TICTAS SYSTEM AUTOMATION LTD v. EXPLORER TRAVEL LTD

DCCJ 3826/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3826 OF 2013

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J U D G M E N T

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1.  The Plaintiff is a company in the business of distribution and sublicensing (in Hong Kong) of the Worldspan Global Distribution System (GDS), which is one of four systems used by travel agencies to make bookings for flights and hotels in Hong Kong.

2.  The Defendant is a travel agent who was a subscriber of the Worldspan GDS pursuant to successive subscriber agreements entered into with the Plaintiff since in about 2005.

Background

3.  The Plaintiff and the Defendant had entered into successive subscriber agreements, the most recent of which being one dated 1 October 2009 (“the Subscriber Agreement”).  Pursuant to the Subscriber Agreement, the Plaintiff had placed with the Defendant necessary equipment to facilitate the latter to use the service of Worldspan.

4.  Pursuant to Clause 12, the term of the Subscriber Agreement was set out to be for four years, i.e. until 1 October 2013 (Clause 12(a)).  It was provided under Clause 12(b) that the Subscriber Agreement would be automatically extended on a yearly basis unless either party gave written notice of termination 60 days prior to expiry of the relevant term (“the 60 days notice period”).  In the circumstances of the Subscriber Agreement, written notice of termination had to be given by 1 August 2013 (“the Deadline”), or it would automatically be renewed up till 1 October 2014.

5.  Negotiations had taken place between the parties before summer of 2013 and a new subscriber agreement in place of the Subscriber Agreement.  There was no agreement reached but a notice of termination was served by the Defendant on 26 August 2013 (“the Termination Notice”).

The Plaintiff’s Case

6.  The Plaintiff took the Termination Notice as a repudiatory breach on the part of the Defendant as it had evinced a clear intention of not to be bound by the Subscriber Agreement.  On 5 September the Plaintiff issued a letter to accept the breach and terminate the Subscriber Agreement with effect from 1 October 2013 (“Letter of Acceptance of Breach”).  After some attempts on mediation, these proceedings were taken out in which the Plaintiff asked that damages be awarded under Clause 15(g) in the amount of $624,960.  In fact the Worldspan service was suspended on 30 September 2013 with equipments repossessed on 3 October 2013.

The Defendant’s Case

7.  The Plaintiff’s claim is defended on the following basis:

	(a)	Whether there were without prejudice communication between the parties;
	(b)	The Plaintiff is not entitled to rely on Clause 15(g) as the Plaintiff had failed to serve a notice as required by Clause 15(a) and the termination was ineffective;
	(c)	Clause 15(g) is a penalty clause and is therefore unenforceable;
	(d)	In any event, there has been a waiver by the Plaintiff to strictly enforce its right to insist on the 60-day notice period for any termination notice under Clause 12(b); and
	(e)	the Plaintiff had failed to mitigate its loss.

8.  By its Counterclaim, the Defendant asked for its entitlement on user credit and a special bonus to be awarded under Clause 11(d).  Parties had resolved this matter between themselves and the remaining issue to be determined by this court is whether any set off is applicable in relation to the Plaintiff’s claim and the Defendant’s counterclaim.

The Issues

9.  The defence set out in paragraph 7 above is basically the agreed issues to be determined.

Whether Notice Required Prior to Plaintiff’s Termination

10.  In its Statement of Claim, the Plaintiff had highlighted Clauses 15(d)(i) and 8(a)(iii) of the Subscriber Agreement together with other terms in the Subscriber Agreement.  The position taken by Plaintiff during trial and counsel’s submission was that the breach was material and therefore would not require a written notice prior to termination.

11.  Mr Li for and on behalf of the Defendant submitted that under the Subscriber Agreement, there are only 2 situations where the Plaintiff would be allowed to terminate the Subscriber Agreement, they are namely Clauses 15(a) and (d).  Clause 15(d) deals with situation where the Defendant has committed a “material breach” and the Plaintiff would be entitled to immediately terminate the Subscriber Agreement without further notice.  He said that the Termination Notice served by the Defendant did not fall within any of the recognized “material breach” categories prescribed under Clause 15(d) and Clause 8(a)(iii).

12.  The text of the two provisions must be read together:-

	Clause 15(d): Notwithstanding any of the foregoing, the following events shall be considered material breaches of this Agreement and the COMPANY shall have the right to immediately terminate this Agreement, without notice to the subscriber and without further liability hereunder:
	(i)	Default in the Defendant’s obligations set forth in Clause 8(a)(iii);
	Clause 8(a)(iii): Failure of the [Defendant] to fulfill the Minimum Bookings for two successive quarters shall constitute a breach of this Agreement.”

13.  Mr Li further submitted that it was instead a situation caught under Clause 15(a) and therefore notice must be served prior to termination.

14.  In reply, Mr Hariman submitted that a material breach means something more than a trivial breach.  The phrase must be construed in each context and in light of the surrounding words.  Since the Termination Noticeevinced an intention not to be bound by and purported to bring an end to the Subscriber Agreement notwithstanding the same being valid and subsisting up until 30 September 2014. It clearly amounts to a repudiatory breach and it goes to the root of the Subscriber Agreement and must be by all accounts a material breach.

15.  Further Mr Hariman said that the breach cannot come within the kind of breaches envisaged by and falling under Clause 15(a) which is capable of being remedied.  An example of this is the failure in paying service charges as prescribed under Part II of Schedule A.  On the other hand, the breach brought about by the Termination Notice was not capable of being cured.

16.  Besides, Mr Hariman said, when one considers the term in Clause 15(d) and words used therein, there is nothing expressly limiting material breaches to the three instances of sub-clauses (i)-(iii) thereunder.  

