Entersys Ltd v. Nec Hong Kong Ltd
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DCCJ 2852/2007 IN THE DISTRICT COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION CIVIL ACTION NO. 2852 OF 2007 ----------------------
---------------------- Coram: Her Honour Judge H.C. Wong in Court Dates of Hearing: 22，25-26 May 2009 Date of Handing Down Judgment: 14 July 2009 ---------------------- J U D G M E N T ---------------------- 1.The Plaintiff entered into a contract with the Defendant as a subcontractor providing on-site program design and build-up service to the Defendant’s project “MOL Enterprise Management System” (the “MOL project”) on 8 April 2004 (“the contract”). The Defendant, NEC Hong Kong Limited (“NEC”) agreed to pay the Plaintiff, Entersys Ltd. (“Entersys”) the sum of HK$280,000 for the contract work. Under the contract, NEC agreed to pay Entersys 50% of the contract price at the start of the project, the balance to be settled upon completion of the project. 2.Entersys claimed that it had completed the project work but NEC had failed to settle the balance of the contract sum. NEC denied that the Plaintiff had completed the project work. It claimed that in breach of the contract, Entersys failed to complete the contract work in accordance with the specifications of its client MOL Asia Ltd. (“MOL”) on or before the deadline agreed or within a reasonable time. Further, the modules submitted were defective in material aspects which rendered them completely non-functional and that Entersys had failed to rectify the defects in the modules on or before the deadline. As a result, NEC had to carry out and complete the MOL project by other means at a cost of $350,000. NEC counterclaimed for the return of the deposit $140,000 and for the sum of $350,000 as damages against the Plaintiff. Backgrounds 3.In early 2004, MOL (Asia) Ltd., a shipping company, invited tenders for designing and developing a computerised document management and workflow system. NEC successfully tendered for the contract and entered into a written agreement with MOL in late March 2004 under which NEC agreed to design and develop a document management and workflow system for MOL (“the MOL contract”). Under the MOL contract, the NEC had to supply both hardware and software components as well as the provision of services to MOL. NEC agreed to deliver to MOL a computer system with software consisting of a document management and workflow system. NEC decided to subcontract to a software company the designing and developing of the software for the MOL project. On 1st April 2004, NEC accepted Entersys’s quotation No. 8521-QTN442-4 of 29 March 2004 at a total price of $280,000 (“the quotation”) (wrongly dated as 29 March 2003 on page 50 of Bundle B1). NEC then issued a purchase order dated 8 April 2004 (“the purchase order”) to Entersys. The purchase order was duly signed by Entersys and NEC (page 8 of Bundle B1). These two documents contained the written terms of the contract between the parties. 4.Under Entersys’s quotation No. 8521-QTN442-4, Entersys agreed to provide the following professional services:-
5.Further, it is a term of the contract that NEC would pay 50% deposit upon the commencement of the project consisting of two payments in two cheques, the first instalment of $95,000 and the second of $45,000 were payable 14 days after kick off. The balance of 30% would be paid at the UAT stage and the remaining 20% would be paid one month after completion. In late April and mid May 2004, NEC duly paid the two payments consisting of $140,000 to Entersys on 24 April 2004 and 18 May 2004. 6.It is not disputed that under the agreement, Entersys would design and develop 3 major modules, namely (1) Leave Application; (2) Claim and (3) Procurement. The 3 major modules software would be installed and integrated into the server of the MOL’s computer system so that each of MOL’s staff computers would be able to access the software. 7.The Leave Application module is intended for employees to apply for leave; the Claim module is intended for employees to claim reimbursement for expenses incurred in the course of work and the Procurement module would allow employees to select and purchase goods for the company from the company’s database that stored seller’s details and prices of goods. The Procurement module in the system would generate purchase orders with details should purchases be approved by the company. 8.The Procurement and Claim modules would contain sub-modules. The sub-modules under the Claim module would consist of:-
9.The sub-modules under Procurement would consist of:
10.Each of the sub-modules would support and coordinate with other sub-modules. The detailed specifications and scope of each of the 3 major modules and their respective sub-modules were set out in the document named “Functional Specification – Document Management and Workflow System for MOL (Asia) Ltd. – version 2.7” (“the specification document”) of 13 April 2004 compiled by NEC approved by MOL. Under the quotation from Entersys to NEC, Entersys agreed to provide:
The Plaintiff’s case 11.The evidence in support of Entersys’s case came from Mr. Phan Wai Dick, Vincent, a director of Entersys. It was his evidence that he and three of Entersys’s staff Thomas Phan, Joey Leung and Raymond were working on site at the office of MOL under the joint supervision of the project manager of the Defendant, Mr. Ivan Leung, and a staff from MOL assigned to the MOL project. It was his evidence that NEC had closely monitored the work process on the MOL project and the performance of Entersys during the development of the software system. Throughout the period of development, Entersys received no complaint of delay on its part of the MOL project work. After the project completed, Entersys received no complaint at all from NEC for a period of two years for the work done by Entersys. The first time Entersys received a complaint on the MOL project was the request for the user acceptance test (“UAT”) which was sent after Entersys issued an invoice demanding payment for the outstanding sum of HK$140,000 on or about 10 January 2007. 12.Between April and August 2004, NEC changed its project manager twice. The first project manager was Mr. Ivan Leung in April 2004 followed by Mr. Jimmy Poon, he was replaced by Ms. Elsa Wong at the end of August 2004. Mr. Phan claimed that in September 2004, Ms. Elsa Wong requested Entersys’s staff including himself and Thomas Phan working on site at the office of MOL to leave because MOL required the room for its own use. Ms. Elsa Wong had further informed him that nothing more was required for them to do on site at the time. Consequently, he and his team vacated the office of MOL. He believed at that stage Entersys had completed its part in the MOL project and was entitled to the balance of the agreed payment. He further believed that the MOL project had also been practically completed. Under the parties’ reseller licence agreement, NEC had agreed that the title to the software including the source codes would be retained by Entersys. Mr. Phan believed that NEC could well have obtained the source codes because Entersys’s staff was sharing the server with NEC’s staff when they were working on site at the MOL office. As the server and computers were left at the MOL office after the Entersys team vacated the premises, NEC’s staff had easy access to the source codes from the server. 