HONG KONG HUNG SHANG ELECTRIC LTD v. NEW CITY (GROUP) LTD t/a NEW CITY COMPUTER SYSTEM CONSULTANTS

DCCJ 2307/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 2307 OF 2007

____________

J U D G M E N T

1.  In 2003, Hung Shang, the Plaintiff, contracted New City, the Defendant, to design and to develop a computer software system for its business operations in Hong Kong and the Mainland. The development had taken 3 years until 2006 when Hung Shang considered so much of the system provided to be incomplete. It now claims for the return of the money paid to New City. New City denies the claim and alleges that it was Hung Shang that unilaterally prevented it from bringing the system into full implementation.

Background

2.  Hung Shang’s group of companies are in the business of manufacturing and sale of connectors used in the electronic industry.  Its headquarters is in Hong Kong while its presence is represented by an associated company in Shenzhen.  The factory also in Shenzhen manufactures the products.  Besides export, the products would also be distributed by its company in Shenzhen for sale in cities such as Beijing, Shanghai, Suzhou, Chengdu and Guangzhou

3.  New City carries on the business as a computer software consultant.  In 2003, Hung Shang approached and consulted New City on the provision of a computer software system custom made for Hung Shang’s business operation.  New City then proposed a project of design and development of an integrated management information system for Hung Shang in Hong Kong and its associated companies and factory in the Mainland.

4.  The system was designed to facilitate the enterprise resources planning (ERP) of Hung Shang that would incorporate various modules dealing with sales, shipping and invoicing, purchase and inventory control, production and material control, distribution and customer relationship management (CRM) as well as an accounting system.   Multiple users from different sites were supposed to have access to the system.

5.  To enable the implementation of the system, New City also proposed a computer network design. This entailed the upgrading of the computer hardware of Hung Shang in accordance with New City’s recommendations.  Hung Shang would also need to arrange connection to the internet for establishing a virtual private network connection between the Hong Kong office and its associated company and factory in the Mainland.

6.  After various meetings and written proposals, the parties entered into a software development agreement (“the Agreement”) on 23 September 2003 whereby Hung Shang formally appointed New City as the consultants to design and to develop the integrated management information system.  New City issued a sales confirmation on the same date that was also signed by the parties and annexed to the Agreement (“the Sales Confirmation”).

7.  The various modules of the system mentioned above were spelt out in clause 1.1 of the Sales Confirmation.  The scope of the system and the services to be provided were defined as follows:

Clause 1.2

“This system is design for running in their office in Hong Kong as well as one factory in China.”

Clause 1.3

“Data among different sites can be integrated by using by bi-directional data replication, an off-line mode, via any means and/or three-tier client server mode, an on-line mode, via point to point connection.”

Clause 3.1

“The service includes:

(a) Software Core With 50 per seat License

(b) On Site Consultation & Services 15 Visits

(c) Programming 40 Man-day

(d) Training 30 Sessions

(e)  Off-site Consultation & Services    Unlimited”

8.  In consideration of New City’s service, Hung Shang agreed to pay a software development fee in the manner as stated in clause 2.1 of both the Agreement and the Sales Confirmation:

“During the continuance in force of this Agreement but subject as herein contained to the contrary, the Client shall pay the Consultants a Software Development Fee of HK$430,000.00 is payable in the following manners:-

(a) a down payment of HK$55,000.00 payable on signing of this Agreement; and

(b)the balance of HK$375,000.00 payable by 30 equal consecutive monthly instalments of HK$12,500.00 each, the first instalment to the payable by Client one month after the date of this Agreement.”

9.  Upon the signing of the Agreement and the Sales Confirmation, Hung Shang made the down payment.  In October 2003, Hung Shang started to pay the monthly instalments of the balance of the contractual fee.

10.  The development of the system was expected to take the following stages that were explained in detail in clauses 4 to 12 of the Agreement:

(1) Source information and requirement collection;

(2) Final design plan;

(3) Software development;

(4) Management training, review and final specifications;

(5) Validation test;

(6) Installation;

(7) Acceptance test.

11.  The time schedule for various stages of the development of the software was projected in clause 4 of the Sales Confirmation:

Clause 4.1

“The system is to be implemented in usually two to four phases. Each phase is to be completed in about three to six months. The customer may shorten the total period by combining the phases and/or implementing more than one phase at the same time.”

