UIC FACTORY LTD v. ZUNG FU CO LTD AND OTHERS

1983 Nos. 7011 & 7134

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The two actions with which this trial is concerned were consolidated pursuant to an order of a Master.

2. The plaintiff in the first action (hereafter referred to as UIC) is the defendant in the second action and the defendant in the first action (hereafter referred to as Zung Fu) is the plaintiff in the second action.

3. It is common ground that in 1981 UIC employed the services of Zung Fu to provide it with a computer system that was capable of handling or could be adapted within a reasonable time to handle its particular stated requirements. Ultimately on 31st July 1981 UIC entered into a number of contacts with Zung Fu.

4. The first was a computer hardware sales contract for the purchase by UIC from Zung Fu of a certain type of Nixdorf computer with a fixed and removable disk drive and three workstations. The Second was a computer software services contract in which Zung Fu agreed to supply and UIC agreed to accept a stock control program, payroll programs and work-in progress programs. The third was a computer software licence and maintenance contract in which Zung Fu agreed to grant a licence to UIC for the use of certain material at a monthly charge. The fourth was a computer maintenance contract in which Zung Fu agreed to provide maintenance services to UIC in respect of certain equipment for a monthly charge.

5. A term of the software services contract was that, if UIC so required, Zung Fu would instruct no more than two members of UIC's staff in the use of the equipment supplied, and that such instruction would comprise an introduction to the operation and use of the computer system and programs supplied.

6. The contract provided that UIC would supply all information and test data and sufficient and competent personnel to enable Zung Fu to complete all appropriate systems and programs and, when completed, leave such in competent hands. There was also a provision that Zung Fu was under no obligation to obtain or request information or data from UIC and that UIC was responsible for the accuracy and completeness of all information and data supplied to Zung Fu whether or not Zung Fu requested it.

7. It is common ground that Zung Fu delivered two parts of the entire payroll program, namely the monthly workers payroll and daily workers payroll programs at UIC's factory premises on 8th March 1982 and likewise delivered the work-in progress programs on 16th July 1982

8. In its amended statement of claim UIC alleges that Zung Fu warranted that the payroll and the work in progress programs were competent to handle or could be adapted within a reasonable time to handle UIC's particular requirements, but that in fact these programs were neither competent to handle nor could be adapted to handle these requirements within a reasonable time.

9. In particular, UIC alleges that the payroll program could not handle employee's overtime payments, bonus payments and fringe benefits, that the piece rate workers program was never ready for handling or calculating the wage of such workers, and that the work-in progress programs either did not function or were not ready for use.

10. UIC further alleges that, notwithstanding repeated requests, Zung Fu either failed or refused to correct these alleged defects and failed or refused to deliver the stock control program which it had agreed to supply under the computer software services contract

11. Moreover, UIC alleges that Zung Fu was negligent both in that it failed to ascertain, whether adequately or at all, UIC's particular requirements, and that it represented and recommended to UIC that the programs available for use with the Nixdorf computer were competent to handle or could be adapted to handle UIC's requirements.

12. In addition to all of these allegations UIC further claims that Zung Fu has committed a breach of an implied term and condition of the computer software services contract that the programs supplied by Zung Fu would fit UIC's particular requirements or would be rendered fit within a reasonable time, or has committed a breach of an express term and condition of the same contract that Zung Fu would instruct members of UIC's staff in the use of the programs supplied by the defendant. As a consequence of this Zung Fu is said to have repudiated that contract and that UIC has accepted the repudiation.

13. Because of these matters UIC contends not only that the consideration for down payments made in respect of the computer hardware and computer software services contracts has failed, and that such sums have become repayable to UIC, but that sums paid by UIC under a lease back agreement entered into by it with United Merchants Finance Limited ("UMF") after UIC had purchased the Nixdorf computer from Zung Fu and sold it to UMF, have been wasted thereby causing UIC to suffer loss and damage.

