DIYIXIAN.COM LTD v. G’FIVE INTERNATIONAL LTD

HCA 229/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 229 OF 2013

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JUDGMENT

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Introduction

1. This is a claim for sums alleged to be due under a written service contract dated 25 July 2011.

2. The plaintiff (“DYX”) is a company incorporated in Hong Kong that carries on the business of providing telecom services including, in particular, VPN and SSL‑VPN systems.  “VPN” stands for “Virtual Private Network”.  Such a network is a private network that extends across a public network or internet and which enables users to send and receive data as if their computers were directly connected to the private network.  Where the user has an established computer network, VPN access involves specialised software on the user’s computers.  SSL‑VPN stands for “Secure Sockets Layer VPN” which is a form of VPN that can be used with a standard Web Browser without the installation of specialised client software.

3. DYX has established a private Multi‑Protocol Label Switching(MPLS) network with a large number of Points of Presence (“PoPs”) across anumber of Asian countries, including China, Hong Kong, Taiwan, Singaporeand Vietnam.  A PoP is a site where there are located modems, digital leased lines and multi‑protocol routers.  The DYX’s MPLS network is known as DYX’s “Backbone”.

4. The defendant (“G’Five”) is a company incorporated in Hong Kong that is part of a group that manufactures smart mobile phones in Shenzhen for sale in emerging markets, particularly India. G’Five imports the phones made in Shenzhen and then supplies them to customers in China, Hong Kong and India.

5. At the material time, G’Five was using an ERP (Enterprise Resources Planning) software package called “Kingdee K3” (hereinafter “K3”).  K3 was designed to allow G’Five to keep track of data relating, inter alia, to inventory, sales, shipping and payment and manufacturing.  For example, if the sales team in Hong Kong obtained an order for phones, they could use K3 to see if the order was covered by existing inventory in Shenzhen and, if it was not, place an order with the factory.  The K3 system utilised the internet service provided by an internet service provider.  It was essential that the data handled by K3 was available to G’Five’s two sites in Shenzhen, its Hong Kong office and its busy office in the Indian city of NOIDA (New Okhla Industrial Development Authority) on a fast, stable and reliable basis.

6. G’Five found that the K3 system did not run smoothly on its network using internet service provided by internet service providers.  At times it was too slow and/or users of the system were unable to maintain contact at G’Five’s different sites.  It therefore decided to try out on 10 computers a software package called “Citrix” which was designed to optimise transfer speed and reduce “latency rates” (the length of time to transmit and receive data measured in milliseconds).  Citrix improved the performance of the K3 system but its operation was not stable and it was expensive.  In late 2010, G’Five therefore decided to explore a VPN solution to their problems in operating their K3 system and a project team was set up consisting of Mr Zhang Wuxue, G’Five’s then Product Manager,Mr Wisor Ou, then G’Five’s Associate Director for Research and Development, Mr Richard Yip and Mr Zhang’s assistant, Mr Kevin Chan.

7. In early 2011, Mr Kevin Chan contacted DYX and there followed a number of meetings and telecons between representatives of both companies.  None of the witnesses called by the parties attended all of the meetings and telecons.  What is clear is that from an early point, G’Five told DYX about how and where it carried on business, how it usedthe K3 software package and the problems that they were experiencing in trying to provide a stable, reliable and fast system that allowed its different sites to connect with another when using K3.  Since G’Five were not seeking a solution that involved the use of Citrix, G’Five did not tell DYX that they had tried using Citrix to solve the problems they were having with their system.  It is also clear that G’Five asked DYX to come up with proposals for a VPN solution to the problems they were having with their inter‑office computer system.