Clause 4.2

“Time Schedule for implemented a particular phase is:

(a) Requirement Analysis and System Design 2 Months

(b) Reference Model Selection/Prototype Construction 1 Month

(c) Design Review 2 Months

(d) System Validation and Basis Setup, System Training and

Installation & Acceptance 2 Months

(e)  Post Implementation Review                1 Month”

12.  Pursuant to clause 3 of the Agreement, New City agreed to use its best endeavours to meet the above time schedule.  Hung Shang agreed to co-operate in achieving that.  In the event that the development fell behind schedule other than due to the default of New City, the time for completion of the remaining parts of the System would accordingly be postponed.  As the customer, Hung Shang’s obligations were spelt out in detail in clause 14 of the Agreement.

13.  By April 2006, the entire contractual sum of HK$430,000 had already been paid.  New City also started to charge Hung Shang what was called maintenance fee.  For the following 5 months until August 2006, Hung Shang had paid maintenance fee in the monthly sum of HK$4,685 each or a total of HK$23,425.  In August 2006, New City charged and Hung Shang also paid New City cost of 2 training sessions held during weekend in the sum of HK$600 each or a total of HK$1,200.

14.  Yet, by October 2006, the System was still incomplete.  Hung Shang was dissatisfied with the progress of the development and the performance of so much of the system provided by then. It denied the team from New City further access to the office of Hung Shang in Hong Kong and that of its associated company in Shenzhen.

15.  In May 2007, Hung Shang commenced this action against New City.  The basis of claim is total failure of consideration.  On this basis, Hung Shang claims for the return of not only the contractual fee of HK$430,000 paid pursuant to the Agreement and the Sales Confirmation, but also the maintenance fee of HK$23,425 and training cost of HK$1,200 mentioned above.

16.  The above background is not in dispute.  I find them to be the facts in any event.

The pleaded case

17.  According to Hung Shang’s pleadings, New City has failed to design or to develop the system in that:

(1) the system failed to allow integration of data from different sites as stated in clause 1.3 of the Sales Confirmation;

(2) New City has failed to provide supporting services to Hung Shang when Hung Shang encountered problems in the daily operation of the system pursuant to clause 3.1 of the Sales Confirmation; and

(3) the system was incomplete contrary to clause 4.2 of the Sales Confirmation.

18.  New City’s pleaded case is that it has faithfully and satisfactorily carried out its duties and obligations under the Agreement.  Nevertheless, since mid-October 2006, Hung Shang had suddenly denied New City the access to the offices of Hung Shang in Hong Kong and the Mainland.  New City has thus been prevented from further performance of the Agreement by bringing the system into full implementation.

19.  New City alleges that it was Hung Shang that was breach of its obligations as the client, which was particularised by way of further and better particulars to be those obligations under clause 14 the Agreement.  Hung Shang’s such conduct, New City pleads, amounted to repudiation of the Agreement.  New City also sought to allege that the problems in the operation of the software were attributable to the lapse of data entry by the staff of Hung Shang to try the system.  A last-minute amendment of the New City’s pleading to encompass that was made.

20.  The major issues in dispute are (1) whether the Agreement was terminated because of New City’s alleged breach; and (2) if yes, whether there was total failure of consideration entitling Hung Shang to claim for the return of the money paid.

Whether New City was in breach

The development prior to mid-October 2006

21.  Though the parties disagree on the alleged problems in the system provided, they are ad idem that the system was incomplete by mid-October 2006.  Mr Lee for New City reiterated that in his closing submission.

22.  What happened since the signing of the Agreement and the Sales Confirmation until mid-October 2006 are evidenced by voluminous contemporaneous documents and email correspondence between the parties.  Without going into every detail, one can see the following development since the parties entered into the Agreement in September 2003.

23.  In late 2003, the parties agreed to a detailed project plan.  Among other things, the project plan contained details of the following stages of the development of the system and the time schedule:

(1) After Hung Shang’s confirmation of the project plan, New City would prepare the design plan.  It would be reviewed, amended and followed by the final design plan for Hung Shang’s confirmation.

(2) According to the final design plan, New City would commence the software development and internal testing.  Comments by Hung Shang during the training and test operation of the software would be recorded in the final requirement checklists.

(3) Comments in the final requirement checklists would be taken into account in finalising the specifications of the system.  New City would submit the final specifications of the system to Hung Shang for confirmation.

(4) Upon confirmation, the final specifications would form the basis of system to be installed.