14. In the prayer UIC claims recession of all four contracts or alternatively seeks a declaration that these have been rescinded, damages for misrepresentation for breach of contract and for negligence, an order for repayment of the sums paid as down payment for the computer hardware and the computer software services contract, and a declaration that UIC is entitled to be indemnified by Zung Fu against all payments which UIC has made and may make to UMF under the leasing agreement. It also claims all damages which UIC may be held liable to pay to UMF under that agreement.

15. In its re-amended defence, Zung Fu, while admitting that it represented to UIC that its programs were competent to handle or could be adapted to handle within a reasonable time UIC's stated particular requirements, denies that it made any warranty to that effect. It admits, however, that such representation was an implied term and condition of the computer software services contract but denies that the programs did not meet or could not be adapted to meet UIC's requirements. In particular it denies that the payroll program could not handle employee's overtime payments, bonus payments and fringe benefits and was unable to calculate piece rate workers wages. It denies that the work-in progress program did not function and was not ready for use, and that Zung Fu ever failed or refused to correct any alleged faults in that program.

16. Zung Fu admits that it did not deliver the stock control program to UIC but avers that it was entitled to withhold delivery of that program because of UIC's failure to make various payments due under the contracts.

17. It denies that it was negligent or that it failed to exercise reasonable skill or care, that it was in breach of any of the terms and conditions of the computer software services contract, that it failed to give adequate instruction to UIC staff in the use of the payroll and work in progress programs, that UIC is entitled to rescind the contracts and that the consideration has failed.

18. Zung Fu admits that training in the use of the piece rate workers payroll system was not given after September 1982 but claims that it was entitled to withhold further training as a consequence of UIC having defaulted for a period of six months in making payment under the computer software services contract for the payroll program.

19. In its claim against UIC, Zung Fu alleges that UIC has failed to pay a total of $71,400 in respect of the system installation fee, the costs of disk packs supplied, the software licence, the balance payable in respect of the payroll and work-in progress programs and various maintenance instalments. It also claims interest on that sum calculated in accordance with the terms of the various contracts.

20. As the pleadings are lengthy the foregoing represents a general outline only of the claims of the parties. I now turn to a consideration of the principal evidence adduced during the course of the hearing.

21. As I have already stated, the monthly staff workers payroll and the daily rate workers payroll programs were delivered by Zung Fu to UIC on 5th March and the work-in progress programs were delivered on 16th July 1982. Training was given by Miss Wong of Zung Fu to Miss Chui of UIC in the operation of these programs until 1st September 1982 when Zung Fu decided to withhold further instruction. Until this date UIC had in fact made only one person, Miss Chui, available for training.

22. It is clear from the evidence that thereafter UIC made no complaint to Zung Fu concerning alleged flaws in the monthly staff workers payroll and daily rate workers payroll programs until pleadings commenced in June 1983, some fifteen months after these programs had been implemented by Zung Fu at the UIC factory premises.

23. The evidence disclosed that Mr. Charles Lee, a director of UIC who had conducted all the negotiations with representatives of Zung Fu leading up to and culminating in the signing of all the contracts, had written to Zung Fu two letters of complaint dated 14th and 28th March 1983 respectively, that is to say some twelvemonths after the implementation of the two payroll programs and some eight months after the implementation of the work-in progress programs. In neither letter did he make any complaint as to the failure of either of these two payroll programs to perform in accordance with the specifications he had laid down, nor did he make any complaint as to the training that Zung Fu had given to UIC's computer operator Miss Chui.

24. Indeed it was not until his letter of 28th March that Mr. Lee made any complaint as to the performance of any of the programs that had been implemented. Even then, such complaint that he did make concerning any defect in the software visa confined to the work-in progress programs. He alleged that these had never worked in accordance with his specification. Had there been any flaws discovered in the payroll programs it seems that, having seen fit to write letters of complaint concerning other aspects of the computer system, it would have been natural for him to have also availed himself of these opportunities to ventilate his complaints as to the alleged defects in the payroll programs.

