The Hong Kong Society for Rehabilitation v. Ho Lai Chuen Cadia t/a Resolution Software Consultants

cacv 372/2003

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 372 of 2003

(on appeal from HCA NO. 18618 of 1998)

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BETWEEN

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Before: Hon Rogers VP, Le Pichon JA and Burrell J in Court

Date of Hearing: 14 September 2004

Date of Judgment: 14 September 2004

Date of Handing Down Reasons for Judgment: 2 November 2004

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.This is an appeal from a judgment of Suffiad J whereby he ordered the return of a deposit in the sum of $1,063,716 to the plaintiff.  At the conclusion of the hearing of this appeal this court dismissed the appeal with costs with reasons to be given in writing.

Background

2.The plaintiff is a charitable organisation.  One of its important functions is to provide the Rehabus service.  As the judge described in his judgment, Rehabus is a kind of taxi service.  There are two aspects to that service.  There is a scheduled route service (SRS) and a dial-a-ride service (DAR).  The SRS caters for the situation where a customer requires to be picked up daily at a fixed point and time and to be taken to another specified point.  As could be imagined this would be used, for example, by those going to work or going to school on a regular basis.  The SRS service is likely to be shared by a number of customers who would be using the same route.

3.The DAR service can be categorised into single orders and group orders.  The single orders will naturally be those where a single customer requests transport from one place to another.  Sometimes, either because the customer so chooses or through necessity, the request for a single order is that the bus be non-sharing.  In other instances group orders may involve multiple pickup points or multiple set down points.

4.When it is appreciated that in 1995 to 1996 the plaintiff had some 63 buses and was handling in the region of 128,000 SRS orders and 173,000 DAR orders, the task of arranging the bus schedules manually was no mean feat.  Since much of the finance necessary for the plaintiff came from the Hong Kong Government, the Audit Department became involved.  Together with the Transport Department, which monitored the plaintiff’s operations, they suggested that it would be more efficient if the routing were computerised.

5.The plaintiff’s Transport Manager, Rex Luk Chi Keung, got in touch with the General Manager of the defendant, Alfred Ng, as early as December 1995.  He provided Mr Ng with what he thought was the necessary information as to the operation of the plaintiff’s Rehabus service.  He made it clear to Mr Ng that the Rehabus operations had to deal with single orders as well as group orders.  There was no doubt in the judge’s mind that the plaintiff relied upon the skill, knowledge and expertise of the defendant in the matter since the plaintiff did not have the necessary skill or knowledge of computer programming systems. 

6.Alfred Ng advised the plaintiff that ‘Roadshow’ was a transportation software package from the USA.  He said it could be used to route large numbers of vehicles and the system could be equipped with an updated road map of Hong Kong.  Rex Luk was given an initial demonstration of the Roadshow system.  Later demonstrations were given to the plaintiff’s Executive Director and Transport Officer as well as to the Management Committee and representatives from the Transport Department.  It was explained that the system was suited to the plaintiff’s requirements and that it allowed the user to choose the best routes and could be customised.

7.There was an initial quotation from the defendant to the plaintiff dated 29 January 1996 for the installation of the Roadshow system.   That was followed by further meetings with the defendant and, at their request, further material was made available to the defendant for their use and study.  Thereafter the quotation was revised several times.  The plaintiff wanted to have a lump sum contract to cover everything including maintenance as the funding for this project would be coming from the Jockey Club and the plaintiff needed to be sure that it could maintain the system.

8.In October 1996, sample screens were prepared by Rex Luk and sent to the defendant to give the defendant full information as to what the plaintiff required from the system.  The judge found as a fact that between January and October 1996 the plaintiff had fully made known to the defendant its entire operation of the Rehabus service and had indicated to the defendant what it required from the defendant, namely a customised version of a computer programming system which would enable the plaintiff to maximise the efficiency of the routing of its Rehabus service.

9.The final contract sum agreed between the plaintiff and the defendant was revised to include the maintenance charges for 10 years.  That was included in an Order Confirmation dated 25 October 1996.  Thereafter a Purchase Order (incorporating the Order Confirmation) was entered into which was dated 31 December 1996.  Under that, the plaintiff purchased Roadshow 85 from the defendant at a total cost of $1,772,860.  There was an initial payment of $1,063,716.00, being 60% of the contract amount.  That was paid to the defendant in March 1997 and constitutes the amount that is the subject of the claim in the action.

10.There was a progress report dated 5 January 1998.  In that report the status of group orders was changed to “pending, wait for later decision”.  This was in contrast to the progress report which had been dated 30 November 1997.  That report, in so far as it related to the item “DAR Organisation Order Maintenance”, gave the progress as “Started, in Progress”.  Following this the plaintiff learnt for the first time in February 1998 that the Roadshow 85 could only process group orders in batches of a maximum of 36 orders.  This came as a complete surprise to the plaintiff and caused considerable consternation because the plaintiff was handling some 60 to 70 group orders daily.  That figure was expected to increase with the expansion of its fleet of buses.  The judge accepted the plaintiff’s evidence that it had only been made aware of the deficiency of the Roadshow system in February 1998. 

11.As the judge found in paragraph 29 of the judgment, the defendant purported to make delivery of the Roadshow system on 6 March 1998.  However, the software installed a few days later could not cater for the group orders as part of the system, but only single orders.  After its installation, the computer and the software was left at the plaintiff’s offices but was never used by the plaintiff.

