Pronet Limited v Clear Communications Limited HC Auckland CP123/98
[2001] NZHC 854
•13 September 2001
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP123/98
BETWEEN PRONET LIMITED
Plaintiff
AND CLEAR COMMUNICATIONS LIMITED
Defendant
Hearing: 9,10,11,12,13,16,17,18,19,20,24,25,26 July 2001
Counsel: H. P. Holland and B. M. Easton for Plaintiff
C. J. Allan and A. J. Lloyd for Defendant
Judgment: 13 September 2001
JUDGMENT OF SALMON J.
Solicitors: Knight Coldicutt & Co., DX CP 18018, Auckland
Rudd Watts & Stone, DX CP 24061, Auckland
Introduction
[1] The plaintiff company, (ProNet) was incorporated in November 1995 for the purpose of selling wholesale bandwidth to corporates and ISPs. By 1997 it had six customers, four of whom were associated with ProNet as shareholders or through common directors. On 26 February 1996 ProNet entered into a contract with the defendant, (CLEAR) for the supply of internet bandwidth. ProNet claims that between August and November 1997 the bandwidth supplied by CLEAR was so congested that traffic was unable properly to proceed over it and as a consequence, ProNet lost its reputation with its clients. Three of those clients, including one of the founding shareholder clients, terminated their arrangements with ProNet. ProNet claims that its business was destroyed as a result.
[2] The sixth statement of claim seeks damages in the amount of $4.6 million, which is said to be the value which ProNet would have had, had it traded until 1999 and then been sold. The claim is brought primarily under the head of breach of contract, but there are also alternative causes of action based upon misrepresentation, the Fair Trading Act 1986, the Contractual Mistakes Act 1977, and in tort.
[3] CLEAR denies that ProNet is entitled to recover under any of its eight causes of action and says that if any breach of contract is made out damages are limited by the terms and conditions applying to the contract. CLEAR counterclaims for the sum of $282,813.67 which it says is the balance owing by ProNet for the supply of bandwidth.
[4] After the conclusion of the hearing counsel for the plaintiff sought leave to file further submissions on the law. After hearing from both counsel on that issue I gave permission and have considered the additional written submissions received from both defendant and plaintiff.
The factual background
[5] So pervasive is the internet in any discussion of computer technology that it is easy to forget that so far as this country is concerned the development of general access to the internet really only began in about 1994. Originally New Zealand’s link to the internet was through the University of Waikato. In 1994 there were very few internet service providers, (ISPs) in New Zealand. In 1995 an ISP known as Iprolink was set up in Auckland. The principals of that company were Mr Craig Anderson and Mr Jim Benson. Mr Benson was also the principal of Napier Computer Systems Ltd, (Napier).
[6] At the time Iprolink was launched Mr John Vorstermans of Wellington, whose company was Actrix, and Mr Robert Hunt of Plain Communications in Christchurch, contacted Mr Anderson with a view to setting up a nation wide independent internet service provider. The result was ProNet whose original shareholders and customers were Iprolink, Napier, Actrix and Plain. An ISP called Tasman Solutions, based in Nelson, became a customer at an early stage. The only other customer acquired by ProNet was Manawatu Internet Services Ltd based in Palmerston North, which joined some time later.
[7] The advantage which ProNet offered its customers was that because it brought bandwidth in bulk it was able to provide internet access to other ISPs at a lower rate than if they purchased the bandwidth directly from a telecommunications company.
[8] In order to provide the service it proposed ProNet needed itself to obtain network access from a telecommunications company. To this end, on 1 October 1995 it prepared and distributed a “Request for Proposal” for an Auckland, Wellington, Christchurch network. The only acceptable response received by Pronet was from Clear.
[9] In the introduction to the Request for Proposal the objectives of ProNet were set out in the following terms:
“ProNet’s primary objective is to create a national IP backbone network throughout New Zealand, initially between Auckland, Wellington and Christchurch. It is envisaged this network will expand over time, with further smaller centres added throughout New Zealand.
Bandwidth requirements are also anticipated to increase over time. Services provided over the network will expand to include voice, video conferencing, M-bone and other services, as deemed appropriate by ProNet.”
(Emphasis in original)
[10] The request called for responses maintaining the same numbering convention as in that document. In a paragraph headed Background, the request included the requirement that the network must have a 100 per cent up-time ratio so that redundancy was required to be built in. The possibility of downtime was envisaged with the requirement that ProNet was to be advised of any required downtime in writing with at least 10 working days’ notice. Paragraph 5 of the request contained the detailed requirements. These included that the network was to be managed by the responder.
[11] A focus of the case was paragraph 5.5 which provided:
“5.5 Network Reliability
The network must be guaranteed 99.7% reliable. If the network fails to meet this target, penalties of $1,000 per hour will be incurred paid within one month of the failure occurring.”
[12] There was no reference in the request to connections to the international internet. However, in his evidence Mr Anderson said that between the time of the proposal and the time of CLEAR’s response there was a discussion about international access and this resulted in CLEAR’s response including, under the head of costs, a costing for a 1 Megabit (mb) US link.
[13] CLEAR’s response emphasised the company’s commitment to a high quality managed service. It repeated ProNet’s requirement of a 100 per cent up time ratio. Paragraph 5.5 of the response provided:
“5.5 Network reliability
CLEAR Communication provides a managed service an [sic] as such, will rebate charges if service measurables (as outlined in the CLEAR line support package) are not met. These rebates are made soley [sic] at CLEAR’s discretion.
The CLEAR Network Services support package outlines the guaranteed availability figure of 99.8 per cent when measured over a 90 day period.”
Mr Anderson says that at the time of the response no support package document was made available or discussed. The only support package documents discovered were dated September 1996 and March 1997 respectively. The only reference in the response to an international link was the costing of a 1mb circuit.
[14] On 22 January 1996 Mr Anderson, as a director of ProNet, signed an agreement for the Auckland, Wellington, Christchurch network envisaged by the proposal. There was no reference in that agreement to any international link.