24.  Since the end of 2003, New City had also submitted to Hung Shang other design plans including the CRM system design plan, the accounting system specifications, the computer network design plan and the ERP design plan.

25.  Apparently, at Hung Shang’s request, the accounting module of the system was supplied first.  Training sessions were held for the staff of Hung Shang.  The accounting system was installed for test use in early 2005.  Hung Shang also provided its requests for improvement of the accounting module.

26.  However, by late August 2005, Hung Shang was stilling reporting problems in the accounting module such as inability to print out statements and data problem.  Subject to adjustment and integration with the other ERP modules, the accounting system was then projected to be implemented in January 2006.  That did not happen.  Modification of the accounting module continued.  The implementation of the accounting system was further postponed.

27.  There were still reports on the problems in the accounting module in as late as September 2006.  In the same month, there was internal email in Hung Shang concerning the problems in the log-in and operation of the accounting module.  There was also report that the module had problem in the balancing of the year-end figures.

28.  As to the entire ERP system, the test run was projected to take place by mid-September 2005 and the parallel run with the current system to take place by late September 2005.  Independent and full operation of the entire system was scheduled to take place in October 2005.  In late August 2005, New City further suggested that the ERP system would be put on line on 8 October 2005.  New City agreed to that.

29.  In late September 2005, New City adjusted the implementation schedule, postponing the test run of the ERP system further to the end of November 2005.  However, towards the end of October 2005, there was still exchange between the parties as to adjustments to be made to the ERP system in accordance with Hung Shang’s business requirements.

30.  The last instalment of the contractual service fee was paid in April 2006.  In its invitation to Hung Shang to join the maintenance programme at the end of March 2006, New City expressly acknowledged that there were incomplete aspects of the system at that stage but it undertook to continue to complete them.  As mentioned above, Hung Shang did begin to pay the maintenance fee with effect from April 2006.

31.  At the end of April 2006, New City reported to Hung Shang that as requested, the trading modules of the system (i.e., purchasing, inventory and sales) would have to be implemented first at the offices of Hung Shang’s group in the Mainland.

32.  By letter in May 2006, Hung Shang complained to New City that the incomplete and delayed system implementation would affect the company’s business operation and future expansion need.  New City was demanded to expedite the completion of the development of the system.

33.  In its report in late June 2006, New City referred to the training and test of the modules just carried out.  Subject to minor adjustments and data entry, the system was expected to run parallel with the current system for 2 weeks.  If the parallel run was successful, the system would be implemented on line 2 weeks thereafter.

34.  The documents show that adjustments to the modules were indeed made.  At one point, it was contemplated that the system would be implemented on line on 20 August 2006.  However, by late August 2006, the parties were still talking about collecting views on and resolving the problems encountered since the parallel run of the system with the current system.  At the end of August 2006, New City reported even log-in problem.

35.  From the documents, the parties are seen to have carried on addressing the problems in operating the ERP system.  In early September 2006, New City advised to move the ERP software and data to the terminal server for another test run.  Hung Shang did so accordingly, but there was still report of the slow response of the system and various other problems almost on a daily basis.  The system was then moved to the Hong Kong office for further test.  Problems persisted.  Notwithstanding the subsequent introduction of new computer servers as advised, Hung Shang was seen still complaining to New City about the problems with the ERP system in late September 2006.

36.  Hung Shang demanded New City to send its team to rectify the problems and to provide further training. There was proposal within Hung Shang to withhold the payment of further maintenance fee pending improvement of the system.

37.  16 October 2006 was apparently the turning point.  On that day, New City sent an email to Hung Sang to follow up on the development.  New City pointed out that after test, the invoicing and reporting functions should work properly.  New City then referred to an enquiry made with the accounts department of Hung Shang on 14 October 2006 but only to be told that the staff of Hung Sang would not carry out the data entry work in the absence of instruction.  New City therefore queried the extent of co-operation put up by Hung Shang’s office in the Mainland for bringing the system to full implementation.

38.  New City’s above email prompted a very strongly worded reply on the same day from Rose of Hung Shang, who was in charge of the administration of Hung Shang’s associated company in Shenzhen.  Whilst New City’s Mainland team was responsive to the feedback, its Hong Kong office was said to have ignored Hung Shang’s complaint.  These had caused serious impact on the daily operation of Hung Shang’s business.

