ATAL TECHNOLOGIES LTD v. STRATECH SYSTEMS LTD

HCCT 56/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 56 OF 2006

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BETWEEN

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J U D G M E N T

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I. INTRODUCTION

1.  On 8 March 2004 the Immigration Department entered into a Main Contract with ATAL for the provision of an Automated Passenger Clearance System (APCS) and Automated Vehicle Clearance System (AVCS) at Hong Kong’s borders. 

2.  On 22 May 2004 ATAL entered into a Sub-Contract with Stratech (a Singapore company) for part of the works.  The Sub-Contract represented about 10% of the Main Contract value. 

3.  The Sub-Contract included the supply and installation of CCTV equipment and the development of software for an Administration and Monitoring System (AMS) and Kiosk Monitoring System (KMS). The Sub-Contract also dealt with the supply of an Automated Vehicle Registration System (AVRS) to read and identify licence plates of vehicles passing through Hong Kong’s borders to or from the Mainland. The Sub-Contract further provided for the supervision, commissioning, testing, maintenance and documentation by Stratech of the various systems supplied.

4.  Disputes arose between ATAL and Stratech in the course of the works.  The disputes led ATAL to issue a written “final warning” on 17 March 2006.  ATAL then terminated the Sub-Contract on 30 March 2006.

5.  The parties’ disputes were the subject of the trial before me.  In this connection, the parties’ counsel agreed a List of Issues for this Court to determine.  The List of Issues is annexed to this Judgment.  In the next section, I shall discuss the 33 questions in the List of Issues.

II. DISCUSSION

A. Termination

Issue 1

6.  Where, following a previous written warning, Stratech fails to proceed with “due diligence” or is “persistently in breach of any obligation,” Sub-Contract cl.17(1)(e) allows ATAL to determine Stratech’s engagement upon 7 days’ written notice. 

7.  By a warning letter of 17 March 2006, ATAL accused Stratech of failing fully to comply with Contractor’s Instruction (CI) 082 (dated 5 October 2005) and CI 117 (dated 5 January 2006).  ATAL also referred to Stratech having failed to obey an instruction of 1 March 2005 to remove tokens from the AVRS.  ATAL gave Stratech until 22 March 2006 (that is, 5 days) to remedy the situation.

8.  By letter dated 21 March 2006 Stratech replied that, with a minor exception, it had complied with CI 82.  The minor exception was the delivery of a DVRS. Stratech had noticed that the original DVRS to be shipped to Hong Kong had a fault.  It therefore had to replace the DVRS before shipping the same. 

9.  Stratech’s letter observed that the DVRS was ready to be shipped along with the other equipment required by CI 117. However, nothing had been shipped, because ATAL refused to permit Stratech to draw on a letter of credit (opened by ATAL on 22 February 2006) to cover the cost of the CI 82 DVRS and the equipment due under CI 117. 

10.  Stratech said that ATAL’s denial of the letter of credit facility was contrary to an October 2005 agreement reached between ATAL and Stratech.  Accordingly, Stratech stated that it was unable to deliver the DVRS or other equipment purely as a result of the unilateral act of ATAL.

11.  In relation to the tokens, Stratech denied that there was anything that it needed to do.  Stratech was only claiming payment for works it had done. ATAL (Stratech alleged) had not been paying Stratech in accordance with the terms of the Sub-Contract. The tokens (Stratech argued) were a standard mechanism embedded in the AVRS to ensure that Stratech was paid promptly.  If Stratech was not fully paid within a reasonable time, the tokens were programmed to cause the AVRS to stop operating. 

12.  Initially, the tokens had been programmed by Stratech to turn the AVRS off on 31 December 2005.  Intense negotiations ensued between ATAL and Stratech to avert that deadline.  The negotiations included ATAL making a payment of monies claimed due by Stratech, but disputed by ATAL. Stratech then reprogrammed the tokens to shut down the AVRS on 30 June 2006. Stratech intimated that, so long as ATAL promptly paid what Stratech claimed due, the tokens would not cause the AVRS to cease operating on 30 June 2006.

13.  The tokens thus functioned like a Damoclean sword over ATAL.  Unless ATAL acceded to Stratech’s payment requests, Stratech would cause the tokens to shut down the AVRS on a given date.    

14.  By letter dated 23 March 2006 ATAL accused Stratech of not having remedied the failings identified in the 17 March 2006 letter.  ATAL wrote that, as a result, it was giving 7 days’ notice to terminate Stratech’s employment as sub-contractor.

15.  Issue 1 asks whether ATAL was entitled to terminate the Sub-Contract for the reasons in the 17 and 23 March 2006 letters.

16.  Plainly, even on Stratech’s case, it had not fully complied with CI 82 due to non-delivery of a DVRS.  That piece of equipment was apparently ready for delivery as at 17 March 2006.  But Stratech was not prepared to deliver it unless Stratech could draw on the 22 February 2006 letter of credit.

17.  Similarly, on Stratech’s case, the equipment required by CI 117 was seemingly ready for delivery as at 17 March 2006.  But Stratech was not prepared to deliver unless it could operate the letter of credit.

18.  Thus, on the assumption that Stratech was right and everything was ready for delivery but for the letter of credit dispute, the question is whether Stratech’s refusal fully to comply with CI 82 and CI 117 could amount to a repudiatory breach of the Sub-Contract.  That would depend, among other matters, on whether ATAL was entitled to forbid Stratech from drawing on the letter of credit.

19.  In the course of carrying out the Sub-Contract, ATAL and Stratech had repeated disputes as to when payment was due. Stratech essentially argued that payment was due shortly after a given piece of equipment or software was delivered.  ATAL took the view that payment was only due after Government had “accepted” a piece of equipment or software delivered by Stratech and had paid ATAL for the same.

20.  For the purposes of Issue 1, it is sufficient to note that, because of the disputes over the timing of payments, Stratech periodically threatened or actually withheld delivery or performance pending satisfaction by ATAL of a claim.  This put enormous pressure on ATAL which had to comply with Government’s timetable for the works.  ATAL’s timetable would be jeopardised by what it regarded as Stratech’s threatened breaches. Consequently, in order to break the deadlock and move the project along, ATAL occasionally agreed to pay Stratech ahead of the time when ATAL believed Stratech was contractually entitled to payment.