8. On 9 March 2011 there was a meeting at G’Five’s office in Tsuen Wan Cable TV Tower attended by a DYX team consisting of Mr Alvin Chan, head of the sales team, Mr Justin Lam, the Account Manager and Mr Lawrence Liu, Senior Sales Manager.  The G’Five team was led byWisor Ou who described how G’Five carried on business and the problems there had been operating the ERP system using K3.  On 14 March 2011, there was also a second meeting at G’Five’s Shenzhen office attended by Wisor Ou and a colleague and a team from DYX which included Mr Tang Chi Yuen who provided pre‑sales technical support to the DYX sales team.  Further meetings and telecons followed.  It is not in dispute that at one of the meetings a representative of G’Five, probably Wisor Ou, asked DYX whether K3 could run on the VPN system to be provided by DYX.  G’Five also allege that their team told DYX that the VPN system to be set up was for the purpose of running the K3 system simultaneously at their offices in Hong Kong, Shenzhen and India.  Later in this judgment I shall deal with the issue of what DYX’s response was to G’Five’s question about use of K3 and G’Five’s allegation that at one of the negotiation meetings Dick Chan and Justin Lam told the G’Five project team that the latency rate between G’Five’s Shenzhen office and its India office would be no more than 120 ms if DYX VPN system were adopted.

9. On 12 April 2011, Justin Lam made a Powerpoint presentationto representatives from G’Five setting out a two alternative VPN proposals.  Option 1 envisaged G’Five’s sites in Shenzhen, Hong Kong, Dubai and India interconnecting with an MPLS link and “[a]ll Dubai, HK and India ERP users will access the ERP server in Shenzhen through dedicated MPLS connection”.  Option 2 envisaged G’Five’s two Shenzhen sites having an individual IP address range and G’Fives supporting “dynamic routing protocol to make failover run automatically”.

10. In the event, G’Five went for Option 2, although with its Dubai office excluded from the network.  The main slide showing Option 2 is instructive.

11. At the centre of the diagram is shown DYX’s MPLS Backbone and the PoPs therein in Shenzhen and Hong Kong.  G’Five’s sites in Shenzhen, Hong Kong and India are connected to the Backbone by “last mile” local loops provided by local network providers.  All of these local loops have a 2 M bandwidth save for that running from a Shenzhen PoP to Shenzhen #1 (6 M) and that from Shenzhen #1 to Shenzhen #2 (50 M).  The area marked “Global MPLS Partner” is a network connected to a DYX Hong Kong PoP provided by an Indian third party network provider, Reliance Globalcom.  “ERP” is referred to in the notations “ERP Server” in the boxes for the Shenzhen sites.  The diagram also shows the DYX Routers and the Customer Routers that are going to be used.

12. Not shown on the diagram is the PoP used in Mumbai, India, to which the Global MPLS Partner was connected and from which a connection was to run all the way to Noida, which is not far from New Delhi.

13. On about 13 April 2011, DYX proffered a proposed service contract for the establishment of the system shown in the diagram, other than to G’Five’s Dubai Office.  The contract set out separately the services to be provided over Phase 1 and Phase 2 and adopted a two‑tiered charge structure, tier 1 specifying the set up and consultancy charges and tier 2 specifying the recurrent monthly charges over a 1 year period.

14. Negotiations continued and a meeting was held at G’Five’s Shenzhen Office on 21 July 2012 attended by, inter alios, DYX’s Director, Mr Man Lap, together with attendant DYX staff, and Mr Zhang Wuxue (also known as Winston Cheung) of G’Five, together with members of G’Five’s project team.  At this meeting DYX made another high level presentation and Mr Zhang indicated that he had high confidence in DYX and said that G’Five would sign a contract.

15. The second proposed service contract was signed by DYX on 25 July 2011 and by G’Five on 5 August 2011.  This agreement had the same structure as the first proposed contract with the details of the service to be provided being set out by reference to Phase 1 and Phase 2 separately, with two tiers of charges, set up and consultancy charges and monthly recurrent charges.  However, the executed contract was for 2 years, rather than 1 year.

16. At the end of the Phase 1 and Phase 2 service details, there was a series of bullet points under the heading Note.  These included:

•  Service quality varies depending on local ADSL / DSL quality.  (No 1)

•   “After the first year contract period, the customer has the rights to terminate this contract and pay 80% of the total remaining recurrent services charge with 60 days prior written notice to DYXnet.”  (No 6)

•  The attached Terms & Conditions form part of the contract and apply to all the services provided by Diyixian.com Limited.  (No 9)

17. The following clauses in the Terms & Conditions are also relevant:

Clause 1:

“In consideration for payment of the Fees, DYX agrees to provide the Services to the Customer. The Customer shall pay the Fees and all applicable taxes and tariffs relating to its use of the Services. DYX will invoice the Customer (on a monthly basis for monthly recurring fee) by electronic mail, post and/or facsimile transmission. Any Fees are due and payable within 30 days after receipt of the invoice. If the invoice amount is not fully received by DYX on or before the due date, DYX shall be entitled to charge the Customer interest on such overdue amount at the rate of 1.5% per month and to be calculated daily from the due date until full settlement and DYX will be entitled to terminate this Agreement, and/or DYX will be entitled the right of use of Customer’s equipment in DYX premises, and/or DYX will be entitled to suspend the provision of any of the Services to the Customer, without prejudice to any other right and remedies available to DYX …”

Clause 4:

“The Customer expressly agrees that use of the Services is at the Customer’s sole risk and that the entire risk as to the quality and performance of the Services is with the Customer. Neither DYX nor any of its directors, employees or agents warrants that the Services will be uninterrupted or error free, or give any warranty as to the results to be obtained from use of the Services. In no event will DYX or its directors, employees or agents be liable to the Customer for any damage, (including but without limitation, special, incidental, or consequential damage)arising from the use of, or inability to use (for whatever reason), the Services, including but not limited to damages resulting from loss of data or loss of profits but not including death or personal injury due to the negligence of DYX, its directors, employees or agents. DYX shall not be held responsible for the error and fault of any third party in providing Service to the Customer.”

Clause 9:

“Unless otherwise agreed in writing the Term of the Agreement will be one year from the service effective date or the first date the Customer is billed the monthly recurring fee, whichever is later(‘the Initial Term’). Each service will continue automatically for additional same terms as the Initial Term (‘Renewal Term’) unless the Customer notifies DYX in writing at least two (2) months prior to the end of the Initial Term or a Renewal Term, as applicable, that it has elected to terminate such Service, in which case such Service shall terminate at the end of such term. The termination of any Service will not affect Customer’s obligations to pay for other Service(s). DYX may by thirty (30) days written notice terminate this Agreement without cause at any time during the Initial Term or the Renewal Term. Notwithstandingthe foregoing, DYX may change or increase the prices it charges Customer for any Service at any time after the Initial Term effective thirty (30) days after providing notice to customer. DYX also reserves right to charge the standard monthly recurring charge (as stated in the Contract) without notice given to the Customer. If the Customer does not agree to pay the increased prices or the standard monthly recurrent charge, the Customer shall give DYX two (2) months prior written notice to terminate this Agreement.”

Clause 12:

“Unless otherwise agreed in writing and signed by both parties, this Agreement constitutes the entire agreement between the parties. ‌At the sole discretion of DYX, DYX’s rights, duties andresponsibilities under this Agreement may be assigned, delegated or otherwise transferred to any of its subsidiaries, affiliates or associated companies. This Agreement is governed by the laws of Hong Kong, SAR and the parties hereby submit to the non‑exclusive jurisdiction of the courts of Hong Kong, SAR.”

18. On 15 August 2011, G’Five paid DYX the set‑up and consultation fee of US$6,900.

19. The contracted for installation of the VPN + SSL‑VPN system took place throughout October 2011.  Thereafter, both DYX and G’Five conducted a number of tests on the system.

20. Overall, these tests showed that the latency rate between Shenzhen and G’Five’s India office was deeply unsatisfactory when K3 was used on the system, both when the VPN facility was used and when the SSL‑VPN facility was used.  Indeed, it was Mr Zhang’s evidence, which I accept, that there were times when the India office could not connect using VPN at all and times when the India office was unable to go into a webpage without “time‑out” being shown on the screen.  When Citrix was used, the outcome tended to be just about satisfactory but G’Five were not prepared to incur the significant expense of obtaining Citrix on a permanent basis for approximately 50 computers when they had entered into the contract with DYX in the belief that the VPN and SSL‑VPN systems would allow use of K3 without using Citrix.