39.  By this email, Hung Shang condemned the accounting module as being useless as it was not integrated with the other modules in the system.  Hung Shang could only use the previous independent accounting software that it had been using.  The system was considered to be coarse and unacceptable.  Hung Shang’s computer department had concluded that the system so far provided was a failure and had decided to take the same off line completely.  The reply ended with a demand to New City to seriously reflect on the problem.  3 minutes after this email, Rose sent an email to her colleague proposing to advise the director of Hung Shang to stop paying any further maintenance fee (that had been put on hold) to New City.

40.  In view of the contemporaneous documents, I find the above development in the matter to be the facts as well.

Clause 1.3 of the Sales Confirmation

41.  This should be considered together with the allegation that the system so far provided was incomplete (by mid-October 2006) and hence breach of clause 4.2 of the Sales Confirmation.

42.  According to Yuen, the director of Hung Shang, his company had provided information and sample data as requested by New City from time to time for test of the modules.  In early 2005, he requested New City to at least supply the accounting module first, because his company had no custom-made accounting software for use by then.  This was supplied but errors and problems persisted.  They included problems with balancing the figures and failure to generate accounting reports.

43.  So far there had been no successful integration of the accounting module with other modules of the system.  In fact, the production module had never been delivered.  The CRM module was still under construction.  The implementation of the ERP system had been postponed time and time again because of the errors and problems that New City had failed to rectify effectively or at all.  At the end of the day, his company had to employ another ERP software called ‘SAP Business One’ adapted for its use and resorted to use the previous readymade accounting system called ‘Peachtree’.

44.  Liu was in charge of the information technology department of Hung Shang’s associated company in Shenzhen.  He joined the company after the Agreement and the Sales Confirmation had been signed.  From the contemporaneous documents, it could be seen that he had been heavily involved in the project since late 2004.  He gave evidence.

45.  Liu explained how his company had responded to New City’s requests for information and sample data for test of the modules; the arrangement that his company had made to facilitate the training and test run; and his repeated requests to New City to expedite the supply of solutions to the problems encountered in operating the accounting and the trading (purchasing, sales and inventory) modules so far supplied.  As mentioned above, these are adequately evidenced by the contemporaneous documents.  The documents support his explanation.

46.  Liu confirmed that it was on or about 21 August 2006 when the ERP system came on line.  But problems kept on surfacing.  For instance, the same serial number being generated on invoices; no integration between purchase invoices and the main system module; no response from the system; log-in problem; and accounting system freezing for no apparent reason.  Despite modifications, the system was never problem-free.

47.  Mr Lee attacked the lack of evidence to substantiate the alleged failure of the system to allow data integration between different sites.  He criticised that the evidence of Liu and Yuen in respect of the alleged failure of the system data integration particularly between the accounting module and the other modules in the ERP system was adduced in the absence of particularisation by pleading in advance. I do not find the attack justified or valid.

48.  By way of further and better particulars of its pleading, Hung Shang contends that as at the time of the commencement of this action, the system was incomplete and full of errors and inconsistencies.  More than 50% of the tested functions either failed or were incomplete.  Basic data recording was not functioning properly, which further broke down the inter-relationship among different functions and modules.  The relationship among various modules was undefined or unrelated to the software programmes.  The account sub-system also could not fulfil the year-end process without error.

49.  Such pleading is based on the evidence of its expert Jefferson Wat.  Wat explained that he has spent 8 days testing the functions of so much of the system installed at Hung Shang. Over the test functions, the percentage of passes was 18.97%; the percentage of incomplete functions was 46.55%; and the percentage of failures was 34.48%. Complete failures amounted to 12.07% of the tested cases.  The total percentage of failures and incomplete functions amounted to over 80% of the test cases. He considered this to be unacceptable.

50.  Putting aside the percentages, one should note the record of tests, results and his comments in detail in Wat’s report dated 23 January 2008.  Among other things, he listed out 18 undesirable findings.  According to him, many of the failures were crucial functions such as stock take that would affect the inventory control function significantly.  He came to his conclusion that has been pleaded as the further and better particulars of the claim mentioned above.

51.  Mr Lee submitted that Wat had carried out no test for data integration between sites for the purpose of compiling his report.  This is true.  However, Wat explained in his report that numerous defects were already detected when the test was carried out in a single user mode.  Hence he did not further simulate the scenario of logging into the system with multiple users from multiple companies simultaneously at all.  In view of the extent of defects and errors found, one could not reasonably criticise Wat for not testing further.

