ATAL TECHNOLOGIES LTD v. STRATECH SYSTEMS LTD

CACV 125/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 125 OF 2011

(ON APPEAL FROM HCCT NOS. 56 OF 2006 AND 3 OF 2007)

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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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AND

HCCT 3/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 3 OF 2007

________________________

BETWEEN

________________________

________________________

J U D G M E N T

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Hon Tang VP:

1.  I have had the advantage of reading Fok JA’s judgment in draft. I agree with it and have nothing to add.

Hon Kwan JA:

2.  For the reasons given in the judgment of Fok JA, I agree with his conclusion on the disposal of this appeal and the costs thereof.

Hon Fok JA:

Introduction

3.  The appellant, ATAL Technologies Limited (“ATAL”), was the main contractor for the “e-Channel” system set up by the Immigration Department at Hong Kong’s border control points.  The respondent, Stratech Systems Limited (“Stratech”), a technology company incorporated in Singapore, was ATAL’s sub-contractor for part of the main contract works.

4.  ATAL brought claims against Stratech in HCCT 56/2006 and, in turn, Stratech brought claims against ATAL in HCCT 3/2007.

5.  By his Judgment dated 30 June 2011, Reyes J adjudged Stratech liable to ATAL in the net sum of $8,720,000 and awarded ATAL damages in that sum with interest and costs.

6.  Stratech appeals against the Judgment and seeks substituted orders as to the balance of monies due from ATAL to it, alternatively from it to ATAL.  For its part, ATAL, seeks to uphold the Judgment but also cross-appeals in respect of the Judge’s findings that certain works were variations.

The facts leading to the termination of the Sub-Contract

7.  The Main Contract was dated 8 March 2004 and was entered into between the Director of Government Logistics and ATAL for the provision of an Automated Passenger Clearance System (APCS) and Automated Vehicle Clearance System (AVCS).

8.  The Sub-Contract was dated 22 May 2004 and represented about 10% of the Main Contract value, covering work including installing CCTV equipment and developing various software for the system (such as the systems referred to by the acronyms AVRS, AMS and KMS[1]). The Sub-Contract also provided for the maintenance by Stratech of the various systems supplied.

9.  In the course of the works, disputes arose between the parties particularly with regard to repayment by ATAL to Stratech. Stratech resorted to commercial pressure to force ATAL to make payments to it, including insisting on secured payment by letter of credit.

10.  Under clause 17.1(e) of the Sub-Contract (set out below), ATAL was permitted, following a previous written warning, to determine Stratech’s engagement on 7 days’ written notice.

11.  By letter dated 17 March 2006, ATAL issued what it described as a final warning letter accusing 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 dated 1 March 2006 to remove tokens from the AVRS.  ATAL gave Stratech until 22 March 2006 to remedy the situation.

12.  Stratech contended, by letter dated 21 March 2006, that it had, save for a minor exception concerning a DVRS, complied with CI 082.  The original DVRS intended to be shipped to Hong Kong was found to be faulty and so a new one had to be replaced before shipment was effected.  The letter noted that the DVRS was ready to be shipped with the other equipment required by CI 117 but Stratech maintained that nothing had been shipped because ATAL had refused to permit it to draw on a letter of credit opened on 22 February 2006 for the cost of the CI 082 DVRS and the equipment under CI 117.

13.  Stratech maintained that ATAL’s denial of the letter of credit facility was in breach of an agreement reached between the parties in October 2005 and that it was therefore unable to deliver the DVRS or other equipment solely as a result of the unilateral act of ATAL.

14.  Stratech denied it was required to do anything as regards the tokens.  It argued that these 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.  They had originally been programmed to switch off on 31 December 2005 but, as a result of intense negotiations including a payment by ATAL of a disputed sum claimed by Stratech to be due to it, Stratech then reprogrammed the tokens to shut down the AVRS on 30 June 2006.  It was Stratech’s contention that, so long as ATAL paid what Stratech claimed was due, the tokens would not cause the AVRS to cease operating on that date.

15.  By letter dated 23 March 2006, ATAL accused Stratech of not having remedied the failings identified in its letter of 17 March 2006 and gave 7 days’ notice to terminate Stratech’s employment under the Sub-Contract, such termination taking effect therefore on 30 March 2006.

16.  ATAL’s act of terminating the Sub-Contract gave rise to the proceedings below and the validity of the termination was one of the main issues.  Other issues included: whether Stratech was obliged under the Sub-Contract to provide the source codes in respect of the AMS and KMS software; whether some of the software developed by Stratech and equipment supplied amounted to variations; and whether ATAL had overpaid or underpaid for the work performed by Stratech.

The Judgment of Reyes J

17.  At the trial of the two consolidated actions before the Judge, the parties’ counsel agreed a List of Issues, which the Judge annexed to his Judgment, consisting of 33 separate questions.