21.  The 22 February 2006 letter of credit was the result of one such agreement between ATAL and Stratech in October 2005. In consideration of Stratech making a prompt delivery of equipment pursuant to CI 117, ATAL agreed to open the letter of credit and allow Stratech to draw upon that facility to pay for the equipment delivered.

22.  But by 17 March 2006 the problem with the AVRS tokens (discussed below) had surfaced.  ATAL became fed up with what it has denounced as Stratech’s strategy of duress.  ATAL therefore informed Stratech that Stratech could no longer draw on the credit, that facility having been procured (in ATAL’s eyes) by the exertion of unfair economic pressure.

23.  Not every threat to break a contract constitutes economic duress.  The cases are, however, vague as to what precisely amounts to economic duress.  At the least, there must be some wrongful threat, made without legitimate commercial justification, giving rise to overwhelming pressure. See Chitty on Contracts (30th ed.), I, para. 7-023 (p.605).

24.  Here, both parties took different views of their entitlements under the Sub-Contract. Stratech threatened to withhold performance if ATAL did not conduct itself according to Stratech’s reading of the Sub-Contract.  This undoubtedly put ATAL in a difficult position in relation to the performance of ATAL’s obligations under the Main Contract.  It was for this reason that ATAL agreed to the open the letter of credit in October 2005.

25.  But, often in the cut and thrust of carrying out a contract, a party may assert that it will not perform unless an alleged right is conceded by the other side.  There is nothing unusual in such behaviour and commercial people can expect (and be able to deal with) such conduct in the ordinary course of events.  It seems to me that a mere threat to withhold performance, even where the threat may not be justified on a true construction of an operative contract, would not constitute economic duress.  Something more is required.

26.  As at October 2005, when ATAL agreed to open the letter of credit, the issue of the tokens had not yet arisen.  That did not surface until 25 November 2005.  In those circumstances, I do not think that ATAL could unilaterally resile from the operation of the letter of credit, as agreed with Stratech, for the early payment of the equipment due under CI 117.

27.  ATAL’s promise to open the letter of credit, made in consideration of Stratech not insisting that Stratech was entitled to be paid earlier, would have been binding.  The October 2005 agreement functioned as a variation of the Sub-Contract (whatever the Sub-Contract ultimately meant) at least as far as payment for CI 117 was concerned.

28.  Consequently, in light of ATAL’s unilaterally having forbidden Stratech to draw on the letter of credit, Stratech’s failure to comply with CI 117 could not by itself have been a valid ground for terminating the Sub-Contract.

29.  Note that Stratech also used the denial of the letter of credit as a reason for not sending the DVRS said to be outstanding under CI 82.  Note also that I have so far assumed that Stratech’s case that, but for the letter of credit, everything due under CI 117 and the DVRS due under CI 82 was ready to be shipped.

30.  In fact, the evidence is to the contrary.

31.  Mr. Ng Man Kit’s unchallenged evidence on behalf of ATAL was that since January 2006 there were 4 DVRS which Stratech had not delivered. Insofar as CI 117 was concerned, Mr. Ng’s equally unchallenged evidence was that, as of 30 March 2006, Stratech had only fulfilled about 22% of CI 117.  It is far from clear whether, in reality, the remaining 78% of equipment due under CI 117 was (as Stratech claimed in its 21 March 2006 letter) actually ready for delivery (subject only to payment under the letter of credit) in mid-March 2006.

32.  But does Mr. Ng’s evidence (which I accept) change the picture?

33.  ATAL’s 17 March 2006 letter only gave Stratech 5 days in which to rectify any failure to perform. Suppose (as is likely to have been the case) Stratech was woefully behind in relation to CI 82 and CI 117. Assume that Stratech was even using the refusal of the letter of credit as an excuse to cover up an underlying inability to deliver substantial amounts of equipment due under CI 82 and CI 117. 

34.  Implicit in Sub-Contract cl. 17(1)(e) must be the premise that time of performance of an obligation is not normally to be treated as of the essence.  Time may be made of the essence by giving a warning letter stipulating a reasonable time by which remedial measures should be taken. If no remedial measures are taken within that reasonable time, the Main Contractor will be entitled to treat the Sub-Contract as repudiated.

35.  The point is that, if according to ATAL’s case so much remained undone, I doubt that a mere 5 days in which to remedy outstanding problems could be enough.  The warning notice cannot then be treated as having given any genuine warning.  At least in relation to CI 82 and CI 117, ATAL appears to have been treating the giving of a “warning” as a mere formality before the near immediate issue of a letter of termination.

36.  Consequently, even accepting Mr. Ng’s evidence, I do not regard ATAL as being entitled to treat the Sub-Contract as rescinded from 23 March 2006 for lack of compliance with CI 82 and CI 117.

37.  I am fortified in that conclusion by the fact that, although the Sub-Contract works began late, they ended on time (subsequent to Stratech’s termination).  It consequently seems to me probable that, even if more time than 5 days had been given for compliance with CI 82 and CI 117, there was still a real possibility of the Sub-Contract works being completed on time.

38.  That leaves the tokens issue.

39.  Here the evidence is that Stratech was “pleasantly surprised” (in the words of its Mr. David Chew) when it learned that the tokens formed part of the AVRS supplied to Stratech. The tokens being capable of programming and re-programming to shut off the AVRS at Stratech’s will on any given date, Stratech saw the tokens as a fortuitous bargaining chip (a “bullet” in the words of Stratech’s Mr. Dominic Lau) to force ATAL’s compliance with Stratech’s demands.

40.  The evidence is that the tokens had a legitimate function within the AVRS.  The fact that the tokens could also be programmed to turn the whole AVRS off on certain dates was a later realisation on Stratech’s part. That additional shut-down function had not been requested by anyone, certainly neither by the Immigration Department nor by ATAL.  That extra function was not supposed to be in what was supplied by Stratech to ATAL or Government. Stratech was thus itself surprised when it dawned upon it how the tokens could be used as leverage in its payment disputes with ATL.

41.  Stratech’s use of the extra function in the tokens does not seem to me to be legitimate commercial pressure.  It was wrong of Stratech to resort to such function in order to force ATAL’s compliance with its demands.  Resort to such function led to ATAL facing enormous pressure from the Immigration Department, since a failure to comply with Stratech’s demands would shut down the AVRS.

