PEGGY P. LIU formerly t/a FUNG & LIU v. ALFA COM.TECHNOLOGY LTD

HCSA9/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS TRIBUNAL APPEAL NO. 9 OF 2006

(ON APPEAL FROM SMALL CLAIMS TRIBUNAL CLAIM

 NO. 8807 OF 2005)

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J U D G M E N T

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Introduction

1. By an invoice dated 23 October 2003 (“the Invoice”), the claimant engaged the defendant to provide, install and implement a computer software called Nexus Professional Management System (“the Program”), which was customized to the needs of the claimant and the configuration of the claimant’s computer system, at a price of HK$80,000.  I will call this “the Contract” below.

2. Under the Invoice, the initial package of the Program should be delivered to the claimant within 3 days after receipt of the deposit.  Customization of the Program would then take 3 to 4 weeks.  The claimant paid a deposit of HK$40,000 on 17 November 2003.  On 19 November 2003, the representatives of the defendant went to the claimant’s office to install the Program but discovered that the claimant’s computer system was infected with virus.  As a result, the Program could not be installed.

3. Disputes subsequently arose.  By letter dated 5 March 2004, the claimant demanded the refund of the deposit of HK$40,000 on the ground that the defendant had failed to deliver the Program as per the Invoice, which was refused by the defendant.

4. The matter eventually ended up in the Small Claims Tribunal.  The claimant claimed for the return of the deposit of HK$40,000.  The defendant counterclaimed for the balance of the price of HK$40,000.  On 22 November 2005, the deputy adjudicator, after trial, dismissed the claimant’s claim and allowed the defendant’s counterclaim in full.  The deputy adjudicator also refused the claimant’s subsequent application for review on 19 January 2006.

5. The claimant now appeals.

Perfected Grounds of Appeal

6. The Perfected Grounds of Appeal read :

Liability

1. The adjudicator erred in law in finding against the claimant and in favour of the Respondent in respect of liability for the reasons below:

(a) Before the contract dated 13 November 2003 (“the Contract”) was signed, the Respondent through its technical officer Mr Patrick Ling [“Mr Ling”] represented to Miss Wendy Ngan and Miss Chan Siu Ling [“Ms Chan”] of the Claimant that the Nexus System could be installed in the Claimant’s computer system (“the Representation”).

(b) Relying on the Representation, the Claimant signed the Contract and paid a deposit of $40,000.00 to the Respondent.

(c) After signing the Contract, the Claimant found out that the Representation was untrue.

(d) By letters dated 5 March 2004, 10 December 2004 and 3 January 2005, the Claimant has exercised the right to avoid the Contract on the ground of misrepresentation.

(e) In the circumstances, the Claimant claims for the return of the deposit should be allowed and the Respondent’s Counterclaim for the balance of the purchase price should be dismissed.

1A. The Adjudicator erred in law in failing to properly investigate the misrepresentation issue set out above.

1B. The Adjudicator erred in treating the evidence of Miss Chan Siu Ling, or a substantial part of the evidence, as hearsay evidence and on that ground (which was erroneous) the Adjudicator rejected Miss Chan’s evidence.

Quantum

2. Even if the Claimant has breached the Contract (which is denied), the Adjudicator erred in law in allowing the Respondent to keep the deposit of HK$40,000.00 and ordering the Claimant to pay the Respondent a further HK$40,000.00.

3. In the absence of evidence showing the actual loss suffered by the Respondent, the Adjudicator ought to have held that at most the Respondent is only entitled to have nominal damages.

4. Further or in the alternative, in the absence of evidence showing that the Respondent is ready, willing and able to perform their obligations under the Contract, the Respondent should not be able to mount an action for price against the Claimant.

Any misrepresentation?

7. The grounds of appeal on liability can be conveniently dealt with together.

8. Mr Liu, appearing for the claimant, argued that the evidence showed clearly that Mr Ling had made an unqualified representation that the Program could be installed in the claimant’s computer system.  When it later turned out that the Program could not be installed because of virus infection, the defendant was guilty of misrepresentation.  Mr Liu sought to rely on the undisputed evidence of Ms Chan that at the various examinations before signing of the Invoice, Mr Ling had checked the configuration of the claimant’s computer system and confirmed that the Program could be installed in the system.

9. In my view, the totality of the evidence does not support the representation as contended.  There is no evidence to suggest that the defendant was aware of the virus infection before the signing of the Invoice.  It is the defendant’s evidence, accepted by the deputy adjudicator, that its representatives did not check if the claimant’s system had any virus problem at the examinations because it was not their concern at all.  They were only concerned if the configuration of the system was suitable for installation of the Program.  Ms Chan’s evidence also suggested that the parties were then concerned about the configuration of the claimant’s computer system only.  Accordingly, if there is any representation made by the defendant, it related to configuration of the computer system only.  It was not unqualified in such a way as contended by Mr Liu.

10. I therefore agree with the submission of Mr Sham, who appeared for the defendant, that the ground of misrepresentation is misconceived.

11. To complete the discussion, I would like to say this on Ground 1B.  Mr Liu complained that the adjudicator had wrongly rejected the evidence of Ms Chan on what Mr Ling said on 19 November 2003 when it was discovered that the Program could not be installed.  In my view, the deputy adjudicator was quite entitled to reject her evidence on the ground of hearsay.  In any event, what transpired on 19 November 2003, which took place after the singing of the Invoice, could not have any bearing on the question if the defendant made the alleged representation at or before the time of the Contract.