18.  On the issues relating to the termination of the Sub-Contract, the Judge held that ATAL was not entitled to rely on the alleged non-compliance with CI 082 and CI 117 to terminate the Sub-Contract.  He found that ATAL had, in breach of an agreement reached in October 2005, refused to permit Stratech to draw on a letter of credit opened on 22 February 2006 covering the costs of CI 117 and this was the reason Stratech was unable to make delivery (Judgment §§9-10, 21-28).  He also held that ATAL failed to give Stratech reasonable time to remedy any outstanding problems under CI 082 and CI 117 and that by giving only 5 days’ warning notice to Stratech, ATAL had merely treated the warning as a formality before the near immediate issue of the letter of termination (Judgment §§33-35).

19.  However, the Judge held that ATAL was entitled to rely on Stratech’s failure to remove the tokens as a repudiation of the Sub-Contract.  He considered that the pressure exerted by Stratech to force ATAL to make payment was not legitimate commercial pressure.  Hence, he concluded that ATAL was entitled to accept Stratech’s repudiatory breach by its 23 March 2006 letter (Judgment §§38-49).

20.  Since ATAL was entitled to terminate the Sub-Contract, the Judge held that it was entitled to damages arising from the termination of the Sub-Contract.  These damages included: (i) hardware maintenance fees of $4,616,867 (rounded up to $4,700,000); (ii) maintenance personnel expenses of $14,000,000 (Judgment §§50-68).

21.  As to the issues concerning the source codes, the Judge held that the AMS and KMS software were “Custom Programs” as defined in the Sub-Contract, and hence that Stratech was obliged to provide the source codes to ATAL.  The Judge accepted that, since the AMS and KMS had been modified from the software originally developed by Stratech, they constituted “Custom Programs” rather than “Contractor Supplied Software” (Judgment §§79-99).  The Judge awarded ATAL damages of $4,280,000 under this head of claim (Judgment §§100-108).

22.  As to the issues concerning the value of work by Stratech, the Judge held that the following items of software and work (issue 18 in the List of Issues) were variations: (a) the SCSI Cards; (b) the 68 Modifications; (c) the Reporting Function; (d) the Portable Checking Station Interface; and (e) the Communication Server Resilience (Judgment §§146-150).

23.  However, in the absence of any expert evidence valuing the variations, the Judge only credited Stratech with $100,000 by way of a nominal amount for those five disputed items as representing the value of those variation works at termination.  He also credited Stratech with $800,485.90 assessed by ATAL’s expert (rounded up to $800,500) in respect of other undisputed variations (Judgment §§152-158).

24.  In respect of interest, the Judge held that ATAL was entitled to interest accrued on the net amount of damages awarded in its favour and that such interest should run from the date of ATAL’s Statement of Claim in HCCT 56/2006 dated 3 August 2006 (Judgment §195).

25.  Although not relevant to the appeal or cross-appeal, the Judgment also dealt with: whether ATAL had infringed Stratech’s copyright in the software developed (the Judge held it had not); cross-actions by ATAL and Stratech for defamation (both claims were dismissed); and whether ATAL was entitled to damages in respect of overpayments made to Stratech under the Sub-Contract (the Judge held it was not).

The termination issue

26.  It was ATAL’s pleaded case that the Sub-Contract was terminated by virtue of clause 17.1(e) of that agreement, which clause provided:

“17. DETERMINATION OF THE SUB-CONTRACT

17.1 If the Sub-Contractor

…

(e) despite previous warning in writing, has without reasonably valid reasons failed to proceed with the Sub-Contract Works with due diligence or is persistently in breach of any obligation under the Sub-Contract, …

…

        then in any such event and without prejudice to any other rights or remedies, the Contractor may, after giving at least seven (7) days’ notice in writing to the Sub-Contractor, forthwith determine the Sub-Contractor’s employment under the Sub-Contract.”

27.  In paragraph 9.5 of its amended statement of claim in HCCT 56/2006, ATAL pleaded:

“9.5 In light of the Defendant’s continuing breach of contract after receipt of the Plaintiff’s letter of 17 March 2006, by a further letter dated 23 March 2006 from the Plaintiff to the Defendant, the Plaintiff gave 7 days notice of determination of the employment of the Defendant pursuant to Clause 17.1(e) of the CSC which took effect on 30 March 2006. …”

28.  It was Stratech’s case on appeal that the purpose of the 7 days’ notice in clause 17.1(e) was to allow the sub-contractor time to address or remedy the alleged default complained of by the contractor and that it should be construed as such.  Since ATAL’s notice in the letter dated 23 March 2006 purported to terminate the Sub-Contract by giving notice, the effect of which would take place 7 days afterwards on 30 March 2006, it was contended that ATAL did not give Stratech the contractually agreed 7 days’ notice – which Stratech contended should afford it 7 clear days to take action.

29.  It was submitted that, in any event, on a proper construction of clause 17.1(e), it was only after the 7 days’ notice that the right to determine the Sub-Contract forthwith arose and, so, the letter of 23 March 2006 could not be an effective means of terminating the Sub-Contract.

30.  Mr Anthony Houghton SC, leading counsel for Stratech, cited Hudson’s Building and Engineering Contracts (12^th Ed.) §8-045 in support of the proposition that the modern approach is to interpret notice clauses with regard to their commercial purpose.  He also cited §8-047 of Hudson and Afovos Shipping Co SA v Romano Pagnan and Pietro Pagnan (trading as R. Pagnan & F.lli) [1983] 1 WLR 195 in support of the propositions that exact compliance with time limits for notices will usually be required and will be treated as a condition precedent to a valid contractual termination and that reference to a number of days are to “clear” days so that any subsequent notice or action indicating determination must occur on the day following the expiry of the stipulated period.