Discussion on Whether Notice Required

17.  Parties’ attention was drawn to Clause 15, the title of which is “Event of Default and Termination”.  Clause 15(a) and (d) deals with situations where the Plaintiff could terminate the Subscriber Agreement.  Clause 15(a) deals with default in payment or obligation where notice is required prior to termination.  On the other hand, for “material breaches” under 15(d), no notice is required.  

18.  To take a closer look at the Statement of Claim, the Plaintiff did not expressly rely on Clause 8(a)(iii) to say that immediate termination was warranted as the Termination Notice amounted to material breach.  The relevant part should be:-

	(i)	paragraph 9: In breach of the [Subscriber] Agreement, by a letter dated 26 August 2013, the Defendant served a notice to terminate the services provided by the Plaintiff... and wrongfully repudiated the Agreement and evinced an intention not to be bound by the Agreement with effect from 30 September 2013.”
	(ii)	paragraph 10: By a letter of reply dated 5 September 2013, the Plaintiff accepted the Defendant’s repudiation... and agreed to terminate the Agreement with effect from 1 October 2013.”

19.  Mr Hariman’s submission at paragraph 47 of his written closing submission that although the Termination Notice was not one of the 3 scenarios provided under 15(d) but it was impliedly a material breach as it went to the root of the Subscriber Agreement.

20.  In my judgment the above approach taken by counsel for both parties was misconceived.  When there is a breach the innocent party finds it to be fundamental as it goes to the root of a contract, which is usually called a repudiatory breach, he is entitled to accept the breach and treat himself as discharged and no longer to be bound by the contract.  This is the basic position under the common law.  Applying that in the present case, if it is established that the Termination Notice had amounted to a repudiatory breach, the Plaintiff is entitled to accept the breach and treat that it was discharged from further obligations under the Subscriber Agreement.  The Plaintiff did not have to rely on Clause 15 be it under sub-clauses (a) or (d).  In any event, for completeness I agree with Mr Hariman that clause 15(a) does not include a situation of repudiatory breach on the part of a subscriber.  On the other hand, I do not find upon proper construction of Clause 15(d) that parties had intended that Clause 15(d) shall deal with repudiatory breach.

21.  The next question one would ask is whether the Termination Notice was a belated notice which called for an automatic extension for 1 year (the “Extended Term”) pursuant to Clause 12(b); or it was a repudiatory breach as alleged by the Plaintiff.  The text of the Termination Notice is this:-

“Dear Sirs,   Re: Termination of Services   Reference were made to the Subscriber Agreement made between the Tictas System Automation Ltd (“the Company”) and Explorer Travel Ltd (“the Subscriber”) date 1 October 2009.   We, Explorer Travel Ltd, being the Subscriber, hereby serve our notice to terminate the services provided by the Company with effect from 30 September 2013.”

22.  The Plaintiff’s case was premised on the assertion that the Termination Notice served after the Subscriber Agreement being renewed evinced an intention to terminate the Subscriber Agreement including the Extended Term altogether.  Such breach went to the root of the contract and therefore the Plaintiff was entitled to accept the repudiatory breach by terminating the Subscriber Agreement and ask for damages to be assessed for loss in the whole of the Extended Terms, i.e. 12 months, under Clause 15(g).

23.  The Defendant tried to say that it was not aware that the Subscriber Agreement had been extended.  If I accept the Defendant’s case, it may be a situation where the Termination Notice only called for the imposition of the Extended Term under Clause 12(b) as the Termination Notice was served after the Deadline.

24.  The Plaintiff produced some e-mail exchange to say that before the time the Termination Notice was served, the Defendant was well aware of the Extended Term being effected on 1 August 2013. There was one email dated 15 August 2013 (11 days before the Termination Notice was issued) in which Mr Cheung of the Defendant asked Mr Nanda of the Plaintiff to clarify that the Subscriber Agreement would expire in September 2013 and not 2014.  In a reply sent out 1 hour thereafter, Mr Nanda said that by operation of Clause 12(b), the Subscriber Agreement would expire on 1 October 2014.  Mr Cheung and Mr Chau, witnesses for the Defendant testified that they were not aware of this email or their English was insufficient to understand the content. I do not accept their evidence on this upon reading the series of the email exchange. The fact that the Defendant asked in the email dated 15 August 2013 indicated that the Extended Term had been mentioned to them earlier than that date, according to Ms Katherine Chan (“Ms K Chan”), on 12 August 2013.

25.  On balance, I find that the Termination Notice was issued after the Defendant was well aware of the renewal or extension of the Subscriber Agreement, and that the Defendant served the Termination Notice as a deliberate attempt in seeking to be discharged from being bound by the Subscriber Agreement including its Extended Term.  It is, in my judgment, a repudiatory breach on the part of the Defendant. 

26.  As mentioned in paragraph 20 above, in the event of a repudiatory breach, the innocent party, the Plaintiff herein, is entitled to accept the breach and treat itself to be discharged from the Subscriber Agreement under the common law.  The provisions under Clause 15(a) and (d) are not relevant.  In the circumstances, I find that there was no duty on the Plaintiff to serve a notice for the Defendant to cure the breach before accepting the breach in the present case.

Whether Clause 15(g) a Penalty Clause

27.  The text of Clause 15(g) is this:-

“Upon termination of this Agreement by the COMPANY [the Plaintiff] as a result of the breach by the SUBSCRIBER [the Defendant] of any of its obligations herein, the COMPANY shall, in addition and without prejudice to its other rights and remedies, be entitled to immediately recover against the SUBSCRIBER the amount of HK$43.40 (inclusive of the Service Charge as stipulated in Part II (clause 2) of Schedule A) for every booking short of the Minimum Bookings as agreed liquidated damages which the parties hereto specifically agree to be genuine pre-estimated loss by the COMPANY [the Plaintiff] from the effective date of termination of this Agreement till the last date of the Initial Term or such Extended Term whichever is the later date”).”

