COMPUTER AND TECHNOLOGIES SOLUTIONS LTD v. MAN WAI TUNG t/a VENTUREWORK TECHNOLOGIES CO

HCA 1763/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1763 OF 2012

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J U D G M E N T

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1.  This is the plaintiff’s (“CTS”) breach of contract action against the defendant (“Man”). 

Factual Background

2.  CTS was and is an information technology (“IT”) software and services provider.  Pursuant to a contract dated 27 August 2010 (“Main Contract”), CTS was engaged by the Housing Authority (“HA”) as the IT contractor for its website revamp project (“Project”).

3.  CTS subcontracted part of the works under the Main Contract to Man, who provided services on website content management systems, at a fee of HK$755,000 (“Subcontract”). It is CTS’ case the Subcontract is evidenced by a written quotation from Man dated 7 October 2010 (“Quotation”), CTS’ Purchase Requisition Form (“PRF”) and the terms and conditions contained in the Tender Documents which led to the Main Contract[1].

4.  It should be mentioned that there was 1 other subcontractor engaged by CTS in the Project, a company called Isobar Hong Kong Ltd (“Isobar”) which provided graphic design. 

5.  In accordance with the terms of the Subcontract, 2 payments totalling HK$362,400 had been made by CTS to Man.

6.  The above matters are not in dispute save that Man says that he was not given a copy of the PRF at the material time, and that neither that document nor the terms of the Main Contract formed any part of the Subcontract.

CTS’ case

7.  CTS’ case is that Man was involved in the Project from the tender stage.  After the Main Contract was awarded to CTS, Man had actively participated in meetings and discussions with HA as the System Architect and a representative of CTS.  However, Man had failed to complete the work under the Subcontract by 27 June 2011 (“Completion Date”) as agreed under a Project Schedule dated 7 April 2011, or at any time thereafter.  Indeed, CTS was unable to contact Man from July 2011.  By a letter dated 10 August 2011, CTS accepted Man’s repudiation of the Subcontract and terminated the same.

8.  As a consequence of Man’s breach of the Subcontract, CTS had to deploy its own staff to work on the Project and to engage 4 subcontractors to complete the work under the Subcontract.  Due to the uniqueness in the design of the systems required for the Project, and the sudden abandonment of the Subcontract by Man, it was not feasible for the replacement subcontractors to continue the work left behind by him and most of such work had to be scrapped and redone.

9.  In addition, HA had made a claim for liquidated damages (“LD”) under the Main Contract against CTS as a result of the delay in the completion of the Project caused by Man.  The LD were deducted from CTS’ payment entitlement under the Main Contract in July 2014. 

10.  CTS therefore claims against Man the followings :

(a)	Additional costs for the 4 replacement subcontractors	HK$931,201
(b)	Redeployment of CTS’ staff	HK$864,100
(c)	LD deducted by HA	HK$621,365.40
	Total:	HK$2,416,666.40

Man’s case

11.  Man denies that he knew about the terms of the Main Contract, and that he had agreed to the Completion Date.  He says that CTS had failed to provide a Project Schedule which was reasonable and acceptable by him.

12.  Man’s case is that his inability to complete the Subcontract on time was due to delay in the completion of various works by Isobar, the changing demands of HA and the lack of timely communications from CTS on various matters regarding the Project.

13.  Man maintains that there were implied terms in the Subcontract to the effect that CTS should ensure that he would be provided with the graphic designs and necessary confirmations in a timely fashion; should not prevent him from performing the services under the Subcontract; and should allow him reasonable time to perform those services.  As a result of the breach by CTS of the implied terms, Man terminated the Subcontract by an email dated 28 June 2011.

The witnesses

14.  Two witnesses were called for CTS, namely, Mr Bernard Chan (“Chan”) who was the Manager of the Project and Mr Cheung Wai Lam (“Cheung”) who was employed as a Principal Consultant by CTS at the material time.  The evidence of the latter concerns primarily the loss suffered by CTS. 

15.  Man was the only witness giving evidence for the defence. 

The issues

16.  The issues in this case are fairly simple.  In respect of liability, it is undisputed that Man had not completed the services which he was to provide under the Subcontract.  Indeed, there is no controversy that (a) he did not respond to CTS’ efforts to contact him since July 2011 and (b) CTS purported to terminate the Subcontract on 10 August 2011 after having sent a letter to Man dated 1 August 2011 pressing him for performance under the Subcontract.  Hence, the arguments on whether Man had agreed to the Completion Date and whether time was of the essence may be seen to be red herrings. 

17.  The true issue is whether the Subcontract had been validly terminated by Man on 28 June 2011 based on the alleged breach of agreement on the part of CTS.  Such termination would have released Man from further performance under the Subcontract.

18.  As regards the loss claimed by CTS, the main contention concerns the LD.

The terms of the Subcontract

19.  In respect of the PRF, Mr Cheung, who appeared for CTS, has rightly accepted that it adds nothing to CTS’ case because the terms of that document are identical to those set out in the Quotation. 