52.  Mr Lee sought to cast doubt on the accuracy and reliability of Wat’s evidence on the basis that Wat had not reviewed several specification documents for the purpose of conducting the test and compiling the report.  They included: (a) ERP design plan version 1 (dated March 2004) ; (b) CRM design plan version 2 (dated February 2004); and (c) specifications of accounting system.

53.  According to list in his report (under section 7.0), Wat had reviewed 14 related documents for conducting the test.  They included ERP system proposals versions 1 and 2 as well as the network design plan, both predated the Agreement.  Wat had also referred to the detailed project plan version 1 and CRM design plan version 1. It was however not pointed out in concrete terms that the differences as a result of the refinement of the versions of specifications had a significant effect on the reliability of the functionality tests carried out by Wat.

54.  New City called Herman Wan, its project manager, as a witness.  He is also the brother of one of the proprietors of New City.  His evidence was mainly that his company had used its best endeavours to discharge its contractual obligations.  Wan went further to attribute the situation to the massive modifications requested by Hung Shang of the system beyond the agreed specifications at a late stage.  This was denied by Hung Shang.

55.  In my view, Wan’s criticism is not fair.  To begin with, Hung Shang had to rely on New City for the custom-made software.  The Agreement contemplated variations and amendments so as to suit the business needs of Hung Shang.  This explains why the final specifications would not be confirmed until just before installation.  If New City had ever taken the view that Hung Shang’s demand went beyond what it was contractually bound to perform, it would have been up to New City to consider whether to take any issue of repudiation on the part of Hung Shang.  New City had never done that; but had continued to respond to Hung Shang’s requests, whether in the form of formal checklist or not.  It is unfair and probably too late to complain about that now.

56.  Wan went even further. During trial, he complained that Hung Shang’s staff had failed to input data to try the accounting system of Hung Shang’s company in Shenzhen as New City advised during the period between September and October 2006.  New City became unable to bring the system into full implementation.  Last-minute amendment of New City’s pleading was made without objection; and Yuen was recalled to give evidence in respect of such newly pleaded allegation.  Yuen also filed his further statement for such purpose.

57.  New City’s new allegation is probably related to its email to Hung Shang on 16 October 2006. The allegation was not then dealt with.  As mentioned above, this prompted Hung Shang’s strongly worded reply on the same day.  The allegation met with Yuen’s denial.  It should be noted that both the allegation and Yuen’s evidence in rebuttal were hearsay.  Miss Gwilt expressed her scepticism about the weight that should be placed on such last-minute pleaded case and evidence.  In my view, whether there was such episode of lapse in making data entry on the part of Hung Shang, this must have failed to strike New City as a significant issue that sufficed to hinder the full implementation of the system.  Otherwise, this would not have been left unmentioned in the pleading and witness statements of New City all along.

58.  Patrick Hui was the expert called by New City.  According to his report, he did not encounter problem in the data integration from different sites.  He did not find it likely that the alleged problem would be encountered in the system architecture deployed in the system in Hung Shang.  There was no data integrity issue between modules.  Any discrepancies should be classified as bugs for rectification instead of failure of the system.  He suggested the possibility of other factors, including hardware performance and operating system and network speed, contributing towards unsatisfactory results.  He considered those to be matter beyond the scope of the Agreement.  He accepted what were stated in the final requirement checklist in November 2005 and believed that most of the problems recorded there had been rectified.

59.  First, it should be noted that Hui could not actually examine the system as installed in the hardware of Hung Shang.  He examined the software provided to him in a simulated operation environment set up at the office of New City.  Secondly, Hui agreed that the modules of the system ought to be integrated.  His view was that there should be no integration unless and until all the individual modules were really ready for that.  When asked when he expected such integration, he suggested that this could take a long time.  He therefore emphasized the importance of fixing a milestone date for the satisfactory completion of each module, unlike what happened in the present case.

60.  I accept the evidence adduced on behalf of Hung Shang.  But irrespective of the dispute between the parties as to the exact extent of errors and problems in that much of the system provided, it is clear, as the witnesses for New City had to admit, that the system so far provided was incomplete for Hung Shang’s purpose in accordance with the Agreement by mid-October 2006.

