tried in this action.  It also submits that the plaintiff was guilty of material non-disclosure when applying for the ex parte injunction. 

The dispute

4.  The plaintiff and the defendant entered into a server
co-location agreement on 30 January 2007.  It provided to the plaintiff an electricity supply of 1.6 kVA per full rack, 0.4 kVA per quarter rack.  On 1 August 2008 the defendant sent a notice of breach to the plaintiff.  The material part reads:

“It has come to our attention that you have been overdrawing our electricity supply at our co-location site …, thereby adversely impacting the balance of our electricity resources for other customers. 

According to the signed Server Co-location Service Application Form dated 30 January, 2007 (‘the Contract’), electricity supply to your company was specified as 1.6 kVA (7.27A) per full rack, 0.4kVA (1.82A) per quarter rack.  However, our latest measurement of your power usage shows the following.”

There is then a table showing excessive loading at 4.03A and 5.03A.  The letter further reads:

“In other words, the overuse of power has been exceeded 50% in both racks.  You are put on notice that this is a material breach which entitles us to terminate the Contract pursuant to Clause 11.5 of the general terms and conditions, which form part of the contract. 

In this connection, we hereby request you to rectify the above breach within fourteen (14) calendar days from the date hereof, failing which, we would without any further notice take all appropriate actions against your material breach, including without limitation, suspension or termination of the circuits and services that we are providing to you.”

5.  Clause 11.5 of the general terms and conditions provides:

“11.5  Without prejudice to any other rights or remedies it may have (whether under this Agreement or at law), either party may terminate this Agreement immediately by serving written notice on the other if:

11.5.1  the other party commits a breach of any material obligation under this Agreement and, in the case of a remediable breach, fails to remedy the breach after receiving fourteen [14] days’ written notice to do so.  For these purposes, a failure by the Subscriber to pay any Charges within thirty [30] days after they become due will constitute a material breach; or

11.5.2  the other party becomes Insolvent.”

6.  Since the defendant gave the plaintiff in the notice of breach a period of 14 days to remedy the alleged breach, it should have taken the alleged breach as one that is capable of being remedied.  Furthermore, the alleged breach being one of overdrawing of electricity supply, it should be rectifiable by replacement and/or removal of some equipment.

7.  On 8 August, the plaintiff wrote and responded to the said notice of breach as follows:

“[We] are writing in response to the ‘Notice of breach’ letter, dated 2008-08/aug-01.  Please note that since receiving the letter, [our] personnel have powered off the following devices to help in rebalancing the electricity supply.”

There followed the particulars of two devices.  The letter continues:

“In the coming seven [7] days, [we] plan to disconnect the following device:”

There followed the particulars of another device.  The letter then says:

“With the above measures in place, we believe that this will rectify and rebalance [our] power usage.”

8.  On 12 August 2008 the plaintiff sent an email to the defendant saying:

“As we have no way to know what your power measurements will read and they do not seem to be in line with our own readings, would you arrange regular readings and reports to us so that we may ensure that we are in compliance with your requirements and may make the necessary adjustments?

To the best of my knowledge, your last reading was taken immediately following an unscheduled power outage.  Obviously our systems were working at peak capacity to recover from the system crash and unusually high power consumption should be expected in this case.

We continue to maintain the position and we have never continuously exceeded the power capacity at any time as a tenant of your data centre, though we cannot comment on the consumption during these PACNET disaster situations.

As a long-term remedy, we suggest that you arrange a dedicated power meter installation from Hong Kong Electric to meter the consumption at our racks and you can invoice us for any over-usage.”

9.  The defendant replied on 15 August as follows:

“We refer to your email below and would reply as follows.

You are reminded that it is your contractual obligation to ensure that your power usage will not be more than that as specified in the contract.  Accordingly, we have no intention at this stage to send you regular readings and reports as suggested. 

As regards your suggestion to pay for over-usage, please be informed that this is not acceptable to us as over-usage of power has materially and adversely affect our other customers in the data centre.”