[15] The agreement, under the head of Service Details, referred to CLEAR’s standard terms and conditions for provision of “CLEAR LAN connect”. A further reference to the standard terms and conditions is made at the end of the agreement as part of the customer acceptance. That passage reads:
“The customer by signing this agreement agrees to subscribe to CLEAR LAN connect, as detailed above on the basis set out in CLEAR’s standard terms and conditions for provision of CLEAR LAN connect, subject to special terms included in this agreement.”
[16] In evidence Mr Anderson said that he noted the reference to the standard terms and conditions, but that they were not provided with the agreement. Indeed, he says that he did not see the terms and conditions until March 1998. He says that when he inquired about them he was told by either Gary Brock or David Gilbert, the CLEAR representatives at the signing, that the standard terms and conditions contained just “standard stuff” relating to things such as debt collection. He agreed in cross-examination that it was clear from the references to the terms and conditions at the commencement of the agreement that they contained more than just standard stuff. He said in answer to a further question:
“. . . when I asked about the terms and conditions I as quite frustrated and there was an unwillingness on the part of CLEAR to make these available. What followed was that eventually I asked about the terms and conditions and really the answer was that they contained standard stuff about debt collection, my comment was that there was nothing I needed to worry about and I signed the document.”
In answer to a question as to whether he was suggesting that Mr Brock or Mr Gilbert deliberately frustrated his attempts to obtain copies of the terms and conditions, he responded:
“They were very casual about the fact that they weren’t needed, I was much more concerned about the terms and conditions.”
[17] Mr Brock and Mr Gilbert both deny saying that the terms and conditions contained “just standard stuff” relating to things such as debt collection. They both say that they believe that the terms and conditions were available at the time, but could not positively swear that that was the case. Mr Brock said that it was his standard practice when printing out an agreement to also print out the standard terms and conditions and then to clip the two documents together. He said he had been regularly following that procedure since he commenced with CLEAR in late 1994.
[18] Two further agreements were signed on 26 February 1996. The first of these replaced the earlier agreement. By this time Manawatu had become a customer of ProNet so that there were further connections needed and additional charges payable. That agreement was in the same terms as the one already referred to.
[19] The second agreement signed on that day was the “Agreement to supply International CLEAR Network Services”. Because it is central to the issues which must be determined in these proceedings it is appropriate to refer to the contents of that agreement. It commences by noting the customer details, with Mr Anderson referred to as the contact for ProNet. Paragraph B is in the following terms:
“B. SERVICE DETAILS: Installation due date 1 March / 1996
INTERNATIONAL INTERNET ACCESS
The “Initial Service Period” shall be 6 months from the date that International CLEAR Network Services are made available for use by the Customer.
Should the performance of International CLEAR Network Services fall below CLEAR’s specification levels for service availability as defined in clause 2.(c) of CLEAR’s standard terms and conditions for provision of International CLEAR Network Services, CLEAR will on request rebate a proportional amount of the monthly lease charges, equivalent to the period of service unavailability.
Should the Customer terminate this Agreement, for all or part of the International CLEAR Network Services provided under this Agreement, before completion of the Initial Service Period, other than in accordance with Clause 8(e) of CLEAR’s standard terms and conditions for provision of International CLEAR Network Services, the Customer shall be liable to pay CLEAR on demand a sum equal to 25% of the recurring monthly charges payable by the Customer from the date the Customer terminates the International CLEAR Network Services until the end of the Initial Service Period.”
Paragraph C set out the charges for the service. Paragraph D was in two parts, the first contained site information, the second was a table headed “Circuit/Service Information”. The table includes a reference to capacity of 192 Kbit/s (kilobits per second) and the international transmission charge of $18,000. Under the head “Special Terms” the following appears:
“CLEAR will monitor the usage by the Customer on the international link. Total traffic growth will be monitored monthly and will be adjusted to the new rate at the new level if two consecutive months exceeds that contracted, otherwise it will remain at existing levels.”
[20] The agreement concluded with the following:
“The Customer by signing this Agreement agrees to subscribe to International CLEAR Network Services as detailed above on the basis set out in CLEAR’s standard terms and conditions for provision of International CLEAR Network Services subject to special terms included in this Agreement.”
[21] These two agreements were signed at ProNet’s offices by Mr Anderson. Mr Brock was not present but said he printed out the two agreements and reiterated that it was his practice to print out the terms and conditions at the same time. Mr Gilbert took the documents to the ProNet office for signature. Whilst he is not certain, he says that he believes that he took the terms and conditions with him. The terms and conditions for the international supply are different to those for the local supply.
[22] Mr Anderson maintains that there were no terms and conditions provided on this second occasion. He said, in his evidence, that he did not raise the matter of the phrase referring to the standard terms and conditions as he expected that the explanation would be the same as that given to him on the earlier occasion. He says that he specifically brought up the issue of the 99.8 per cent guarantee that CLEAR had put in its original proposal and that David Gilbert confirmed that the guarantee applied to the international contract. Mr Gilbert says that he does not recall any such discussion and that the 99.8 per cent availability was something outside his knowledge. He acknowledged in cross-examination that he was aware that reference to 99.8 per cent availability was contained in the terms and conditions and that if he had been asked whether the 99.8 per cent guarantee was in the international contract he would have confirmed that it was.
[23] The supply of both local and international bandwidth appears to have been satisfactory during 1996. In February 1997 there were two complete outages on the links supplied to ProNet by CLEAR. That meant that the circuit was down and no internet traffic could get through. There was discussion between ProNet and Clear regarding compensation for these outages. It seems no agreement was reached and no claim is made in these proceedings by ProNet relating directly to those outages, although they are relied upon in a more general sense.
[24] Mr Anderson then says that from about August 1997 there was a slow slide in the performance of the international circuit. Performance was worse in the period from September 1997 to late November, with a major improvement taking place near the end of November. Mr Anderson said in his evidence that the onset of the congestion which caused this reduction in performance was not immediately apparent to ProNet or to Mr Anderson’s company Iprolink because both were in a growth phase so that in itself masked any significant decline in billable traffic.
[25] There was really no dispute that over the September to mid November period major congestion occurred and the CLEAR cable links to the United States were severely overloaded. In the course of discovery, measuring data was obtained from CLEAR. Measuring data only became available in late September 1997. There was no data for August or for most of September, and even within the 48 day period from 1 October to 17 November full data was only available for about 35 days.