21. G’Five pressed DYX to improve the latency rate but they failed to do so when K3 was used on the system.

22. By an email of 20 January 2012, Justin informed Mr Lan of G’Five that billing for the recurrent monthly charges would begin as from 1 January 2012.  He enclosed with this email reports of router to router tests conducted by DYX involving routers located in Shenzhen, Hong Kongand India.  The results are pleaded in the Schedule to the Amended Reply and Defence to Counterclaim.  They were much better than the results achieved in tests over the whole system when K3 was used.

23. On 3 February 2012, Justin sent Mr Lan invoices for the recurrent monthly charge for January 2012. ‌By way of response, Wisor Ou informed Justin and Lawrence Liu of DYX by email dated 8 February 2012 that G’Five intended to terminate the service contract because the quality of the MPLS VPN and SSL‑VPN did not satisfy G’Five’s operational needs and failed to achieve the purpose of the service contract.

24. Thereafter, on 27 February 2012, G’Five sent to DYX a signed standard DYX termination form as insisted upon by DYX.  In Section IIIof this form the customer was invited to indicate the reason for terminationby ticking the appropriate box or boxes.  These boxes included: “Productdoesn’t meet requirement”; “Cannot provide service requirements (e.g. China contact for China IP etc)”; “Poor product/service performance”.  G’Five ticked none of the boxes in Section III. The form was signed by Wisor Ou on behalf of G’Five.

25. By letter dated 4 July 2012, DYX informed G’Five that the service contract was terminated pursuant to clause 1 of the Terms and Conditions.  Despite further demands for payment, G’Five has refused and continues to refuse to pay any monthly recurrent charge.

26. The sum sued for by DYX is for the 11 chargeable monthly recurrent charges due for the calendar year of 2012 and pursuant to bullet point no 6, 80% of the 11 chargeable monthly sums for the calendar year of 2013, making a total of US$237,600.

The case advanced by G’Five

27. G’Five contends that:

(1)  The service contract is liable to be rescinded on the ground that DYX falsely represented during the pre‑contract negotiations that the K3 system could be run on the VPN whichDYX was proposing to set up for G’Five.  ( Paragraph 4(c) of the Amended Defence and Counterclaim (“AD&C”) )

(2)  Alternatively, it was a condition of the service contract that theK3 system could be run on the intended VPN system and DYXwere in breach of the said condition. (Paragraph 4(d) of AD&C)

(3)  The service contract is liable to be rescinded on the ground that DYX falsely represented during the pre‑contract negotiations that the latency rate of the intended VPN system using K3 between Shenzhen or Hong Kong on the one side and India on the other would not exceed 120 ms.  (Paragraph 4(e) of the AD&C)

(4)  Alternatively, it was a condition of the service contract that the latency rate of the intended VPN system using K3 between Shenzhen or Hong Kong on the one side and India on the other would not exceed 120 ms and DYX were in breach of that condition.  (Paragraph 4(f) of the AD&C)

(5)  DYX were in breach of the following implied terms in the nature of conditions in the service contract: (a) in the performance of the contract DYX would act with reasonable care and skill and thereby ensure that the intended VPN system would properly connect the respective offices of G’Five in Hong Kong, Shenzhen and India for operating K3; (b) the VPN to be set up would be of merchantable quality; and (c) the VPN to be set up would be reasonably fit for G’Five’s stated purpose, namely to use K3 reliably and speedily through the intended VPN network.  (Paragraphs 5(g) (ii) and (iii) of the AD&C).

The case advanced by DYX

28. DYX pleaded that the VPN system installed complied with the contract and denied that:

(1)  Any statements were made on DYX’s behalf that K3 could be run on the proposed VPN system or that the latency rate of the proposed VPN system between G’Five’s Shenzhen office and the India office would not be more than 120 ms.

(2)  It was in breach of any implied conditions as to fitness for purpose or merchantability.

The witnesses called by the parties

29. DYX called:

(1)  Mr Chan Tai (also known as Alvin Chan) who, as stated above, was in charge of DYX’s sales team at the material time.  He left the employment of DYX on 30 May 2015.

(2)  Mr Tang Chi Yuen who represented the DYX’s technical team in the service contract negotiations. Mr Tang continues to work for DYX as a member of the technical team.

(3)  Mr Chan Chun Pui (also known as Dick Chan) whose evidence in his witness statement was in response to the witness statement of Mr Li Chengfeng called by G’Five and thus dealt with matters occurring after the service contract had been executed.