28.  The Plaintiff asserted that Clause 15(g) is a liquidated damages clause as expressly stipulated in the provision.  Mr Hariman relied on Ip Ming Kin v Wong Siu Lan, CACV 201/2012, 28 May 2013 and submitted that the essence of a penalty is a payment of money stipulated as in terrorem of the offending party, whereas the essence of liquidated damages is a genuine pre-estimate of damages; for a pre-estimate to be unreasonable, there must be a substantial discrepancy between the estimated damages and the level of damages likely to be suffered; a provision will be held to be a penalty if the sum stipulated for is extravagant and unconscionable; and the reason why the parties do agree to such stipulation is that the nature of the damage is such that proof of it is extremely complex, difficult and expensive.

29.  According to his submission it is also important to note the remarks of Lord Woolf in the Privy Council Judgment of Philips Hong Kong Ltd v The Attorney General of Hong Kong [1993] 1 HKLR 269 at 276(20-35):-

“...Whatever the degree of care exercised by the draftsman it will still be almost inevitable that an ingenious argument can be developed for saying that in a particular hypothetical situation a substantially higher sum will be recovered than would be recoverable if the plaintiff was required to prove his actual loss in that situation. Such a result would undermine the whole purpose of parties to a contract being able to agree beforehand what damages are to be recoverable in the event of a breach of contract. This would not be in the interest of either of the parties to the contract since it is to their advantage that they should be able to know with a reasonable degree of certainty the extent of their liability and the risks which they run as a result of entering into the contract.”

30.  Mr Hariman also drew the attention of this court to a decision of the UK Supreme Court in the joint appeals of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2015] 3 WLR 1373.  As highlighted in the case summary, it was held there that:-

“The fact that a provision did not provide for pre-estimate of loss, or that it was deterrent, did not necessarily mean that it was penal, since the legitimate interest of the innocent party might extend well beyond the recovery of compensation for his loss; and that, in a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption had to be that the parties themselves were the best judges of what was legitimate in a provision dealing with the consequences of breach.”

31.  Mr Hariman therefore said that applying the above to the present case,  if Clause 15(g) were found not to provide for a pre-estimate of loss or to be a deterrent, it would not be struck down as a penalty clause if a legitimate interest to the clause could be established.

32.  To persuade this court in accepting that Clause 15(g) has stated a genuine pre-estimate of loss provides for liquidated damages and not meant to be deterrent, Mr Hariman relied on the evidence of the Plaintiff’s witnesses.  Ms K Chan who had been working for the Plaintiff for over 20 years gave evidence on why there was this Clause 15(g) and how $43.40 was arrived at.  Her evidence is summarized by Mr Hariman as below:-

	(1)	Pursuant to the Distributor Agreementbetween the Worldspan group of companies (“Worldspan”) and Creative Technologies Limited (“CTL”).  Worldspan, being owners of the GDS, granted the rights and obligations pertaining to the distribution / sublicensing of the GDS to CTL, the majority shareholder of the Plaintiff.  Clause 5 of Schedule 5.2 of the Distributor Agreementincluded the obligation imposed on CTL to generate 500,000 as Net Billable Booking Requirement from the 3rd year of the Distributor Agreement.  CTL in turn passed on such rights and obligations to the Plaintiff by virtue of the Distribution Services Agreement.  CTL is thus dependent on the Plaintiff for its obligations owed to Worldspan to be met.  The Plaintiff is in turn reliant on subscribers including the Defendant for the Net Billable Booking Requirement to be met, which is achieved by the imposition of a minimum bookings requirement stated in Paragraph II 1 of Schedule A of the Subscriber Agreement.
	(2)	Should the obligation set out hereinabove not be met, any loss of profit sustained by Worldspan as a result would have to be made up by CTL and the Plaintiff in turn to CTL.  Hence whether the Plaintiff is able to meet its obligations to CTL, and in turn CTL to Worldspan, depends on its subscribers including the Defendant making the minimum bookings as required.
	(3)	The sum of $43.40 per booking was arrived at after taking into account various factors (see paragraph 58 below).

In conclusion Mr Hariman said that based on the above, Clause 15(g) is a genuine pre-estimate of damages to be applied in case of breach on the part of the Defendant and there was a legitimate interest to serve. 

33.  Mr Li on the other hand argued on behalf of the Defendant that Clause 15(g) is penal and not enforceable.  First he said the judgments in Cavendish and ParkEye are not binding on Hong Kong courts.  Instead, he invited this court to make reference to the legal principles that are presently applied in our jurisdiction by the Court of Appeal in Ip Ming Kin at paragraph 41:-

	(a)	It will be held to be penal in nature if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.  (Illustration given by Lord Halsbury in Clydesbank Case [1905] AC 6).
	(b)	It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren (1829) 6 Bing. 141.)
	(c)	There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. 11 App Cas 332).
		On the other hand:
	(d)	It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties (Lord Halsbury, Clydebank Case [1905] AC 11; Lord Mersey, Webster v. Bosanquet [1912] AC 398).

34.  Mr Li further submitted that in determining whether Clause 15(g) is a penalty clause, some peculiar features in the present case should be noted.  He said that the Distribution Agreement and the Distribution Services Agreement are irrelevant and should not be considered by this court.  Mr Hariman submitted that the contractual relationship between the Plaintiff and CTL arises by virtue of the fact that CTL subcontracted its rights and obligations under the Distributor Agreement to the Plaintiff by virtue of the Distribution Services Agreement.  The Distribution Services Agreement between that of the Plaintiff and CTL mirrors that of the Distributor Agreement, namely the obligation is imposed on the Plaintiff to meet the Net Billable Booking Requirement, i.e. 500,000 per year.  The Net Billable Booking Requirement mirrors that of the one owed by CTL to Worldspan.  As such CTL is reliant upon the Plaintiff to generate the minimum number of bookings so that the Net Billable Booking Requirement owed to Worldspan can be met.