[26] Evidence was given for ProNet by Dr Ilze Ziedins, a senior lecturer in the Department of Statistics at the University of Auckland. She deposed as to her experience in the telecommunications industry and her work on analysis of internet traffic. She said that for the days between 1 October and 17 November in respect of which data was available the less heavily loaded of the two United States links had extremely high loads for 107 hours, which is around 9.29 per cent of the time. She said that represented 4.95 per cent heavy loading if taken over a 90 day period. She pointed out that if records had been available for the whole 90 days the percentage of time when extremely high loads were experienced, would have been higher than 4.95 per cent.
[27] The second of the two links had even heavier utilisation. The ProNet traffic was carried on one or other of these two links. It was not possible to say at any given time which of the two links was carrying ProNet traffic.
[28] Dr Ziedins referred to the extent of “packet” loss. Data sent by the internet is broken up into packets. Dr Ziedins concluded that the packet loss during the periods of high loading was at least 31 per cent and most likely around 40 to 50 per cent.
[29] ProNet maintains that this period of poor performance caused its customers to lose confidence in ProNet’s ability to provide the high quality service it had promised. Mr Hunt, is a director of Plain, the Christchurch customer of ProNet. He is also a 25 per cent shareholder in ProNet. He gave evidence that the extent of the problems experienced over the September/October period were such that his customers were seriously disadvantaged. He concluded that ProNet’s reputation had been so damaged that Plain’s customers needed to hear that they had a new carrier. He advised Mr Anderson in mid November, after having first confirmed service availability from another carrier, that he would be leaving Plain in mid December 1997.
[30] Mr Brown of Manawatu Internet Services gave evidence that his company decided to leave ProNet around September 1997 and signed an agreement with Telecom in either late October or early November. He said that he believed that his company lost about 300 customers during the period of poor performance.
[31] Mr O’Donoghue was the director of Tasman Solutions in Nelson. He gave evidence that because of the poor quality of international internet access over the September/November 1997 period he decided to shift to Telecom. He told Robert Hunt he was making that arrangement about the beginning of December 1997.
[32] Napier subscribed to the local area network only, so was not affected by the congestion on the international link. Iprolink and Actrix both claimed to have been seriously affected by the congestion. Mr Vorstermans of Actrix said that he considered ProNet’s reputation had been ruined by the bad band width it received and supplied. He said that Mr Anderson and he discussed shutting ProNet down completely very early in 1998. It appears that ProNet finally terminated its agreement with CLEAR at the end of July 1998.
The nature of ProNet’s claim
[33] As already indicated, ProNet’s primary cause of action is for breach of contract. ProNet relies on CLEAR’s acceptance document which it claims applies to the international contract as well as to the local one. ProNet claims that CLEAR is in breach of the provision in the acceptance document guaranteeing the availability figure of 99.8 per cent when measured over a 90 day period. It claims a breach of that provision during February 1997 and during the period from August to December 1997. In particular it is claimed that between 1 October and 17 November utilisation of the links was at best 96.77 per cent rather than 99.8 per cent. ProNet denies that the terms and conditions form part of the international contract and say in the alternative, that at least the limitation of liability provision contained in those terms and conditions do not apply to the contract between CLEAR and ProNet.
[34] CLEAR on the other hand denies that the proposal forms part of the contract at all. CLEAR claims that the terms of the contract are to be found in the agreement of 26 February and in the standard terms and conditions referred to in that agreement. It is necessary, therefore, to determine just what constitutes the contract between CLEAR and ProNet and whether it is appropriate to have reference to the CLEAR proposal in determining those terms. It is also necessary to determine whether the whole or part of the standard terms and conditions are included in the contractual arrangements between the parties.
[35] It is first appropriate to set out some of the provisions of the standard terms and conditions. The two conditions which are of primary importance are numbers 2 and 9. They provide as follows:
“2. CLEAR’s commitment to the customer
(a) CLEAR will use all reasonable efforts to provide a high quality reliable service to the Customer at all times but does not guarantee that International CLEAR Network Services will be continuous or fault free.
(b) The initial service period (“Initial Service Period”) shall be that specified in the Agreement or if no period is specified shall be six months from the date International CLEAR Network Services become available to the Customer. Thereafter International CLEAR Network Services are provided on a monthly basis.
(c) Circuit Availability: 99.8% availability over the entire length of the circuit, based upon a 90 day measurement interval. The circuit shall be deemed unavailable should the bit error rate exceed 0.1% for 10 or more consecutive seconds.
(d) Transmission Performance: 99% Error Free Seconds, based on 64 Kbps transmission.
(e) Maintenance Procedures. The contracted service, including any Terminating Equipment as referred to in clause 7(a) and all elements of the CLEAR network, will be maintained on a 24 hour, 7 day a week basis.
9. CLEAR’s Limitation of Liability to Customer
(a) CLEAR’s liability arising from any cause (including the negligence of CLEAR or any of its employees or contractors) in the provision of International CLEAR Network Services or any failure to provide International CLEAR Network Services under these terms and conditions shall be limited to CLEAR’s standard charge for providing the International CLEAR Network Service giving rise to the claim against CLEAR.
(b) All liability of any kind (including but not limited to negligence) on the part of any third party network operator, its officers, employees, contractors and agents, however arising in the provision of services by such network operator to CLEAR s expressly excluded. This exclusion is included by CLEAR as the agent of such persons for their benefit and may be enforced by any of them as a complete defence to any claim.
(c) Except for payment obligations, neither party is responsible for any delay or suspension of a service caused by something outside that party’s reasonable control which makes performance by it in the usual way impractical; examples of which include acts of God, and service outages caused by another carrier.”
[36] ProNet claims that if the terms and conditions do form part of the contract then the 99.8 per cent availability provision in paragraph 2(c) applies. Effectively, of course, at least the first sentence of that sub paragraph is in the same terms as paragraph 5.5 of CLEAR’s proposal.
