OWT ASIA LTD v. CPCNET HONG KONG LTD AND ANOTHER

HCA 6436/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 6436 OF 2000

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J U D G M E N T

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Introduction - the claims in these proceedings

1.  In about mid-1999, the market for the provision of telecommunications services in Hong Kong was opening up to greater competition.  One of the companies that sought to position itself to take advantage of this was the Plaintiff in these proceedings, which is now called OWT Asia Limited.  It planned to engage in the provision of facilities for the public to make international telephone calls from Hong Kong using telephone calling cards which it would issue.  David Zong Chen (“Mr Chen”) was the director of the Plaintiff who was most closely involved in the planning and implementation of this business.  He looked into the technology available to enable such services to be provided, and eventually decided to purchase a system (consisting of two components which I shall describe further below) for this purpose from the Defendant, which is now known as CPCNet Hong Kong Limited.  The Defendant was not the manufacturer or original supplier of the system.  It, in turn, entered into a contract to acquire the system from the Third Party, Proactive Techonology Limited with a view to selling the system on to the Plaintiff.

2.  Unfortunately, the system supplied to the Plaintiff did not meet its expectations.  The Plaintiff complains that the Defendant was in breach of a number of implied terms of the contract between itself and the Defendant, which justified the Plaintiff in treating that contract as having been repudiated by the Defendant.  The Plaintiff says that it accepted such repudiation on 17 October 1999, and is entitled to recover from the Defendant the partial payment of the price which it had made to the Defendant earlier.  The Plaintiff also claims damages from the Defendant in respect of wasted expenditure which it says it incurred.  Alternatively, the Plaintiff says that it was induced to buy the system from the Defendant by a number of representations made to it by a salesman employed by the Defendant, and that such representations were untrue, entitling it to rescind the contract, recover the partial payment made and claim the same damages from the Defendant.

3.  In addition, following the Plaintiff’s termination of the contract, it appears that the Defendant has continued to press for payment of the balance of the price for the system.  When its requests for payment met no response, the Defendant engaged the services of a debt collection agency to assist in recovery of the amount which it considered to be outstanding from the Plaintiff.  According to the Plaintiff, the tactics employed by the agency were improper and amounted to intimidation, trespass and harassment, and the Plaintiff seeks damages and an injunction against the Defendant in respect of this.

4.  The Defendant denies liability to the Plaintiff in respect of all of the Plaintiff’s claims, and has brought a counterclaim against the Plaintiff for the balance of the price which it says is outstanding.  As to this, the Plaintiff says that even if it was not entitled to treat the contract between itself and the Defendant as at an end, it was nonetheless not bound to pay the balance to the Defendant as the payment terms which were agreed made the balance payable only “on acceptance”, which the Plaintiff says means on satisfactory completion of the user acceptance tests (“UAT”) in relation to the equipment – which never happened.

5.  The Defendant issued third party proceedings joining the Third Party in these proceedings, and claiming an indemnity against the Third Party in respect of any sums it might be found liable to pay the Plaintiff.  Although in form the claim against the Third Party extends to an indemnity in respect of any damages that might be payable by the Defendant to the Plaintiff on the claims arising out of the activities of the debt collectors employed by the Defendant, there does not appear to be any basis for such a claim, which was not pursued by Mr Yeung, who appeared for the Defendant at the trial.  I therefore shall not consider this aspect of the Third Party proceedings further.

6.  The Third Party denies liability to the Defendant, saying that the Defendant, by refusing to make payment to the Third Party of amounts due to the latter, had evinced an intention no longer to be bound by the contract between them, thus repudiating it.  The Third Party says that it accepted the repudiation and thus is not liable to the Defendant.

The witnesses

7.  At the trial, the Plaintiff called one witness, Mr Chen.  As I have noted, he was the person at the Plaintiff who was most closely involved with the matters giving rise to these proceedings.  He made two statements for the purposes of these proceedings, which he adopted as his evidence.  He amplified that evidence at trial, and was cross-examined on behalf of both the Defendant and the Third Party.  As the purchase of the system was essential for the Plaintiff to start up its intended business, Mr Chen, as one might expect, had a reasonable recollection of the circumstances of its purchase, and of the developments thereafter.  I found him generally to be a reliable witness, and had little difficulty in accepting most of his evidence.

8.  The Defendant called three witnesses at trial.  These were Chang Ming Fai (“Mr Chang”), David Siu Hang Ho (“Mr Ho”) and Ma Suk Mei (“Ms Ma”).  Witness statements by two other persons, Ling Shing Yau Eddie and Ko Lee Lee, were also served by the Defendant, but they were not called at trial.  Their evidence was adopted by Mr Ho, without objection by the other parties, on the basis that none of them were involved with the matters under consideration at the time that they happened.

9.  Mr Chang was the salesperson at the Defendant with whom Mr Chen placed the order for the system.  At the time of the trial, he was no longer working for the Defendant.  His recollection of events leading up to the purchase of the equipment was vague.  Although his evidence in his statement was fairly precise, it became apparent during cross-examination that he was much less sure of his position at trial, saying in response to many questions that he could not recall what had happened.  He appeared to have little to do with the transaction after the conclusion of the sale agreement, and was not involved in the commissioning of the equipment, which was left to be sorted out between the Plaintiff and the Third Party.  Although he was copied with a number of the e-mails setting out problems and issues arising during this process, he does not seem to have responded to any of them.  When the Defendant later delayed in making payment to the Third Party, the latter says that it took up the matter with Mr Chang, without any response from him.  Mr Chang said that he had little recollection of this.  There were also a number of respects in relation to which his evidence at trial differed from that given in his witness statement – for example, he initially said that he had never met Mr Chen until very shortly before the quotation given by the Defendant to the Plaintiff was prepared, and said that he was not involved in the negotiation of the terms of the transaction, which had been handled by his superior at the Defendant.  However, he eventually accepted that he probably had met Mr Chen before, and did discuss or negotiate the price terms in relation to the sale of the system.  Taking these matters into account, where his evidence has differed from that of Mr Chen, I prefer Mr Chen’s evidence.

10.  Mr Ho was not involved in the transaction at the relevant time.  He gave evidence as to the industry practice and standards in relation to certain aspects of the system which the Plaintiff said were deficient, with a view to showing that this was not the case.  He also gave evidence as to one of the main issues in the case – whether the system was capable of supporting postpaid as well as prepaid calling cards.  Given that he had no involvement in the matters at the relevant time, and was not particularly familiar with the system under consideration here, I found his evidence to be of limited assistance.

11.  Ms Ma gave evidence in relation to the claim arising out of the employment of the debt collection agency.  She was, however, not greatly involved in relation to this particular matter.  Her evidence, too, was thus of limited assistance for present purposes.

12.  The Third Party called two witnesses, Mr Lee Wah Sang Terence (“Mr Lee”) and Ms Tsui Ching Yin, also known as Linda Tsui (“Ms Tsui”).  Mr Lee was involved in relation to early negotiations with Mr Chen when the latter was considering purchasing the system directly from the Third Party.  He was also responsible for handling the sale of the system to the Defendant for on-sale to the Plaintiff.  Like Mr Chang, although Mr Lee’s statement was fairly specific in relation to matters in issue in these proceedings, when it came to the trial, his recollection was much less detailed, and in relation to many questions put to him in cross-examination, he said that he had no recollection, or had no view on the particular matter.  Ms Tsui was a member of the Third Party’s team responsible for commissioning the system after its installation, and for carrying out the UATs.  Her recollection of matters was somewhat more detailed, and I accept that she was generally a truthful witness.  However, there were a number of areas in relation to which she expressed views which could not, I think, have been within her own knowledge, and I have not placed weight on her evidence in relation to such matters.

