Soberingoutcome

02 February 2002

Edward Alder

An unusual thing happened recently in Hong Kong IT legal circles. An IT dispute was fought through the courts right through to a trial in Ho v Xerox (Hong Kong) Limited, 16 January 2002, Deputy Judge Cheung.

The tenacious Mr Ho, trading as Resolution Software Consultants (RSC), sued Xerox Hong Kong for around US$1m outstanding on an order for software and related services. Xerox counterclaimed for repayment of a US$30,000 deposit. The court ordered Xerox to pay RSC around US$470,000 along with commercial interest on most of it and RSC's legal fees.

The IT industry rarely litigates because the cost can be enormous, regardless of the sums claimed. In the 30 years or so that IT has been a part of business life, only about half a dozen IT related judgments have been given by Hong Kong courts.

The Issues

Unusual as it is for IT disputes to reach the courts, the circumstances of the case were depressingly familiar to IT lawyers: a supplier's sales team keen to "book" a sale before year end, overly brief documentation, confusion to the contractual role of a software "reseller", the signing of documentation without appreciation of the legal consequences and termination of the contract due to cost and delay.

The Facts

Simplifying greatly, Xerox held negotiations throughout 1996 with Astea, the supplier of Dispatch-1 software. In late 1996 RSC was appointed "local distributor" for Astea. Astea representatives claimed they explained RSC's role to the Xerox people, but that was denied by Xerox.

On the last day of 1996 the Xerox Financial Director signed an "Order Confirmation of Dispatch-1" covering the software to be delivered, the number of users, the prices and the implementation stages. During the course of the negotiations a draft software agreement between Astea and Xerox was supplied to Xerox but it was never signed. Xerox paid a deposit of about HK$1.3m.

Due to implementation difficulties four months after the order was signed Xerox wrote to RSC to "cancel" or terminate the order.

The Arguments

Xerox said they never intended to commit contractually by signing the order, that even if they had the order was too brief to constitute a "complete contract", and if there was a complete contract it was with Astea, not RSC. Xerox also said the real purpose of the order was to "lock in" the prices in case Xerox wished to commit to buying the software later. Lastly, Xerox said that due to the problems with the project they had been entitled to terminate.

The Result

The judge rejected Xerox's arguments and held that the order was a binding contract and Xerox had no right to terminate it.

PRACTICAL POINTS

(1) The judge picked up on a simple but telling comment made by RSC's lawyer in court. If Xerox had not intended to create a binding contract by signing the order, they could easily have avoided that by inserting "subject to contract" on the document before signing. The case will be a sobering lesson for Xerox because it could have been avoided altogether if a few moments of a lawyer's time had been sought during the negotiations.

(2) Presenting a case like this requires the lawyers to spend plenty of time "educating" the court on the technical issues. In his judgment the judge made no secret of his inexperience in IT and the associated law. Difficult contractual and copyright issues arise when a customer buys packaged software from a retailer or "reseller" (see below). The reseller supplies the software in physical or electronic form. However, usually the customer's licence to use the software must be granted in some way directly by the software company. How this is handled during negotiations can produce a variety of different legal consequences and arrangements. On this the judge said "all this [law] is really interesting, and is as new to me as the expert evidence on highly technical computer science that I have heard ... ".

Xerox argued that the contract was not "complete" and therefore not binding because while the terms for installation had largely been agreed the terms for the software licence had not been. All the RSC had done on this during the negotiations was to send Xerox a draft of a licence agreement to be entered into between Astea and Xerox to which Xerox had not replied. The judge said "if a buyer chooses to buy blind, ie without finding out the terms of the licence [from the software company] first before he purchases it from the retailer, he does so at his own risk in that if subsequently he does not find the terms of the licence agreeable& which in most consumer cases are non negotiable, he will risk not being able to use the software".