[37] No evidence was called by either side to explain the meaning of the second sentence of sub paragraph (c) or the meaning of sub paragraph (d). CLEAR argued, however, that the availability provision applies only to the physical ability of the circuits to accept messages. CLEAR acknowledges that the February outages were an example of the circuits being physically unavailable, but claims that during the periods of overloading the circuits remained available.
[38] CLEAR maintained that paragraph 9 of the conditions limits any liability of CLEAR to the charge it made to ProNet over the relevant period.
[39] Mr Allan submitted on behalf of CLEAR that the law in New Zealand is that the party signing an incorporating document is bound by all of the terms contained or referenced in it. He referred to two New Zealand decisions. The first is that of Dawson v Monarch Insurance Co. of New Zealand [1977] 1 NZLR 372, a decision of Somers J in the Supreme Court. In that case the Court rejected an argument that terms and conditions referred to in a Certificate of Insurance were not incorporated in the contract. The Judge regarded the law as clear and said that it was not possible for the plaintiff to insist upon the certificate, but to protest at evidence of a document expressly referred to in it. The other decision was that of Farmers Mutual Insurance Group v Eade (unreported, High Court, Dunedin Registry, M.1064/85, 9 May 1986, Cook J.). That again was an insurance case and the decision in Dawson was followed.
[40] In England the law not been stated so unequivocally. Emphasis is there placed upon the need for adequate notice. In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 2 WLR 615, a decision of the English Court of Appeal, Bingham LJ reviewed decisions of the House of Lords and Court of Appeal and concluded at page 445:
“The tendency of the English authorities has, I think, been to look at the nature of the transaction in question and the character of the parties to it; to consider what notice the party alleged to be bound was given of the of the particular condition said to bind him; and to resolve whether in all the circumstances it is fair to hold him bound by the condition in question.”
[41] One of the decisions reviewed was that of Thornton v Shoelane Parking Ltd [1971] 2 QB 163. In that judgment Megaw LJ said at page 173:
“When the conditions sought to be attached all constitute . . . “the sort of restriction . . . that is usual”, it may not be necessary for a defendant to prove more than that the intention to attach some conditions has been fairly brought to the notice of the other party. But at least where the particular condition relied on involves a sort of restriction that is not shown to be usual in that class of contract, a defendant must show that his intention to attach an unusual condition of that particular nature was fairly brought to the notice of the other party. How much is required as being . . . “reasonably sufficient to give the plaintiff notice of the condition” depends upon the nature of the restrictive condition.”
[42] Interfoto was a case of a delivery note containing conditions on the back, one of which was held to be unreasonable and extortionate and so was excluded from the contract because reasonable notice had not been given of it.
[43] Circle Freight v Medeast [1988] 2 Lloyds LR 427, was a case concerning carriage of goods. Tthe plaintiffs argued that liability for the defendant’s loss was excluded by the standard trading conditions of the Institute of Freight Forwarders which were incorporated into the contract. After referring to the decision in Interphoto Taylor LJ at page 433 stated the law in these terms:
“. . . it is not necessary to the incorporation of trading terms into a contract that they should be specifically set out provided that they are conditions in common form or usual terms in the relevant business. It is sufficient if adequate notice is given identifying and relying upon the conditions and they are available on request. Other considerations apply if the conditions or any of them are particularly onerous or unusual.”
[44] And, Bingham LJ said at page 435:
“. . .the clear rule of English law is that clear words of reference suffice to incorporate the terms referred to.”
[45] With respect, I prefer the formulation of the English Courts and in particular the summary of the law by Bingham LJ in Interfoto. I would add, that it is important to consider the nature of the contracting parties. A different standard may be applied to a business contract in the course of a business relationship to that which might be appropriate in the case of a retailer/retailer customer relationship or, for example, in a “ticket” case.
[46] In her supplementary submissions, Ms Holland referred me to a number of further authorities in support of her proposition that the exclusion clause in particular did not bind the plaintiff. They were cases involving fraud or innocent misrepresentation as to the nature of a particular condition. Her further submissions appear to accept the general proposition that conditions (including an exclusion clause) can be incorporated into a contract by reference.
[47] There is no doubt in this case that Mr Anderson was aware of the existence of terms and conditions applying to the contract but not incorporated in it. He claims, however, that he was misled on the first occasion when he signed a contract with CLEAR as to the nature of those terms and conditions.
[48] There are two issues between the parties. The first is whether or not the terms and conditions were actually with the contract and the second is whether, if they were not, adequate notice has been given of their content.
[49] As to the first issue there is the evidence of Mr Brock as to his standard practice. Mr Gilbert also says that it was standard practice to provide the terms and conditions to a customer before an agreement was signed. I suspect, however, that he may be repeating what he was told by Mr Brock. Unfortunately, there are several instances in the evidence of CLEAR where witnesses made statements in relation to matters which were, on the face of it, within their own knowledge. When questioned those witnesses admitted that those statements were what someone else had told them. Certainly, Mr Gilbert did not personally print out the terms and conditions on any of the three occasions. Terms and conditions were not found amongst ProNet’s discoverable documents. If they were provided on each occasion that must mean that three sets of terms and conditions were lost or discarded. On the other hand, if it was indeed Mr Brock’s standard practice to print out the terms and conditions and Mr Anderson’s evidence is to be accepted, then there must have been three occasions when that standard practice was not followed. It may be, of course, that they were printed out but for one reason or another did not come to Mr Anderson’s attention. I am inclined to accept Mr Anderson’s evidence that he did not see the terms and conditions, so that it is necessary to consider his further evidence as to what he was told when he inquired as to the content of those documents.
[50] Neither Mr Brock nor Mr Gilbert have any recollection of Mr Anderson raising with them the question of the content of the standard terms and conditions. Both of them deny that Mr Anderson was told that the conditions were “just standard stuff relating to debt collecting”. Mr Gilbert says that they were simply not allowed by CLEAR to fob customers off in that way. He makes the point that had Mr Anderson raised the question of the terms and conditions that would immediately have focussed everybody’s attention on whether or not they were there. It also seems inherently unlikely that they would have referred to the terms and conditions as relating to debt collecting, because they do not. To have referred to them in that way would have constituted a deliberate attempt to mislead and I do not accept that there was such an attempt. I do not accept Mr Anderson’s evidence as to his inquiry about the terms and conditions. In any case he acknowledges that he made no inquiry a month later when he signed the international agreement. It must have been apparent to him that the terms and conditions associated with that agreement were likely to be different to those applying to the local network agreement.