31.  As a matter of construction, I do not consider that the purpose of the 7 days’ notice in writing in clause 17.1(e) is to afford the sub-contractor time to remedy the failure to proceed with due diligence without valid reasons or the persistent breach of contract complained of.  Clause 17.2 of the Sub-Contract provides:

“17.2 Either party may terminate this Sub-Contract forthwith by giving written notice, if the other party:

(a) commits any material breach of its obligations under this Sub-Contract and (in the case of a breach capable of being remedied) fails, within thirty (30) days after receipt of a written notice by the other party requesting to do, to remedy the breach;”.

32.  In the light of clause 17.2, which deals with termination following failure to remedy a breach after notice requesting this, it would, in my view, be inconsistent and redundant for the 7 days’ notice in clause 17.1(e) to be for the purpose of remedying the breach complained of.

33.  I believe this conclusion is fortified by reference to some of the other sub-paragraphs of clause 17.1 of the Sub-Contract, for example (a) and (f).  Those sub-paragraphs, in context, provide:

“17. DETERMINATION OF THE SUB-CONTRACT

17.1 If the Sub-Contractor

(a) has abandoned the Sub-Contract, or

…

(f) commits an act of bankruptcy or enters a deed or arrangement with his creditors or, being a company goes into liquidation, (other than a voluntary liquidation for the purposes of re-construction), or has a receiver appointed for all or part of his undertaking

then in any such event and without prejudice to any other rights or remedies, the Contractor may, after giving at least seven (7) days’ notice in writing to the Sub-Contractor, forthwith determine the Sub-Contractor’s employment under the Sub-Contract.”

I do not think that the purpose of written notice under clause 17.1, in circumstances where sub-paragraphs (a) or (f) were engaged, would be to enable the sub-contractor time to remedy his breach.

34.  What, then, is the purpose of written notice under clause 17.1?  In my view, the purpose of that notice is to give the sub-contractor sufficient time to remove any of its staff or equipment off the Site (defined in the Sub-Contract as “the lands and other places provided by the Contractor for the purpose of the Sub-Contract Works”) before the Sub-Contract is terminated.  And for this purpose, Clause 17.1 requires that at least 7 days’ notice to be given to the sub-contractor.

35.  That this is the purpose of written notice under clause 17.1 is supported by reference to clause 17.4 of the Sub-Contract.  That clause provides:

“17.4 The Contractor, in lieu of giving a notice of determination under this Clause, may, following seven (7) days’ notice in writing to the Sub-Contractor, take part only of the Sub-Contract Works out of the hands of the Sub-Contractor and may himself design, execute, complete and maintain such part …”.

By this clause, the Contractor has the option, instead of terminating the Sub-Contract as a whole, of effectively terminating only part of the Sub-Contract by taking back a specific part of the Sub-Contract Works.

36.  Thus, in the case of a complete termination of the Sub-Contract under clause 17.1, the written notice to be given will inform the sub-contractor that it is required to remove all its staff and equipment from the Site.  On the other hand, where, instead of a notice of determination under clause 17, the Contractor decides to take part only of the Sub-Contract Works out of the hands of the sub-contractor, the written notice to be served under clause 17.4 will inform the sub-contractor that it is required to remove those of its staff and equipment from the Site that relate to the part of the works which the Contractor is taking out of its hands.

37.  As a matter of fact, ATAL’s written notice of 23 March 2006 did specify what action Stratech was required to take within the 7 days’ notice period.  The notice stated:

“This Notice of Termination of Employment is now issued under Clause 17.1(e) of the Sub-Contract Conditions. We hereby give you 7 days notice of termination of your employment under the Sub-Contract which will take effect on Thursday, 30 March 2006. …”

And then, in its final paragraph, the notice continued:

“You are instructed to remove all your staff and any of your equipment which does not form part of the Sub-Contract Works from all project locations and to discontinue all work and equipment deliveries related to this project on Thursday, 30 March 2006. …”

This therefore made it clear to Stratech that it was being given notice to determine the whole of the Sub-Contract rather than just part of it and that it must remove all its staff and equipment from the Site.

38.  With that purpose of the notice clause in mind, I return to consider the question of whether the proper construction of clause 17.1(e) requires a further notice of determination after the giving of 7 days’ notice in order to terminate the Sub-Contract.  Stratech contended that it did and that the mechanism for terminating the Sub-Contract under clause 17.1(e) was a two-tier mechanism whereby the Contractor gives 7 days’ notice in writing followed by a further determination (which Stratech contended must also be in writing) to bring the Sub-Contract to an end.

39.  For his part, Mr Gerard McCoy SC, leading counsel for ATAL, accepted that clause 17.1(e) was a two-tier mechanism but submitted that the two tiers consisted of (i) previous warning in writing, followed by (ii) notice to determine after at least 7 days’ notice.  Thus, he submitted that the 23 March 2006 letter was proper notice to determine the Sub-Contract, such termination only taking effect after 7 days’ notice on 30 March 2006.