The background to the proceedings

The Plaintiff’s intended business

13.  In about June 1999, the Plaintiff (through Mr Chen) was considering the purchase of the system for its intended business of the supply of international telephone services.  Mr Chen says that it was the Plaintiff’s intention to start by providing prepaid calling card services, and later to expand to the provision of postpaid calling card services.

14.  The supply of international telephone services using prepaid calling cards involved the purchase by members of the public of calling cards issued by the Plaintiff with a certain amount of credit encoded on the card.  By dialling an access number, the purchaser of the card would be taken through a series of voice prompts giving instructions on how to place a call to the desired destination.  The call would then be put through, and at the end of the call, the charge for the call would be deducted from the balance remaining on the card.  When the value encoded on a prepaid calling card was exhausted, the customer would have to purchase a new calling card.

15.  The use of postpaid calling cards involved a similar arrangement, except that instead of a certain amount of credit being encoded on the card, the card would usually have no value encoded on it.  Rather, the system would keep track of the calls made using a particular card, and periodic bills would be issued to the customer (say on a monthly basis) requiring payment of the amount then outstanding.  When the customer made payment, this would be recorded, and the outstanding balance accordingly reduced.

16.  There was thus a difference between the way in which the two types of calling cards operated.  This difference has given rise to one of the main issues in dispute between the parties.  The Plaintiff contends that what it purchased was a system that was described as having the ability to handle both types of calling cards, but that it received a system that could only handle prepaid calling cards.   The Defendant and Third Party, on the other hand, contend that all that was sold was a system consisting of hardware which could be used as a platform for either type of calling card, but which was never intended to include the software which would enable it to function effectively as a platform for the provision of postpaid calling card services.

The Plaintiff’s discussions with the Third Party

17.  The Plaintiff started by discussing the purchase of the System directly with the Third Party.  However, it appears that these negotiations ultimately did not bear fruit because the Third Party was unable to arrange for lease financing to assist the Plaintiff in acquiring the system.  Mr Chen said that during the course of these negotiations, he mentioned to Mr Lee that the Plaintiff’s intention was to start by engaging in the prepaid calling card business, and also that at some point in the future, it would also wish to engage in the supply of telephone services using postpaid calling cards.  Mr Lee, however, says that the possibility of using postpaid calling cards was not mentioned.  Although Mr Lee was fairly specific about this in his witness statement and evidence in chief, he was rather less categoric in his answers when cross-examined by Mr Wong, who appeared for the Plaintiff.  Having considered their evidence, I have come to the view that Mr Chen’s recollection is to be preferred, and I accept that he did mention this matter.  However, it is possible that as the focus at the time was on the starting up of the Plaintiff’s enterprise by embarking on the prepaid calling card business, the possibility of expanding into postpaid calling card services may not have assumed great prominence in the discussions.

18.  The system that was under discussion consisted of two parts.  The first was known as a Lucent Internet Telephony Server Gateway ITS SP-One T1, and the second was known as a Prepaid & Postpaid Solution Platform PCCP Model PXS 1000.  These were intended to operate together to enable a calling card business to be operated using the public internet as a means of delivery of telephone calls from the originating point (Hong Kong) to their destination.  As its name suggests, the first part of the system was produced by the American company, Lucent.  There is no complaint about this part of the system.  The controversy in this case centres on the second part of the system, which was produced by the Third Party.  I shall call it “the PXS 1000”

19.  In the course of their discussions, Mr Lee gave Mr Chen a brochure describing the PXS 1000.  There were in fact two versions of this brochure, Version 2.1 and Version 2.2, both dated 1 February 1999.  It is not clear which version was the one supplied by Mr Lee to Mr Chen.  It seems that at some stage, both of them found their way into Mr Chen’s hands.  Although there are differences between them, I have not found these differences to be determinative of any of the matters in issue, and I shall therefore refer mainly to Version 2.2, which could be regarded as being slightly more favourably worded from the point of view of the Defendant and the Third Party.  The terms of this brochure are of some relevance, and will be referred to later in this judgment.

The Plaintiff’s dealings with the Defendant

20.  Thereafter, in around late June 1999, the Plaintiff entered into an arrangement with the Defendant for the provision by the Defendant of internet access services for the purpose of its proposed business.  Mr Chang was involved in this process.  According to Mr Chen, Mr Chang approached him at the beginning of July 1999 to suggest that the Plaintiff should acquire the system from the Defendant, rather than the Third Party.  Mr Chen says that following some negotiations, he decided that the Plaintiff should go ahead and purchase the system from the Defendant, particularly as it was offering it at a somewhat better price than that offered to the Plaintiff by the Third Party.  Apart from the price itself, Mr Chen said that the payment terms being offered by the Defendant were more favourable to the Plaintiff as well.  As will be seen, this would appear to be the case, judging from the terms which the Defendant offered to the Plaintiff, as compared to those which it accepted vis-a-vis the Third Party.

21.  Mr Chen says that while discussing the possible purchase with Mr Chang, he made it known to him that the system was required for the purposes of an intended internet telephony business, initially using prepaid calling cards, but with a view to providing service with postpaid calling cards later.  He says that Mr Chang also represented that on site installation would be provided, that the system would meet the requirements of the UATs, that it would conform with the brochure and that after making an initial payment, the balance of the purchase price would only have to be paid after the results of the UATs had been accepted by the Plaintiff.  In his statement, Mr Chang disagreed as to these matters.  However, when giving evidence, he was, like Mr Lee, much less categorical, saying that he had little recollection of the events in question.  Again, I would accept Mr Chen’s evidence for the most part.  It seems to me very likely that he would have mentioned the purpose for which the system was needed, although, as I have said earlier, it may be that less stress was placed on the postpaid aspect of the business model which the Plaintiff proposed to adopt.

22.  So far as the alleged representations are concerned, however, while I would be inclined to accept that these matters were discussed, and that Mr Chang may well have said something along these lines, such statements are not, in my view, really aptly described as representations, since they are more promissory in nature, and were in any event subsumed within the implied terms relied upon.  It seems to me to be more apt to characterise any failure to perform in accordance with such representations as a breach of the contract, rather than a misrepresentation.

The contract between the Plaintiff and the Defendant

23.  The result was that the Plaintiff agreed to purchase the system from the Defendant.  The contract was evidenced by the Defendant’s quotation dated 12 July 1999, issued to and accepted by the Plaintiff.  It is pertinent to note the description of the PXS 1000 in that quotation, and also to note the payment terms which were agreed.

24.  The PXS 1000 was described as follows:-

“Prepaid & Postpaid Solution Platform PCCP Model PXS 1000

-     4 x T1 capacity

-     Signalling Switch Server with DTMF, MFR1 and MFR2 span Signalling

-     Calling Card Application Host

-     Calling Card Subscriber Database using FoxPro inside the Application Host

-     Voice Processing resources residing in the signalling switch server internal resources with VRAS card

-     Installation”

25.  The total cost of the system was US$80,855, made up of US$24,205 in respect of the Lucent gateway, and US$56,650 in respect of the PXS 1000.  The original payment terms which were typed on the quotation called for 50% of the price to be paid as a deposit on receipt of the order, 40% on installation and 10% on acceptance.  However, this was manually amended so that the payment on installation was deleted, and the percentage of the price payable “on acceptance” was increased to 50%.  The Plaintiff paid the first instalment of US$40,400 on 14 July 1999.