[51] It would have been apparent from the information contained in Part B of the agreement that the terms and conditions contained at least eight clauses, that they contained specification levels for service availability and provisions imposing liability on the customer in the event of termination other than in accordance with the agreement.
[52] The concluding words of the agreement are important. The customer agrees to subscribe to the services on the basis set out in the standard terms and conditions for provision of the services. Those words certainly point to the agreement covering more than just “standard matters to do with debt collection”.
[53] The question then is whether adequate notice of the terms and conditions was given. The only terms and conditions relied upon by the parties are clause 2(c), first sentence only and clause 9 limiting liability. As to 2(c) the requirement there is no more than ProNet maintains was included in the contract in any case, so no difficulty arises in relation to it. ProNet, however, argues that the limitation of liability clause is an unusual one and should be excluded from the contract. I do not agree. There were factors outside the control of CLEAR which could affect performance on the international circuits. Additionally, CLEAR was unable to control the level of use of the subscribers to its circuits. Both these matters must have been known to ProNet. In those circumstances a limitation on liability should be expected. There is no evidence that the particular term is harsh or unusual. Mr Anderson is an experienced and successful businessman. He has a wide knowledge of computer technology and the internet. He is regarded as one of New Zealand’s leading experts in his field. These are all factors which should have made it more likely that he would expect to find in the terms and conditions matters of importance to the contract he was entering into.
[54] Accordingly, I conclude that adequate notice of the terms and conditions was given, including in particular, of clause 9. I hold that the contract consists of the signed document and the terms and conditions. In my view those documents contain the whole of the contract between the parties. The acceptance document is not part of the international contract. It is quite clear that it related only to the local area network contract. The reference in it to the cost of international access did not form part of the international contract which was for a quantity of access very much less than that quoted for in the acceptance document.
[55] The next question is whether CLEAR was in breach of clause 2(c). CLEAR has argued that the reference to circuit availability should be construed as applying only to circumstances where the circuit was down and could not be used at all. It argues that the circuit is still available, even if it is overloaded. I do not accept that argument. If there is any lack of clarity in the meaning of the words used the construction should be against CLEAR whose clause it is.
[56] CLEAR promised to use all reasonable efforts to provide a high quality reliable service. It knew that ProNet was relying upon it to do so. In those circumstances I construe the reference to circuit availability as incorporating the case where it is not available at the standard which the parties anticipated and agreed to. The expert evidence referred to earlier placed a percentage availability rate on the circuit at the times it was congested. For the reasons set out below I find on the balance of probabilities that circuit availability fell below 99.8 per cent, not only during February, but also over the September, October, November period 1997.
[57] Mr Anderson says that from about August 1997 there was a slow slide in the performance of the international circuit and that it was worse in the period September to late November. He says that he first noticed the problem when he was in the United States in late August. He summarised the traffic analysis data received from CLEAR as showing that the international links were utilised to almost 100 per cent for large periods from 25 September to 17 November and that over 80 per cent was likely to result in significant packet loss.
[58] Mr Hunt’s evidence suggests that his company first noticed bandwidth problems in August or September 1997. Mr Vorstermans of Astrix describes recalling months “of deplorable band width supply from CLEAR to ProNet . . . towards the end of 1997”.
[59] Mr J N Abley was responsible for the architecture and development of CLEAR’s IP backbone network from November 1996 until August 1999. He was aware of the congestion on the two international circuits during 1997 resulting in packet loss. Mr Abley agreed that between February and October 1997 Clearnet which was CLEAR’s ISP provider, experienced a five-fold increase in international IP usage and that between May and mid November CLEAR did not increase its international capacity apart from the provision of a two megabit teleglobe circuit, which was apparently not particularly suitable for normal internet traffic. He agreed in cross-examination that CLEAR’s wholesale ISP customers suffered serious congestion in relation to their international traffic in the months between August 1997 and mid November 1997. An e-mail sent by him shows that by October the congestion situation was very serious.
[60] Discovered material from CLEAR shows that they were aware of problems relating to bandwidth capacity during the whole of 1997. There was a small increase in capacity in May, but the situation deteriorated later in the year. The picture given by the discovered material is that CLEAR knew there was a problem coming but did nothing about it until it became really severe in mid October and even then, did not act until about the second week of November.
[61] In my view that put CLEAR in breach of standard clause 2(a) in that they did not use all reasonable efforts to provide a high quality reliable service. Had CLEAR taken action earlier it may well be that ProNet’s customers would not have terminated their arrangements, at least at that time.
[62] The defendant maintained that the congestion problems suffered by the plaintiff were in whole or part, its own fault because the plaintiff was using more bandwidth than it was paying for. Indeed, the contract envisaged that that might be the case because it gives CLEAR the right to increase the charge if bandwidth utilisation exceeds a specified level for a specified period. During 1997 the charge was increased pursuant to that provision. The evidence is conflicting as to whether ProNet then exceeded the capacity represented by the increased charge. But even if it did, it is clear in my view that this was not a significant cause of the congestion. ProNet was only one of a number of users of CLEAR’s international link.
[63] The pleadings claim that during the period from August 1997 to December 1997 the plaintiff suffered major packet loss of varying amounts exceeding .2 per cent of the time when measured over a 90 day period. There is then specific reference made to the period 1 October to 17 November, which is the period during which measured data was available. Bearing in mind that the onus of proof is on the plaintiff in this regard, I conclude on the basis of all the evidence that the congestion was at a level where availability was below 99.8 per cent during September, October and November 1997.
[64] Accordingly, I find that CLEAR was in breach of clause 2(c) for those three months.
Damages
[65] There are two provisions relating to compensation for loss. In the international agreement, signed by ProNet, there is the paragraph under the heading “Service Details” which provides that if the performance of international CLEAR network services falls below CLEAR’s specification levels for service availability as defined in clause 2(c), CLEAR will on request rebate a proportional amount of the monthly lease charges equivalent to the period of service unavailability. There is then clause 9(a) of the standard terms and conditions which provides that CLEAR’s liability arising from any cause, shall be limited to CLEAR’s standard charge for providing the service giving rise to the claim.