35.  Mr Hariman also submitted that it is stipulated under Clause 14.1 of the Distribution Services Agreement that if the Plaintiff fails to meet the Net Billable Booking Requirement by the end of year three onwards, CTL shall have the right to appoint a replacement company to distribute the Worldspan Products in the Plaintiff’s territory or to terminate the Distribution Services Agreement.  This almost exactly mirrors the Distributor Agreement.  Further the Plaintiff will make up the shortfall and reimburse CTL the equivalent of the prevailing average booking fee Worldspan receives from its participating carriers.  It mirrors what CTL could have to do against the Plaintiff in the event of the same in respect of the Distributor Agreement.

36.  This is my view on this sub-issue.  It is not disputed that CTL is the majority of the Plaintiff holding 95% of its interest.  The Plaintiff’s case was that CTL entered into Distributor Agreement with Worldspan for the distribution (via the Plaintiff) of Worldspan’s computer reservation system.  CTL in turn entered into a Distribution Services Agreement with the Plaintiff for it to further distribute the service to subscribers who are the end users of the service.  The main concern of Worldspan at the time of the Distribution Agreement, apart from performance of other obligations thereunder, was that Mr Nanda would be the person running the business.  Under Clause 13.3.2, it was stipulated that “In the event that Sunil Nanda ceases (other than by reason of his physical or mental incapacity) to remain the managing director of the Nominated Company, Worldspan may serve on CTL a written notice setting forth the particular default and such default continues for a period of 60 days... Worldspan may terminate this Agreement by providing CTL with 180 days prior written notice.

37.  “Nominated Company” was defined in Schedule 1.1 to mean “a company incorporated under the laws of Hong Kong which has entered or will enter into Subscriber agreements with Subscribers in the format set forth in Schedule 6.1.”

38.  Under Schedule 6.1 of the Distributor Agreement there is a form Subscriber agreement.  It is referred to in Clause 6.1 of the Distributor Agreement under which CTL “agrees that all agreements with its Subscribers... shall be in the form set out in Schedule 6.1 and CTL shall not make any modifications to the form Subscriber agreement without Worldspan’s prior written consent......”

39.  The form Subscriber agreement was initialed by parties to the Distributor Agreement i.e. Worldspan and CTL.  It was part of the Distributor Agreement.  Further as could be seen, the Subscriber Agreement subsequently made between the Plaintiff and the Defendant herein had adopted the form and the content of the form Subscriber Agreement.  Modification, if any, was slight and not relevant to these proceedings.  I do not agree with Mr Li’s saying that there was no relationship between the agreements.

40.  From the provisions set out above together with the execution of the Distribution Services Agreement, the Plaintiff in the present case must be the Nominated Company as defined under Schedule 1.1 of the Distributor Agreement.  It cannot be said that the other 2 agreements are irrelevant when the legitimate interest of Clause 15(g) is discussed.  I do not agree that one could say that the Plaintiff was unrelated to the obligation CTL owed to Worldspan.

41.  Further Mr Li submitted that the Distributor Agreement did not show what loss would be suffered by CTL should it fail to meet the Net Billable Booking Requirement.

42.  In reply, Mr Hariman submitted that how much CTL had to pay Worldspan would depend on how far they are short of the Net Billable Booking Requirement and the prevailing fee received on average per booking at the relevant time.  Further it is established that any shortfall and need to reimburse CTL by the Plaintiff by virtue of the Net Billable Booking Requirement not being met must be the result of the Plaintiff’s subscribers including the Defendant not being able to generate the minimum number of bookings.  That is the Plaintiff’s loss.

43.  In regard to the consequence in case of CTL’s failing to comply with the terms set out in the Distributor Agreement, I find Clause 5 of Schedule 5.2 in the Distributor Agreement relevant.  It stipulated that failure to achieve the Net Billable Booking threshold for 2 consecutive Contract Years, Worldspan may terminate the Distributor Agreement by providing CTL with 180 days prior written notice.  As the Nominated Company of CTL, as defined in paragraph 37 above, the Plaintiff would have no reason to exist if CTL was replaced or terminated by Worldspan.

44.  Mr Li further submitted that the Distributor Agreement between CTL and Worldspan was renewed every year on 7 July since 2003.  It was further renewed on 7 July 2013; in other words, this contract was already renewed irrespective of whether the Subscriber Agreement would be extended by the Defendant on 1 October 2013.

45.  In my judgment, the fact that the Distributor Agreement had already been renewed did not mean that Worldspan would not go after the CTL for loss if any.  To be fair to Mr Li he is entitled to say that there was no evidence to show that any claim had been made.  I do not however think we should speculate on why there was no such claim made by Worldspan or CTL against the Plaintiff even the Defendant had not been able to contribute to the Net Billable Booking Requirement. 

46.  Mr Li said that Clause 15(g) provides for a fixed lump sum for various kinds of breaches under the Subscriber Agreement i.e. Clauses 15(a) to (f).  He also suggested that had the pre-estimation by Mr Nanda be genuine, it should have adopted a sliding scale for each year.  Mr Hariman disagreed and submitted that in fact, Clause 15(g) does not stipulate a single indiscriminate sum to be payable notwithstanding the nature and type of breach.  It pays regard to the nature and duration of the breach and provides a formula for the calculation of liquidated damages.  For instance in the present case, with no bookings to be generated between 1 October 2013 and 30 September 2014 following breach, repudiation and termination of the Subscriber Agreement, the calculation is:-

43.40 x 12 (number of months) x 1,200 (minimum bookings to be generated per month) = $624,960.