12. For the above reasons, Grounds 1 to 1B all fail.  The deputy adjudicator’s finding that the claimant was in breach of the Contract stands.

Quantum

13. I next turn to the question of quantum.

14. I note that the defendant counterclaimed for the balance of HK$40,000 as loss of profit.  In allowing the counterclaim, the deputy adjudicator found that because of the claimant’s breach, the defendant was unable to fulfil the Contract by installing the Program.  The defendant was therefore entitled to the balance of HK$40,000. 

15. Plainly, the defendant was entitled to the actual loss and damage that it had suffered as a result of the claimant’s breach.  However, awarding the defendant the full balance under the Invoice is, on the evidence before me, questionable.  First, there is no evidence to support the defendant’s allegation that it had suffered a loss of profit in the sum of HK$40,000, which is half of the total price under the Invoice.  As I understand Mr Sham, although he supported the award, he did not contend that the defendant was entitled to the alleged loss of profit.  Second, the loss and damage suffered by the defendant has to be properly assessed.  Unfortunately, the deputy adjudicator had apparently not made a proper assessment.  Both Mr Liu and Mr Sham submitted that a proper assessment is dependent on the nature of the Contract.  Mr Sham contended that the Contract was a contract for services.  When the defendant was prevented from rendering the services because of the claimant’s breach, it was entitled to the balance under the Invoice : see McGregor on Damages, 17^th ed, paragraphs 29-001 at p.962.  Mr Liu argued that the Contract was a sale of goods contract.  The defendant had failed to provide even the initial package, let alone the Program.  It could not maintain an action for price.  Alternatively, the defendant is not entitled to substantive damages in the absence of any evidence of loss and damage : Born Chief Co (trading as Beijing Restaurant) v George Tsai [1996] 2 HKLR 188, per Nazareth VP (as he then was) at p.195.

16. Thus, according to counsel’s submissions, the assessment of loss and damage is dependent on whether the Contract was a sale of goods contract or a contract for services.  The subject matter of the Contract is computer software.  The following passage in Benjamin’s Sale of Goods, 7^th ed, at para.1-086 at pp.75-76, which Mr Sham cited, is worth noting :

“The question whether computer software should be classed as “goods” for any purpose has been a matter of debate in the different common law jurisdictions for some decades.  However, the issue has been authoritatively dealt with by Sir Iain Glidewell (obiter) in the Court of Appeal ruling in St Albans City & DC v International Computers Ltd.  The question in that case was whether a contract for the supply of software was subject to any implied term as to quality or fitness for purpose.  In his Lordship’s view a computer disk was clearly within the definition of “goods” for the purpose of the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982, while equally clearly a program, “being instructions or commands telling the computer hardware what to do”, of itself was not.  If a disk carrying a program was transferred by way of sale or hire and the program was defective, the seller or hirer of the disk would be in breach of the terms as to quality and fitness implied by these Acts.  However, in the St Albans City case, as is equally common, the defective program was not sold or hired: it had simply been transferred from a disk on to the claimants’ computer without delivery of the disk; the property in the program remained in the supplier and under the contract the claimants were licensed to use it.  The program was not “goods” and so there was no statutory implication of any term as the quality or fitness for purpose.  However, his Lordship went on to hold that, in the absence of any express term, such a contract would be subject to an implied term at common law that the program would be reasonably fit for (i.e. capable of achieving) its intended purpose.

Even where a disk (or other physical medium) is sold or hired, however, it does not follow that the program which is encoded on it is necessarily also sold or hired.  Frequently, the property in the copyright in the program is vested in a third party, such as its author, and the supplier agrees in a composite transaction to make available to his customer both the medium and the right of access to, and use of, the program by procuring a licence for its use.  Of such a transaction Lord Penrose in Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd said: “In my opinion the only acceptable view is that the supply of proprietary software for a price is a contract sui generis which may involve elements of nominate contracts such as sale, but would be inadequately understood if expressed wholly in terms of any of the nominate contracts.  Further, it is in my opinion unacceptable to analyse the transaction in this case as if it were two separate transactions relating to the same subject matter.  There is but one contract.  If on a proper analysis it does not fit the basic characteristics of any one nominate contract, the preferable view … is that it is innominate but reflects elements also found typically in nominate contract forms.”

A contract to write a new program for a customer is, of course, capable of being simply a contract for the supply of services.”

17. On the evidence before me, it is not clear if the Contract was purely a sale of goods contract or a contract for services or a contract with mixed characteristics.  (It seems that by using delivery of initial package in the Invoice, some physical things had to be delivered.)  The deputy adjudicator had apparently not directed her mind on this question before allowing the defendant’s counterclaim in full.  In my view, further investigation and finding have to be made on the nature of the Contract for the purpose of assessment.  It follows that the case has to be remitted to the deputy adjudicator for further disposal.

18. Mr Liu relied on the Born Chief case and contended that the case should not be remitted.  I disagree.  In my view, it is only fair that the case be remitted to the deputy adjudicator to carry out the requisite investigation to ascertain the actual loss and damage that the defendant had suffered because of the claimant’s breach.

Conclusion

19. For the above reasons, I will allow the appeal to the limited extent that the award of allowing the defendant’s counterclaim in full be set aside and direct that the defendant’s counterclaim be remitted to the deputy adjudicator or in her absence another adjudicator of the Small Claims Tribunal for assessment.  For the avoidance of doubt, I should make it clear that the parties are at liberty to adduce further evidence for the purpose of assessment.

20. On costs, in light of how the appeal is disposed of, I will make an order nisi that there shall be no order as to costs.