The Defendant’s contract with the Third Party

26.  Also on 14 July 1999, the Defendant purchased the system from the Third Party.  The description of the PXS 1000 in the quotation submitted by the Third Party to the Defendant was in substantially identical terms to that set out above.  The payment terms, however, were in the form which originally appeared, before amendment, on the Defendant’s quotation to the Plaintiff.  It will thus be seen that the Plaintiff was given rather more favourable payment terms by the Defendant than the Defendant was given by the Third Party, and that there was thus a mismatch between the payment obligations under the two quotations, the effect of which was that the Defendant would be obliged to pay the Third Party some 40% of the purchase price on installation, which could be (and in this case was) some time before that amount would be receivable by it from the Plaintiff.

Installation and testing of the system

27.  On 6 August 1999, the Defendant wrote to the Third Party, requesting delivery and installation of the system.  In this letter, the Defendant authorised the Plaintiff to perform the “acceptance test” (i.e. the UATs) and stated that it would accept the results.  Although it may not have been ideally worded for this purpose, this was understood by all concerned as an authorisation by the Defendant to both the Plaintiff and the Third Party to deal directly with one another in relation to the UATs, with the Defendant agreeing to be bound by the results thereof.

28.  Thereafter, the system was delivered on 16 August 1999 and installed between 17 and 25 August 1999.

29.  On 18 August 1999, Mr Patrick Low (“Mr Low”), a computer consultant engaged by the Plaintiff to assist it with the testing and assessment of the system and the commencement of its business (as Mr Chen’s background was more in business than in technology), sent an e-mail to various persons with the Plaintiff and the Third Party mentioning a number of points that required the Third Party’s attention.  These included, at item 5, a request to call Mr Chen to confirm the price (if any) and the time required to install the postpaid software.  The next day, 19 August 1999, a Mr Eric Lam (“Mr Lam”) responded that two weeks would be needed to install the postpaid software.  No suggestion was made that any additional price would be payable.

30.  Thereafter the Plaintiff and Third Party agreed on the initial version of the UATs.  These required three tests to be carried out, namely a Call Flow Test, a Card Administration GUI Test and a Y2K Test.  These tests were carried out on 27 August 1999.  The result, which is set out in an e-mail from Mr Low, was that failures were detected in relation to the Call Flow Test, the Card Administration GUI Test could not be continued until the Call Flow Test was dealt with, and failures were also detected in relation to the Y2K Test.  Further work on the system was then done by the Third Party, and further UATs carried out on 30 August 1999.  These tests appear to have been largely satisfactorily completed, although a small problem was found in relation to an error in the Remove Tab, which the Third Party was asked to fix.

31.  Although the 30 August 1999 UATs were largely satisfactory, further problems emerged, which were pointed out by the Plaintiff (through Mr Low) to the Third Party on 1 and 5 September 1999.

32.  Meanwhile, the Plaintiff distributed a number of calling cards to friends and associates of Mr Chen and the Plaintiff’s staff.  Mr Chen said that the object of this was to allow the recipients of the cards to try out the system, and to report any complaints or difficulties that they had with the system.  It seems that some problems were raised as a result, particularly in relation to the customer interface – that is, how the user was dealt with by the system.  This led to requests for improvement by the Plaintiff, as evidenced by Mr Low’s e-mail to Mr Lam and Ms Tsui of 13 September 1999.

33.  On 14 September 1999, there was a meeting between the Plaintiff and the Third Party, as a result of which it was agreed that the UATs would be amended.

34.  Also on 14 September 1999, Mr Low complained to Mr Lam and Ms Tsui about the absence of a sufficiently user-friendly graphical user interface (“GUI”) to enable card and PIN (personal identification number) calling details.  The purpose of this was, according to Mr Chen, to enable the Plaintiff to respond to customer queries or complaints.  For example, if a customer complained that he had been cut off during a call, or apparently charged despite being unable to make the call which he wished to make, the existence of such an interface would make it possible for the Plaintiff to call up the customer’s calling record by inputting the card number or the PIN number assigned to the customer.  The complaint was that despite Mr Chen having specifically raised the question of calling detail records with the Third Party, there was even at this stage “no proper GUI for tracking historical data”.  Mr Low pointed out that the Plaintiff “would have preferred a GUI for viewing current usages as well”.  Mr Low said that what was provided was something which enabled historical data to be retrieved, but in a way which was unmanageable.  The suggestion from the Third Party that this could be done by exporting the data from the system to a different program (Microsoft Excel) was rejected as being cumbersome and unsuitable for someone not experienced in handling computers.  The e-mail concluded with a call for a revision to the UATs, and a demand that they be completed by 22 September 1999, failing which there was a risk that the system would be rejected by the Plaintiff.

35.  It would appear that although the system had been delivered and installed by 25 August 1999, triggering the Defendant’s obligation to pay the next 40% of the purchase price under its contract with the Third Party, the Defendant had not in fact made this payment.  Mr Lee said that he was, by mid-September 1999, chasing the Defendant (in particular through Mr Chang) for payment frequently, but with no response.  Mr Chang professed to have no real recollection of this, but I am satisfied that Mr Lee’s evidence is accurate in this respect.  According to Mr Chen, Mr Lee voiced dissatisfaction with the delay in payment by the Defendant at the meeting of 14 September 1999, and asked Mr Chen to assist by pressing the Defendant to make payment to the Third Party, failing which the Third Party might feel compelled to withhold further assistance in relation to completion of the UATs.  Mr Lee denied having made this threat.  I accept Mr Chen’s evidence that the matter of non-payment by the Defendant was raised - it seems likely that the Third Party would seek to enlist the assistance of the Plaintiff in this respect, as it would be anxious to receive payment, given the amount of time and effort that was having to be expended in bringing the system up to the Plaintiff’s expectations.  As for the threat to withhold further cooperation, this was not carried out for some time, and thus whether or not it was made at this time is not a matter of particular relevance.  For what it is worth, I am inclined to think that such a statement was probably made, with a view to persuading the Plaintiff to assist if it could.

36.  Thereafter, on 18 September 1999, revised UATs were agreed.  These involved improved versions of the Call Flow Test and Y2K Test, a continuation of the Card Administration Test, and a number of new tests – namely, a Load Test, Alarm Monitor Test, CDR House Keeping Test and Report Generator Test.  These were said by Linda Tsui to have been incorporated to meet some of the Plaintiff’s requests for enhancements to the function of the system and to fine-tune the system for the Plaintiff.

37.  Further UATs were carried out on 22 September 1999.  Again, these were not wholly successful.  The Alarm Module Test was not done, and the Card Administration Test was not completed.  Problems were encountered with the Report Generator Test as well.

38.  On 23 September 1999, the Plaintiff asked the Third Party to provide the manual for part of the system known as the Excel Switch.  The Third Party indicated that this was available and would be provided at the next UATs.  Following an exchange of e-mail correspondence, it appears to have been agreed that the next UATs would take place on 30 September 1999.  This, however, did not happen.  Mr Chen says that Mr Lee told him on 30 September that, because of the Defendant’s continued failure to make the payment of the long outstanding 40% of the purchase price to the Third Party, the Third Party would no longer be prepared to continue with the UATs.  Mr Lee said at first that he did say this, but not until the next day, 1 October 1999.  However, at trial, he was less certain as to this, and indicated that this was said around 30 September or 1 October.  Ms Tsui also agreed that she had been instructed to cease providing assistance to the Plaintiff and not to carry out any further UATs.  She too, however, was unable to put a precise date on when she was told this, saying that it was around 30 September or 1 October.  In my view, it is likely that the decision of the Third Party to withhold further cooperation was made on 30 September, since there would otherwise be no explanation for the failure to carry out the UATs scheduled for that day.