47.  Compare that with a hypothetical scenario of shortage of booking, the end result would be different depending on the magnitude of shortfall.

48.  I would say that strictly speaking a rate was fixed for compensation to be calculated but not a sum.  I agree with Mr Hariman that different scenario of breach may produce different end results by applying this rate and that would reflect the severity of the breach.  If the breach was less serious, that is, the shortage was marginal the compensation to be paid would be different even though a fixed rate was to be applied.  In any event, a single lump sum payment is not a conclusive indicator to say that a term is penal. 

49.  Yet further, relying on Clause 8.2 of the Distributor Agreement Mr Li sought to suggest Worldspan was stopped from making claims for loss and/or damages against CTL.  I agree with Mr Hariman that this submission was misconceived.  Clause 8.1 and 8.2 under Article VIII provided protection to both parties by imposing limitation om liability.  The two clauses dealt with liabilities on consequential, incidental or punitive damages to CTL or their related third parties; or Worldspan or their related third parties as the case may be.  Upon proper construction, the two clauses did not exonerate either party from liability on those damages arising from failure to meet the Net Billable Booking Requirement or a fundamental breach under the common law.  On the other hand it is set out under Clause 8.5 certain situations where a party had to indemnify the other.  Clause 8.2 did not mean to be a catch-all exemption clause for any party to the Distributor Agreement to be exonerated from liabilities arising.

50.  I also agree with Mr Hariman that there is also nothing stopping or preventing Worldspan from suing CTL at common law in respect of losses / damages incurred as a result of CTL failing to meet the Net Billable Booking Requirement. 

51.  I agree with Mr Hariman on the background reason for CTL to make up any shortfall and reimburse Worldspan.  I accept Mr Nanda’s evidence about commercial sense and business efficacy in this regard.  I accept that the imposition of a minimum bookings requirement on subscribers assists the Plaintiff in meeting the Net Billable Booking Requirement under the Distribution Services Agreement.

52.  Mr Li for the Defendant also submitted that even by adding up the Net Billable Booking Requirement in all the subscriber agreements, the Net Billable Booking Requirement under the Distribution Services Agreement could still not be met.  Mr Hariman commented that this had ignored the commercial and practical realities that:-

	(i)	Different subscriber agreements commence and expire at different dates and are not identical (with the minimum bookings requirement in each case different),  so whilst the aggregation of all the minimum bookings requirement may fall below the Net Billable Booking Requirement at one point in time, it may match or exceed at another point in time; and
	(ii)	It may be the case that whilst one subscriber may fall below the minimum bookings requirement, another subscriber may generate enough to go over and above it thus offsetting the effect of any shortfall;
	(iii)	The minimum cannot be set too high either or else no subscriber would enter into agreement with the Plaintiff.

53.  More importantly, Mr Hariman said it does not displace the fact that loss incurred by the Plaintiff in having to make up shortfall due to the Net Billable Booking Requirement not being met arose from subscribers not being able to generate the requisite number of bookings.  It is to that end that liquidated damages clauses are inserted to enable the Plaintiff to be compensated for such loss.  I accept the submission of Mr Hariman.

54.  Furthermore, Mr Li said it has been stated that in assessing whether a clause is a genuine pre-estimate, the “mitigation principle must be taken into account in deciding whether or not the clause was a genuine pre-estimate in the first place” See: Chitty on Contract (32^nd edn, 2015 Volume 1) para. 26-187 and also para. 53 of Ip Ming Kin supra.  He submitted that there was no mitigation factored into $43.40.  First I say that a fixed rate  adopted to be applicable being throughout a term of 4 years should not be criticized and the suggestion of using a sliding scale was a suggestion with hind sight.  Mr Chau could have suggested that if he thought that was a more accurate estimate of the loss to be suffered in case of breach.  Further, there are many factors  to be considered when determining the enforceability of a clause.  I would say mitigation principle is one of them and it should be considered if it was one of the factors adopted in the pre-estimate.  

The Genuine Pre-Estimate Nature of $43.40

55.  Mr Hariman has set out in his final submission calculations of loss in different years using different average fee per booking.  He submitted that in place of prevailing average fee per booking at the relevant time (say $47.62 in 2014 and $45.78 in 2013), the effect of the liquidated damages clause at Clause 15(g) introduces the figure of $43.40.  The loss payable by the Defendant as a result of the said clause in respect of default for the months of January – September 2014 would be lower; instead of $514,296 (10,800 x $47.62) it would be $468,720 (10,800 x $43.40).

56.  Mr Li criticized Ms K Chan and Mr Nanda for failing to establish the Plaintiff’s position that there was genuine pre-estimate of loss in case of breach.  He said that from the evidence of Mr Nanda, it is unclear as to what minor adjustments were made and what percentage was given for the minor adjustments.  It is also unclear what was the original figure he used to add on the 3.2% to 3.3% increase, but in any case, the figure of $43.40 was intended by Mr Nanda to represent the actual average booking fee that would be received by Worldspan.  He went further to say that if, however, the average booking fee for year 2008 (that is, $36.58 is used as an example, the projection that Mr Nanda had would be as follows:-

	Year	Average Book Fees (HK$)
	2008	36.58
	2009	37.79
	2010	39.03
	2011	40.32
	2012	41.65
	2013	43.03

57.  He said that one can immediately see from the above projection that the figure $43.40 was still over and above the projection that Mr Nanda suggested he had worked out.