42.  At trial Stratech sought to minimise the impact of a shutdown of the AVRS.  At the time (March 2006) the AVRS was used to enable the smooth passage of vehicles through only some (but by no means all) of Hong Kong’s border crossing lanes.  A stoppage of the AVRS (Stratech suggested) would only hold up the passage of vehicles in a few lanes.  There would be inconvenience (Stratech said) as vehicles in those lanes would have to be cleared manually.  But (Stratech reasoned) that would only mean returning to the old system before the AVRS was installed.  Stratech contended that passenger through-put (subject to the APCS) would not be affected.

43.  I disagree.

44.  Stratech must have resorted to the threat of shutting down the AVRS precisely because the disruption caused would be great (not minimal).  Stratech must have known that the resultant disruption was likely to be great.  That was why it regarded the tokens as an effective bargaining weapon. 

45.  The Immigration Department would have suddenly had to deploy more staff (at relatively short-notice) to man the dysfunctional AVRS lanes.  It is far from clear that Government could have easily done this. 

46.  The time taken to drive through the AVRS lanes would also have increased. There would have inevitably been backlog. It is true that in the past the system operated manually. But since then, with the use of AVRS, the Government and the public would have come to expect speedier clearance.  It is not apparent on the evidence that effective alternative arrangements could rapidly have been undertaken by the Immigration Department to ensure the smooth clearance of vehicles.

47.  By its 21 March 2006 letter Stratech made plain that it would not resile from resorting to the tokens to turn off the AVRS with potentially chaotic consequences, if ATAL did not accede to Stratech’s demands.  In those circumstances, there would always be a threat of Stratech resorting to illegitimate pressure against ATAL.  That continuing threat would be intolerable to any party to a contract.  It would amount to repudiatory conduct by Stratech. 

48.  In light of Stratech’s letter, there would have been no point in giving more time to Stratech to change its mind on the illegitimate use of the tokens.  Stratech had made clear that it would not change.  Further warning was pointless.  ATAL was thus entitled to accept the repudiatory breach by its 23 March 2006 letter and treat the Sub-Contract as terminated as a result.

49.  In short, ATAL was entitled to terminate the Sub-Contract by reason of Stratech’s continuing threat to use the tokens to disrupt the operation of the AVRS.

Issue 2

50.  Maintenance under the Sub-Contract was to have been for a period of 10 years after conclusion of the works.

51.  By way of damages arising from the termination of the Sub-Contract. ATAL seeks the following:-

(1) One-time costs (comprising over-run of resources, legal fees and hardware cost of undelivered items): $918,772.18.

(2) Hardware maintenance costs over 10 years: $9,110,740.95 or, (alternatively) $6,278,940.

(3) Maintenance support team over 10 years: $14,026,361.96.

52.  As to one-time costs, Mr. Anthony Houghton SC (appearing for Stratech) queried the legal fees and cost of hardware.

53.  I am prepared to accept that ATAL incurred legal fees in connection with the termination.  Those have been calculated at $183,000. 

54.  Two firms were involved: Masons and Simmons & Simmons.  It is unclear why 2 firms were necessary.  It is possible that this has led to some duplication.  I therefore think that some deflation of the legal fees is warranted.  If one proceeds robustly and takes (say) a third off, then one arrives at roughly $120,000.  That is nearly the equivalent of disallowing the fees of the first firm employed by ATAL (that is, Masons at $71,010).  The amount of $120,000 therefore should be roughly about right.

55.  In terms of hardware, ATAL acquired the hardware which Stratech failed to deliver for $657,100.  That seems to be the correct measure.  If one rounds that amount upwards slightly, the amount for hardware will then be $660,000.

56.  ATAL claims over $9 million for hardware maintenance. 

57.  Here I agree with Mr. Nicholas Cooney SC (appearing for ATAL) that, from the Sub-Contract, hardware maintenance constituted some part of Stratech’s obligations under the Sub-Contract.  See, for instance, the 4^th Schedule to the Sub-Contract.  But I think that Mr. Houghton is right when he points out that $9 million seems excessive.

58.  Mr. Molloy (ATAL’s QS expert) based his figure of $9 million plus on the Stratech’s contract prices plus an inflationary factor of 8% over 10 years.

59.  I do not think that this is right.  It is unclear why Stratech’s contract prices should be the starting point.  How Stratech as sub-contractor decided to price its goods and services was entirely for Stratech.  The bottom line was the final lump sum at which Stratech priced the whole of the Sub-Contract works.  Stratech’s prices for individual goods and services may or may not be reflective of market conditions for such items.

60.  Nor do I see any rationale for the inflationary factor of 8%.  That strikes me as arbitrary.   

61.  Mr. Molloy’s more modest alternative of over $6 million is based on the actual market cost of relevant hardware (as assessed by Mr. Molloy at $4,616,867.98) plus escalating percentages over 10 years.  The escalating percentages are based on an invoice for the maintenance of a camera.

62.  Again I do not think that this right.  It is unclear to me why escalating percentages should be applied.

63.  It seems to me that the correct figure is Mr. Molloy’s starting point of $4,616,867.98 or (rounded) about $4,700,000.  There is evidence from Ms. Anvio Wong of ATAL that such sum for hardware maintenance would be too low.  But that seems to me more assertion than based on hard evidence.

64.  The largest component of ATAL’s claim is for maintenance personnel over 10 years.  For ease of calculation, I shall round the figure down to $14 million.

65.  The sum of $14 million (which includes an overhead of 6.25%) may seem large at first blush.  But at the end of the day the amount seems reasonable. 

66.  It was the evidence, for example, of Mr. Shrisankaraan’s for ATAL that 4 staff were needed on standby to attend the system 24 hours a day, 7 days a week.  Those 4 staff would have to be on permanent call and could do little else besides. 

67.  I note further that the figure of $14 million is roughly comparable with the $12,003,261 which Stratech itself tendered for maintenance personnel over 10 years.

68.  In answer to Issue 2, I would accordingly assess ATAL’s damages arising out of termination of the Sub-Contract at $19,480,000 (that is, $120,000 + $660,000 + $4,700,000 + $14,000,000).