Termination of the contract between the Plaintiff and the Defendant

39.  Also on 30 September and 1 October, the system crashed repeatedly.  The cause of the problems on 30 September 1999 is not entirely clear.  However, the Plaintiff says that the problem on 1 October 1999 was that the system had been disabled, apparently as a result of the deletion of certain software modules from the system.  It does not appear to be disputed that the crashes in fact happened (certainly the contrary was not suggested to Mr Chen).  However, none of the witnesses were able to throw any light on why and how this might have come about.

40.  Fed up with the problems that had arisen and the failure to resolve them, Mr Chen ordered a different system from another supplier on 1 October 1999.  Although he said in his statement that he did this on the evening of that day, he corrected this when giving evidence, to indicate that this probably happened in the small hours of the morning.  The alternative system was delivered on 7 October 1999.  Nothing further having happened by 17 October 1999, the Plaintiff informed the Defendant by letter that day that it was rejecting the system on the basis of the Defendant’s alleged repudiation of the contract between them.  The reason given was the refusal of the Third Party to complete the UATs, although the date of the refusal was wrongly stated as 24 September 1999.

41.  Meanwhile, the Third Party continued to press the Defendant for payment, with no immediate effect.  The 40% instalment remained outstanding for some considerable time, although it was eventually settled several months later.

Engagement of debt collectors by the Defendant

42.  During the first half of 2000, the Defendant engaged the services of a debt collection agency called Gold Partners Credit Management Limited (“Gold Partners”).  According to Mr Chen, in the first two weeks of June 2000, employees of Gold Partners made many telephone phone calls (about 100 or slightly below that number) to the Plaintiff, pressing for payment of the balance of the price to the Defendant.  Mr Chen says that in many of these telephone calls, threatening and abusive language was used.  Mr Chen also says that two individuals visited the Plaintiff’s premises on 13 June 2000 and demanded that the balance which they said was owing to the Defendant should be settled, and threatened to come back repeatedly unless this was done.  This was reported to the police, who took no action.  Complaints were made about this to the Defendant.

43.  Following the institution of these proceedings by the Plaintiff, it seems that Gold Partners have ceased to be involved in this matter.  Internal records of Gold Partners which have been disclosed by the Defendant indicate that the matter was put into abeyance so far as they were concerned on the commencement of these proceedings.

The Plaintiff’s claims for breach of contract and misrepresentation

44.  Against this background, Mr Wong submits that the following matters constituted breaches of either express or implied terms of the contract between the Plaintiff and the Defendant, which entitled the Plaintiff to terminate the contract as at 17 October 1999 and claim damages in respect of the expenditure by the Plaintiff that has been wasted as a result of such breach.  Alternatively, he submits that some of the matters amount rendered the representations said to have been made by Mr Chang untrue, so that the Plaintiff is entitled to rescind the contract, and claim the same wasted expenditure as damages for misrepresentation:-

(1)	The failure to deliver the postpaid software in respect of the system, without which it could not be used for operation of an international telephone service using postpaid calling cards - this was said to be a breach of either the express description of the PXS 1000 as contained in the quotation of 12 July 1999, and in the product description documents constituted by the brochures, or alternatively an implied term that the system would correspond with its description.  It was also said to be a breach of a representation by Mr Chang that the system supplied would conform with the brochure.
(2)	Non delivery of a usable GUI - this was said to render the system unfit for its purpose, to make it not of merchantable quality and resulted in its failing to conform to its description, in breach of implied terms of the contract, to be implied by operation of the Sale of Goods Ordinance.
(3)	The failure to carry out the UATs to the complete satisfaction of the Plaintiff, and the ultimate refusal by the Third Party to carry them out - these matters were said to render the system unfit for its purpose or to make it not of merchantable quality, in breach of the same implied terms.
(4)	The system failures on 30 September and 1 October 1999 - these were said to show that the system was unfit for its purpose and was not of merchantable quality, in breach of the same implied terms.
(5)	The failure to deliver the Excel Switch manual - this was said to be a breach of an implied term requiring the provision of all manuals needed to enable the Plaintiff to operate and manage the system.

Was a postpaid function and the software for it part of the system?

45.  So far as the first of these points is concerned, both the Defendant and the Third Party submitted that software for the operation of a postpaid calling card service was not included within what was agreed to be supplied under the respective contracts between the Defendant and the Plaintiff, and the Third Party and the Defendant.  Mr Yeung relied on the following matters in support of this contention:-

(1)	Various passages in the brochure supplied by the Third Party to the Plaintiff indicated that this was the case;
(2)	No representation that such software would be provided was made by Mr Chang to Mr Chen;
(3)	When enquiring about the postpaid software, Mr Low had asked for the price and how long it would take to produce it, thus indicating that it was not part of what was contracted to be supplied for the price in the quotation, and also an awareness on the part of the Plaintiff that the software did not yet exist;
(4)	There was no complaint about this matter in the contemporaneous documentation, in particular the Plaintiff’s e-mail of 14 September 1999, its letter to the Defendant of 17 October 1999, its letter before action, its letter to officers of the Defendant in the United States of 17 June 2000 (which made express reference to the purchase of a prepaid calling card system), or even its original Statement of Claim in these proceedings;
(5)	Evidence of Mr Lee and Ms Tsui to the effect that this was not part of what was contracted for.

46.  Mr Yeung submitted that taken together, these facts showed that this complaint (like the others) was no more than an excuse to try to get out of the contract, at a time when the Plaintiff had already decided to change to a different system, as evidenced by an e-mail from the Plaintiff to the Third Party of 21 September 1999, in which reference was made to a “new partner”.

47.  Reliance was also placed on evidence from Mr Ho, Mr Lee and Ms Tsui to the effect that there was a difference between a “platform” and the software required to perform particular functions.  What was sold was said to be a solution platform, and it was contended that the machinery supplied was capable of being used to operate a postpaid calling card business, if the appropriate software (which was not, and was not intended to be, included) were installed.  It was also suggested by Mr Ho that adjustments could be made to the prepaid software which was provided so as to render it useable for the support of a postpaid calling card business, by making changes to the credit status of a customer’s account, so as to allow an infinite amount of credit, and the use of the recharge function which enabled a card to be topped up or its value reset on payment of outstanding charges.

48.  It should be noted that it was not in dispute that no postpaid software was provided, and that such software had not yet been fully developed.  Thus, if the ability to support a postpaid calling card business was, under the contract between the Plaintiff and the Defendant, part of the system to be supplied, it was not provided (subject to the point made by Mr Ho about the possibility of making adjustments to the software which was provided).

49.  In my view, the starting point is the description of the system in the quotation of 12 July 1999.  The PXS 1000 is described as a “Prepaid and Postpaid Solution Platform”.  Taken on its own, this would seem to me to convey to a purchaser in receipt of the quotation that what was being supplied would be capable of enabling the purchaser to operate a calling card business using both prepaid and postpaid calling cards.  This description, which appeared in the Defendant’s quotation to the Plaintiff, was in the same terms as the description used by the Third Party in its quotation to the Defendant.  Mr Lee testified that he prepared the latter quotation, on the basis of the brochure, in particular its table of contents, which made reference to both prepaid and postpaid calling cards.  When cross-examined, he accepted that he was unsure whether or not postpaid software was included.

50.  Although Ms Tsui said that postpaid software was not included, I do not regard her evidence as being of any real weight in relation to this aspect of the matter.  She was not involved in the negotiations for the supply of the system, whether as between the Third Party and the Plaintiff in the early stages in June 1999, or as between the Third Party and the Defendant.  She was not responsible for the preparation or drafting of the brochure on which Mr Lee based the quotation prepared by the Third Party.  In any event, I do not think that evidence of this sort to explain what was meant by the term “Prepaid and Postpaid Solution Platform” would be admissible.