58.  Mr Hariman commented that the Defendant had undertook a microscopic analysis as to the reasonableness of the $43.40 but such an exercise does not take the Defendant’s case very far.  He further submitted that the methodology adopted by Ms K Chan and Mr Nanda in arriving at the figure of $43.40 had taken into account potential inflation and other economic factors; average recorded fees received by Worldspan in the past years (for the years 2003 to 2009) and historical trends.

59.  I must say that after hearing evidence of Mr Nanda and Ms K Chan, put in the light of the submission of Mr Li, I accept that the Plaintiff had made real efforts in arriving at an estimate on the loss the Plaintiff would suffer in case of breach.  Even if I accept figure of $43.03 suggested by Mr Li if the approach of Mr Nanda was adopted, I do not think it would undermine the credibility of Mr Nanda.  I do not see concrete evidence showing that $43.03 was extravagant and unconscionable to render Clause 15(g) unenforceable.

60.  I also accept Mr Hariman’s submission that Clause 15(g) existed to create certainty in the contractual relationship between the parties and facilitates business planning. 

61.  Mr Hariman further commented and I accept that Clause 15(g) only operating to the benefit of the Plaintiff ignores the business model and the different roles taken up by the parties to the Subscriber Agreement, as well as their different rights and obligations.  Mr Hariman pointed out that nothing inequitable or unfair could arise as there were GDS distributors other than the Plaintiff which the Defendant could enter into contract with should it harbour objections towards the Plaintiff over the terms and provisions of the Subscriber Agreement.

62.  In answer to the submission of Mr Li, I say that even the conventional approach in Ip Ming Kin is taken, I still do not find that Clause 15(g) is a penalty clause for reasons set out above.

63.  For completeness I shall deal with the same issue taking into consideration of the approach brought about by the decision in Cavendish.  It is not disputed that that the test is whether there is legitimate interest in having a such a clause.

64.  Mr Hariman submitted that there is a legitimate interest for the Plaintiff in having Clause 15(g) in the Subscriber Agreement and the Defendant to be bound by it.  These entail:-

	(i)	Allowing the Plaintiff to seek compensation from the Defendant if due to breach, repudiation and termination of the Subscriber Agreement the Plaintiff in turn suffers a loss by not being able to meet the Net Billable Booking Requirement pursuant to the Distribution Services Agreement and having to make up the shortfall / reimburse to CTL;
	(ii)	Same as (i) but in making up the shortfall / reimburse to CTL, alleviating or inducing CTL so as not to exercise its right to terminate the Distribution Services Agreement, with or without CTL being able in turn to alleviate or induce Worldspan not to exercise its right to terminate the Distributor Agreement or preclude a claim for indemnity from Worldspan;
	(iii)	Facilitating the Plaintiff to meet its obligation of making the Net Billable Booking Requirement to CTL under the Distribution Services Agreement, with or without resulting in CTL being able in turn to meet its obligation of making the Net Billable Booking Requirement to Worldspan under the Distributor Agreement; and/or
	(iv)	Providing a clear, cost saving formula and approach to the calculation of liquidated damages in the event of the Subscriber Agreement being terminated.

65.  I accept the submission of Mr Hariman and find that in the circumstances of the present case, there was a legitimate interest in having the Clause.  In my judgment, Clause 15(g) is a liquidated damages clause and is enforceable.

Waiver of Clause 12(b)

66.  Having ruled that Clause 15(g) is not a penalty clause and therefore enforceable, I shall now deal with another point raised by the Defendant and that is the issue on waiver.  The Defendant alleged that  breach of the Subscriber Agreement if any had been waived.  It sought support from the following:-

	(a)	The parties were actively and proactively engaged in negotiations from June to July 2013 to enter into a new contract with different terms to take effect after the expiration of the Subscriber Agreement;
	(b)	The Defendant had informed and reminded the Plaintiff that Defendant would switch to another system; including but not limited to the whatsapp messages between Ms Sylvia Chan (“Ms S Chan”) of the Plaintiff and Mr Cheung Ka Chun of the Defendant;
	(c)	The Plaintiff had in early August delivered 2 new draft agreements to the Defendant and enquired if any of them had been signed on 12 August 2013 which was consistent with the Plaintiff having waived its rights under Clause 12(d), this is also consistent with the assurance given by Ms S Chan of the Plaintiff on 22 August 2013;
	(d)	Unfortunately, negotiations between the parties subsequently failed, and on 10 September 2013 Ms K Chan of the Plaintiff and Mr Chau of the Defendant agreed that the Subscriber Agreement be extended for a year.  Ms K Chan confirmed that Mr Chau told her on that day that he would extend the contract for one year; and
	(e)	Following that confirmation, a letter was sent to the Plaintiff on 19 September 2013 and was delivered on the same day.  Ms K Chan was able to tell it was 19 September 2013 that she received the letter was because of the date stamped on the letter.  Had Ms K Chan’s evidence that she declined the option to extend the Subscriber Agreement for one year been the true version, it would be surprising to note that the Plaintiff never responded to challenge the aforesaid letter.

67.  Mr Hariman said that first all communication after 1 August must be without prejudice as a dispute then existed between the parties and legal proceedings must have been in contemplation.  Any offers to settle made thereafter must have been under without prejudice correspondences, which are inadmissible as evidence.  He also said that it is most improbable for there to be nothing in writing from the side of the Plaintiff if any agreement had indeed been reached as contended by the Defendant.  The form and nature of the Defendant’s purported notice of acceptance of renewal allegedly dated 19 September is also suspicious and self serving.

68.  The Plaintiff’s case was also that operation of Clause 19 of the Subscriber Agreement also precluded the Defendant from being able to rely on any purported waiver.

Clause 19 WAIVER   “Failure or delay of the COMPANY to require strict performance or to enforce any provision of this Agreement or the granting of any previous waiver or forbearance by the Company shall not be construed as a waiver with respect to the same or any provision of this Agreement or to any act or omission of the SUBSCRIBER.”