25. I digress momentarily to observe that evidence given by Miss Chui that due to pressure of work she had been unable to respond to Miss Wong's requests to prepare the raw data without which the work-in progress programs could not be put into actual use, causes me to entertain the gravest doubt that there was any justification for Mr. Lee's complaint in the second March letter that "the WIP software system has never been working according to the specification and it is a junk to us.".

26. Mr. Lee testified that when the work-in progress system was delivered to UIC in July 1982, more than four months after the delivery of the monthly staff payroll and the daily rate workers payroll programs, everything was proceeding smoothly and he was still satisfied with Zung FU except for the fact that the work-in progress system was, according to him, late in arriving, and the piece rate workers payroll program was not yet operating.

27. He complained that although Miss Wong had instructed Miss Chui in the use of the monthly staff payroll and daily rate worker payroll programs, she had not instructed her in the operation of the piece rate workers payroll program. He added, however, that this was because Zung Fu had informed him that the piece rate workers payroll program could only be operated in conjunction with the work-in progress programs. Indeed there was subsequent evidence which established that it was necessary to operate the two systems in conjunction with each other. It is significant that Mr. Lee admitted that, of the three programs that the payroll system was required to handle, two of them, namely the monthly staff payroll program and the daily rate workers program, were operating properly.

28. He also admitted not only that he had never complained to Zung Fu that its representatives had failed to instruct Miss Chui in the operation of the software programs, but that he had not done so because those programs, in respect of which instruction had been given were therefore usable and that accordingly he was very contented.

29. Moreover, he agreed that prior to his two letters of complaint to Zung Fu in March 9983, he had made no complaint that any of the programs delivered to UIC did not conform with his requirements.

30. In her evidence, however, Miss Chui claimed that the staff payroll program was unable to produce automatically each pay day a fixed allowance paid to staff members and to add it to their salary. She also claimed that after the requisite information had been fed into the computer, a diligence bonus, or, as it was often alternatively referred to, an attendance bonus, which was paid to staff who arrived punctually and did not leave early, would not automatically be added by the computer each pay day to the salary of such staff members who were entitled to that bonus. In other words, the computer was able to regurgitate the raw data that she had fed into it concerning arrival and departure times but could not calculate and add the diligence bonus to the salary of each staff member who was entitled to it.

31. She also claimed that the daily rate workers payroll program was also unable to handle the same two functions. Having said that, however, she was unable to recall whether the daily rate workers received a fixed allowance.

32. Miss Chui further testified that she had asked Miss Wong why the computer could not handle the calculations of the allowance and the diligence bonus payable to staff and daily rate workers, and was simply told by Miss Wong in effect that the computer could not handle these functions. She acknowledged, however, that she had received training in the operation of the staff and daily rate workers programs from Miss Wong.

33. Apart from Miss Wong, who had programmed and implemented these programs, two other computer systems analysts, one of whom designed the payroll programs delivered to UIC, testified that these programs were able to perform these functions. Miss Wong said that when she took these programs to UIC for implementation the content column of the parameter file contained a zero for every function in the programs. In the case of the function for the relevant diligence bonus, this meant that unless the zero was amended to another numeral, the program would be unable to produce that bonus.

34. Miss Wong testified that she had either performed the requisite amendments at UIC's factory or had instructed Miss Chui how to effect them. she further claimed that while she was attending at the factory and training Miss Chui this function was operating.

35. I am satisfied on the evidence before me that a simple operation is required to amend a numeral in the content column of the parameter file, and that as numerous functions which UIC did not specify in its requirements were included by Zung Fu in the payroll programs in order to enable UIC to meet any future needs that might reasonably arise, I do not think that it is in the least likely that Miss Wong would have neglected to teach Miss Chui hour to amend the content column so as to enable her to activate these dormant functions as and when the need arose. I do not have the slightest hesitation in accepting Miss Wong's evidence that she taught Miss Chui how to perform this operation.

36. I do not accept Miss Chui's evidence that in response to her alleged query as to why the computer could not handle the calculation of the allowance and the diligence bonus, Miss Wong had replied that the computer was unable to process these functions. Not only does such a claim run counter to what emerged from the evidence of all three computer systems analysts, but a demonstration given to the court by Miss Wong at the office of Nixdorf Computer Ltd. showed that the computer could indeed handle these functions.