[66] This provision appears to have the same result as that contained in the contract itself. The service giving rise to the claim was the international internet service provided by CLEAR for the months of September, October and November 1997. Clause 9 limits damages to CLEAR’s standard charge for that service. The signed contract document provides the same level of compensation without proof of fault on CLEAR’s part or loss suffered on ProNets. However, in case this should not be correct, I proceed to consider the level of loss suffered by ProNet.
[67] ProNet’s claim for damages is based on the proposition that it would have sold the business in 1999 when demand for internet service providers was at a peak.
It has valued the company at that date. It has included the value of new products which it says it would have developed in the intervening time and which would have significantly increased the value that the company would otherwise have had. None of these products had been developed at the time in 1998 when ProNet effectively went out of business. It seems that some development work had been undertaken, but it is also clear that the advantage of that development work has been gained by ProNet shareholders. But in any case, I accept the submission on behalf of the defendant that at the time of the making of the international agreement in February 1996 there is no evidence that the defendant was aware that ProNet intended to develop and market additional products through its bandwidth customers. I hold that it was not reasonably forseeable by CLEAR that ProNet would develop in that way. There is no reason why CLEAR should have regarded ProNet as other than a wholesale bandwidth provider.
[68] As to the date for assessing damages; the general rule is that damages are to be assessed as at the date of the breach, although in particular cases the Courts may depart from this rule to work out a fairer solution: Sterling v Poulgrain [1980] 2 NZLR 402, 420 (CA).
[69] Before deciding the date at which damages should be assessed, it is necessary to consider whether the plaintiffs claim that the defendant’s breach caused the loss of the business, can be sustained. The plaintiff says that as a result of the defendant’s breach the plaintiff’s reputation was destroyed and it was not possible for the business to keep going.
[70] That submission tends to run counter to the position stated in a letter from the plaintiff’s solicitors to defendant’s solicitors dated 7 April 1998. That letter included the following comment:
“. . . if the present dispute can be resolved there is no reason why the existing business relationship cannot continue for the mutual profit of both CLEAR and ProNet. ProNet is a successful operator and can offer a long-term relationship with CLEAR.”
[71] No adequate explanation has been offered by the plaintiff as to why that view was expressed, if in fact it was not correct.
[72] Another reason why I do not accept the proposition that ProNet’s reputation was destroyed, is that ProNet’s principal customers were also its shareholders and were fully aware of the reason for the problems ProNet was experiencing. They knew that CLEAR was the cause of the problem, not ProNet. It is also the case that there is no evidence that ProNet attempted to acquire new customers to replace those that left, and it seems clear that the company acquiesced in the development opportunities it had identified being taken over by shareholders without any payment to ProNet for those opportunities.
[73] It follows that I do not accept the reasons given by ProNet for deciding that the company should cease to trade. In my view it is much more likely that the shareholders concluded that their interests were better served by obtaining their internet access directly from a telecommunications company rather than through a wholesaler. It may well be that the difficulties with the supply from CLEAR constituted a reason for arriving at this conclusion, but I do not accept that those difficulties caused the loss of the whole of ProNet’s business. In my view the loss suffered by ProNet was no more than the loss of the business of the three customers who left in late 1997, early 1998.
[74] I have noted that ProNet took no steps to replace the customers it had lost, nor did it take any active steps to try to persuade those customers to stay. Rather, the reverse. On 7 January 1998 ProNet wrote to Tasman and Manawatu terminating the services to them. The letter included the following passage:
“As it is possible to get cheaper services by yourselves going to suppliers like Xtra directly there is really no business case for ProNet continuing to supply you. It is unfortunate that this has come about but I think I am safe in saying that we all know that the ISP industry is a very competitive one.”
[75] In explaining that letter, Mr Anderson said that Tasman and Manawatu had decided to leave by that time. But in fact the letter confirms the situation that existed. By the end of 1997 Telecom’s Xtra company was providing internet access a very much cheaper rate than that being paid by ProNet to CLEAR.
[76] I hold that there was no attempt to mitigate the loss of ProNet’s customers. The consequence of that finding is that this is a case where it is appropriate to assess damages as at the date of the breach.
[77] There were strongly divergent views expressed by expert witnesses as to the loss suffered by ProNet. Mr Battles, who gave evidence for the plaintiffs, said that he would have valued ProNet at the end of 1997, inclusive of the value of its potential new products, at $2.68 million. He arrived at this figure by applying a sales multiple of four to the core revenue during the 1996/97 period of $671,000. In cross-examination he acknowledged that he worked on the basis of revenue rather than customer numbers. In response to a question he agreed that if ProNet had three customers and the revenue of about two-thirds of its actual revenue it would still be appropriate to adopt the sales multiple approach. When asked his opinion as to the value of the company excluding the potential from the developments, he specified a figure of $2 million and said that he arrived at that figure by placing a value of approximately $600,000 to $700,000 on the intellectual property within the business. He said that that figure was the result of looking at the time required to develop the new services and the new technology and also trying to assign some value to ProNet’s goodwill.
[78] Mr Anthony Frankham adopted Mr Battles’ assessment as to the value of the business at October 1997. He said he considered that assessment to be reasonable. He acknowledged that he personally did not have a data base to draw upon to assess the value of the ProNet business using sales multiples. He acknowledged that the value assessed was significantly greater than ProNet’s reported net financial position, which recorded only modest assets and a low level of net shareholder’s funds. He said that such divergence in values is not uncommon, and that the valuation approach recognises the value of the fundamental assets of the business, namely the national access backbone, the traffic monitoring system for billing, the access ProNet had to customers and the potential that could be derived therefrom. He said that at the time the business closed down it had no value.
[79] He acknowledged that if the bandwidth business became uncompetitive in terms of rates there was a risk that the customers would be unsettled and might be lost. He said he factored that possibility into the 40 per cent deduction that he made. For the 1999 and 2001 values he deducted 40 per cent, but did not do so for the 1997 value. He agreed that on the issue of whether there was a market in 1997 for the sale of companies like ProNet he had relied on the evidence of others.