40.  Having reflected on the arguments, I have come to the conclusion that Mr McCoy’s submission in this regard is correct.  Given the purpose of the written notice under clause 17.1(e), I consider that the notice to the sub-contractor served under that clause may itself indicate that the Sub-Contract will forthwith determine after 7 days.  In the case of a notice under clause 17.4 to take part only of the Sub-Contract Works out of the hands of the sub-contractor, that notice similarly will be effective immediately after 7 days without any further written notice being served.  Thus, it is the written notice providing at least 7 days’ notice to the sub-contractor that informs it whether it is to be relieved of the whole of the Sub-Contract (clause 17.1(e)) or part only of the Sub-Contract Works (clause 17.4).

41.  I had at one stage of the argument considered whether the mechanism whereby the Contractor might “forthwith determine” the Sub-Contract under clause 17.1(e) should, because of the words “in lieu of giving a notice of determination under this Clause” in clause 17.4, be construed so as to require a separate written notice of determination to be given.  The argument would be that those words must refer to determination under clause 17 as a whole and that this would suggest that clause 17.1(e) is a two-stage process whereby the Contractor gives 7 days’ notice in writing followed by a further determination either to bring the Sub-Contract to an end as a whole (under clause 17.1(e)) or only in part (under clause 17.4). And that further determination should be “a notice of determination” and, so, should be in writing.

42.  However, on reflection, I do not think that construction is correct.  First and foremost, it is not consistent with the purpose of the notice clause as I have construed it above.  Secondly, the necessity for a second written notice under clause 17.1 would be redundant in respect of the circumstances in sub-paragraphs (a) and (f) to which I have referred and so the 7 days’ notice and notice to determine could be one and the same document.  Thirdly, my initial inclination that Mr McCoy’s construction of clause 17.1(e) would require the word “after” in the phrase “after giving at least seven (7) days’ notice in writing” to be read as meaning “upon” is not, I think, sound: the use of the word “after” is grammatically justified to make it clear that although written notice is given on one date, the effective date of termination cannot occur until at least 7 days thereafter.

43.  It remains therefore necessary to consider if the Sub-Contract was validly terminated by ATAL.

44.  As regards the tokens in the AVRS, ATAL had written to Stratech on 1 March 2006, complaining that Stratech had no right to insert these tokens and requiring their removal immediately.  The 17 March 2006 letter was expressed to be a final warning requiring the removal of the tokens.  The Judge found that Stratech’s stance in its 21 March 2006 letter that it would not resile from resorting to the tokens to turn off the AVRS if ATAL did not accede to its demands was an exercise of illegitimate commercial pressure by Stratech and would amount to repudiatory conduct by it (Judgment §47).  Since Stratech had earlier resorted to this threat to extract payment from ATAL in December 2005, and on the basis of the Judge’s finding (which finding is not the subject of appeal), there can be no doubt, in my view, that, by 23 March 2006, Stratech was “persistently in breach” of the Sub-Contract in this respect.  The presence of the tokens and the expressed intention to use them as a threat to force ATAL to make disputed payments was a breach of contract which was ongoing and, therefore, persistent. Stratech’s argument that ATAL had only made two requests for the removal of the tokens and that the latter request in March 2006 was premature because the operative time when the tokens would shut down the system had been reset to 30 June 2006 so that there was no persistency in the breach is, in my view, artificial and ignores the reality of the continuing repudiatory breach constituted by Stratech’s refusal to remove the tokens thereby leaving in place what it regarded as an effective bargaining weapon.  The necessary conditions precedent for termination under clause 17.1(e) clearly existed as at 23 March 2006.

45.  In Stratech’s letter of 21 March 2006 (in reply to that of ATAL dated 17 March 2006), Stratech sought to justify the use of the tokens and to deny ATAL’s right to rely on clause 17.1(e) in respect of them and, in its letter of 24 March 2006 (in reply to that of ATAL dated 23 March 2006), it proposed discussion of the issue of the tokens.  It was contended in Stratech’s skeleton submissions that it had “reasonably valid reasons” not to entertain ATAL’s requests immediately.

46.  Such attempted justification would not be relevant for the purposes of clause 17.1(e) for two reasons.  First, on the Judge’s finding in relation to the tokens, there was no valid reason not to comply with ATAL’s request.  Secondly, and in any event, the reliance by the Sub-Contractor on “reasonably valid reasons” only applies where it is said to have failed to proceed with the Sub-Contract Works with due diligence and does not, as a matter of construction, apply to where it is said to be persistently in breach of any obligation under the Sub-Contract.  Thus, since Stratech’s actions in respect of the tokens constituted a repudiatory breach by it of the Sub-Contract, there is no room for reasonably valid reasons to be proffered in response.

47.  It follows that ATAL was entitled, on 23 March 2006, to give 7 days’ notice in writing to Stratech of its intention to terminate the Sub-Contract as a whole under clause 17.1(e).  It is clear that ATAL relied on its 23 March 2006 letter as such notice in writing and also as the effective notice of determination of the Sub-Contract, albeit that the determination would not take place until after the end of 30 March 2006, that being the latest time by which Stratech was instructed to remove its staff and equipment from all project locations and to discontinue all work and related equipment deliveries.  For the reasons I have given, I am satisfied that this notice was an effective notice of determination and consistent with the proper construction of clause 17.1(e).