51.  I do not regard the suggestion that there was a difference between a “platform” and the software required to make it operate for the purposes intended as being meaningful or viable.  What the Plaintiff wished to purchase was a system that would enable it to operate its business – initially the provision of international telephone services using prepaid calling cards, and later such a service using postpaid calling cards as well.  Absent the necessary software, what was sold would not amount to such a system.  Further, it is to be observed (as Mr Wong pointed out) that there was no dispute that software for a prepaid calling card system was included as part of the product.  That being so, there would seem to be no proper basis for suggesting that prepaid software was included within the description “Prepaid and Postpaid Solution Platform”, but that postpaid software was not.

52.  The fact that such postpaid software was not yet fully developed, and that this would appear to have been known to the Plaintiff, does not assist the  Defendant either.  There is nothing to prevent a party to a contract binding himself to provide something which does not yet exist.  If he does so, he obliges himself to ensure that it is brought into existence in time to enable him to fulfil his contractual obligations.  That would seem to me to be the case here.

53.  Turning to the specific points made by Mr Yeung, I do not think that there is anything in the brochure that assists him.  Mr Yeung drew attention to pages 4, 5, 17 and 20 of the brochure which was marked “Version 1.2”.  Mr Shum (for the Third Party) also drew my attention to page 16 of that brochure.  Even assuming that the brochure was part of the contract between the parties, despite it not having been expressly incorporated or referred to in the quotation, it seems to me that, if anything, it lends support to the Plaintiff’s case.  I would make the following observations in relation to the various parts of the brochure which were relied upon by the Defendant and the Third Party:-

(1)     Page 4 - section 1 on this page would appear to support the Plaintiff’s case.  It states:-

“The Proactive Calling Card Platform (PCCP) for both fixed line and wireless carriers is a turnkey system that automates the processing of telephone calls that are billed to Prepaid Calling Cards or Postpaid Calling Cards. ...”

“The functions supported by the PCCP include all the features and facilities necessary to create prepaid calling card, postpaid calling card and SIMM card services. ...”

Nothing in this section suggests that postpaid calling card services are not supported.  On the contrary, it is expressly stated that they are.   Nor is there anything to indicate that separate software, which is not included, is required for the support of postpaid calling card services.

(2)     Page 5 - section 3 on this page also supports the Plaintiff’s case.  It deals expressly with postpaid calling, and indicates that the platform provides support for postpaid calling cards, saying that they are similar to prepaid cards (described in section 2 of the brochure) in terms of capabilities and configuration.  Again, there is nothing to suggest that any necessary software is not included.

(3)     Page 16 is a call flow chart for prepaid calling cards.  Mr Shum suggested that the absence of a similar chart for postpaid cards was an indication that postpaid calling software was not part of what was sold.  I do not agree.  As Mr Wong pointed out, there is no reason to think that the call flow for a postpaid card would be significantly different from that for a prepaid card.  In such circumstances, I do not think that the absence of a postpaid card call flow chart can be taken as showing that postpaid software was not to be included.

(4)     Page 17 is a sample of a call detail record.  It is stated that this is kept in text format which can be exported out to other software for further billing processing by an external billing platform.  I do not see that this assists the Defendant or Third Party.  If anything, the reference to billing could only be relevant to a postpaid calling card business (there being no need to bill a purchaser of prepaid cards, who would only have the value encoded on the card available with which to make calls), and thus supports the Plaintiff’s position.

(5)     As to page 20, I am afraid that I can see nothing on that page to support the Defendant’s position either.

54.  Apart from these passages in the brochure, it is to be noted that the brochure refers expressly to certain features as being optional (see, e.g., sections 5.3, 5.4, 5.5, 5.6 and 5.11).  However, none of these would appear to be exclusively referable to postpaid calling cards, so as to bring it home to a reader of the brochure that the software necessary for these is not included.  On the contrary, section 5.3 (which might be thought relevant to postpaid calling cards) in terms refers to prepaid calling cards.

55.  Mr Yeung’s second point was that Mr Chang did not in fact represent that postpaid software would be included.  I have already indicated that, on the whole, I prefer Mr Chen’s evidence on this point.  However, it seems to me that this is, in any case, not strictly relevant to this issue.  The question of what was included is to be determined by reference to the terms of the contract.  For the reasons already given, I am satisfied that the contract between the Plaintiff and the Defendant did provide for the supply of any necessary postpaid software.

56.  I do not think that the fact that Mr Low asked for the “price (if any)” of the postpaid software assists the Defendant.  Mr Low was not involved in the making of the contract for the purchase of the system.  Moreover, the reply from the Third Party did not suggest that any additional payment was required.  If it had been, one would have expected this to have been mentioned.  The fact that the software was not yet ready does not assist the Defendant either, as I have explained in paragraph 52 above.

57.  The point that no complaint about this was made thereafter, until the Statement of Claim in these proceedings was amended, has some forensic force.  However, it is clear that a party who terminates a contract because of the other party’s breach is not debarred from relying on additional grounds for termination, and in my view, I do not think that this is a sufficient basis for concluding that the point has no merit, particularly as the absence of the postpaid software was raised, and at the time the Plaintiff was given to understand that it would take some weeks before it would be ready.  That being so, it is not surprising that when terminating the contract, the focus should have been on the problems with the prepaid part of the system, which was of most immediate relevance to the business that the Plaintiff was proposing to conduct.

58.  As to Mr Lee and Ms Tsui’s evidence, I have already indicated that I do not regard their views as to what was or was not included as in any way conclusive of this question.

59.  Finally, as to Mr Ho’s suggestion that the software supplied could be adjusted or modified to provide the necessary support for postpaid calling, I do not regard this as providing an answer.  Mr Ho accepted that he had could not tell whether the adjustments could in fact be made.  More significantly, Ms Tsui, who was involved with the product on the technical side was clear in her evidence that there were different types of software for the prepaid and postpaid functions.  Had Mr Ho’s suggestion been a workable one, it would no doubt have been suggested by the Third Party when Mr Low asked for the postpaid module.  However, this was not done.

60.  I therefore conclude that postpaid software to enable the system to operate a postpaid calling card business was part of the description of the system sold to the Plaintiff and that the failure to provide it was a breach of the contract between the Plaintiff and the Defendant.  In my view, it was a breach of both the implied terms as to conformity with description, and of fitness for purpose (as I have found that the postpaid calling card business was something which Mr Chen had mentioned to the Plaintiff and Third Party prior to purchasing the system from the Defendant).  Moreover, it was a breach which, in my view, would have entitled the Plaintiff to treat the contract as having been repudiated by the Defendant, and so to terminate it.

Absence of a sufficiently user-friendly GUI

61.  The Plaintiff’s second complaint relates to the GUI for viewing call detail records.  The Defendant and Third Party suggested that what the Plaintiff was asking for was a GUI which enabled such records to be viewed on a current, or real time basis.  There may have been some misunderstanding as to this on the Defendant’s part.  Mr Chen’s evidence was that while he would have liked to have had a GUI that enabled the status of a current telephone call, or one in the current record session (i.e. on the same day) to be called up when a customer rang in to complain, his main complaint was that the GUI which was provided did not enable the Plaintiff to retrieve a customer’s calling details by simply entering the complaining customer’s PIN number.  Being able to do this would enable the Plaintiff to provide a better quality of service to its customers, which was regarded as important for a start up business in what was expected to be a competitive market.