69.  The Defendant said that this has not been pleaded by the Plaintiff and in any event, Clause 19 is not applicable to the present case.

70.  Perhaps it is convenient to deal with the pleading point first.  It has been pleaded in paragraph 5 of the Statement of Claim that “the Plaintiff shall refer to the [Subscriber] Agreement for its full term, true meaning and effect at the trial of this Action”.  This covers Clause 19 as and when necessary.  Further, I do not find that the Defendant would be prejudiced by the Plaintiff’s not pleading Clause 19 as the argument was its construction only.  

71.  There are different kinds of waiver.  The Defendant’s did not specify on kind of waiver but the submission of Mr Li shows that it was waiver by estoppel that the Defendant relied on.  Under this doctrine, there was agreement between parties or the conduct of a party had led the party in default to believe that he will not exercise that right.[1]  It is trite that first the conduct must be clear and unequivocal and secondly even though consideration may not be required, the other party must have altered his position in reliance on it or at least acted on it.[2]   

72.  From evidence before me the mere fact that there was on-going negotiation between parties could not have amounted to waiver in the circumstances of the present case.  There was no clear and unequivocal statement or conduct to say that parties’ right under the Subscriber’s Agreement should be subrogated.  The negotiations including the drafts were only business tactics to get the best for the Plaintiff or for both in the situation.

73.  In my judgment, the fact that negotiation started in February 2013 while the 2009 Contract was to expire by end of September same year was good indication that the Plaintiff at least had allowed sufficient time for negotiation.  I accept Ms K Chan’s evidence that although the Extended Term was automatically effected on 2 August 2013 to commence on 1 October 2013, it would be for 1 year only.  For commercial reasons, the Plaintiff was still trying to negotiate for a new contract for longer terms.

74.  Further I find nothing in the whatsapp messages between Ms S Chan and Mr Cheung of assistance to the Defendant in establishing its case on waiver.  The discussion in July was focused on whether the new contract should be for 6 or 7 years.  It was not disputed that the Deadline to prevent the Extended Term to take effect was on 1 August 2013.  There were massages exchanged on 2 August 2013 but nothing crucial had been said except that there was conversation about Ms S Chan having failed to attend an appointment with Mr Chow.  Again nothing substantial was exchanged in those messages dated 7 and 8 August 2013.  Nothing had been said that the Defendant did not have to serve a notice pursuant to Clause 12(b) or the consequence thereunder was subrogated to any extent.

75.  Further I would say that neither Ms S Chan nor Mr Cheung could have a final say on the terms of the new contract.  They might have certain instructions as to the length of the new contract they should bargain for their own employer.  But as could be seen from the whatsapp messages they were actually exchanging thoughts and ideas to test the bottom line of the other side.  In any event nothing material had been proposed or determined after 25 July 2013 as could be shown by the whatsapp messages. 

76.  I do not find the negotiations or the enquiry as to whether the final draft had been signed on 12 August 2013 (11 days after the Deadline) material in saying that there was a waiver.  The terms offered therein were different from the Extended Term.  It was a contract for 6 years.  It was part of the negotiation carried on since early 2013.  It can no doubt be understood that if parties failed to reach a new contract, the new contract would of course take the place of the Extended Term.

77.  There remain some dispute on fact and for the sake of clarity, I shall set out my finding on those disputed facts below.

78.  There were factual dispute on when the 3-option offered was made.  It is not disputed that there was a 3-option offer made by Ms K Chan.  The difference is on the date it was made.  The Defendant suggested that it was made on 3 September but the Plaintiff said that the offer was made on  6 September.

79.  In my judgment it was more probable that the 3-option offer was made on 3 September and not 6 September.  It was unlikely that after repudiation was accepted on 5 September the Plaintiff would still offer 1 year extension as an option on the very next day bearing in mind that there was no dispute the Extended Term had been effected on 1 August to commence on 1 October under Clause 12(b).

80.  Further according to Ms K Chan, after the Letter of Acceptance of Breach was written on 5 September she called the Defendant on the same date and asked them to go for other GDS service provider as they so pleased.  Such remarks were quite rude by any standard.  In the circumstances, I find it less probable that Ms K Chan would call immediately the following day after such rude remarks and made an offer including extension of 1 year.  I however do not find that Ms K Chan was in particular lying on this.  There might be a lapse of memory on the date of the event.

81.  According to the Defendant, the 3-option offer was repeated by Ms Chan on 10 September.  Ms K Chan said after the 3-option offer made on 6 September (found to be 3 September), the Defendant had made a counter-offer on 9 September inviting the Plaintiff to bid the offer of a competition in the market.  The counter-offer was however rejected on the 10 September by her and it was over this telephone conversation Mr Chau said he would take the offer of 1 year extension.

82.  Mr Chau did not mention he had made any counter-offer on 9 September and did not mention of rejection of his counter-offer on 10 September by Mr K Chan.  Again I find that it was unlikely that any offer had been repeated for same reason I mentioned above.  In my judgment, Ms K Chan’s version was more logical and with more details.  I accept her evidence.  I accept that there was conversation on 9 September in which the Defendant made a counter-offer.  It was only when his counter-offer was rejected on 10 September he made an attempt to accept the offer for 1 year made on 3 September but at that time he was already barred from accepting the same.  I therefore reject the evidence of Mr Chau that he had accepted the offer of 1 year extension verbally on 10 September.

What Happened on 19 September

83.  Going back to the negotiation between the parties.  Mr Chau of the Defendant said that further to the acceptance of 1 year extension made over the phone on 10 September, there was a letter sent to the Plaintiff on 19 September to confirm the same.  But Ms K Chan called again and made the 2-option offer i.e. to pay for damages or to sign a new contract on longer terms.