Issue 3

69.  In light of my conclusion that ATAL was entitled to terminate the Sub-Contract, Issue 3 does not arise.

B. Tokens

Issue 4

70.  It follows from Issue 1 that ATAL was entitled to require Stratech to remove the tokens from the AVRS.

Issue 5

71.  As a result of Stratech’s refusal to remove the tokens, ATAL had to develop a “work-around” to the AVRS.  ATAL claims $1,930,999 as the cost of replacing the AVRS with a system which could not be programmed to break down on a given date by Stratech.  ATAL claims a further $410,151 as the cost of standby measures taken on 30 June 2006 to deal with any shut down of the AVRS due to the tokens.

72.  In my judgment, ATAL is entitled to both heads of damage.  However, the amounts claimed are excessive.  They are not even supported by Mr. Molloy. 

73.  I think that Mr. Molloy’s estimates of the 2 heads of damage (at $1,554,759.79 and $169,153.78 respectively) are likely to be more accurate. 

74.  But I would omit $16,000 and $44,800 in respect of the hire of a venue and public relations firm for the purposes of a press conference at which ATAL sought to allay fears about any looming breakdown of the AVRS on 30 June 2006. I doubt that, at the time of entering into the Sub-Contract, the holding of such a press conference was a reasonably foreseeable consequence of a breach by Stratech.  This would reduce the figure of $169,153.78 to $108,353.78 or (rounded) about $110,000.

75.  Total damages under this head would then be about $1,660,000 (if one rounds down the figure of $1,554,759.79 to $1,550,000).

76.  Mr. Houghton criticises ATAL’s damage calculations on several grounds.

77.  Mr. Houghton says, for example, that the calculations include hardware cost, although what was replaced was AVRS software.  But, in working around software, one may have to acquire hardware specifically compatible with the new system one is developing.

78.  Mr. Houghton suggests that the implementation costs, travelling expenses and 12.5% overhead claimed by ATAL are excessive. But these have been deflated by Mr. Molloy (whose methodology in so doing I accept).  The overhead of 12.5% has been reduced by Mr. Molloy to a more reasonable 6.25%.

C. Source Code

Issue 6

79.  Stratech was supposed to provide the source codes of “Custom Programs” (as defined in the Sub-Contract) to ATAL.  This would in turn enable ATAL to deliver the source codes to the Immigration Department in accordance with ATAL’s obligations under the Main Contract. 

80.  Stratech did not provide any source codes (in whatever format) to ATAL.

81.  The AMS allows an immigration officer at a control point to perform administrative and monitoring functions in relation to lanes within the APCS and AVCS. The KMS allows the clearance functions of kiosks at lanes fitted with the AVCS to be controlled by an officer.   

82.  Stratech says that the AMS and KMS provided to ATAL were “Contractor Supplied Software” (as defined in the Sub-Contract). According to Stratech, under the Sub-Contract, it was only obliged to license ATAL to use the AMS and KMS. 

83.  The dispute is therefore whether the AMS and KMS provided by Stratech were “Computer Supplied Software” or “Custom Programs”. There is no dispute that ATAL was required to hand over source codes of the latter, but only to license use of the former.

84.  The Main Contract defined “Contractor Supplied Software” as “the programs to be supplied by the Contractor as specified in Tables 2.1 - 2.3 and/or 2.5 - 2.7 of Schedule 2...” 

85.  The Main Contract defined “Customs Programs” as “the programs required to be provided by the Contractor pursuant to clause 14.2, the details of which are set out in the Project Specification, Schedule 3 and Schedule 5”.

86.  The surrounding evidence as to what the parties (the Immigration Department, ATAL and Stratech) considered to be “Custom Programs” and what “Contractor Supplied Software” is ambiguous. 

87.  For instance, Table 2.1 of Main Contract Schedule 2 is headed “Mandatory Contractor Supplied software items (Category A)”. But the Table describes software involving automated passenger clearance (part of the AMS) as “Custom Program”.

88.  During the Main Contract tender process in 2004, ATAL had asked for a similar description of automated passenger clearance software as “Custom Program” in Schedule 18 (Table 18) of the Main Contract to be changed to “Site Application Software”.  This led to the expression “Custom Program” in Table 18 being amended to “Site Application Program”. 

89.  At trial Mr. C. K. Lau of ATAL (who had requested the change to “Site Application Software”) could not explain the significance (if any) of the use of “Program” for “Software” in the phrase “Site Application Program”.  

90.  The Main Contract stipulates that in the event of discrepancy between Schedule 2 (Table 2) and Schedule 18 (Table 18), the latter is to prevail.  But, as the amended version of Schedule 18 has retained the word “Program” in the phrase “Site Application Program,” it is not apparent on the evidence whether the Immigration Department accepted ATAL’s then view in 2004, that at least parts of the AMS were “Contractor Supplied Software”.

91.  The intention underlying the distinction between “Custom Program” and “Contractor Supplied Software” is self-evident. 

92.  Where a program has been significantly customised to meet a user’s requirements, the end product may be regarded as commissioned by the user.  The user might then legitimately claim the intellectual property rights in the program as customised to the user’s requirements.  The user could then require the source code to be provided to enable the user to repair or modify the program as necessary in the future.  In this case, Main Contract Condition 10 expressly vested the intellectual property rights in Custom Programs in the Government as end user.

93.  On the other hand, where a program has been developed by a supplier and has only been modified in minor ways to meet a user’s requirement, the program could well be regarded as substantially the same software as that developed by the supplier.  The supplier should not normally be treated as surrendering its intellectual property rights in the software merely because it has provided the software to a user.  At best, the user would then only be licensed to use the supplier’s software.  In this case, Main Contract Condition 24 required the grant of an irrevocable licence to Government to use “Contractor Supplied Software”.

94.  The Issue therefore becomes a factual dispute: To what extent have the AMS and KMS been modified from (say) software originally developed by Stratech in order to meet the requirements of the Immigration Department?

95.  To comply with Government’s detailed specifications, there were extensive modifications of certain clearance system software which Stratech provided.  On this basis, it seems to me that the AMS and KMS constituted “Custom Programs” and not “Computer Supplied Software”.  I am fortified in this conclusion by the fact that the process of “customising” Stratech’s original software for the AMS and KMS took some 2 years.  This was far from a case of taking software off the peg and running the same after a few tweaks and minor modifications.