[80] Mr Basrur, for the defendant valued on two bases: the enterprise value and the equity value. Disregarding the new products he said that the enterprise value at November 1997 was $58,863 and the equity value was a negative $37,776. He said that ProNet could not be valued on the same basis as retail ISPs because it was an aggregator of services, it did not have a developed product and it did not have a large customer base. He did not think that the use of multiples was a proper way to value the company. He recorded for example, that in 1999 multiples of 15 were being used and in 2001 multiples of two were used. He said that the method used by Mr Battles and hence the resulting value does not take into account the fundamentals of the business.
[81] He considered that there was a threat to ProNet’s business because customers could source bandwidth directly and that ProNet did not have a sustainable advantage because of very low barriers to entry and that there would be continual pressure on ProNet to reduce prices. He concluded:
“. . . the level of operating expenditure was not sufficient to support this business. Net operating margins are very low and also understated and are not sufficient to sustain operations.”
And he expressed this view:
“ProNet’s customer base was very vulnerable due to the small number of customers and the fact that they did not have firm long-term contracts in place with their customers.”
[82] Mr Basrur noted the letters referred to above that ProNet sent to Tasman and Manawatu on 7 January 1998 terminating the services to them. He noted that Mr Benson said in his evidence that ProNet was only there to supply high quality bandwidth to commercial entities and that when that failed there was simply no reason for its being. He noted too, John Vorstermans’ evidence to the effect that he and Craig Anderson discussed shutting down ProNet completely in very early 1998.
[83] In cross-examination he was asked why he had ignored the market prices paid for internet related companies and he said he did not believe that there were comparables which would be applicable for use in a fair market valuation. He said that it was not possible to compare a wholesaler like Pro-Net with a retail internet service provider. He said that none of the companies, the subject of the sales referred to in the plaintiff’s evidence, were comparable to ProNet because the businesses which they operated were different, their assets, their customer base, their risks and their products were different.
[84] Mr Basrur considered that the ProNet bandwidth business was worth nothing in 1997.
[85] Counsel for the defendants criticised the approach taken to valuation by Mr Battles. He noted that Mr Battles focused chiefly on an assumed sale in 1999. He submitted that there was no evidence as to the market for ISPs in 1997. Additionally, there was no evidence as to the value of a wholesale bandwidth company with only six customers. He said that Mr Battles gave no weight to factors such as the very low number of customers, the fact that those customers were linked to ProNet only by monthly oral contract, that ProNet gained no new customers during 1997 and that the company not profitable.
[86] Counsel for the defendant also points out that in the 1999 valuation, Mr Battles predicted that additional products revenue would be about twice that of bandwidth revenue. However, when asked by the Court to value the bandwidth business as at 1997 he estimated a figure of $2 million compared with a total of $2.7 million which he had assessed as the value of the business including the future value of the additional products. Counsel submitted that there was an inconsistency and that a much greater allowance should have been made for the future value of the additional products in arriving at a value that disregarded that aspect.
[87] I have serious doubts as to the appropriateness of the assessment of loss made on behalf of the plaintiff. On the basis of Mr Battles’ evidence his figure would have to be reduced to represent some of the factors identified by Mr Frankham. The resulting figure would then need to be reduced by two-thirds to take into account the fact that just one-third of the business was lost. Mr Battles agreed that a proportional approach to the value was appropriate. Put at its highest, the plaintiff’s evidence would establish a starting figure of about $1.6million ($2 million reduced by 20 per cent to reflect the factors identified by Mr Frankham), that figure would then need to be reduced by two-thirds to $530,000. In my view that figure would need to be reduced again to take into account failure to mitigate and the strong probability that given the rapidly decreasing prices of internet access customers would have been lost in any case.
[88] It is also appropriate to take into account amounts which customers of ProNet refused to pay because of the poor internet access over the relevant period. Mr Anderson’s evidence is that the total amount outstanding to ProNet by its customers is $150,678.97. He said no steps had been taken to recover these amounts because it was felt that the customers had a legitimate dispute with ProNet over the quality of the bandwidth, at least to the extent of the amount owing. This figure is, in my view, the maximum amount of damages to which ProNet would be entitled in the absence of the provisions of the contract.
[89] I turn now to an assessment of the damages payable pursuant to the terms of the contract. At the time of the congestion CLEAR was charging ProNet $33,000 per month for internet access. Presumably that was a figure averaged over 12 months to take into account the different length of months. For the three month period earlier identified, that would be a total of $99,000. That is the amount that would be payable by CLEAR to ProNet both in terms of the signed contract document and clause 9(a) of the standard terms and conditions.
[90] Against that sum it will be necessary to set off any amount established as owing pursuant to CLEAR’s counterclaim which will be addressed later in this judgment.
Other causes of action
[91] The alternative breach of contract claims are also subject to the limitation provision, so that it is not necessary to address them further. That leaves for consideration the misrepresentation claims under the Fair Trading Act 1986, the claim under the Contractual Mistakes Act 1977 and the claim in tort.
Misrepresentation
[92] The second cause of action alleges that “on one or more occasions the defendant represented to the plaintiff that the defendant guaranteed the plaintiff 99.8 per cent availability of the network to transmit, including consistent high quality access to international internet connectivity. This, of course, is pleaded as an alternative to the first cause of action on which the plaintiff has succeeded as to liability.
[93] For the defendant, Mr Allan notes that the first occasion on which the representation was said to have been made related to the first contract signed, not to the international one. But in any case, in my view the alleged misrepresentations take the matter no further than the actual provisions of the terms and conditions. I hold that in so far as any representation was made in relation to the international contract, it was a reference to the provisions of the terms and conditions.
The claim under the Fair Trading Act
[94] The plaintiff submits that the damages limitation provision cannot survive a claim under the Fair Trading Act 1986.
[95] The statement of claim alleges that the defendant engaged in misleading or deceptive conduct. The particulars given are first, that the defendant failed to provide 99.8 per cent availability of the service as represented. Accepting for the moment (although this is far from clear) that the Fair Trading Act applies, I do not consider that any representation made as to 99.8 per cent availability of the service falls into the category of misleading or deceptive conduct. Rather it was a standard which the defendant believed could be achieved, and which it did achieve for a significant part of the contract period.