20.  As for the Tender Documents, they are relevant for 2 reasons.  Firstly, under the Implementation Timetable of that document the work under the Subcontract had to be completed within 42 weeks.  According to Man’s pleaded case, the contractual period under the Subcontract was indeed 42 weeks.  It is agreed between the parties that the commencement date for the work under the Subcontract was the 7 September 2010.  The 42-week period therefore ended on 27 June 2011 (excluding the last day of that period). 

21.  Secondly, the Tender Documents contain a LD clause.  It appears from the evidence that the same clause is contained in the Main Contract.  There is no dispute that Man was not given a copy of the Main Contract by CTS.  However, it is accepted by him that he was given the Tender Documents for the preparation of CTS’ bid for the Main Contract.  In the premises, CTS has to rely upon the Tender Documents to establish liability for the LD on the part of Man.  I shall return to this topic below.

22.  Mr Li, who appeared for Man, maintains that time is not of the essence under the Subcontract.  Mr Cheung did not seek to argue otherwise.  He relies upon the 1 August 2011 letter[2], which he says had made time of the essence.  The failure by Man to respond to the request to resume his service entitled CTS to terminate the Subcontract. 

23.  In my view, the complete silence by Man since July 2011 was plainly an act of repudiation of the Subcontract.  Hence, the issue of liability here depends on whether Man had lawfully terminated the Subcontract by 1 August 2011. 

24.  For completeness, I do not agree that there is any fundamental deficiency in CTS’ pleaded case.  The material facts relied upon by it have been adequately pleaded and there can be no surprise for Man. 

25.  Turning to the implied terms relied upon by Man, there are 5 in total as follows :

“(i) [CTS] shall co-operate to provide timely graphic designs and confirmations for the website to [Man];

(ii) [CTS] shall ensure that its subcontractor, Isobar, and HA will provide timely graphic designs and confirmations for the website to [Man];

(iii) [CTS] shall not prevent performance of the [Subcontract] by [Man];

(iv) [CTS] shall ensure that its subcontractor, Isobar, and HA will not prevent performance of the [Subcontract] by [Man];

(v) [CTS] shall allow [Man] reasonable time to perform the [Subcontract] by reason of [its] failure to comply with any of the implied terms and conditions … above.”

26.  CTS takes no issue with implied term (iii).  Mr Cheung submitted it would be unreasonable to impose an obligation on the part of CTS to ensure the performance of third parties.  I agree.  Implied terms are underpinned by reasonableness.  There is nothing to suggest that it was reasonable to impose an obligation on CTS over matters outside its control.  No authority has been cited in support of such an implied term.  I therefore reject terms (ii) and (iv).

27.  The same criticism cannot be applied to term (i) if it is understood that CTS should provide the designs and confirmations to Man when they were available.  With that in mind, I see no reason to disagree that such a term was implied into the Subcontract as a matter of business efficacy.

28.  In respect of term (v), it is not very well formulated.  On the other hand, it is reasonably clear that what is contended is that reasonable extent of time should be allowed to Man if there was delay in the provision of designs or confirmations.  With that refinement, I also accept this to be a valid implied term.

Breach of the Subcontract by CTS ?

29.  There is no dispute that there were delays to the Project caused by HA, in terms of changes of instructions and/or lateness of confirmations, and by Isobar in its production of various designs[3].  However, it is common ground that not every event of delay had an impact upon the work under the Subcontract.  The parties differ as to the extent or seriousness of the delays and how the lateness of various events had impacted upon Man’s work.

30.  The problems encountered in the Project are evidenced by various emails and minutes of meetings.  It is a matter of common sense that for a major task like the Project where a number of participants were involved some delay would be expected in the course of the work for various reasons.  Normally, the contractors would do what is reasonable to accommodate changes required by the customer and to make up for the delay encountered in the course of work by, eg, employing additional resources to speed up some of the other work.  Mr Li did not seek to argue otherwise. 

31.  The documents show that CTS was working with Man all along to try to overcome various issues caused by delay.  Indeed, it appears that CTS was acting reasonably as expected of a responsible contractor. 

32.  It is convenient at this point to deal with 2 matters.  Firstly, the weight of the evidence is that Man did agree to the Completion Date.  In particular, he took part in the discussions which led to the Project Schedule dated 7 April 2011[4]; the documents which came into existence after that date are consistent with the fact that CTS and Man were trying to meet the Completion Date; and there is no document which recorded Man’s disagreement to the Completion Date (there are of course documents which recorded his concern over various delays and that they would impact upon his work). 

33.  Secondly, I find both CTS’ witnesses to be reliable.  They were straightforward and spontaneous in the witness box, and their evidence is consistent with the documents.  On the other hand, Man was evasive at times when he was cross-examined, and the contentious part of his evidence is not supported by the documents.  I do not find him to be a reliable witness. 