96.  Contrast the position with the AVRS. 

97.  Mr. Cooney submitted that this was a “Custom Program” because it had to be modified to identify vehicles with Hong Kong or Mainland plates passing through certain checkpoints.  But I am far from persuaded on the evidence that such modification required substantial (if any) re-writing of the software as opposed to only making minor adaptations to tailor the software to actual conditions. 

98.  On this, the evidence of Mr. Shrisankaraan of ATAL (who was in charge of replacing the AMS software provided by Stratech) is significant.  He accepted that Stratech’s “AVRS technology -- being the technology used in capturing and processing data in the licence plate recognition system” was “Contractor Supplied Software”.  This was in distinction to “AVRS integration program” (presumably the software by which the AVRS was integrated with the rest of the AVCS) which Mr. Shrisankaraan argued was “Custom Program”.

99.  I would answer Issue 6 thus:  Stratech was required to provide the source codes for the AMS and the KMS.  Stratech was not required to provide the source code for the AVRS.  But it was obliged to grant an irrevocable licence for the use of the AVRS. The format of any source code to be provided is not a relevant issue.

Issue 7

100.  Source codes for the AMS and KMS not having been provided, ATAL had to develop a replacement for the AMS and KMS.  It claims the cost incurred for that activity.

101.  The sum claimed by ATAL under this head is $5,027,728.57.  That amount comprises hardware cost ($378,157); development tools and software license ($4,240); network and office setup ($24,970); outsourcing development ($1,397,242.21); and both in-house and outside resources for development, testing and nursing (respectively, $2,485,124.28 and $737,995.08).

102.  For hardware, I would disallow $3,024.  This latter amount (as Mr. Molloy points out) is only substantiated by a quotation from a company named Oasis.  Subtraction leaves $375,133.

103.  The development tools and network and office set-up figures are supported by invoices.  I allow them.

104.  For outsourcing development, I would disallow the claimed overhead of $82,190.72.  It is unclear to me why overhead should be charged on the costs of engaging consultants.  Subtraction of overhead gives $1,315,051.49.

105.  Mr. Molloy’s assessment of in-house resources for development and testing ($2,338,940.50 plus overhead of $146,183.78) seems excessive.  The figure is not based on time sheets.  It instead assumes that certain personnel engaged beyond the date when they were originally supposed to be released, must have continued working (and been engaged full-time) on the replacement of the AMS and KMS.  The personnel may have been substantially engaged on that project.  But I doubt that 100% of their “over run” is realistically to be attributed to the same.  I would deflate Mr. Molloy’s estimate (including overhead) by 25% to give $1,863,843.21.

106.  As for outside resources for development and testing, Mr. Molloy assesses that at $694,583.60 plus overhead of $43,411.48.  I am again unclear on the basis for the overheads for outside resources.  I therefore disallow the latter.  Outside resources remain at $694,583.60.

107.  Everything else is substantiated by invoices and other documents.

108.  The above leads to a revised figure of $4,277,821.30 (that is, $375,133 + $4,240 + $24,970 + $1,315,051.49 + $1,863,843.21 + $694,583.60).  I round up that figure for convenience to $4,280,000.

D. Payment

Issue 8

109.  Sub-Contract cl. 15.1 required Stratech to submit statements of the value of all work properly done “within seven (7) days upon completion of each milestone for payment set out in the Main Contract or otherwise agreed with the Contractor”.  ATAL was then supposed to “make applications for payment in accordance with the Main Contract including the Sub-Contractor’s claim for the value of work done”.

110.  Sub-Contract cl. 15.2 required ATAL to pay Stratech “within thirty (30) days from the date of the Sub-Contractor’s invoice for such payment, or within such other period as may be specified in the Third Schedule”.  Payment was not to be withheld only because of minor defects or omissions which did not materially affect use.

111.  Sub-Contract Schedule 3 appears to be the same as an Appendix C to the Sub-Contract.  That gives a payment timetable.  In relation to various pieces of hardware and software, that provides for payment of an initial 20% deposit.  The remaining 80% was to be paid in “back-to-back principle in accordance with cl.20.2.2 of Contract Schedule 20 of the Main Contract”.

112.  Under Main Contract Condition 38 ATAL was to be remunerated in accordance with Main Contract Schedule 20.  Further, any payment by Government shall be made within 30 days “after the receipt of the Contractor’s invoice”.  But the 30 days would not start to run until a payment was payable.

113.  Main Contract Schedule 20 contained a Payment Schedule.  In relation to Implementation Services, various percentages of the total contract price would fall due upon the completion of specified stages of the works (cl.20.2.1).  The stages were system development, user acceptance test, production roll-out and system nursing. Payments for hardware and software, on the other hand, would be made to ATAL by the Government “upon acceptance” (cl.20.2.2).

114.  ATAL’s case is that Stratech was only entitled to payment upon actual “acceptance” by the Government of hardware or software delivered by Stratech. 

115.  Stratech’s case is that it was entitled to payment for hardware or software upon delivery of the same.

116.  What happened was that ATAL did not make payment applications to the Government unless the latter had intimated that it had “accepted” hardware or software delivered. Stratech kept pressing for payment as, in its view, payment for hardware and software was due within 30 or so days after delivery.  This stalemate over the timing of payment led to frustration on both sides.

117.  ATAL thought that it was futile to ask Government to pay when the latter was not satisfied that software or hardware was performing properly within the whole system of which that software or hardware only constituted a part.  Stratech, on the other hand, expected payment soon after delivery, regardless of whether hardware or software delivered by it had been satisfactorily integrated into the entire of the customised clearance systems being developed under the works.

118.  The issue therefore comes down to what “acceptance” within Main Contract Schedule 20 means.

119.  In my judgment, in its natural and ordinary meaning, “acceptance” means something similar to what “acceptance” entails under the law relating to the sale of goods. 

120.  A buyer is deemed to have accepted goods when one intimates that one has accepted them or when the buyer acts inconsistently with ownership of the goods remaining in the seller.  A buyer is not treated as having accepted goods, however, until the buyer has had a reasonable opportunity of examining the goods and ascertaining whether the goods conform to the sale contract.  Nonetheless, where a buyer does not intimate acceptance (or does not reject goods) after the lapse of a reasonable time, the buyer is deemed to have accepted.    