Clause 3.1 of the Sales Confirmation

61.  Clause 3.1 of the Sales Confirmation (above) set out the 5 types of services to be provided by New City. According to the further and better particulars of its pleading, Hung Shang contends that (except for the provision of the software) New City has failed to provide these services particularly those in support when Hung Shang encountered problems in the daily operation of the system.

62.  I can understand if Hung Shang were complaining about the responsiveness and effectiveness of New City’s support services.  But by putting forward the claim on the basis of total failure of consideration, Hung Shang is effectively contending that New City has failed to provide such services at all.  Judging from the events evidenced by the contemporaneous documents discussed above, I do not find that to be the case.

Clause 4.2 of the Sales Confirmation

63.  The allegation that the system was not complete by mid-October 2006 is discussed above together with the alleged failure of the system to allow data integration between different sites in Hong Kong and the Mainland where Hung Shang’s group of companies are located.  Here I focus on the alleged failure to complete the system within the time schedule set under clause 4.2 of the Sales Confirmation.

64.  According to Yuen, Wan had informed him that the software should be completed within half to a year from the signing of the Agreement or in any event before the last instalment of the contractual fee would be paid.  Whether that indeed happened or not, that sounds more like projection of the time schedule rather than the fixation of a deadline for the completion of the system.

65.  Indeed, prior to the signing of the Agreement and the Sales Confirmation, the parties had already projected the time schedule for the completion of the system.  An instance of that was the meeting on 21 July 2003 where the plan for total implementation of the system for Hung Shang’s group of companies was scheduled to be completed within 18 months.

66.  When it came to the Agreement, clause 4.2 of the Sales Confirmation annexed to it set out the time schedule for the implementation of a particular phase of the system agreed between the parties.  As mentioned above, the detailed project plan after the signing of the Agreement and the Sales Confirmation again set out the time schedule for the various stages of the development and implementation of the system.

67.  Of all the projected time schedules, I think it is reasonable to believe that the parties probably did not contemplate that the system would remain incomplete for implementation by the time when the last instalment of the contractual service fee was paid. Such inference is somehow supported by the allocation of the contractual fee to the various stages of the development of the system in clause 2.2 of the Agreement.

68.  However, even that was not intended to be deadline for the completion of the system.  Clauses 3.1 and 3.2 of the Agreement made clear that New City agreed to use its best endeavours to conform to the time schedule under clause 4.2.  Clauses 3.3 and 14 referred to the significance of Hung Shang’s co-operation in the process in order to meet the projected time schedule.  Likewise, in the detailed project plan that the parties agreed to subsequent to the Agreement, reference was expressly made (under section VIII) to the various factors that might cause delay in the implementation of the system.

69.  In any event, the reality was that the system was not complete within any of the projected time schedules mentioned above or by April 2006 when the last instalment of the contractual fee was paid.  However it was equally the reality that Hung Shang never sought to terminate New City’s service until its decision to do so in mid-October 2006.  In the circumstances, reference to the time schedule set out in the Agreement or the Sales Confirmation or the alleged oral promise by the representatives of New City is no longer relevant.

70.  It was argued on behalf of Hung Shang that some 3 years had passed since the signing of the Agreement and the Sales Confirmation, but the system was still incomplete and full of problems.  Perhaps enough is enough.  However, until the Agreement was rightfully terminated, it was kept alive for the benefit and burden of both parties.

71.  New City never contends that nothing further could or would be done to bring the system to full implementation for Hung Shang’s purpose.  It is never alleged that New City has refused to continue to work on the system.  In order to rightfully terminate the Agreement, Hung Shang could have fixed a deadline and made it of the essence by notice.  Failure to meet the deadline so set would have become breach of condition entitling Hung Shang to terminate the Agreement.  Had Hung Shang done so?

72.  The documents show that Hung Shang had put on record its dissatisfaction with the progress of the development of the system after the last instalment of the contractual fee had been paid. An instance was the letter dated 13 May 2006 to New City.  However, apart from complaining about the delay, Hung Shang simply demanded New City to expedite the development of the system.  In the meantime, Hung Shang continued to pay the maintenance fee charged by New City.  The parties continued their joint effort obviously with a view to bringing the system to complete implementation.

73.  As mentioned above, 16 October 2006 was the turning point.  According to Yuen, his staff, including Rose, had complained about the system constantly.  Sometime in October 2006, Hung Shang allegedly sent an ultimatum to New City.  New City was demanded to fix all the problems in the system or Hung Shang would remove the system from its server and engage another contractor to develop a new system.  Among the available documents, Yuen could only be referring to the emails dated October 2006 mentioned above.