12.At a meeting on 10 March 1998 Alfred Ng suggested four options in an attempt to solve the problem of only being able to process group orders in batches of 36.  The next day those four options were put in writing and faxed over to the plaintiff.  The judge held that the first three options did not provide a solution to the problem and, indeed, that seems to have been common ground between the parties.  The 4^th option, which relies on what is called virtual orders, only provided a partial solution, it involved a very cumbersome and complicated procedure in computerization and would involve a great deal of extra programming work to implement it.  The judge specifically held that it was the defendant that was trying to persuade the plaintiff to accept the 4^th option.  In a letter of 20 March the defendant stated that it would take 117 man-days if option 4 were to be developed.  In short it was neither ready to be implemented nor even if it were implemented would it provide what the plaintiff had contracted for.  The judge held that the plaintiff was well within its rights to reject option 4 because it did not provide a solution to the problem which would have met its requirements.

13.On 25 March 1998 the plaintiff made clear in the letter of that date that it could not release the second payment because the agreed system had not been delivered in a satisfactory form.  Specifically it was stated in that letter that the system could not “process group orders and could not even function or test for function to process the single orders.”  The letter went on “This essentially means it cannot serve any useful purpose for our DAR bookings.”

14.These same sentiments were repeated in a letter 2 days later.  The reply on 30 March from the defendant placed stress on the amount of work which the defendant had by then carried out, which was much more extensive than had been anticipated originally.  By 3 April the defendant was writing to the plaintiff suggesting that it should design an “integrated customer-built system so that Roadshow would not be necessary.”

15.The plaintiff gave notice to the defendant by letter dated 23 April 1998 that it should deliver a completed system by 15 May 1998 failing which the plaintiff would consider legal proceedings for compensation. 

16.By letter dated 7 May 1998 the defendant informed the plaintiff that it had ceased marketing Roadshow and went on to say “As far as we know, there is currently no plan to enhance the network map, or the product feature for Hong Kong market.”  The letter also went on to say that the defendant had undergone a major downsizing since the previous year and that it intended to focus its “limited resources” on a mini-system.  Also rather cryptically the letter said that it had been impossible to source the new graphic board needed by Roadshow.

17.It was not until the letter dated 26 June 1998 from the plaintiff’s solicitors to the defendant that the plaintiff unequivocally said the plaintiff had accepted the defendant’s repudiation of the agreement on the grounds that the defendant had failed to deliver the completed system as contracted for by the plaintiff.  At the same time the plaintiff reserved its right to claim for damages and loss.

This appeal

18.On this appeal Mr Sarony SC, who appeared on behalf of the defendant, sought to take the line that the system which had been delivered on 6 March would have increased the efficiency of the plaintiff’s operation and, essentially, that the plaintiff should have given the defendant an opportunity to try and put a system into operation which processed group orders in 2 or more batches.  It was the defendant’s case that the plaintiff had been unreasonable in not permitting the defendant to go ahead and try out such a system and that the plaintiff had prematurely held the defendant to have repudiated the contract.

19.The difficulty with the defendant’s argument is that it ignores the crucial findings of fact by the judge.  Those findings have been set out above.  It is quite clear that the plaintiff made its requirements known and those requirements were part of the contract.  What was delivered on 6 March 1998 did not on any basis cater for group orders.  If the plaintiff was justified in serving the notice on 23 April, then that is an end to the matter.  Whether or not the defendant might have been able to produce a system at some time in the future, which might have satisfied the plaintiff, is irrelevant.  The fact is that the system was not ready at the time when the defendant was contractually bound to have it ready.  The plaintiff had given due notice that the system had to be ready.  Nothing further was delivered.  The plaintiff was therefore justified in accepting that the contract was repudiated.

20.Mr Sarony’s argument was thus dependant upon not adhering to the findings of fact made by the judge.  But it also had to be put on the basis that gave an unjustified gloss on the period that it was estimated that it would need to develop the 4^th option.  Moreover, the argument depended upon the notion that some improvement in overall efficiency sufficed to constitute “maximising” efficiency.  Furthermore, the argument assumed that something that not only required a 2-stage process but did not take into account all the criteria when undertaking that 2-stage process, would be, or should have been, acceptable on the basis that it was better than doing the process manually.

21.The point about the delay ignored the letter of 20 March in which it was said that 117 man-days were required and concentrated on an optimistic view that the work could be accomplished in 1 month.  Nowhere is that suggested in the documents.  The best that could be pointed to were estimates in respect of the other three options which were contained in the fax of 11 March 1998 where it was said that more than one month’s programming efforts were required.

22.In any event, Mr Sarony took this court through the evidence relating to the “virtual orders”.  That was contained in the transcript starting at pages 220 onwards with reference to a flow chart which was contained in the documents and headed “Virtual Orders”.  In my view a proper consideration of that evidence demonstrates clearly that the proposal for handling group orders which was contained in option 4 involved the exclusion from a full consideration, and therefore processing, of the data involving individual intermediate routes and considering only the starting and finishing locations of the buses.  Even if Mr Sarony were correct in suggesting that the plaintiff should have given the defendant an opportunity of developing option 4, I consider that as set out in the evidence, that option would not have provided the plaintiff with a system that could take into account the routing for all the buses at the same time and thereby optimise the routing schedule for all buses.  By leaving out some of the criteria in the comparison, and processing the results in batches, thus using only part of the relevant data, the proposed system appears to me, on the face of it, to leave open the possibility of an uneconomic process and unnecessary wastage.

Hon Le Pichon JA:

23.I agree.

Hon Burrell J:

24.I agree.

Mr Jat Sew-Tong SC and Mr Sanjay A Sakhrani, instructed by Messrs Norton Rose, for the Plaintiff/Respondent

Ms Neville Sarony SC and Ms Winnie Chan, instructed by Messrs Ho, Wong & Wong, for the Defendant/Appellant