84.  Ms K Chan said that on 19 September she made a new 2-option offer good until close of the day: the Defendant could either pay damages for $624,960 for his breach or to accept a contract with a longer term.  No reply was heard from the Defendant.  The Plaintiff said that the letter allegedly dated 19 September now exhibited at p320 in the bundle was in fact undated and was received not on that day.  She could not remember on which day it was received.

85.  It is my view that even if I believe the Defendant that an offer made on 3 September by the Plaintiff was accepted by the Defendant on 10 September verbally and on 19 September in writing, it could not assist the Defendant because of the Letter of Acceptance of Breach served on 5 September.  The Letter of Acceptance of Breach not only made the story of the Defendant sound odd, it was a clear indication that there was no waiver on the part of the Plaintiff.

86.  On credibility of the witnesses, I find Ms K Chan’s account on what had happened on 19 September more probable.  I accept her evidence that she made a 2-option offer to Mr Chau with a view to getting a position better than 1 year for the Plaintiff on 19 September.  I find that it was when faced with these two options, the Defendant went back to accept the 1-year extension option.  I find this consistent with Mr Chau’s previous action.  When faced with being bound by a 1-year automatic extension, he wrote on 26 August to terminate the Subscriber Agreement.  This time, when faced with a 2-option offer, he wrote to confirm for that the Defendant accepted the 1-year extension option which was not open for him any longer.

Whether without Prejudice Communication

87.  I have considered the points raised by parties on whether the communication since 1 august 2013 were without prejudice.  First, I do not find in favour of the Plaintiff because if there were any dispute, it would be after the Letter Acceptance of Breach (5 September 2013) and not dating back to the Deadline (1 August 2013).  Having said that it is still for the Defendant to prove that it was led by the clear and unequivocal conduct of the Plaintiff to believe that it would not insist on its rights under Clause 12(b) and that it had altered its position.  I find that there is no waiver as alleged by the Defendant.

Damages to be Awarded

88.  Mr Li submitted that following a breach by the Defendant, the Plaintiff would only be entitled to damages that flow directly from the breach, which are subject to the rules of causation and remoteness.  It was suggested that the Plaintiff would at most only be entitled to any actual loss of profits that it may derive from the total booking fees received by Worldspan (that is 55% of the booking fees) from the minimum bookings that were required of the Defendant, and this must of course be subject to the rule of mitigation of damages.

89.  I do not agree with Mr Li’s submission.  Even though I have found that the Plaintiff was entitled to accept the repudiatory breach and ask for damages under common law, for assessment of damages, the Plaintiff could still seek to rely on Clause 15(g) for liquidated damages unless it is invalidated by the court.

Duty to Mitigate

90.  The last issue to be determined is whether the Plaintiff had mitigated its loss in the circumstances of the present case.

91.  Mr Hariman submitted that is trite that where a valid liquidated damages clause exists, no question of mitigation of damages arises.  He relied on Diamond Jubilee Investment Ltd v Chan Yiu Chung Sidney [2010] 1 HKLRD 638 at paragraph 22 where McGregor on Damages (18th edition) at paragraph 13‑021 and Abrahams v Performing Rights Society [1995] ICR 1028) were refer to.

92.  Upon reading decision of the Court of Appeal in Abrahams, I find the holding of Hutchison L.J. at pp1040 relevant:-

	“.....Mr. Davis submitted that to permit a party in breach who had agreed a pre-estimate of the damages that should be paid if he broke his contract to seek to diminish the agreed sum by argument as to mitigation would be contrary to the whole principle underlying the concept of liquidated damages. He referred to the following passage in McGregor on Damages, 15th ed. (1988).  I quote from paras. 445 and 445A:
		“Effect of holding a stipulated sum to be liquidated damages or a penalty   “445 (a) Sum held to be liquidated damages. The courts implement the intention of the parties in the case of liquidated damages by holding the plaintiff entitled to recover the stipulated sum on breach, without requiring proof of the actual damage and irrespective of the amount, if provable, of the actual damage.   “445A In most cases where the plaintiff has recovered his liquidated damages the stipulated sum has been greater than the actual, or at least the provable, damage. However, just as this cannot diminish his damages, so he cannot increase them by ignoring the liquidated damages clause in the rare case where the actual damage is demonstrably greater than the stipulated sum, a situation most likely to arise where one sum is stipulated to be paid on a number of varying, yet uncertain, breaches and the most serious breach is the one which occurs.”
	Mr. Davis submits, and I accept, that this formulation shows that the concept of a duty to mitigate is entirely foreign to a liquidated damage claim, the whole object of which I take to be to fix a certain sum to be paid irrespective of the actual damage suffered by reason of the breach. How could it be right to hold a plaintiff, who can show that his actual damage is greater , to the stipulated sum, but permit an employer who can show that it is less to take advantage of that fact? Why should such an obviously unfair and inconsistent approach be approved when it is open to the additional criticism that to allow it exposes the parties to the risk, expense and uncertainty of litigation the avoidance of which is to be presumed to be one of the principal reasons for their stipulating for liquidated damages?”

Conclusion

93.  I have in the above found that wrongful termination by way of the Termination Notice amounted to a repudiatory breach and no prior notice is required.  Further I find that Clause 15(g) is not a penalty clause that there was no waiver and there was no duty on the Plaintiff to mitigate its loss.  I enter judgment for the Plaintiff and the Defendant shall pay the Plaintiff the sum of $624,960 together with interests.  Interest, shall be at HSBC best lending rate plus 1% from date of writ to date of judgment and at judgment rate from date of this judgment until it is fully paid.

94.  Further, I find that the sum agreed under Counterclaim shall be set off from the judgment sum mentioned above.

Order

95.  It is my order that :-