48.  This was not the basis on which the Judge held ATAL to be entitled to terminate the Sub-Contract.  ATAL advanced this as ground 1 of its amended respondent’s notice and, in my view, it is an argument which succeeds.

49.  It is therefore unnecessary to consider the fallback argument deployed by Mr McCoy in the event it were held that a further notice of determination were required.  That argument was that there was such a further notice in writing in that, in reply to Stratech’s letter of 24 March 2006, ATAL sent a letter dated 30 March 2006 in which it reiterated that the removal of the tokens was instructed in its letter of 1 March 2006 but that Stratech had failed to remove them.  ATAL concluded the letter by formally confirming, for the purposes of clause 17.1 of the Sub-Contract, that Stratech’s employment thereunder was determined from that date.

50.  In any event, despite initial reservations, I have concluded that the Judge was correct to find that ATAL was entitled, as a matter of common law, to accept, by its letter of 23 March 2006, Stratech’s repudiatory breach of the Sub-Contract.

51.  It is clear from clause 17.1 that the rights under that provision are “without prejudice to any other rights or remedies” and this would include common law rights and remedies.  It is also clear, as a matter of law, that where contractual and common law rights overlap the use of a contractual mechanism of termination does not, where there is an express reservation of rights, oust the common law mechanism.  Mr McCoy cited in support of this proposition of law the judgment of Moore-Bick LJ in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB27 at §§44-45 where he held:

“44. It must be borne in mind that all that is required for acceptance of a repudiation at common law is for the injured party to communicate clearly and unequivocally his intention to treat the contract as discharged: see Vitol SA v Norelf Ltd [1996] AC 800, 810G-811B, per Lord Steyn. If the contract and the general law provide the injured party with alternative rights which have different consequences, as was held to be the case in the Dalkia case [2006] 1 Lloyd’s Rep 599, he will necessarily have to elect between them and the precise terms in which he informs the other party of his decision will be significant, but where the contract provides a right to terminate which corresponds to a right under the general law (because the breach goes to the root of the contract or the parties have agreed that it should be treated as doing so) no election is necessary. In such cases it is sufficient for the injured party simply to make it clear that he is treating the contract as discharged: see the Dalkia case [2006] 1 Lloyd’s Rep 599, para 143, per Clarke J. If he gives a bad reason for doing so, his action is none the less effective if the circumstances support it. That, as I understand it, is what Rix LJ was saying in Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyd’s Rep 436, para 32, with which I respectfully agree.

45. In the present case the parties accept, and indeed the arbitrator has found, that the breaches on the part of the yard which entitled Gearbulk to terminate the contracts were in each case sufficient to amount to a repudiation.  I accept Mr Dunning’s submission that in its letters of 7 November 2003 and 4 August 2004 Gearbulk purported to terminate the contract pursuant to article 10.1(b)(c) and not under the general law, but each of the letters made it clear that it was treating the contract as discharged and in those circumstances each was sufficient to amount to an acceptance of the yard’s repudiation. …”

52.  The initial reservations in question arose from the fact that common law repudiation was not pleaded by ATAL and the question of whether the Sub-Contract was terminated for repudiatory breach was not an issue in the agreed List of Issues before the Judge.  I consider, however, that these are not sufficient reasons to preclude the Judge from basing his decision on common law repudiation as he did and from ATAL seeking to support that decision in this appeal.  It is quite clear that the issue of whether ATAL was entitled to require Stratech to remove the tokens and whether the latter failed to do so without reasonably valid reasons were in issue before the Judge (see List of Issues, items 1(3) and 4).  In those circumstances, the question of whether Stratech’s refusal to do so constituted a breach of contract for the purposes of clause 17.1(e) would necessarily have been a matter in dispute at trial to be resolved by the Judge.  Although ATAL’s pleaded case did not assert that its letter of 23 March 2006 was an acceptance, as a matter of common law, of Stratech’s repudiatory breach, it is clear from that letter read in context that ATAL was relying on, amongst other contentions, Stratech’s refusal to remove the tokens and continued use of those tokens as a bargaining weapon.  I am not persuaded that the evidence of the parties would have been any different if the issue of common law repudiation had been properly raised in the pleadings.  There was no question between the parties that the Sub-Contract had been terminated by ATAL: the only material question in issue was whether the termination was valid.

53.  For these reasons, I would conclude that it was open to the Judge, and the Judge was correct, to hold that the Sub-Contract was repudiated by Stratech and that ATAL was entitled to accept the repudiatory breach by its letter of 23 March 2006.  I would also conclude that it would also have been open to the Judge to hold that ATAL properly invoked the clause 17.1(e) termination mechanism in respect of Stratech’s persistent breaches of contract in relation to the tokens and that it duly terminated the Sub-Contract by its letter of 30 March 2006.