30. G’Five called:

(1)  Mr Zhang Wuxue who at the material time was G’Five’s Product Manager and who participated in some of the pre‑contract negotiations. ‌He continues to occupy a senior position in G’Five.

(2)  Mr Li Chenfeng who participated in a pre‑contract telecon and conducted post‑contract tests on the VPN system supplied by DYX.  Mr Li remains employed by G’Five.

31. Despite the prominent roles that they each played in the pre‑contract negotiations, Justin Lam was not called as a witness on behalf of DYX and Wisor Ou was not called by G’Five.

Did DYX represent in the pre‑contract negotiations that the K3 system could be run on the VPN system to be set up by DYX?

32. DYX does not dispute that at the meeting held on 9 March or at the one held on 14 March 2011 one of G’Five’s team, probably Wisor Ou, asked DYX whether K3 could run on a VPN system to be provided by DYX.  In paragraph 7 of his witness statement, Mr Chan Tai testified that upon hearing this question at the 9 March 2011 meeting, he and his DYX colleagues explained that:

“[DYX] only provided VPN services as a platform/network for the telecommunications between the [G’Five’s] own offices in Hong Kong, Shenzhen and India; whereas Kingdee K3 is a software used by the Defendant in its ERP system, which was a matter of [G’Five’s] own choice. For the avoidance of doubt, I had emphasised to Wisor Ou and his colleagues that [G’Five] had to use suitable software in their use of the VPN to be set up by [DYX] and they had to consult their own ERP system provider as to the best software to be used. My colleagues and I had never represented to G’Five’s staff that the VPN to be set up by [DYX] was for the running of Kingdee K3.”

33. In cross‑examination, Mr Chan stated that after he had said what is related in this paragraph of his witness statement, there were no follow up questions from the G’Five representatives.

34. In paragraph 9 of his witness statement, Mr Tang Chi Yuen testified:

“During this meeting [on 14 March 2011] Wisor Ou and his colleague told us that they were using Kingdee K3 Software and asked whether KingdeeK3 could run on MPLS VPN. Upon hearing this enquiry, we told Wisor Ou and his colleagues that basically ERP software such as Oracle, SAP and Kingdee which run on IP protocol could run on MPLS network, but it was a matter for [G’Five’s] own ERP system provider as to how the Kingdee K3 software was installed in their ERP system. My colleagues and I had never represented to Wisor Ou and his colleagues that the VPN to be set up by [DYX] would be for the purpose of running [G’Five’s] Kingdee K3 system for its Hong Kong, Shenzhen and India offices.”

35. Mr Chan Chun Pui (Dick Chan) testified in paragraph 4 of his witness statement:

“Although we had told [G’Five’s] representatives that basically ERP software such as Oracle, SAP and Kingdee which run on IP protocol could run on the VPN, it was in fact a matter for [G’Five’s] own ERP system provider as to how the Kingdee K3 software was installed in their ERP system.”

36. Mr Zhang is indentified in G’Five’s Further and Better Particulars as being one of the G’Five representatives to whom the alleged representation that the K3 system could be run on the VPN system to be set up was made.  Mr Zhang did not state specifically in his witness statement that he attended either of the March 2011 meetings; nor did he say this in his oral evidence in chief.  However, in his oral examination in chief he stated that he attended most of the many bi‑lateral meetings held in G’Five’s Shenzhen office and in paragraph 18 of his witness statement he testified that, “[a]t all material times, DYX represented to us and made us believe that the K3 ERP system used by G’Five can be run on the VPN to be established”.

37. Mr Tang said in evidence that he never negotiated with Mr Zhang, but on the other hand he did not say he attended all the meetings; indeed, it is clear that he did not attend the 9 March 2011 meeting.

38. On the basis of some answers given by Mr Zhang when cross‑examined about his pre‑contract knowledge of VPN systems, Mr Tim Wong, who appeared for DYX, submitted that Mr Zhang was an unreliable witness.  I reject this submission.  In my judgment, Mr Zhang was having some difficulty in following the thrust of the questions, as indeed was I.