37. Notwithstanding all the indications that point strongly to the programs having been activated, counsel for UIC argues that there is a piece of evidence that independently supports Miss Chui's testimony to the contrary.

38. It emerged during the course of the demonstration at Nixdorf that the numerals in the content column of the parameter file which related to the diligence bonus and to the parameter whereby the formula for the bonus was calculated, and which, in order for the diligence bonus function to operate, should both have been numerals other than zero, actually appeared as zeros.

39. Miss Wong was unable to explain how these figures now appear as zeros, when according to her, either she or Miss Chui had already amended the zeros to the appropriate numerals. If Miss Wong had performed the amendments then clearly someone had either deliberately or accidentally, and if deliberately, either innocently or with sinister intent, re-amended these numerals.

40. If Miss Chui had either failed to perform the amendments as instructed by Miss Wong or had performed them ineptly, the computer would not have been able to calculate the diligence bonus.

41. In the light of, first, Miss Wong's evidence, which I accept as being both truthful and reliable, as to these functions having been operative, secondly, the evidence of Mr. Charles Lee that he had been very contented with the monthly staff payroll and the daily rate workers payroll programs, and thirdly, the fact that, although Mr. Lee had specifically required this function, he had made no complaint in either of his two letters in March 1983 that they had not been operating according to his requirements or that there was anything defective in either of them, I am satisfied that the two amended numerals had subsequently been re-amended to zero.

42. Although counsel for Zung Fu suggested to Mr. Lee in the course of cross-examination that he had made up his allegations in order to avoid paying what UIC owed to Zung Fu for the computer package, there is insufficient evidence before me to justify a positive finding that the numerals were re-amended with sinister intent. Of the possible alternative explanations that might be advanced, the most innocent explanation, and in my view a by no means unlikely one, is that some time after Zung Fu had withdrawn further training facilities from UIC, Miss Chui, in the course of her use of the computer, misapplied such knowledge as she possessed and re amended the two numerals to zero.

43. Miss Wong testified in effect that Miss Chui was a dull and unreceptive pupil and an exceedingly slow learner. This is an assessment, which having seen and heard Miss Chui give evidence, does not in the least surprise me. I found her to be a hesitant, vague and uncertain witness who on occasion had difficulty in understanding simple questions. I am unable to place reliance on either her recollection of events or her assessment of a computer system which she had difficulty in understanding and operating. Moreover, she admitted that she had been unable to cope with all of the duties Mr. Lee had cast upon her. Her pressure of work was such that she was unable to assemble the raw data which was necessary for the operation of the work-in progress programs and which could only be provided by UIC.

44. I also find it inconceivable that if the payroll program functions, which she claimed to be inoperative, had in fact not been operating, she would not have conveyed this information to Mr. Lee or that he would not otherwise have come to learn of these defects at an early stage. As I have already observed Mr. Lee made no complaint as to these allegedly important matters in either of his letters of March 1983.

45. However, it is not necessary for me to speculate as to why the numerals appeared as zeros at the demonstration at Nixdorf. I simply mention these possible explanations to indicate that reasons exist other than that the numerals had not been amended from zero either by Miss Wong or by Miss Chui at Miss Wong's direction.

46. The major part of the hearing was devoted to extremely lengthy and probing cross-examination of the three witnesses called by Zung Fu. I found these witnesses to be truthful and reliable. By way of contrast I find myself unable to place reliance on the testimony of Mr. Lee and Miss Chui.

47. I cannot escape the conclusion that although UIC, through the agency of Mr. Charles Lee, enthusiastically embarked on the ambitious and expensive venture of computerising its manual system of recording and calculating various information, the company was too short sighted and parsimonious to provide a competent person to operate it, to allow that operator sufficient time to gather the raw data so necessary if the work in progress programs were to be put into use, and to provide sufficient back up by assigning another member of the staff to be trained with her in the operation of the computer. One wonders what Mr. Lee would have done had his operator Miss Chui fallen ill or had suddenly decided, for whatever reason, to leave the employ of UIC.