54.  In the circumstances, it is not necessary to deal with the first ground in ATAL’s cross-appeal by which it seeks to overturn the Judge’s conclusions in respect of Stratech’s failure to comply with CI 082 and CI 117.  This ground would have included consideration of whether the Judge was correct to find (Judgment §35) that ATAL’s final written warning dated 17 March 2006, in giving Stratech 5 days in which to remedy outstanding problems relating to those instructions was insufficient but, as I have indicated, that question does not now arise.

The damages awarded in favour of ATAL

55.  As noted above, the Judge awarded ATAL (i) hardware maintenance fees rounded up to $4,700,000 and (ii) maintenance personnel expenses of $14,000,000.

56.  In respect of the hardware maintenance fees, Stratech contended that, under the Sub-Contract, it was not obliged to provide hardware maintenance.

57.  The scope of Stratech’s obligations to provide maintenance services and maintenance fees is set out in the Fourth Schedule to the Sub-Contract.  This defined “First Line Support” (which ATAL was to provide), “Second Line Support” and “Third Line Support” (which Stratech was to provide) and stipulated a “Maintenance Period” for the second to tenth years after the Sub-Contract Works.  Neither Second Line Support nor Third Line Support was, as defined, concerned with hardware maintenance:

“ ‘Second Line Support’ includes fault reproduction, problem resolution, use of log file to diagnose problems, on-site investigation and diagnosis.

‘Third Line Support’ involves resolution of high level issues, identification of software bug and hot fix for software bug where appropriate, which cannot be resolved by Second Line Support.”

58.  However, ATAL sought to rely on clause 1.2(b) of the Fourth Schedule which provides that:

“Stratech will provide Second and Third Line Support in respect of the System(s).”

59.  The Sub-Contract provided (by clause 3) that it was to be read with the Main Contract.  The word “System” was defined in the Main Contract as meaning “the Hardware, Software and the Custom Programs in combination one with the other for the formation of” the APCS and AVCS.  Hence, ATAL contended that Stratech’s obligations under the Second and Third Line Support in respect of the System(s) included hardware maintenance.

60.  However, clause 1.5 of the Fourth Schedule provides that:

“1.5 Stratech may from time to time inform ATAL about any upgrades and/or replacements that are necessary to maintain or improve the performance or service level of the System(s) and/or propose any changes that may be necessary. The costs of such upgrades and/or replacements are not included in the Maintenance Fees.”

(Underlining added)

61.  In my opinion, that express exclusion in clause 1.5 and the absence of any reference to hardware in the definitions of Second and Third Line Support support the conclusion that Stratech’s obligation did not extend to hardware maintenance.  Construing the Fourth Schedule as a whole, therefore, and notwithstanding the definition of “System” in the Main Contract, I would hold that Stratech’s obligation did not so extend.  I do not regard the definition of the term “System” in the Main Contract as being intended to dictate the interpretation of the word “System(s)” in the Fourth Schedule of the Sub-Contract when the provisions of that schedule are read together and as a whole.  I would therefore respectfully disagree with the Judge’s holding (Judgment §57) that:

“57. … hardware maintenance constituted some part of Stratech’s obligations under the Sub-Contract. See, for instance, the 4^th Schedule to the Sub-Contract. …”

62.  As regards the maintenance personnel expenses, Stratech noted that the Judge had awarded damages to ATAL on the basis of evidence that “4 staff were needed on standby to attend the system 24 hours a day, 7 days a week” (Judgment §66).

63.  Stratech contended, however, that the Judge erred in not taking into account the division of responsibilities in the Fourth Schedule of the Sub-Contract.  Thus, under clause 1.3, Stratech would provide Third Line Support via phone and email and, only if ATAL failed to resolve the problem, would Stratech, if it deemed it necessary, send representatives to Hong Kong, whose accommodation expenses would be paid by ATAL.  Under clause 1.2(a), Stratech would provide training to ATAL’s employees to offer First Line Support; and under clause 1.1(b), “on-site” investigation would be conducted by Stratech.

64.  In the light of those provisions, Stratech contended, it was plain and obvious that Stratech was not obliged to send 4 staff to attend the system 24 hours a day, 7 days a week.

65.  Although I would accept those contentions, I do not consider that it follows the Judge was in error as contended by Stratech. That is because the premise of ATAL’s claim was not that the expenses claimed represented Stratech’s obligations under the Sub-Contract but rather, that they were caused by Stratech’s breach.  It was ATAL’s case that it was obliged to take over Stratech’s responsibility for the Second and Third Line Support, a responsibility ATAL did not have under the Sub-Contract.  Because of this, ATAL had to provide staff for the Second and Third Line Support and hence, on a full time basis, since that staff was additional staff.

66.  Turning to the quantum of the maintenance personnel expenses, Stratech’s main criticism of the Judge’s assessment was that instead of basing these on concrete evidence from ATAL as to the actual personnel expenses, which Stratech contended ATAL did not adduce, he chose to adopt the evidence of ATAL’s expert witness, Mr John Molloy.  It was submitted that the Judge should have rejected ATAL’s claim in totality or only made a nominal award (as he did in respect of the variations).