121.  In that light, both parties have taken an extreme position.

122.  “Acceptance” is unlikely to mean “whenever the Government decides to accept goods”.  That would subject ATAL to the whims, right or wrong, of the Immigration Department.  That would be arbitrary.  If that was meant, clearer words would have been necessary.

123.  On the other hand, it cannot be that there is “acceptance” right at the moment of delivery.  Government or ATAL should at least have a reasonable opportunity of examining whatever is delivered to assure themselves that the piece of hardware or software conforms to what should have been delivered.  Government or ATAL must have a reasonable opportunity to inspect the hardware or software to see that the same did not suffer from defect. 

124.  This does not mean that Government or ATAL could insist that, before there can be acceptance, the hardware or software delivered by Stratech must be fully integrated into a passenger or vehicle clearance system.  The work involved in customising a piece of software or hardware supplied by Stratech into a fully operational APCS or AVCS (a process which could take several years) is a wholly different matter. Remuneration for such customising would be dealt with as part of the staged payments for implementation services.

125.  Once a reasonable time for inspection of the hardware and software supplied by Stratech had elapsed, ATAL was entitled to apply for payment of the hardware or software.  Government was obliged to pay as stipulated in the Main Contract.  ATAL was in turn obliged to pay “back-to-back” as stipulated in the Sub-Contract.

Issue 9

126.  The parties did not explore in any detail when a reasonable time would have elapsed for inspection of any particular hardware or software delivered by Stratech. 

127.  Nonetheless, I accept Mr. Houghton’s submission that such reasonable time would at best have been a matter of weeks (not months) from the time of delivery.  Accordingly, the likelihood is that, in not paying earlier for some hardware or software, ATAL was in breach of its obligations to Stratech under the Sub-Contract. 

128.  But, prior to ATAL’s termination of the Sub-Contract in response to the tokens issue, Stratech did not treat any such breach as a repudiation entitling it to treat the Sub-Contract as rescinded.

Issue 10

129.  The October 2005 Agreement was a one-off arrangement between ATAL and Stratech.  It did not operate as a separate contract varying the entire of the payment terms under the Sub-Contract.

E. Overpayments

Issue 11

130.  The relevant payments (11 in all) were made by ATAL in advance of when ATAL believed that Stratech was entitled to receive the same.  The payments were “advances” in the sense that they were not made on a “back-to-back” basis. 

131.  ATAL made the payments before Government had “accepted” hardware or software delivered by Stratech.  Government had therefore not yet paid ATAL.  ATAL simply paid Stratech to induce the latter to perform its obligations promptly in accordance with current timetables.

132.  It was a commercial decision for ATAL to pay Stratech in advance of the time when ATAL believed (rightly or wrongly) payment was due.  In that sense, I am unable to see how without more Stratech can be said “not to be entitled to such payments”.

133.  In relation to the 1st to 6th “advance” payments, I am unable to see any vitiating factor such as duress, mistake or undue influence by which ATAL can claim to treat Stratech as not entitled to receive the same.

134.  The 7^th to 11^th “advance” payments, on the other hand, date from early December 2005.  ATAL made those payments under threat of the AVRS ceasing to operate by reason of Stratech’s programming of the tokens.  As discussed above, Stratech’s threat constituted economic duress in my view.  Therefore, in relation to those payments, there may be a vitiating factor. 

135.  But duress would only have made the 7th to 11th payments voidable.  Duress does not mean that the relevant agreements to pay were void from the beginning.

136.  ATAL is not here seeking to avoid the payments, but only to claim interest on the same.  I do not think that course is open to ATAL. 

137.  Unless ATAL avoids the agreements to pay, the payments remain valid.  ATAL cannot blow hot and cold.  In any event, as is apparent from my answers to Issues 8 and 9, it is far from clear on the evidence that the 7^th to 11^th payments were made significantly in advance of when they ought to have been made.

Issue 12

138.  The 7^th to 11^th payments (but not the 1^st to 6^th payments) were made in response to economic duress.

Issue 13

139.  For the reasons stated in Issue 11, ATAL is not entitled to damages in relation to the 7th to 11th payments.

F. Due diligence

Issue 14

140.  Stratech’s refusal to deliver software or hardware as a result of alleged late payment by ATAL constituted a breach of the Sub-Contract.  Given (as discussed in Issues 8 and 9) that ATAL was in breach of its obligations under the Sub-Contract in not applying to Government earlier for payment, Stratech was still obliged to continue performing its Sub-Contract obligations. 

141.  Stratech could conceivably have opted to treat ATAL’s default as a repudiatory breach entitling Stratech to treat the Sub-Contract as terminated.  But Stratech did not do so.  Instead, Stratech decided to treat the Sub-Contract as subsisting. In that case, Stratech remained bound to fulfil its obligations and could not withhold performance.

Issue 15

142.  As a result of Stratech’s failure to deliver equipment on time for the completion of the CCTV systems at the China Ferry and Man Kam To control points, ATAL had to install temporary systems to meet the relevant works timetable. 

143.  ATAL claims $335,715 for the temporary systems. Mr. Molloy has assessed Stratech’s claim down to $282,469.99 (including overhead of 6.25%).  I accept that as the measure of ATAL’s damage for Stratech’s failure.  For convenience, I round the amount down to $280,000.

Issue 16

144.  The fact that ATAL may itself have been in breach of the Sub-Contract would not by itself have excused Stratech from performing its obligations.

G. The Value of Work by Stratech

Issue 17

145.  Stratech is entitled to payment for software supplied prior to termination of the Sub-Contract.  But, against such payment, ATAL would be entitled to set-off its damages incurred to rectify defects within the software.

Issue 18

146.  The items listed are variations.

147.  ATAL agreed to pay for the SCSI Cards.  It seems to me therefore that ATAL agreed to treat the supply of the SCSI Cards as a variation.  Straetch claims $14,260 for the SCSI Cards supplied.

148.  On Mr. C. K. Lau’s evidence, ATAL appears to have regarded the “68 Modifications” as variations.  ATAL asked Stratech to convince Government that the “68 Modifications” were variations.  But this does not alter the fact that, as far as ATAL was concerned, the “68 Modifications” were variations.  Stratech claims $1,444,800 as the invoice amount for this.