48. I am left with the firm impression that due to the inability of Miss Chui to cope with the demands made upon her to operate single-handed the computer system, the dramatic results that Mr. Lee expected from it did not materialise and that, not appreciating the real reasons why it was taking longer than anticipated to have the whole system operating smoothly, he became disenchanted with Zung Fu and wrongly attributed blame to it.

49. I accept Miss Wong's testimony that despite full training in how to feed data into the computer for the work-in progress programs, Miss Chui was still unable to operate these programs. Notwithstanding the ineptitude shown by Miss Chui and her failure to provide all of the data required to enable UIC to put the work-in progress programs into actual use, Miss Wong continued to attend at UIC's factory and persevered in training her. Finally, in September 1982, Zung Fu instructed Miss Wong to cease attending training sessions at UIC.

50. I am satisfied that Zung Fu had adequately performed its duty to UIC in respect of training. Zung Fu was not only under no obligation to persist indefinitely in giving tuition in the operation of the computer but was entitled to expect that UIC would co-operate by ensuring that all the necessary data was provided so that the work-in progress programs could be put into use.

51. Moreover, since the piece rate workers payroll program could only operate in conjunction with the work-in progress programs, UIC's failure to provide a reasonably competent operator and to prepare the necessary data for the work-in progress programs meant that in practical terms Zung Fu could not proceed with the implementation of the piece rate workers payroll program. Indeed, Miss Chui admitted that after Miss Wong had discontinued giving her training she simply put aside the task of preparing the data.

52. Since Miss Chui had made several attempts to contact Miss Wong to find out when she intended to return and resume training, it seems to me that if there had been any real anxiety on the part of UIC to complete the implementation of the system it would have made every attempt to assemble the data in order to expedite Miss Wong's return. As to Mr. Lee's complaint in his second letter in March 1983 that the work-in progress system had never been working, I can only observe that, in view of the events to which I have already referred, it is not entirely surprising that UIC encountered problems in operating it.

53. Finally, I am satisfied that wherever teething problems arose after the implementation of the payroll programs in March 1982, Zung Fu responded to every call that UIC made to it to remedy whatever defect had been discovered, and that these two programs were functioning in accordance with Mr. Lee's expectations.

54. UIC has fallen far short of the standard of proof required to substantiate its claim. Its action must therefore fail.

55. Zung Fu complains that UIC fell badly into arrears of payment of installation charges of $3,100 for the computer system which fell due on 1st March 1982, of a charge of $1G,900 for disk packs for data storage which fell due on the same date, of charges of $3,200 and $9,000 for the software licence and maintenance contract and the software services contract respectively, both of which fell due on 5th March 1982, and of a charge of $11,000 being the balance owing on the work-in progress system and due on 20th July 1982. It was due to the failure of UIC to meet its obligations in respect of these sums that Zung Fu alleges that it finally withheld delivery of the remaining program ordered by UIC, namely, the stock control program.

56. When referred to a letter of demand from Zung Fu dated 24th March 1983, Mr. Lee conceded that the amounts stated therein and the dates on which Zung Fu claimed that these amounts had fallen due, were all true and correct. These amounts include those that I have mentioned earlier. The other amounts to which the letter of demand refers are $6,150 for hardware maintenance under the computer hardware maintenance contract, and $25,650 for the software licence and maintenance under the contract relating thereto.

57. The computer software services contract provides that where software services were to be supplied on a periodic basis the balance of the contract price, which in this case was 50%, was to be effected within 14 days of the date of invoice and that the invoicing would be effected in the manner stipulated in the software order form or in such manner as might be agreed in writing between the customer and the supplier.

58. Curiously, although a software order form number is cited in the heading of the contract, neither party seems to be aware of the existence of any such form. Moreover, the parties do not suggest that there was any written agreement concerning the manner in which invoicing would be effected. The question arises as to when Zung Fu was entitled to receive payment in respect of the software programs it had supplied.