67.  Although the evidence concerning the maintenance personnel expenses may be described as slender, it was Mr Molloy’s evidence that ATAL based the sum claimed on the basis of actual costs of employment of a dedicated team of three analysts and one team leader.  The relevant costs pleaded by ATAL were prepared by Ms Anvio Wong, a Senior Quantity Surveyor who was seconded to ATAL as a Contract Administrator, whose evidence was that the costs of manpower resources were calculated based on the number of man days or man months provided to her by the respective project managers and the monthly salaries of the personnel deployed in the project. In the absence of evidence to the contrary, it was open to the Judge, in my opinion, to accept Mr Molloy’s quantification of these costs in principle.

68.  Stratech criticised two particular aspects of Mr Molloy’s quantification, namely the allowance of a 4.4% annual inflation rate and an allowance of 6.25% as contribution towards head office overheads.

69.  As regards the inflation rate, Stratech pointed to the fact that the Judge had rejected as arbitrary ATAL’s 8% annual inflation rate as applied to its quantification of the hardware maintenance costs (Judgment §60) and contended that the 4.4% figure was equally arbitrary. However, it would appear that the 8% figure was not simply for inflation but included an element for the impact of replacement hardware on other parts of the system, including feasibility studies, software development and installation of hardware.  The arbitrary nature of the 8% figure is not therefore necessarily replicated in the 4.4% inflation figure.  Both that figure for inflation and the 6.25% overheads figure were matters of unchallenged expert evidence from Mr Molloy and it seems to me that it was open to the Judge to accept that evidence.  The Judge having done so, I do not consider there is a proper basis for this court to interfere with his findings.

70.  I would therefore uphold the Judge’s quantification in respect of the maintenance personnel expenses.

71.  Although academic in the light of my conclusion as to liability for the hardware maintenance fees, I would similarly have upheld the Judge’s acceptance of Mr Molloy’s unchallenged evidence as to his starting point for these expenses since that evidence was based on hardware costs given to him by ATAL’s Assistant Project Manager, Mr Shrisankaraan, and by Ms Wong.

Whether Stratech had an obligation to provide source codes

72.  In Part VII – Project Specification under the Main Contract, it was provided by clause 4.2.2 that:

“All Custom Programs and add-on Custom Programs (if any) including source codes, object codes and command codes originated and first prepared for the Government by the Contractor’s Employee shall be owned by the Government. The Contractor shall deliver to the Government the source, object and command codes of the Custom Programs and add-on Custom Programs in hardware-readable forms on the System Acceptance Date.”

73.  Under the Sub-Contract, Stratech was to design and develop AMS and KMS Console software applications for the two automated clearance systems, i.e. the APCS and the AVCS. The issue here turns on the question of whether the AMS and KMS provided by Stratech were “Contractor Supplied Software” or “Custom Programs” as those terms are defined in the Main Contract, with which (as I have already noted) the Sub-Contract is to be read.  Relevant parts of the Main Contract were: the Technical Proposal Contract Schedule 2 (Software); the Technical Proposal Contract Schedule 3 (Specification); and Part VII Project Specification.

74.  “Contractor Supplied Software” is defined in the Main Contract as being “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 …” and “Custom Programs” is there defined as being “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.”

75.  It was Stratech’s case on appeal that there was no itemisation in the Sub-Contract as to which elements of Stratech’s software was to be categorised as a Custom Program but the Main Contract, it was contended, included an agreement between ATAL and the Immigration Department to the effect that the software provided by Stratech was not to be so categorised.

76.  Stratech referred to the fact that during the Main Contract tender process between ATAL and the Immigration Department, ATAL requested that various items in respect of the APCS and the AVCS should be described as “Site Application Software” rather than “Custom Program”.  The explanation for this was stated (in a letter dated 8 January 2004) as follows:

“We refer to our letter (ref. ATL/002/2004/CKL) dated 7 January 2004 whereby we mentioned correction of wording ‘Custom Program’ to ‘Site Application Software’ in paragraph 1(b). This is because the aforesaid application software packages, used for remote camera controls, video compression, video recording and playback, are ‘off-the-shelf’ software packages. These packages are proprietary products called SuperTrack TM, and are site specifically modified to the different requirements of the various sites. As such the Intellectual Property Rights (IPR) of these packages belong to the software supplier. ATAL is only responsible for the installation of the software packages at the sites.”

77.  Whilst this might suggest that there could be Contractor Supplied Software within the APCS and the AVCS systems, I respectfully agree with the Judge’s comment (Judgment §86) that the evidence of what the parties considered to be Custom Programs and Contractor Supplied Software respectively is ambiguous.  The Judge noted the description of Table 2.1 of Schedule 2 listing “Mandatory Contractor Supplied software items” but which identified software involving the automated passenger clearance which was part of the AMS as “Custom Program”.

78.  Given the ambiguity, I respectfully agree with the Judge’s holding that the issue is essentially a factual one to determine to what extent the AMS and KMS had been modified from software originally developed by Stratech in order to meet the requirements of the Immigration Department (Judgment §94).

79.  The Judge found:

“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 ‘[Contractor] 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.”

80.  In the light of the Judge’s findings of fact as to the modification and customisation of the original software, which were not challenged, I am satisfied that the AMS and KMS were “Custom Programs” as defined in the Main Contract so that Stratech was obliged to provide the Immigration Department with the source codes for them.