149.  In a letter dated 3 December 2004 Mr. Michael Hall of ATAL appears to have acknowledged that the Portable Checking Station Interface and Communication Server Resilience were Variation Orders.  Stratech claims $1,788,800 and $1,713,120 respectively as outstanding on the invoices for these items.

150.  The Reporting Function appears to have been accepted by ATAL as a variation.  This is because no objection appears to have been made by ATAL when Stratech repeatedly described the Reporting Function as a variation in the course of the works.  Stratech claims $654,976 as outstanding on the invoice for this variation.

Issue 19

151.  Variations were to be valued in accordance with Sub-Contract cl.9 and paid in accordance with Sub-Contract cl.15.

Issue 20

152.  In light of my conclusion on Issue 1, Stratech would only be entitled to be paid for the value of work actually done when the Sub-Contract was terminated. 

153.  ATAL disputes that the variations discussed in Issue 18 had been performed at the time of termination of the Sub-Contract. That is because by then the relevant software or hardware supplied by Stratech had not yet passed certain tests or been accepted by the Government. 

154.  It is unclear to what extent, following termination, Stratech’s variation work could be fully integrated into the system eventually delivered by ATAL.  Thus, for example, Mr. Cooney has drawn my attention to a letter from ATAL (Mr. C. K. Lau) to Stratech dated 17 March 2006 pointing out that the AVCS and APCS were operating to a certain level, but the systems were still by no means complete or within specification. 

155.  In those circumstances, I do not think that it would be right to hold that ATAL was liable to pay for the entire value of the variation work identified.  At the time of termination, such variations may not have been fully functional within the terms of the Sub-Contract and so ATAL would not have been enjoying the benefit of anything like their full value (if at all).  Nor is it clear to what extent the variation works were (or could be) incorporated into ATAL’s work-around systems.

156.  My difficulty is that Stratech has not adduced evidence (expert or otherwise) valuing the variations as at termination.  Mr. Houghton has attempted to make good the omission by relying on amounts invoiced or agreed with ATAL for the variation work.  But Stratech’s invoices (even if the amounts charged were not substantially queried by ATAL before termination) do not necessarily reflect the true value of the relevant variation works as actually performed.

157.  In the absence of cogent evidence, the most that I can do is to credit Stratech with a nominal amount as representing the value of the disputed variation works at termination.  I will accordingly allow a credit of $100,000.

158.  I can, however, include in my assessment a credit of $800,485.90 assessed by Mr. Molloy in respect of variation works agreed by ATAL to be payable to Stratech. That credit includes $14,252 (not $14,260) for the SCSI cards.  For ease of calculation, I shall round up the credit assessed by Mr. Molloy to $800,500.  

159.  I would assess total damages payable to ATAL as follows:-

(1) ATAL’s costs related to termination
(a) One time cost $780,000	$780,000
(b) Maintenance cost over 10 years	$18,700,000
SUB-TOTAL	$19,480,000
(2) ATAL’s costs for AVRS replacement	$1,550,000
(3) ATAL’s costs for 30 June 2006 measures	$110,000
(4) ATAL’s costs for AMS & KMS replacement	$4,280,000
(5) ATAL’s costs for temporary CCTVs	$280,000
ATAL’S TOTAL COSTS FOR COMPLETING
SUB-CONTRACT	$25,700,000
ADD: Total previous payment to Stratech
($13,303,659.27 rounded down)	$13,300,000
ATAL’S TOTAL COST	$39,000,000
LESS: Sub-Contract Value
($17,372,655.41 rounded up)	$17,380,000
LESS: Value of agreed variations	$800,500
LESS: Nominal amount for variations	$100,000
LESS: Maintenance Sub-Contract Value
($12,003,261 (that is, $4,852,383
(for 2nd - 4th yrs) + $7,150,878
(for 5th -10th yrs)) rounded down)	$12,000,000
ATAL’S TOTAL DAMAGES	$8,719,500
	(say $8,720,000)

H. Copyright

Issue 21

160.  As far as I can see, Stratech’s pleaded claim for copyright infringement is confined to the unlicensed use by ATAL of the suites of programs comprising the AMS, KMS and AVRS (as particularised in Appendix F of its Re-Re-Re-Re-Amended Statement of Claim). I therefore read Stratech’s claim as confined to the unlawful copying or use by ATAL of the source code of the identified suites of programs.

161.  In respect of source code, contrary to Stratech’s allegation, there was no evidence at trial that ATAL had wrongfully copied Stratech’s source code in coming up with a work-around to the AMS, KMS or AVRS.  Dr. Dan Hong (Stratech’s expert) candidly admitted that she had “no hard evidence” of any copying of source code.

162.  A claim for copyright infringement may extend to a complaint for unlawful copying of the design of a program (that is, the structure, sequence and organisation of a program).  But, if design infringement is to be the subject of complaint, one’s pleading must specify what elements of what program’s design have been wrongly infringed. 

163.  Stratech’s pleading does not identify any design or structural elements of particular programs in which Stratech claims to have the copyright.  No explanation is given as to why Stratech claims to enjoy the copyright over any specific design, structural or organisational features of any particular programs.

164.  All that Stratech pleads is that “on a date ... unknown ..., [ATAL] ... reproduced a substantial part (or parts) of the structure of the APCS/ AVCS/ AVRS/ Variation Order Software”. That is wholly inadequate.  ATAL would have no idea from such bare allegation what precisely Stratech’s case was against ATAL in respect of the infringement of the structure of Stratech’s programs.

165.  Stratech attempted to advance a case through Dr. Dan Hong’s evidence that ATAL had wrongly infringed Stratech’s “design documentation”. Here I agree with Mr. Gerard McCoy SC (also appearing for ATAL) that such attempt was impermissible.  It was not the function of Dr. Hong’s report to advance a case which Stratech had never particularised. 

166.  In any event, the project’s design blueprint, the System Analysis & Design Report (SADR), appears to have been the result of the combined efforts of Government, ATAL and Stratech.  I accept Mr. Shrisankaraan’s evidence to the effect that the SADR was a “collective design of the Immigration Department, ATAL, EDS [another sub-contractor] and Stratech”.  It is therefore unclear how Stratech can claim copyright in any “design documentation”.

Issue 22

167.  I have answered this question in Issue 6.  The AVRS was “Contractor Supplied Software,” whereas the AMS and KMS were “Custom Programs”.