[96] The second respect in which such conduct is alleged is set out in the statement of claim in the following terms
“25. The defendant engaged in conduct with was misleading, deceptive, likely to mislead or likely to deceive in the following particulars:
. . .
25.2 If the defendant is not able to determine whether or not it is in breach of 7 hereof, or the term in 27 hereof, whichever is applicable, the defendant’s conduct was misleading, deceptive, likely to mislead or likely to deceive in including such a term in on or more of the following particulars;
(i) Failing to record adequate information;
(ii) Failing to store adequate information;
(iii) Agreeing to a term in the agreements, in relation to which the defendant knew or ought to have known that insufficient information would be available to determine compliance or non-compliance with the term referred to herein; or
(iv) Agreeing to a term in the agreements and failing to ensure that sufficient information would be available to determine compliance or non-compliance with the term referred to herein.”
[97] This appears to be an allegation that if a representation is made as to performance there is an obligation on the person making the representation to record information to enable the person to whom it was made to ascertain whether or not the representation was fulfilled. That places an onus upon the person making the representation which is not supported by the provisions of the Fair Trading Act itself.
[98] For the plaintiff, Mrs Holland submitted that it was a necessary inference from the representation that adequate information would be kept by CLEAR to enable ProNet to ascertain whether or not the representation was being complied with. No authority was provided for such a novel proposition and I reject it. The claim under the Fair Trading Act fails.
Contractual Mistakes Act 1977
[99] This cause of action takes as its starting point the proposition that the Court would accept the defendant’s argument that it was obliged only to provide a physical circuit which was available for use although congested. I have rejected that argument so that it is not necessary to address this cause of action.
Claim in Tort
[100] The plaintiff claims that the defendant owed it a duty of care to employ all reasonable efforts to provide a high quality reliable service. It says that the defendant was in breach of its duty of care to provide access availability of 99.8 per cent. It is, of course, now well established that in some circumstances on concurrent liability in contract and tort exists. However, an accepted exception is where such liability would permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability: see Allison v KPMG Peat Warwick [2000] 1 NZLR 560 (CA).
[101] If concurrent liability was permitted in this case it would have that effect and accordingly, I hold that the action in tort cannot succeed.
The Counterclaim
[102] The defendant claims the sum of $282,813.67 said to be owing by the plaintiff to the defendant for bandwidth supplied up to and including 31 July 1998. The claim was originally greater but the defendant has reduced it to make allowance for the periods in February 1997, when the international circuits were completely unavailable.
[103] The claim arises as a result of short paid invoices over a period of time. ProNet has no defence to the claim except for a period from January to July 1998. Mr Anderson says that in January of that year he and Mr Vorstermans met with three people from CLEAR to discuss a number of issues, including a reduction in price to reflect the fact that ProNet’s bandwidth requirements had been reduced by one-third and to reflect the lower charges being made by CLEAR’s competitors. Mr Anderson says that CLEAR agreed to pricing reductions and that Mr King of CLEAR advised them that these would be reflected in their next bill.
[104] In fact the bills for January, February and March were reduced to a figure of $13,300 per month. In April, after threatening to cut off supply, CLEAR removed the discounts given and back-billed ProNet claiming that the reduction had been in error. CLEAR then continued to bill at the higher rate until supply stopped in July. It seems that the amount in dispute represents six charges of $10,700, totalling $64,200 plus GST of $8,025.
[105] Mr Anderson also claims that what he describes as a miscellaneous charge on 30 April of $29,838.75 plus GST should also be deducted.
[106] CLEAR acknowledges that it did agree to a reduction, but that instead of reducing the charge by about a third, it reduced it by two-thirds and that the correct charge was $24,000 exclusive of GST.
[107] ProNet’s response to this is that the reduction was to reflect not just the reduced bandwidth required by ProNet, but also a reduction in charges generally.
[108] In cross-examination of Mr King, the CLEAR witness who gave evidence in relation to the counterclaim, he was shown a document originating from CLEAR dated 4 December 1997, which acknowledged that CLEAR was not offering a premium service and that price for similar bandwidth in the market was much more competitive than theirs. The memorandum recorded that if CLEAR did not make changes they would be under great threat of losing their larger ISP customers and that they should adjust their pricing.
[109] He acknowledged that Mr Anderson’s contention that a charge of about $3,300 per 64 kbs fitted with the sort of reduction a customer would expect to have received at this time, given the state of the market. He was also obliged to agree that CLEAR’s explanation for the mistake it claimed it had made did not make sense. CLEAR claimed that it had reduced the charge to one-third instead of reducing it by one-third. However, the charge prior to the reduction had been $33,000 and, of course, $13,300 being the reduced charge invoiced was more than one-third of that figure.
[110] It was put to him that Mr Anderson’s explanation that he was actually given a lower price per 64 kbs was more likely to be correct and he agreed that that was so. I too accept that that is so. The evidence satisfies me that it is more likely than not, that CLEAR agreed not only to a reduction because of the reduced capacity being taken, but also to reflect the lower prices being charged by CLEAR’s competition.
[111] Accordingly, I am satisfied that CLEAR’s invoice should be reduced by $72,225.
[112] It seems that the miscellaneous charge which Mr Anderson claims should be deducted is not specifically referred to in CLEAR’s evidence, but nor does that evidence accept that that charge should be deducted. If the parties are unable to agree on the correct treatment of that amount I am prepared to hear further submissions. My tentative view is that as the proposed deduction was not challenged in evidence, it should be allowed. I also reserve leave for the parties to make further submissions should my calculations of the amounts involved be arithmetically incorrect.
Conclusion
[113] The plaintiff is entitled on its claim to judgment for $99,000 plus GST, if it is not already included in the $33,000 per month charge. CLEAR is entitled to judgment on its counterclaim for $282,813.67, less the amounts referred to in paragraphs [111] and [112]. The net result will be an amount owing by ProNet to CLEAR. Costs are reserved for submission if the parties cannot agree.
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