The variation works and their value

81.  There are two discrete issues here: first, whether the five disputed items were variations; secondly, if they were, what credit should be given to Stratech in respect of them.

82.  As I have noted, the Judge held that the items to be variations.  That holding is challenged by ATAL’s cross-appeal, to which I shall return.

83.  On the footing that the five items in question were variations, Stratech contended that the Judge was in error in only ascribing a value of $100,000 to those works and not properly valuing them in accordance with clause 9.2 of the Sub-Contract, which provided:

“The value of all authorised variations shall be ascertained by reference to the rates and prices (if any) specified in this Sub-Contract for the like or analogous work, but if there are no such rates and prices, or if they are not applicable, then such value shall be such as is fair and reasonable in all the circumstances. …”

84.  There were no rates or prices for the items in the Sub-Contract and no analogous work by reference to which such rates or prices could be ascertained.  Hence, the rates and prices of the variations should be “such as is fair and reasonable in the circumstances” and Mr Houghton submitted that that phrase would include the prices expressly agreed by the parties.

85.  Stratech submitted that, in respect of these items, ATAL did not dispute Stratech’s prices as such and its invoices were not challenged; nor did ATAL’s witnesses, including its quantum expert Mr Molloy, propose alternative prices.

86.  The crux of the matter, however, is that the variation works were not fully functional as an integrated part of the whole system as at the date of termination of the Sub-Contract.  As the Judge said:

“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.”

87.  The Judge then reasoned as follows:

“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.”

88.  With respect, I agree with the Judge’s reasoning in this regard.  The variation works were not completed and so the claim was not a contractual claim for payment of variations under the Sub-Contract. Instead, the Judge had to determine the value of the variations on a quantum meruit basis.  Although the Judge described the sum of $100,000 as “a nominal amount”, I do not think the Judge was intending to award nominal damages (which would be a considerably lesser sum).  Instead, this was a nominal amount “as representing the value of the disputed variation works at termination”.  In my view, the Judge was entitled to discount the invoiced sums and assess what he considered to be a fair value for the variations as at the date of termination of the Sub-Contract.

89.  Although ATAL sought, by the second ground of its cross-appeal, to contend that the Judge was wrong to find that the disputed variations were in fact variations, Mr Cooney confirmed that ATAL would be content not to press its cross-appeal in this regard if the Court were with it on the Judge’s decision on the value of the disputed variation works.  Since I have concluded that the Judge’s approach was correct in that regard, it is not necessary to consider this aspect of ATAL’s cross-appeal.

Interest

90.  In order to put the issue relating to interest into context, it is helpful to set out the passages from the Judgment in which the Judge assessed the damages payable to ATAL and awarded interest.  He said:

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

(1) ATAL’s costs related to termination
(a) One time cost	$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)”

And he concluded:

“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.”

91.  The overriding principle for awarding interest to a plaintiff is not as compensation for damage done, but for being kept out of money to which should have been paid to him: see Allan v Ng & Co (a firm) [2012] 2 HKLRD 160 per Kwan JA at §74.  That principle was common ground between the parties.

92.  Hence, Stratech contended that interest should only run from the time when the loss was suffered and not from the date of the writ.  It was submitted that maintenance expenses to be incurred by ATAL regarding the maintenance service under the 4^th Schedule to the Sub-Contract – i.e. item 1(b) in the Judge’s assessment set out above – would mainly arise in the future during the Maintenance Period (i.e. to the end of the tenth year after the Sub-Contract Works).  Thus, ATAL’s loss relating to that head of claim would only accrue in the future and not when the writ was issued in HCCT 56/2006 on 3 August 2006.

93.  However, subject to the overriding principle referred to above, an award of interest under s. 49(2) of the High Court Ordinance (Cap. 4) is a matter of discretion for the Judge.  Here, the Judge’s approach was to set out the amounts of damages due to ATAL, deduct the credits due to Stratech and then express the net sum due to ATAL.

94.  Whilst the element of maintenance costs was assessed by reference to a period in the future, a number of countervailing points should be taken into account.  First, although the damages for maintenance costs is assessed in relation to a future period, the award of damages is an assessment of the present monetary entitlement of ATAL in the light of Stratech’s breach of contract.  Secondly, the net amount of damages is set off against the Maintenance Sub-Contract Value to Stratech in the sum of $12,000,000, which represents a credit to Stratech that similarly relates to a future period.  Thirdly, the principal sum is reduced by this judgment by the sum of $4,700,000 so that the net maintenance costs are considerably reduced.

95.  I would therefore accept ATAL’s submission that the Judge’s approach of awarding interest as an overall global sum, on the net amount due, was within his discretion.

Conclusion and costs

96.  Save that I would allow the appeal in respect of Stratech’s liability for the hardware maintenance fees, so that the judgment in favour of ATAL is reduced by $4,700,000, I would otherwise dismiss the appeal.

97.  As to costs, ATAL has been largely successful in terms of the issues argued in the appeal but Stratech has succeeded in reducing the amount of damages due to it by over 50%.  I would therefore make an order nisi that Stratech pay two-thirds of ATAL’s costs of the appeal, to be taxed if not agreed, with a certificate for two counsel.