39. Having carefully reviewed all the relevant evidence, I have come to the conclusion that at one of the pre‑contract bi‑lateral meetings, probably the one held on 9 March 2011, either Justin Lam or Chan Chun Pui, in response to the question from the G’Five side whether KingdeeK3 could run on the proposed VPN system, told the G’Five representatives present, including Wisor Ou and Mr Zhang, that ERP software such as Oracle, SAP and Kingdee3 could run on the proposed VPN system.  In my judgment, this statement was not followed up, as Messrs Tang, Chan Tai and Chan testified, with a warning that G’Five should consult their ERP software provider as to whether K3 was suitable to be used on the proposed VPN system.  I say this for the following reasons: (i) the allegedwarning and insistence that G’Five should take their own steps to establish the suitability of K3 for use on the proposed VPN system is just too “pat” and self‑serving to be credible; (ii) it is inconsistent with Mr Zhang’s evidence in paragraph 18 of his witness statement which I accept; (iii) contrary to the assertion of Mr Chan Tai that there was silence after the alleged warningwas given to G’Five, I am sure that if this warning had been given, G’Fivewould have reacted strongly because what they wanted was a VPN system on which they could use K3 which they had been using for a long time at their Shenzhen sites; thus, I am quite satisfied if the warning had been given, G’Five would taken at least one of the following steps, none of which they did in fact take: (a) approached their ERP software provider; (b) insisted that K3 was tested on the proposed system before signing the contract; (c) made it an express condition of the contract that K3 was suitable to be used on the VPN system; and (d) called off the negotiations.

40. I accordingly hold that G’Five have established the representation pleaded in paragraph 4(c) of the Amended Defence and Counterclaim.

41. In my judgment that representation was a representation as to existing fact going to a particular feature of the VPN proposed and was not a statement looking to the future, as argued by Mr Wong.  It is analogous in my view to a statement made by a car dealer to a potential buyer that a car’s exhaust emissions complied with government requirements.  The dealer’s representation in this hypothetical case is as to a particular feature of the car and is undoubtedly a representation of existing fact.  By analogy, the same goes for the representation I have held DYX made in the pre‑contract negotiations.

42. I also find that: (i) the representation was intended to be and was relied on by G’Five in entering into the contract; and (ii) the representationwas false.  The representation was false because, as the post contract testscarried out by DYX on the VPN system showed, it was when K3 was used with the VPN system that the performance of the system was deeply unsatisfactory.

43. I did not understand it to be contended by Mr Wong that G’Five’s misrepresentation case was rendered nugatory by any of the terms in the contract.  A possible candidate for such an argument is clause 12 of the Terms & Conditions.  However, in my judgment the wording of clause 12 is concerned only to exclude reliance on contractual terms that are not contained in the written contract; the clause therefore has no application to an inducing misrepresentation of existing fact.

44. It follows that G’Five are entitled to rescind the contract and to recover the set‑up and consultation fee of US$6,900 they paid in August 2011.

45. The conclusion just expressed in paragraph 44 above renders it strictly unnecessary to deal with G’Five’s other pleaded defences, but I think it appropriate that I should deal with the fitness for purpose defence and I shall make some brief observations on the other defences.

46. Whilst I am not persuaded that G’Five stipulated expressly that the system was to be able to work simultaneously in its offices in Hong Kong, Shenzhen and India using K3, I am quite satisfied that G’Five made it abundantly clear that the VPN system they required was one that would provide reliable and speedy interconnection between its offices when using K3. I am also satisfied that this formulation of the purpose is within the ambit of G’Five’s pleaded case.