59. Since neither party has claimed that any software order form specified the manner of invoicing, I am left to conclude that the parties did not enter into any specific agreement on this aspect. That being so, it seems to me that payment of the price and delivery of the goods were concurrent conditions.

60. I find that Mr. Lee had accepted that payment and delivery would be concurrent. Indeed in cross-examination he agreed that at the time of the letter of 24th March 1983, payments in respect of the software programs that had been delivered by Zung Fu as well as other sums claimed by Zung Fu and to which I have already referred, had been outstanding from between six and twelve months.

61. His concessions in cross-examination that each of the items, claimed by Zung Fu and referred to in that letter, was due on the date on which Zung Fu alleged it was payable, reinforces the conclusion that he accepted that delivery of each program and payment of the price therefor were concurrent conditions.

62. I pause here to mention that in the letter of 24th March 1983 Zung Fu claimed that the balance of payment on the payroll software system had been outstanding since 5th March 1982 and that the balance of payment on the work-in progress software system had been outstanding since 20th July 1982. I am somewhat puzzled by these two dates because there seems to be no doubt that the payroll software was delivered and accepted on 8th March and the work in progress software was delivered and accepted on 16th July. Whatever the reason for these two slight discrepancies might be, I am satisfied that I should not attach any significance to them, particularly in view of Mr. Lee's admissions.

63. I find that UIC accepted delivery of the software programs on different dates without complaint and I place no credence in Mr. Lee's claim that he was dissatisfied about the alleged late delivery of the work-in progress programs and had complained to Zung Fu about the delay. I find that all along Mr. Lee had expected deliveries of the programs to be made in stages as and when his operator became sufficiently competent to begin operating them.

64. Not only does it seem reasonable, in view of the matters I have earlier referred to, that Mr. Lee would have recognised that the gradual implementation of programs was highly practicable, but the evidence of Miss Wong that UIC had never pressed for an earlier delivery of the work-in progress program, also suggests that Mr. Lee had acquiesced in the mode and times of delivery of the various programs.

65. Mr. Lee conceded that UIC had also failed to maintain payments due to UMF under the hardware leasing agreement. It was presumably in the light of this admission that counsel for Zung Fu put to him that the real reason for UIC's failure to meet its financial obligations was that it had been suffering, from liquidity problems, not that there had been anything defective in the software programs supplied by Zung Fu.

66. Although there was certainly no concrete evidence to support this allegation, I found Mr. Lee's response to it to be somewhat less that satisfactory. Having paused for approximately a minute he finally replied that what counsel had alleged was out of the question because the amounts involved were not large. When pressed further on the subject he conceded that although the total amount due to Zung Fu, namely $71,400, was substantial, each of the seven sums of which this amount was composed was "not a very great amount".

67. Whatever might be the real reason or reasons for UIC's failure to pay Zung Fu the various sums due under the contracts, I am satisfied that every program implemented by Zung Fu for UIC complied with UIC's special requirements and that all defects that had been detected after implementation had been promptly rectified by Zung Fu. I also accept that all these defects were minor and that Zung Fu had at all times been ready and willing to rectify promptly and free of charge any errors that might subsequently have come to light.

68. I therefore give Judgment for Zung Fu in the sum of $71,400. In addition to the sum of $71,400, Zung Fu also claims interest thereon in accordance with the terms of the various contracts. These provide that interest is chargeable on a day to day basis at the rate of 4% over the best lending rate for the time being of the Hong Kong and Shanghai Banking Corporation on such sum of money payable thereunder which is not paid on the due date for payment.

69. It has not been suggested by Counsel for UIC that the amount of $10,814 claimed in respect of interest thus computed to the date of the issue of Zung Fu's writ has been calculated inaccurately.

70. Accordingly I allow the claims for interest in the sum of $10,814 calculated to the date of the issue of Zung Fu's writ and for interest on the sum of $71,400 calculated at the rate of 4% over the best lending rate of the Hong Kong & Shanghai Banking Corporation from the date of the issue of the writ until the date of Judgment.