10.  On 2 September 2008 the defendant sent the plaintiff another notice of breach.  The material part reads:

“We refer to our letter dated 1 August 2008 in which you were reminded, amongst others, that you had been overdrawing our electricity supply at our co-location site …

Under cover of your letter dated 8 August 2008, you replied that you had disconnected and would disconnect some of your equipment so as to rectify and rebalance your power usage.

In breach of your above representations, we found that you have still been overdrawing our electricity supply and our measurement of your two racks on 18 August 2008 was as follows.”

There is then a table that records excessive loading at 3.13A and 3.33A.  The notice continues:

“From the readings above, it is clear that your racks were already over the limitation of 7.27A per rack as stipulated in the contract.

You are put on notice again that this is a material breach under our signed Server Co-location Service Agreement Form dated 30 January 2007 (‘the Contract’) which entitles us to terminate the Contract pursuant to Clause 11.5 of the general terms and conditions, which form part of the Contract.

You are given the final opportunity to rectify the abovementioned material breach within seven (7) calendar days from the date hereof (i.e. on or before 9 September 2008), failing which, we would without any further notice take all appropriate actions against your material breach, including without limitation, termination of the circuits and services that we are providing to you.”

Serious question to be tried

11.  The plaintiff alleges that it has tried to replace some old servers with more power efficient ones.  Its director Mr Pfeffer said in his affirmation made for the ex parte application that:

“14.  The plaintiff nevertheless took swift action by putting on tender and ordering new, less power-hungry servers, to replace a large number of the equipment housed on the two racks in question.  The process took time but within about four weeks, i.e. by the end of August 2008, we had taken delivery of 16 new energy-efficient servers, 8 of which were to be deployed at the defendant’s data centre - there were 14 servers on the racks at the time.  On the first couple of days in September, our Vincent Chan liaised with a representative of the defendant, informing him that we would be replacing the older, less efficient, servers with new ones in stages, which would greatly reduce power consumption and remedy any possible “overloading” situation.  That representative refused to let us install the new servers.  There is now produced and shown to me marked … copy of 2 emails between the Plaintiff’s [staff] and the Defendant’s Network Operation Centre in early September 2008, showing the Defendant’s stance of refusing the Plaintiff’s request for bringing in the new servers.”

12.  The first email was dated 8 September from the plaintiff to the defendant, it reads:

“[Our staff] (the names of six persons including the director) will deliver 8 server rack to [the data centre] tomorrow.”

13.  The defendant replied on 9 September as follows:

“Pls be informed that due to the existing power loading from your equipment have already exceeded our contract limit, you are not allowed to move in any more equipment in order to prevent any power failure again, thanks for your kind attention and co-operation.”

14.  Counsel for the defendant disputes that there was any attempt by the defendant to replace old servers with more energy-efficient servers.  Counsel said the plaintiff was trying to put in more servers to make the bad situation worse.  However, the defendant has not gone on affidavit to refute the plaintiff’s allegation of such an attempt.  I will refer to this again.

15.  Unfortunately there was another incident of overdrawing of electricity on 10 September.  On 11 September the defendant sent the plaintiff a Service Termination Notification.  The material part reads:

“We refer to our letter dated 2 September, 2008 in which you were reminded, among other things, that you have been overdrawing our electricity supply at our co-location site ...  You were also requested to take all possible measures to rectify the situation.  Unfortunately, no significant improvement has been made. 

We found that you have still been overdrawing our electricity supply and our measurements of your two racks on 10 September 2008 were as follows.”

There follows a table showing overdrawing of electricity at 2.83A and 3.45A.  The Notice continues:

“From the readings above, it is clear that your racks are already over the limitation of 7.27A per rack as stipulated in the contract.

As the deadline for compliance has elapsed but your breach is still continuing, we have no choice but to exercise our rights under the signed contract to terminate the service(s).  …”

16.  The defendant duly switched off the power supply to the plaintiff’s servers on 12 September.  The plaintiff’s solicitors wrote to the defendant on the same day regarding the termination.  They also referred to the attempt to replace the old servers with new ones.  The letter reads:

“We … refer to your letter of 11 September 2008 to our client.