Issue 23

168.  By Main Contract Condition 10 (which Stratech is deemed to have known and accepted) the intellectual property rights in Custom Programs “shall be vested in the Government upon delivery to the Government”. Accordingly, there can be no basis for a case of copyright infringement in relation to the AMS and KMS.

169.  By Main Contract Condition 24 (which Stratech is also deemed to have known and accepted) an “irrevocable non-exclusive sub-licensable licence to use ... the Contractor Supplied Software” is granted to Government as from delivery of the same.  It follows that an irrevocable non-exclusive licence for the use of the AVRS was deemed to have been granted with the delivery of the latter to Government.

170.  Stratech argues that, pending full payment of the contract amount for the AVRS, only temporary licences have been given to ATAL or the Government.  I am unable to accept this submission.  That is not what the parties agreed. 

171.  The parties agreed that an irrevocable licence would be granted upon delivery.  That express agreement militates against construing an implied term that a licence was only to vest temporarily until full payment.

172.  Mr. Houghton suggests that reading Main Contract Condition 24 literally would put Stratech in the absurd position that it was “effectively giving away intellectual property, either pending payment on an unknown date, or even in perpetuity”. I do not see anything absurd in that position. 

173.  The grant of a licence and full payment for the AVRS have not been made conditional upon each other in respect of the AVRS. Nothing in the Main Contract or Sub-Contract qualifies the clear import and effect of Condition 24.

174.  ATAL also relies on Copyright Ordinance (Cap.528) ss.15(1) and (2) in support of its case.  Section 15(1) provides that copyright in a commissioned work belongs to the person who is entitled to the copyright under any agreement between the author and the commissioner of the work.  Section 15(2) provides that the person commissioning a work has an exclusive licence to exploit the same for “all purposes that could reasonably have been contemplated ... at the time the work was commissioned”. 

175.  In light of my conclusions in relation to Main Contract Conditions 10 and 24, it is unnecessary for me to consider the application of those provisions.         

Issue 24

176.  See the Answer to Issue 21.

Issue 25

177.  In light of my conclusions in relation to Issues 21 to 23, Stratech’s case on infringement of copyright fails. 

178.  There is no evidence of ATAL having copied Stratech’s source code.  Further, copyright in the AMS and KMS vested in the Government upon delivery and Government had an irrevocable licence for the use of the AVRS.  To the extent that ATAL was using the AMS, KMS and AVRS pending development of a work-around, ATAL would have been covered by Government’s intellectual property rights.  

179.  Stratech has not properly or sufficiently pleaded any case of design infringement.  In any event, the SADR was a joint document.  It is therefore unclear how copyright in design vests in Stratech.

Issue 26

180.  In light of the answers to Issues 21 to 25, this Issue does not arise.

Issue 27

181.  In light of the answers to Issues 21 to 25, this Issue does not arise.

I. Defamation

Issue 28

182.  Stratech pleads that at a press conference on 29 June 2006 Mr. Otto Poon of ATAL made defamatory statements.  The difficulty is that, contrary to Mr. Houghton’s submission, Stratech has simply pleaded the alleged defamatory meanings of what Mr. Otto Poon spoke.  Stratech has not actually pleaded the precise words (whether in Chinese or English) spoken by Mr. Poon which are said to bear the pleaded defamatory meanings. 

183.  The Court is therefore unable to assess whether any particular words spoken by Mr. Poon could in their ordinary and natural meaning have the meanings alleged by Stratech. 

184.  A transcript of what Mr. Poon is alleged to have said was included in the trial bundle.  But the transcript is to a great extent an English translation of what Mr. Poon said in Chinese.  It is not known who did the translation.  Nor is it known to what extent the translation captures the nuance of what Mr. Poon actually said (as opposed to embellishing the same).  In evidence, Mr. Poon was not prepared to accept the translation as an accurate account of what he said in Chinese.

185.  Further, the transcript is a long one.  In light of the deficiencies of Stratech’s pleading, it is far from evident which precise parts of the transcript are said to bear the numerous alleged meanings pleaded by Stratech.

186.  In those circumstances, it seems to me that Stratech’s pleading of defamation is embarrassing.  Stratech’s case on defamation fails from the outset.

Issue 29

187.  In light of the answer to Issue 28, this Issue does not arise.

Issue 30

188.  In light of the answer to Issue 28, this Issue does not arise.

Issue 31

189.  In light of the answer to Issue 28, this Issue does not arise.

Issue 32

190.  In light of the answer to Issue 28, this Issue does not arise. 

191.  In any event, it appears to me that Mr. Poon would have a defence of fair comment. 

192.  Mr. Poon was responding at the press conference to news that Stratech had programmed the tokens to switch off the AVRS. Insofar as the transcript correctly records what he said, Mr. Poon would have simply been giving his honest views on a matter of public interest (namely, the degree to which passengers and vehicles could pass smoothly through Hong Kong’s borders if the AVRS ceased to function).

193.  Mr. Poon would have been entitled to say something about how the problem had arisen, to state his opinions on Stratech’s conduct leading to the problem, and to explain how the matter was to be dealt with in the future without reference to Stratech.

Issue 33

194.  In light of the answers to Issues 28 and 32, this Issue does not arise.

III. CONCLUSION

195.  There will be damages in favour of ATAL against Stratech in the net amount of $8,720,000.  Interest will run on that sum at 1% over HSBC prime from the date of the Statement of Claim (3 August 2006) to the date of this Judgment.  Thereafter interest will run at the judgment rate until payment.

196.  There will be an Order Nisi as follows:-

(1) ATAL is to have 95% of its costs of the consolidated actions, such costs to include the costs of ATAL’s application to strike out parts of Stratech’s claim.

(2) Mr. Poon is to have his costs as against Stratech.

(3) All costs are to be taxed on a party and party basis if not agreed.

(4) There will be certificate for 2 counsel.

197.  ATAL has substantially prevailed.  However, until the eve of trial, ATAL itself maintained a claim for defamation against Stratech.  That claim was bound to fail in light of a deficiency in ATAL’s pleading similar to that identified above in respect of Stratech’s defamation claim. Frankly recognising its difficulty, at the eve of trial, ATAL applied to amend its claim by striking out its own pleading in defamation.  In light of that, I do not think that it would be right to award ATAL’s 100% of its costs.

198.  There will be liberty to apply.