34.  Given the state of the evidence, I have a great deal of difficulty finding that CTS was in breach of the Subcontract notwithstanding the parties’ agreement that there were delays caused by HA and/or Isobar.  In particular, there is no expert evidence to assist the court in terms of assessing whether various delays could or could not reasonably be absorbed with the remedial measures which were adopted.  In other words, the court cannot simply equate delay with breach of the Subcontract on the part of CTS.  This point can be illustrated by the following.

35.  There was a meeting between CTS and Man on 15 June 2011 when the issues over delay were discussed.  It is common ground that Man suggested at the meeting that the Completion Date be postponed.  However, as recorded in an email dated 22 June 2011[5], the parties eventually agreed to adopt various measures to make up for time lost and to adhere to the Completion Date.  Such measures included the deployment by CTS of its own resources to take over some of Man’s work. Putting aside Man’s evidence that no agreement was reached at the meeting (I prefer Chan’s evidence in this regard), in order to establish that CTS was in breach of the implied term to allow Man a reasonable extension of time[6] it has be demonstrated that the remedial measures were inadequate. There is no proper evidential basis to come to such a finding.

Termination of the Subcontract by Man ?

36.  There is a further problem with Man’s case. Even assuming that CTS was in repudiatory breach of the Subcontract, there is no termination of the same by Man with an acceptance of the breach.

37.  Man relies on an email dated 28 June 2011 as the acceptance of CTS’ breach of contract.  His evidence is that the last sentence of that document constituted an express termination of the Subcontract.  That sentence is as follows :

“We can’t continue the development until we have managed to have a compromise and reasonable planning for the project.”

38.  I have no hesitation rejecting Man’s case.  Far from terminating the Subcontract, that sentence sought to ventilate his frustration over the problems encountered in the Project and to reiterate his position that “a compromise and reasonable planning” was required.  He was pointing to the way forward.  Indeed, that message is clearer if the email is read in its entirety. 

39.  I also reject Man’s suggestion that any lack of clarity in the email was attributable to his poor standard of English.  It is apparent from the documents that Man had a good command of that language.

40.  I agree with Mr Cheung that Man’s case is contradicted by the fact that Chan replied to his email on the same day and Man did not respond by pointing out that the Subcontract had been terminated.  Instead, on 30 June 2011 Man sent another email[7] to CTS.  This later email also contradicts Man’s evidence that he made no further response to CTS because the Subcontract had been terminated.

41.  If the Subcontract had not been terminated, it must follow that there was no reason for Man not to have continued with the Project. 

42.  In the premises, I hold that Man was in repudiatory breach of the Subcontract, which was terminated by CTS on 10 August 2011.

Damages

43.  In respect of the costs of the replacement contractors and the deployment of CTS’ staff[8], I have no difficulty accepting that they flowed from Man’s breach of the Subcontract.  In particular, I accept Cheung’s evidence that Man’s work had to be redone by reason of the lack of source code, which is supported by the minutes of a progress meeting dated 30 June 2011[9]. I have no reason to doubt the reasonableness of the need to employ replacement contractors and their costs.  I also accept the veracity and reasonableness of the costs of deploying CTS’ staff.

44.  The LD claim is not straightforward.  There are 2 issues – causation and remoteness. 

45.  In respect of causation, there is no evidence that the delay which gave rise to the LD was entirely attributable to Man’s breach of the Subcontract, save for a blanket assertion contained in the witness statement of Cheung[10] which has been adopted as his evidence.  However, it is common ground that there were delays to the Project for which Man was not responsible.

46.  Mr Cheung has very fairly accepted the difficulty of this part of his case.  In the absence of proper proof, this claim must be rejected. 

47.  In the premises, it is unnecessary to deal with the issue of remoteness of damage.  However, I would indicate briefly my factual findings which are relevant to this issue.  I accept Man’s evidence that he did not look at the LD provisions in the Tender Documents.  This is not surprising given that he was a technical person and his task at the time was to assist CTS in compiling its bid for the Main Contract. 

48.  On the other hand, the circumstances of the case dictate that Man must have anticipated at the time when the Subcontract was made that if there was delay in the completion of his work which impacted upon the completion of the Project, it was likely that CTS would have to compensate (normally by way of damages) HA for the delay. 

49.  LD are simply pre-estimated damages.  Whether there is any difference between the payment of damages and the payment of LD CTS to HA is a question of law which is unnecessary to resolve in this case.

Conclusions  

50.  By reason of the matters aforesaid, I give judgment in favour of CTS against Man in the sum of HK$1,795,301 with interest to run from 10 August 2011 at half commercial rate (prime plus 1 %) until the date of judgment and thereafter at judgment rate until payment.  The costs of this action be to CTS.

51.  Last but not least, I am grateful to both counsel for their assistance in these matters.