Your allegation against our client that it has been overdrawing the electricity supply at … is categorically denied.  We are instructed that the readings of loading as set out in your said letter as well as in your previous letters did not reflect the action drawing of electricity supply by our client, as such readings were not measured at the point of actual consumption.

…

Moreover, you have been in further breach of the said contract that you have unreasonably and without any basis refused to let our client to deliver 8 new servers to [the site] for the purpose of replacing the old ones.  We are instructed that the new servers would help reduce the drawing of electricity supply.  In the premises, if, which is not admitted, the drawing of the electricity supply has exceeded the permitted loading, it was caused by you in that you have refused to allow our client to take reasonable measures to contain the same.”

17.  The defendant’s manager, Chan King-Lai, dealt with this letter in her affirmation as follows:

“46.  Having considered the matters set out by [the plaintiff’s solicitors,] the Defendant came to the conclusion that the Plaintiff had no defence whatsoever to the Defendant’s termination.  In specific: -

(1)   the plaintiff was bound by the evidence provided by the   Defendant under the Server Co-location Contract, in particular, under Clause 4.5 of the General Terms and Conditions.  Further, the Defendant had carried out more than one measurement and the Plaintiff was proved to have overloaded on each and every of the occasions;

…

(3)  the Plaintiff received the first Notice of Breach from the Defendant as early as on 1 August 2008, not to mention the previous warnings given by the Defendant subsequent to each measurement.  What the Plaintiff should have done was to remove sufficient number of its equipments as it stated in its reply to the Defendant dated 8 August 2008, as opposed to moving in any new equipment.  In any event, the defendant was perfectly entitled to refuse entry of new equipments under Clause 3 of the Acceptable Use Policy when it reasonably suspected, basing on past experiences, that the Plaintiff would be in further breach of the Server Co-location Service Contract.  I have been further advised and verily believe that the Defendant is also under a duty to mitigate its loss in the event of the Plaintiff’s breach of contract.  The Plaintiff (sic) did so by avoiding further loss to be caused by the Plaintiff’s new equipments.”

18.  Before the plaintiff’s alleged attempt on 9 September to replace the old servers with new ones, there were only two reported incidents of overdrawing of electricity supply in the notices of breach.  The evidence shows that the plaintiff did not ignored these notices.  They have switched off and removed some equipment.  I cannot see what past experiences that could have afforded the defendant a reasonable apprehension that the plaintiff would, by replacing the old servers with new and efficient ones, breach the contract again.  I also see no commercial reason why the plaintiff should bring in more servers to increase the loading when there were already incidents of overdrawing of electricity and notices of breach.

19.  I think there is clearly a serious question to be tried on whether the plaintiff was trying to replace the old servers on 9 September and to put its house in order by making use of the 7-day opportunity given by the defendant in the second notice of breach.  If that was the case, then the defendant has wrongfully blocked its attempt and the defendant has failed to allow the plaintiff to put its house in order.  In that event, the defendant could not have complained against the plaintiff for overdrawing electricity until after the plaintiff has been given a reasonable opportunity to rectify the problem. 

20.  I therefore find that there is a serious question to be tried on whether the defendant is entitled to switch off the power supply on 12 September or thereafter without giving the plaintiff a fresh opportunity to rectify the problem of overdrawing of electricity.  The reason being that the opportunity given in the notice of breach dated 2 September could not have been withdrawn without good reason.

Further ground for termination of services

21.  The defendant also relies on late payment as a breach that purportedly justifies the termination of service.  Apart from being a disputed issue, this was also not a ground relied on in the notices of breach or notice of termination.  I do not think the defendant can rely on this as an alternative ground retrospectively.

Did the defendant caused power failure?

22.  The defendant has also alleged that the plaintiff’s overdrawing of electricity had caused power failure, but the two notices of default did not say so.  Furthermore, the other evidence adduced by the parties does not clearly show that the plaintiff had caused any power failure.  If this power failure were a serious issue, then I would hold that it has to be tried.  However, I do not think that this is an issue as the defendant has not relied on this in the notices of breach or the notice of termination.