74.  The email from Rose of Hung Shang on 16 October 2006 did not contain the ultimatum that Yuen alleged.  Even assuming such ultimatum existed, no deadline was said to have been fixed or time having been made of the essence.  Contrary to what Yuen said, Rose unequivocally stated that Hung Shang had already ceased to use the system by the time of her email.  Yet curiously, Rose only proposed to take instruction from Yuen about the stoppage of payment of the maintenance fee to New City only after that email.

75.  Mr Lee submitted that prior to any ultimatum or decision to terminate the contractual relationship with New City, Rose appeared to have reacted to New City’s email on 16 October 2006 by effectively “jumping the gun” in denying New City access to the offices of Hung Shang to work on the system.  This, he submitted, amounted to premature rejection of the system that Hung Shang had no legal right to do at the time. I share his observation.

76.  According to New City, a meeting was held later in October 2006 at Hung Shang’s office in Shenzhen. There the representatives of New City made clear that without access to the system at the offices of Hung Shang, New City could not work further on the system so as to bring it to full implementation.  This must be the case and I find this to be the fact.  This also formed the basis for New City’s contention that the contractual relationship between the parties was effectively terminated by Hung Shang’s repudiation.  I accept that.

77.  Miss Gwilt relied on The Hong Kong Society for Rehabilitation v Ho Lai Chuen Cadia CACV 372/2003 (on appeal from HCA 18618/1998) (2 November 2004).  There the Society sued the defendant supplier for the return of the deposit for the supply of a transportation software package that amounted to 60% of the contract price.  The defendant purported to deliver the software.  It was installed only to be found to be incapable of handling group orders.  It was never used by the Society.  Hence the Society’s claim for the money back.

78.  The Society obtained judgment in the first instance.  On appeal, it was argued on behalf of the defendant that the software delivered would have increased the efficiency of the Society’s operation and it was unreasonable for the Society not to permit the defendant go ahead to try and put a system into operation that suit the Society’s needs.  The defendant argued that the Society had prematurely held the defendant to have repudiated the contract.  The appellate court rejected the defendant’s argument.  Miss Gwilt argued that I should likewise reject the similar argument now advanced by New City.

79.  One should not lose sight of the facts of the cited case.  The defendant there purported to deliver the software that fit the contractual requirements.  When it was discovered that it did not, the Society sent an ultimatum to the defendant to deliver a system that would fit the contractual requirements by a specific deadline.  The defendant did not comply.  As the appellate court held, the Society was justified in serving such notice to the defendant.  That brought an end to the matter.  Whether or not the defendant might have been able to produce a system at some time in the future that would satisfy the Society became irrelevant.  The fact was that the system was not ready by the deadline set by the due notice from the Society.  The Society was therefore justified in accepting such repudiation on the part of the defendant (see that judgment in the first instance at paras.29-31; on appeal at para.19).

80.  Yuen questioned whether New City can prove that it would have made the system work fully, if it had been allowed to work on it.  This does not matter.  What matters is that New City was ready and willing to do so at the material time but was prevented from doing so by Hung Shang without making time for completion of the system of the essence again.  New City was clearly not in position to continue to tender performance unilaterally.  It must be taken to have accepted Hung Shang’s repudiation and to have been discharged from further performing the Agreement.

Whether there was total failure of consideration

81.  The above answer to the issue of whether New City was in breach and thus entitling Hung Shang to terminate the Agreement would have put an end to Hung Shang’s claim.  But evening assuming that Hung Shang had rightfully terminated the Agreement, would it have been entitled to the claim on the basis of total failure of consideration?

82.  One would be tempted to conclude that since the system was incomplete at the time of the termination of the Agreement, Hung Shang did not get the software system that it had bargained for; and therefore this is a case of total failure of consideration.  Miss Gwilt emphasized that this has to be considered from Hung Shang’s point of view, citing Chitty on Contracts (13^th ed) Vol.1 at 29-054.

83.  Indeed in The Hong Kong Society for Rehabilitation case, the court allowed the Society’s claim for the return of the money paid to the defendant.  Yet again, one must not lose sight of the facts of that case.  The money paid by the Society was described as a ‘deposit’.  Nevertheless, being 60% of the contract price, this had to be part payment instead of mere deposit to secure the performance of the contract.  It is not apparent from the judgment if there was any issue of total failure of consideration.  But that would not have mattered, because the Society also claimed for misrepresentation on the part of the defendant.  The court found there was such misrepresentation, without which the Society would not have entered into the contract with the defendant (see the judgment in the first instance at para.116).  There was basis for the court to order the return of the money paid as a result of the misrepresentation, whether that was deposit or not.