47. The service contract was neither fish nor fowl: it was not a contract for the sale of goods, nor was it a contract exclusively for services.  It was not a sale of goods because the equipment provided by DYX was not sold to G’Five but instead was made available for use as part of the VPN system to be set up for the duration of the term of the contract; Section 16(3) of the Sale of Goods Ordinance accordingly has no application.  Since the contract was not one solely for services it is problematical whether the Supply of Services (Implied Terms) Ordinance applies to the service element of the contract and, even if it does, the resulting implied term would be one of reasonable care and skill in the performance of the service and not fitness for purpose. Nonetheless, in my opinion, G’Five having stated the above intended purpose for the VPN system in circumstances where they were manifestly relying on the expertise of DYX, the contract contained at common law an implied condition that the system supplied would be reasonably fit for that purpose, subject only to deficiencies in the quality of internet services provided by third parties.  The English Sale of Goods Act 1893, on which the Hong Kong Sale of Goods Ordinance is in significant part based, was a codification of the common law and pre‑1893 it had long been held that there was at common law an implied condition of fitness for purpose where the facts were as required in what was then s 14(1) of the 1893 Act[1]. ‌For example, in Jones v Bright (1829) 5 Bing 533; 130 ER 1167, the plaintiff buyer successfully sued the seller of copper purchased for sheathing a ship on the ground that the copper was not fit for that purpose; the copper sheathing had lasted just 4 months instead of the expected 4 years.  Giving judgment in the Court of Common Pleas, Best CJ said:

“ The law then resolves itself into this; — that if a man sells generally, he undertakes that the article sold is fit for some purpose; if he sells it for a particular purpose, he undertakes that it shall be fit for that particular purpose.

    … the case is of great importance; because it will teach manufacturers that they must not aim at underselling each other by producing goods of inferior quality, and that the law will protectpurchasers who are necessarily ignorant of the commodity sold.”

In my view, the same common law reasoning applies today to analogous innominate contracts like the service contract in this case, particularly having regard to the closeness of the analogy between the index service contract and contracts governed by s 16(3) of the Sale of Goods Ordinance and s 5 of the Supply of Services (Implied Terms) Ordinance.

48. The implied term does not, in my judgment, fall foul of clause 12 of the Terms & Conditions.  It is not dehors the contract but is an integral part of the agreement contained in the written terms.

49. I also reject Mr Wong’s submission that DYX is free from any liability for breach of the implied term as to reasonable fitness for purpose by virtue of clause 4 of the Terms & Conditions.  By section 12 (3) of the Control of Exemption Clauses Ordinance (“COECO”), clause 4 will only operate to exclude DYX’s liability for breach of the postulated fitness for purpose implied term to the extent the clause is reasonable.  The burden of establishing that the clause is reasonable is on DYX (s 3 (6) of COECO) and in determining the issue of reasonableness the court must have regard to the matters specified in Schedule 2 (s 3 (2)) and must have regard in particular to whether, and if so to what extent, the language of the clause is language understood by the person against whom the clause is sought to be enforced.

50. The guidelines set out in Schedule 2 are not the only matters which can found a determination that an exemption clause is unreasonable,see Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd’s Rep 273 (CA).  In my judgment, clause 4 is a clause which was manifestly unreasonable to have been included in the contract because its effect is to put DYX under no enforceable obligation whatsoever as to the quality and performance of the VPN system.

51. The implied term as to reasonable fitness for purpose I have found to be established is a term in the nature of a condition. It follows that upon its breach, G’Five was entitled to terminate the contract as it did and is also entitled in the alternative to its misrepresentation claim, to recover the US$6,900 it paid under the contract as money paid under a consideration that has wholly failed.

52. Assuming the contract contained an implied term that the VPN system should be of “merchantable quality” I have some doubts whether the inability of the system to work satisfactorily when K3 was used rendered the system unmerchantable.  I say this because on the evidence I infer that the VPN system would have functioned satisfactorily if some other software comparable to K3 had been used.

53. In my view the defence that the contract was induced by a false representation as to the latency rate between G’Five’s Shenzhen officeand the India office would have failed because, assuming this representation to have been made, it was purely in the nature of a contract promise and was not a representation of existing fact.  Further, the claims that the contract contained contractual conditions that K3 could be used on the proposed VPN system and that the Shenzhen–India latency rate would not exceed 120 ms were doomed to fail on account of the wording of clause 12 of the Terms & Conditions which I think was a clause that satisfied the requirement of reasonableness.

Conclusion

54. For the reasons I have given, DYX’s claim fails and G’Five’s counterclaim for a declaration that G’Five has validly rescinded the service contract and for the return of the US$6,900 succeeds.  I shall hear submissions from the parties if they are unable to agree what, if any, discretionary interest ought to be awarded on the US$6,900.