62.  I think that Mr Chen’s evidence is supported by the e-mail from Mr Low to the Third Party of 14 September, from which it is clear that the complaint was as to the absence of a user friendly GUI to enable historical (as opposed to current) records to be viewed by keying in a PIN number.

63.  There was no evidence to suggest that a GUI which operated in the way which the Plaintiff wanted was ever delivered.  While there might be some scope for argument as to whether software which operated in a particular way that was short of the ideal from the purchaser’s point of view could be said to be unfit for its purpose, it seems to me that having regard to the nature of the Plaintiff’s intended business, a reasonably easy to use GUI which enabled customer’s call detail records to be brought up by reference to their PIN numbers was of sufficient importance to justify the Plaintiff’s contention that the absence of it rendered the system unfit for its purpose.

64.  I would therefore conclude that on this ground too, the Defendant was in breach of its contract with the Plaintiff, and that this breach of the implied condition of fitness for purpose was also one which entitled the Plaintiff to terminate the contract with the Defendant.

Defects in the system supplied and failure to complete the UATs

65.  The Plaintiff’s third complaint is as to general defects in the system which were revealed during the various UATs carried out in August and September 1999, and the system crash on 30 September and 1 October 1999.  It is said that the failure to remedy these matters rendered the system not merchantable and unfit for its purpose.

66.  As to these complaints, the Defendant’s response was that:-

(1)	It is acceptable practice when supply computers and computer programs to supply programs that contain errors and bugs;
(2)	The UATs were completed so as to amount to acceptance on either 22 or 28 September 1999, and this being so, there is no basis for suggesting that the system was not merchantable or unfit for its purpose;
(3)	There was evidence to suggest that the Plaintiff had been using the system commercially from as early as 13 September 1999, which indicates that it was in fact fit for its purpose and was merchantable;
(4)	Ms Tsui’s evidence was that the system was operating satisfactorily by 30 August 1999, so that it was merchantable and fit for its purpose thereafter; and
(5)	In relation to the UATs, the only relevant UATs were those contained in the first version of the UATs, the additional tests included in the second version on 18 September 1999 being matters which were not within the scope of the Third Party’s authority to agree to on behalf of the Defendant.

67.  As to the first point, this is in my view based on an incomplete or incorrect reading of the passages in the textbooks relied upon by the Defendant (Lloyd, Information Technology Law (3^rd ed) and Reed & Angel Computer Law (5^th ed)) and on a misunderstanding of the effect of the decisions of the English court in Saphena Computing v Allied Collection Agencies Ltd [1995] FSR 616, and Eurodynamic Systems Plc v General Automation Ltd (unreported, QBD, 6 September 1988).  It is true that those textbooks and authorities support the view that a computer program or software which contains bugs or errors will not necessarily be regarded as defective, or unfit for its purpose, but it is made clear that this is on the basis that the supplier is obliged to rectify such bugs and errors (either on a paid or unpaid basis, depending on the terms of the contract between the parties).  If bugs or errors are identified and cannot be remedied, it may be necessary to go on to consider whether their effect is such as to render the software or program in breach of these implied conditions.

68.  Applying this to the present case, I would accept that the existence of bugs and errors (which are clearly recorded in the contemporaneous e-mail exchanges) would not necessarily put the Defendant in breach of its obligations to supply a product that was merchantable and fit for its purpose.  But this would be the case only so long as it was prepared to fix such bugs and errors.  Once the Third Party, who was the Defendant’s agent for the purpose of carrying out the UATs (and thus, necessarily also its agent for the purpose of fixing bugs or errors that might be revealed) abandoned the further carrying out of the UATs on 30 September or 1 October 1999, it was no longer within the ability of the Defendant to fix such bugs and errors, with the consequence that it was at risk of being in breach of these obligations.  The fact that the Third Party might have been entitled to take this stance, based on the contractual terms as to payment which it had agreed with the Defendant, is of no assistance to the Defendant vis-a-vis the Plaintiff.

69.  The Defendant’s case that the system was accepted by the Plaintiff either on 22 or 28 September 1999 appears from the further and better particulars of its Re-Re-Amended Defence and Counterclaim.  However, no explanation is given as to why the Plaintiff should be regarded as having accepted the system on either of those dates.  Moreover, as at both dates, there were outstanding issues under the UATs (whether major or minor is not relevant for this purpose) which had not been resolved.  Further UATs were envisaged, but they never took place.  Although some of the UATs were signed off by or on behalf of the Plaintiff, it is clear that not all of them were.  I am therefore quite satisfied that the Plaintiff had not accepted the system as at either of those dates.

70.  As to the suggestion that the Plaintiff had been using the system commercially since 13 September 1999, I am satisfied that this was not the case, and accept Mr Chen’s evidence that all that had happened by that point was that he had supplied calling cards to friends and associates to enable them to try out the system and provide him with feedback on it, and that this did not constitute either commercial use of the system, or evidence that the system was free of defects, errors or bugs.

71.  As to Ms Tsui’s evidence, while it may have been her opinion that the system was operating adequately from 30 August onwards, I do not think that this view can be sustained.  It is quite clear that bugs and errors were found to exist from time to time, and required to be fixed.  Although some of the revisions to the UATs were said to be in respect of enhancements to the system sought by the Plaintiff, these were agreed to by the Third Party, and thus required to be completed also.  The fact is that as at the time that the Third Party decided to withhold further assistance and cooperation, it was common ground between it and the Plaintiff that the UATs had not been completed.  In these circumstances I am not prepared to conclude that the system was in fact fully and satisfactorily operational at any time up to the time when the Third Party declined to cooperate further.  Moreover, having regard to the crashes of the system which occurred on 30 September and 1 October 1999, in respect of which no efforts were made to resolve the problem, I am satisfied that as at 17 October 1999 when the Defendant was given notice of the Plaintiff’s termination of the contract, it was in breach of its obligations to the Plaintiff as the system was at that point non-functioning, and thus neither of merchantable quality nor fit for its purpose.

72.  Finally, I do not accept that a distinction can be drawn between the UATs originally agreed upon, and the revised UATs of 18 September 1999 for the purpose of identifying the scope of the Defendant’s obligations in relation to testing and acceptance.  The Defendant had clearly made the Third Party its agent for the purpose of carrying out such tests, and thereby clothed it with authority to make such modifications thereto as might be required or requested by the Plaintiff.  Mr Yeung suggested that the amendments were not reasonable ones, and thus should not be binding on the Defendant.  I disagree.  The evidence of Ms Tsui was that not all modifications requested by the Plaintiff were agreed to – a number being rejected as unreasonable or beyond the scope of what the system was intended to provide.  That being so, I do not see that it can be said that the modifications which were agreed to were unreasonable, nor that the Plaintiff should have been aware that this was the case so as to be disentitled from insisting on completion of them.

73.  I therefore conclude that, for this reason also, the Plaintiff was entitled to treat the Defendant as having repudiated the contract between them, and to bring it to an end on 17 October 1999.

74.  It was suggested that the Plaintiff had somehow contributed to the failure to complete the UATs.  As I understood this suggestion, there was a suspicion on the part of the Defendant that the failure to hold the UATs which had been proposed for 28 September 1999 was due to the Plaintiff using Mr Low’s absence from Hong Kong as an unjustified pretext for putting them off.  I can see no basis for this suggestion.  In any event, it is quite clear that it was the Third Party who was ultimately responsible for calling off the UATs and refusing to proceed further with them, and that it did so because it had not received the 40% instalment of the price due to it from the Defendant.