84.  The test of whether the consideration for Hung Shang’s payment has totally failed turns on whether none of the performance by New City can be considered to have been bargained for. In a case of a contract for mere sale of a product, the payer is paying for the end-product.  In a case of a contract for work and materials/product, the payer is relying on the service rendered by the payee and is paying for such as well as the end product: see Chitty on Contracts (above) at 29-055.  In view of the services and product that Hung Shang contracted for and to be provided by New City pursuant to the Agreement and Sales Confirmation, I am inclined to say that the present case falls within the latter case rather than the former.

85.  Miss Gwilt referred to clause 2.3 of the Agreement:

“Notwithstanding that the Software Development Fee is broken down above in percentage for reference purpose, nothing in this Agreement shall be construed to mean that this Agreement is several or capable to be severed in phase or part and both parties hereto are obliged to perform the whole project as envisaged in this Agreement.”

86.  This clause made clear that the contract evidenced by the Agreement was a non-several one.  This does not mean any failure to perform would amount to total failure of consideration.

87.  Reference was also made to clause 21.1 of the Agreement:

“For the avoidance of doubt and notwithstanding any provision herein provided to the contrary, the maximum liability of the Consultants shall not in any event exceed the actual amount already paid to the Consultants by the Client.”

88.  This clause limits the amount of compensation recoverable from New City rather than limiting the form of the remedy to one of return of the money already paid.

89.  In conclusion, even assuming that Hung Shang had rightfully terminated the Agreement, I doubt whether this is a case of total failure of consideration.

90.  In any event, the monthly maintenance fee of HK$4,685 since April 2006 and the extra cost of providing training on Sundays at HK$600 each were paid for the services provided under separate agreements.  Irrespective of the dispute under the Agreement or as to the quality of such maintenance and training, it can hardly be argued that the consideration for those services has failed totally.

91.  Hung Shang would have been entitled to claim for damages for the business loss (if any) caused by the delay and/or the extra cost of obtaining a replacement software system from another supplier.  But there is no such claim.  Nor is there such evidence.

Others

92.  By pleading, New City alleges loss and damage as a result of Hung Shang’s refusal to allow it to carry on with the performance of the Agreement with a view to bringing the system into full implementation.  New City somehow raises the defence of set off.

93.  By further and better particulars of its pleading, New City clarified that being prevented from providing maintenance services to the system, it has suffered from reduction in revenue generating capacity.  I do not see real factual basis for such contention. Nor is there any basis for the alleged set off or counterclaim (which does not exist anyway).

94.  Mr Lee submitted that even assuming that New City was in breach, Hung Shang has failed to take reasonable steps to avoid its loss.  He submitted that Hung Shang has unreasonably turned down his client’s offer to rectify the defects in the system. He relied on Payzu v Saunders [1919] 2 KB 581; Chitty on Contracts (Vol.1) at 26-113.  Mr Lee criticised Hung Shang for merely leaving the system in the computer server of the Hong Kong office of Hung Shang until it appointed another consultant to adapt the SAP software for its use over a year later.

95.  Mitigation is not pleaded and strictly not in issue.  Further, on the basis of the claim for the return of the contract price on the ground of total failure of consideration (though failed), the authorities cited and the principles of mitigation relied on by Mr Lee do not apply as they do in the case of claim for damages.  In any event, each case should be decided on its own facts.  So should the question of mitigation be, if in issue at all.

Conclusion

96.  On the evidence, I can see the cause for Hung Shang’s complaint about the quality of the software system developed by New City.  However it is for Hung Shang to establish its right to claim and the basis of claim as pleaded.  Hung Shang has chosen to confine its claim to the basis of total failure of consideration without any alternative claim for damages.  For the reasons explained above, Hung Shang’s claim fails.

Order

97.  The claim is dismissed.  Following such event, costs of the action should be to New City, including any costs reserved but without prejudice to any costs order made prior to today.  Costs shall be taxed, if not agreed.  For the avoidance of doubt, I certify the engagement of counsel.  In the absence of application in 14 days to vary, the costs order shall become absolute.