Material Non-Disclosure

23.  Regarding material non-disclosure, the defendant says that the plaintiff should have disclosed to the ex parte judge Clause 2.3.1 of the Data Centre Acceptable Use Policy.  The clause reads:

“2.3.1  All Customer Equipment must be clearly labelled with Customer’s name and individual component identification.  Each connection to and from a piece of customer equipment shall be clearly labelled with Customer’s name and the starting and ending point of the connection.  Customer Equipment must be configured and run at all times in compliance with the manufacturer’s specifications, including power outlet, power consumption and clearance requirements.  Customer must provide [the defendant] with prior notice of any time it intends to connect or disconnect any Customer Equipment or other equipment.”

24.  Counsel for the defendant submits that overdrawing of electricity amounts to a breach of this clause by the plaintiff.  The plaintiff should therefore have referred this clause to the ex parte judge.  However, counsel admits that the defendant does not know of the manufacturer’s specifications of the plaintiff’s equipment on power consumption.  There is therefore no evidence of power consumption by the defendant’s equipment that was contrary to this clause.  This clause is thus not relevant and there was no need to refer it to the ex parte judge.

25.  The defendant also said that the plaintiff should have referred Clause 3 of the said Policy to the judge.  Clause 3 reads:

“3.  [The defendant] reserves the right to immediately suspend a Customer’s Service at any time if it reasonably suspects that there is or will be a breach of this Acceptance Use Policy by the Customer, its Representatives or its Users.”

26.  Counsel again confirms that the breach suspected under this clause is a breach of Clause 2.3.1 referred to above.  I have already said that there is no evidence of actual breach of that clause.  For the same reason given above, I say that there is also no basis to suspect a breach of this clause.  Clause 3 is therefore irrelevant as well. 

27.  The next clause that the defendant submits should have been referred to the ex parte judge is Clause 11.5 of the General Terms and Conditions.  I have already set it out above.  Since the plaintiff has referred to the notices of breach, I am of the view that the purpose and intent of this clause is already known to the judge.  The express reference to it at the ex parte hearing would not have added any more to it.

28.  The defendant also refers to Clause 4.5 of the General Terms and Conditions and says that this clause should have been referred to the ex parte judge.  This clause reads:

“In case of disputes over any usage of the Services or the Charges, [the defendant’s] usage records and those of any third party supplier or service provider in providing the Services shall be conclusive evidence of all such usage of the Services or Charges.”

29.  This clause in the normal course of events should stop frivolous disputes.  However, can it really prevent the user from raising a dispute when the plaintiff’s records appear to be blatantly wrong, or when the records appear not to have been compiled in bona fide manners?  I have doubts on whether this clause can have the effect as contended by counsel for the defendant.  In any event, the plaintiff has not been seriously challenging the allegation of overdrawing of electricity, otherwise it would not have switched off and removed some equipment and made other suggestions for resolution of the problem.  I do not think I can find the plaintiff guilty of material non-disclosure for not referring this clause to the judge.

30.  Finally, counsel also referred to Clause 7.8 of the general terms and conditions.  It reads:

“The subscriber shall not, and warrants and undertakes to [the defendant] that it will not, act or allow others to act in such a way that may jeopardize or impair the provision of the Services by [the defendant] in Hong Kong or any other parts of the world.”

31.  This clause was not referred to in the several affirmations of the defendant or in counsel’s written submissions.  It was only referred to in the course of counsel’s oral submissions.  It appears to be the fruit of counsel’s diligence in the course of or shortly before the hearing.  As suggested by counsel for the plaintiff, this clause must have escaped the attention of the defendant and its solicitors.  If so, I cannot find fault with the plaintiff if it and its lawyers have also overlooked this clause which is made obscure by its small print as well as by the large number of clauses before and after it. 

32.  All in all, I find that the plaintiff is not guilty of any material non-disclosure at the ex parte hearing.

33.  Having found for the plaintiff on all issues raised by the defendant, I am of the view that I should order costs of the application in favour of the plaintiff, and I so order.