System failures on 30 September and 1 October 1999

75.  As for the system failures on 30 September and 1 October 1999, as I have indicated in paragraph 71 above, whatever their cause may have been, their effect was clearly to render the system non-functional, and thus not merchantable or fit for its purpose.  The failure to remedy these problems therefore provided a further basis on which the Plaintiff was entitled to terminate the contract with the Defendant.

Failure to deliver the Excel Switch manual

76.  Finally, as to the failure to deliver the Excel Switch manual, while I would accept that there was an implied obligation on the Defendant to provide such manuals as were necessary to enable the Plaintiff to operate the system, and that this manual was not in fact provided (although it seems that it was ready and available, and was intended to be provided), I do not think that this was such a serious breach as to justify, taken on its own, termination of the contract.

The complaints - merely a convenient excuse on the Plaintiff’s part?

77.  Finally, I have considered Mr Yeung’s suggestion that the complaints raised by the Plaintiff were merely excuses to justify its rejection of the system when it had already decided to make arrangements for acquisition of a different system in place of that which it had agreed to buy from the Defendant.  I do not think that there is any merit in this suggestion.  It is correct that on 21 September 1999 the Plaintiff had, in an e-mail to the Third Party, referred to having discussions with a new partner.  However, Mr Chen testified that when looking into possible systems for use in the Plaintiff’s business, he had looked at both the system purchased from the Defendant and also at the system which eventually replaced it, and that the e-mail of 21 September 1999 related only to the use of a different type of line of incoming calls at the local end, and did not involve a change from the basic technology being used.  He also said that this particular matter did not move any further, and was unrelated to the decision to purchase the replacement system, which was made on 30 September after the events of that day.  This evidence was not contradicted, and I accept it.  Further, it is, as I have noted, quite clear that there were problems and difficulties that had arisen with the system supplied by the Defendant, as is evidenced by the many e-mails raising such issues that passed between the Plaintiff and the Third Party from late August to the end of September 1999.  In these circumstances, I do not think that the Plaintiff should be criticised for acquiring a replacement system when it did.

The misrepresentation claim

78.  In the light of the conclusions that I have reached on the question of breach of contract, it is not necessary for me to consider the alleged misrepresentations, and I do not propose to do so.

Damages

79.  As I have found that the Defendant was in breach of its obligations to the Plaintiff, and that the Plaintiff was justified in terminating the contract by reason of such breaches, it follows that the Plaintiff is entitled to recover damages from the Defendant in respect of such breach.  The Plaintiff claimed that it was entitled to recover the amount paid by it to the Defendant by way of deposit and 50% part payment for the system, and in addition to recover what it said was expenditure which had been wasted as a result of the breaches of contract and rejection of the system supplied by the Defendant.  Mr Yeung questioned the Plaintiff’s entitlement to recover most of these items, principally on the basis that the evidence put forward by the Plaintiff did not adequately support its claim for damages.  I shall therefore deal with each item in turn.

80.  The Plaintiff claims return of the US$40,400 deposit which it paid to the Defendant.  I can see no basis on which this claim can be resisted.  The Plaintiff is clearly entitled to recover this amount from the Defendant, having rejected the system as it was entitled to do by reason of the Defendant’s breaches of contract.  In any event, the system being unusable, this item clearly constitutes wasted expenditure.  Mr Yeung did not, I think, dispute the Plaintiff’s entitlement to this item.

81.  In relation to the other items of damage claimed, Mr Yeung drew attention to the fact that the total of these items far exceeded the amount of administrative expenses shown in accounts of the Plaintiff which Mr Chen produced for the period ending 31 December 1999.  Although Mr Chen described these as audited accounts, it is clear from their face that they were not, and were only management accounts.  Mr Chen’s error may have been due to the fact that he was feeling unwell on the day when he was cross-examined as to the Plaintiff’s claim in respect of damages.  It is fair to say that the difference in amount is nonetheless considerable, and somewhat surprising.  The Plaintiff has, for whatever reason, failed to produce its audited accounts.  However, it seems to me that provided that other satisfactory evidence of such items of expenditure is adduced, the Plaintiff may nonetheless be entitled to recover in respect of them.

82.  The next item claimed is co-location expenses of HK$19,784.  As to this, invoices for these amounts were produced, and the only point taken by Mr Yeung was that there was no evidence of actual payment.  However, it seems to me that given the existence of the invoices issued by a third party to the Plaintiff, there is adequate evidence of this item of loss.  It would either have been paid by the Plaintiff, or perhaps paid by Mr Chen on its behalf (Mr Chen said, and I accept, that in the early stages, he personally funded many of the Plaintiff’s expenses).  In the latter case, Mr Chen would be entitled to reimbursement by the Plaintiff.  I therefore consider that this item is recoverable as wasted expenditure.

83.  There is then a claim for HK$390,000 for Mr Low’s services.  There is evidence of this sum having been paid by Mr Chen personally, on behalf of the Plaintiff.  The point which is taken is that Mr Low was in any event involved in the change of system from that provided by the Defendant to a fixed line system which replaced it.  It seems to me that this does not provide a complete answer to the claim, as the Plaintiff would in my view be entitled to at least the cost to it of Mr Low’s involvement in relation to the commissioning of the Defendant’s system, which occupied a substantial part of the period from July to October 1999.  Mr Wong suggested that at least HK$300,000 could be regarded as attributable to that period.  This seems to me a reasonable apportionment, on the basis that Mr Low was not involved with the new system until 7 October 1999, and I think that the Plaintiff is entitled to recover this lower amount as wasted expenditure also.

84.  There follows a claim for HK$3,388 for services provided by a company called ITXC.  No issue appears to have been taken in relation to this item, and I therefore allow its recovery as damages for wasted expenditure.

85.  There is then a claim for HK$81,361 for internet access charges paid to Hong Kong telecom.  Mr Yeung took two points on this - first, that some of the invoices were addressed to Mr Chen, rather than to the Plaintiff, and second, that there was no evidence of actual payment.  As to the second point, it seems to me that the invoices having been produced, this claim stands in the same position as that mentioned in paragraph 82 above.  As to the first point, I do not see any substance in it.  The earlier bills were addressed to the Plaintiff, and marked for the attention of Mr Chen.  The later bills were addressed to Mr Chen, but the second line of the address referred to the Plaintiff.  The charges arose from a fixed term contract of one year for the provision of internet access.  Thus, even though bills were received and paid after termination, the obligation to make such payments (which was successfully negotiated down somewhat, to the Defendant’s benefit) was incurred beforehand.  It seems to me that the obligation to pay for such services rested with the Plaintiff, to whom the earlier bills were addressed.  I am therefore satisfied that all of these bills are to be regarded as having been issued to the Plaintiff, and that the Plaintiff is entitled to recover this amount.

86.  An item for internet access installation costs of HK$504 paid to Hong Kong Telecom was not pursued, as it was included in the HK$81,361 mentioned in the previous paragraph.

87.  The next items were further payments to Hong Kong Telecom of HK$18,273 and HK$4,514 for local access lines.  Again these were supported by invoices to the Plaintiff, and with the exception of an amount of HK$912 in respect of Mr Chen’s home telephone line in one of the invoices, should, in my view, be allowed, so that the total amount in respect of these items will be HK$21,875.

88.  There is then a claim for HK$95,474 payable to the Defendant in respect of internet access charges.  This item has not in fact been paid, although a bill was received by the Plaintiff.  The Plaintiff says that if the Defendant is willing to waive its claim, the Plaintiff will drop this item.  Whether or not the Defendant does so is a matter for it to decide.  However, if it does not waive this claim, this amount will clearly be recoverable as wasted expenditure.

89.  There is then a claim for promotional items of HK$6,000 and recording expenses for voice prompts of HK$4,284.  Again, invoices were produced.  Mr Chen’s evidence was that both of these items were in fact wasted, as they were specifically tied in to the system purchased from the Defendant.  I accept this evidence, and therefore allow these items as well.

90.  The remaining items are in respect of office rental (HK$50,000) and director’s salaries (HK$478,750).  In respect of these, it was suggested that the evidence was unsatisfactory.  It was pointed out that there was no tenancy agreement in relation to the office premises.  Mr Chen said, and I accept that the tenancy was an oral one, the matter being left on an informal basis as the premises were owned by a friend of his.  As to the director’s employment letters, I accept that the use of the office premises eventually taken up as the Plaintiff’s address might have been for convenience, as the letters were signed before those premises were actually taken up, when the Plaintiff had no other address to use.  However, it seems to me that unlike the other expenditure items claimed as wasted expenses, which are clearly referable only to the business to be carried on using the equipment to be supplied by the Defendant, these items are more in the nature of general administrative overheads, which the Plaintiff is likely to have incurred in any event.  In these circumstances, I am not persuaded that they can be regarded as wasted expenses which are recoverable as damages from the Defendant.

91.  To summarise, therefore, I would accept that the Plaintiff is entitled to recover the following amounts from the Defendant:-

(1)	50% deposit		US$ 40,400
(2)	Co-location expenses		HK$ 19,784
	Mr Low’s services		300,000
	ITXC’s services		3,388
	HK Telecom internet access charges		81,361
	HK Telecom local access line charges		21,875
	Promotional expenses		6,000
	Voice prompt recording expenses		4,284
		TOTAL	HK$ 436,692
(3)	If Defendant does not waive this item, internet access charges payable to Defendant		HK$ 95,474

The claim for intimidation and harassment

92.  Turning to the Plaintiff’s claim arising out of the alleged acts of intimidation and harassment perpetrated by employees of Gold Partners, it seems to me that in principle, the Defendant would be liable for such acts as it employed Gold Partners as its agent to collect the debt which it considered to be due to it from the Plaintiff.  Further, I accept Mr Chen’s evidence that a degree of disturbance and disruption was caused by the many telephone calls that were made, and the unwelcome visit to the Plaintiff’s office.  The Defendant was not able to put forward any evidence to contradict this account.  The only evidence as to the tactics employed by Gold Face were its brochure, which mentioned the need to be “troublesome” and a suggestion by Ms Ma that in another case, recordings of the telephone calls by employees of Gold Face to a recalcitrant debtor showed no untoward behaviour on their part.  I do not find this latter suggestion to be of any relevance, since it related to another, unrelated, incident.

93.  However, the Plaintiff is unable to demonstrate that it has in fact suffered any loss or damage.  I therefore decline to make any award of damages, whether nominal or substantial in respect of this claim.

94.  Nor have the unwelcome activities continued.  They appear to have ceased once the matter became the subject of litigation more than five years ago, as appears from Gold Partners’ internal records.  Given my decision as to the claim for breach of contract, from which it follows that no sum is owing by the Plaintiff to the Defendant, there is no reason to think that further acts of harassment or intimidation will take place.  In the circumstances, I do not think it necessary or appropriate to grant a permanent injunction in respect of the acts complained of.

The Defendant’s counterclaim

95.  Turning to the Defendant’s counterclaim, it follows from my conclusions as to the Plaintiff’s claim in contract that the counterclaim must fail, and I therefore dismiss it.  I would in any event have concluded that there had never been “acceptance” within the meaning of the contract so as to render the balance of 50% of the purchase price payable, as acceptance in this context must mean acceptance of the results of the UATs.  This never happened, and its failure to come about was not, in my view due to any fault on the part of the Plaintiff, but due to the Third Party’s decision to withhold any further assistance on its part in continuing to conduct the UATs.

The third party proceedings

96.  I deal finally with the Defendant’s claim for an indemnity from the Third Party.  Mr Yeung submitted that the Defendant had simply acted as a middleman in relation to the transaction, and had entered into back to back contracts with the Third Party and the Plaintiff.  He said that it therefore followed that if the Defendant was liable to the Plaintiff, it was entitled to an indemnity from the Third Party.

97.  This is not correct.  Although the contracts were back to back in a general sense, their terms were, as I have pointed out, not identical, particularly in relation to payment.

98.  Although the Third Party would appear to have been in breach of its contract with the Defendant in respect of the failure of the system to correspond with its description by reason of the absence of the postpaid software, I do not think that it follows that the Defendant succeeds against the Third Party.

99.  Although this breach would have entitled the Defendant to reject the system vis-a-vis the Third Party, it in fact never did so.  Rather, by failing to pay the 40% instalment due from it to the Third Party on installation of the system, it placed itself in breach of its obligations to the Third Party.  The Third Party says that the persistent failure to make payment, despite numerous requests and demands to do so, amounted to a wrongful repudiation by the Defendant of its obligations under its contract with the Third Party, which the Third Party accepted by withdrawing its services in relation to the UATs on or about 30 September 1999.

100.  Mr Yeung submitted that ordinarily, unless time for payment is made of the essence of a contract, a failure to pay on time will not amount to a repudiation of a contract.  However, as appears from Creatiles Building Materials Company Limited v To’s Universe Construction Company Limited [2003] 2 HKLRD 309, whether or not a failure or refusal to pay on time has this effect depends on the facts of the particular case, and there may be cases in which it will amount to a repudiation of the contract.

101.  In this case, it seems to me that the persistent failure of the Defendant to pay, or even to respond at all to demands for payment which I am satisfied were made by Mr Lee to Mr Chang and the Defendant, does evince an intention on the part of the Defendants not to be bound by the contract between itself and the Third Party.  Further, I am satisfied that the Third Party was thereby entitled to, and did, regard itself as released from further performance so that it was justified in refusing to carry on with the UATs from the end of September 1999.  The consequence is that even though the Third Party might otherwise have been in breach of its obligations to the Defendant by failing to deliver the postpaid software, the Defendant not having terminated the contract on this ground, it remained open to the Third Party to perform that obligation later, until it became itself entitled to treat the contract as terminated so as to free itself from the obligation to do so.

102.  Mr Yeung submitted (I think without any great conviction) that the Third Party had waived its right to treat the contract as terminated by carrying on with the UATs for a period of about a month despite the Defendant’s non-payment of the 40% instalment.  I do not think that this was the case.  At best, it would show that the Third Party had not yet elected to treat the contract with the Defendant as at an end.

103.  The Defendant’s claim against the Third Party therefore fails, and will be dismissed.

Disposition and costs

104.  In the light of these conclusions, I shall make the following orders:-

(1)	Judgment is to be entered for the Plaintiff against the Defendant for the sums of US$40,400, HK$436,692 and (if the Defendant does not agree to forego its claim for internet access charges) HK$95,474.
(2)	In relation to interest, as I have not had the benefit of the parties’ submissions as to the period for which and the rate at which interest should be awarded on the damages to which I have found the Plaintiff to be entitled, I would invite the parties to make written submissions as to this within 21 days.  However, should any party desire to have the matter dealt with by oral submissions, they should take steps within that period to arrange for a hearing to take place.
(3)	The Defendant’s counterclaim against the Plaintiff is dismissed.
(4)	The Defendant’s third party claim against the Third Party is also dismissed.

105.  So far as costs are concerned, I shall make an order nisi that the Defendant is to pay the Plaintiff’s costs of the action, and the Third Party’s costs of the third party proceedings, such costs to be taxed on the party and party basis if not agreed.