13.Mr. Phan denied it was Entersys’s duty to conduct the UAT. He also claimed that it was a matter between NEC and MOL. He believed the work concerning UAT in Entersys’s invoice as accepted by NEC had already been performed by Entersys. Further, training had already been provided by Entersys to the staff of NEC and MOL to enable NEC’s staff to conduct UAT for the staff of MOL. 14.It was Mr. Phan’s evidence that in the course of developing the software, MOL had been amending its specifications repeatedly. Entersys was required to develop the 3 modules in spite of late changes in the instructions from MOL. Consequently, Entersys could not complete the Leave Application and Claim Application modules until mid August 2004. As the original completion date was 30 July 2004, the due date was amended because the Leave Application specification could not be finalized until late May 2004. As to the Procurement module, Mr. Phan claimed that the module was near completion in mid August pending minor amendments and instructions to be confirmed by MOL. At the meeting held on 27 August 2004 on final instructions and amendments, it was agreed that Entersys would deliver the Procurement module on 2 September 2004. After the meeting, Entersys duly made the amendments. However, there were outstanding matters before full completion of the Procurement module, such as instructions on MOL’s account numbers and the method of distribution of the accounts on expenses. Nevertheless, Entersys did manage to submit the final amended version to NEC on 2 September 2004. Mr. Phan claimed that the Procurement module submitted was in full working order and could be used. He further claimed that bugs in the 3 modules were rectified by Entersys from time to time at the request of NEC. Should NEC request further removal of bugs and minor errors, Entersys could have easily rectified them. There were occasions in or around mid August 2004 that Entersys had on the request of NEC solved a number of problems for NEC e.g. the problem with creating a “User Manager” and a “401 unauthorized” error that MOL discovered during testing of the latest version of the 3 modules. Entersys tested the software further and discovered the problems were not caused by the 3 modules developed by Entersys, they were caused by the DMS programming developed by NEC for MOL. The DMS program was not fully compatible with the 3 modules created by Entersys, and Entersys did assist NEC to fix those problems. Mr. Phan further claimed that if NEC had developed a parallel program for the MOL project, the 3 modules developed by NEC would be exactly the same as the one submitted by Entersys. The Defence case 15.Ms. Elsa Wong, the deputy general manager of NEC gave evidence on behalf of the Defendant. Ms. Wong admitted that after the agreement was entered between MOL and NEC to develop the MOL project, MOL had only given some general idea as to the operation of the 3 modules and the goals MOL hoped to achieve by means of the 3 modules. In order to crystallize the notional ideas of MOL, NEC sub-contracted the MOL project to Entersys to build the software programs that would satisfy the requirements of MOL. It was on those basis that the specification document was written in April 2004. 16.Ms. Wong claimed that Entersys failed to complete the 3 major modules in accordance with the user’s requirements. She claimed that the system with the 3 major modules developed by Entersys was not workable, it was worthless and failed to conform with the user’s requirements in the specification document. 17.NEC found the user account in the version of the Leave Application module, submitted by Entersys in mid August 2004, could not be created. The problem was only fixed by Entersys after an e-mail request from NEC on 16 August 2004. There were also other problems in that module that required attention. As to the Procurement module, there were various bugs and errors which rendered the software unworkable. The sub-modules of purchase order function were not completed. In spite of repeated requests from NEC, Entersys refused to complete the work. Ms. Wong further claimed that the modules developed by Entersys were not ready for UAT at the end of August 2004. Problems with the modules developed by Entersys had been pointed out to the Entersys team at the meeting of 18 August 2004. In spite of an agreement by Entersys to rectify the problems at the meeting, NEC suspected it was unlikely Entersys would complete the 3 modules to the satisfaction of NEC or MOL. Consequently, at a meeting between the representatives of MOL and NEC on 18 August 2004, NEC proposed to take up the task of developing the 3 major modules itself at no extra charge to MOL. 18.According to Ms. Wong, the System Analysis and Design version 1.1 submitted by Entersys on 2 September 2004 on the 3 major modules failed to match the details in the specification document. NEC therefore requested Entersys to provide a revised version that would comply with the specification document. However, Entersys failed to develop a revised version of the System Analysis and Design. 19.Ms. Wong claimed that in spite of NEC’s decision to develop the 3 modules itself, she did not notify Entersys to stop working on the 3 major modules. In fact, in early October 2004, she had requested Thomas Phan, Vincent Phan and Joey Lau to rectify the problems of the modules before returning to MOL’s office premises to continue the on-site development of the 3 major modules. She had hoped they would deliver the 3 modules error or bug-free that complied with the user’s specifications. Should that happen, NEC would stop its own work on the modules to save time and costs. However, subsequent to the early October 2004 communication, there was no further contact between Entersys and NEC on the MOL project. 20.Ms. Wong further claimed that NEC completed the 3 major modules developed by its own staff which complied with the MOL specifications in January 2005. NEC’s system was accepted by MOL and was integrated and installed into MOL’s computer intranet system by NEC. The MOL project was therefore completed. 21.Ms. Wong said she was surprised by the demand for payment from Entersys on 10 January 2007, two years after the contract terminated between Entersys and NEC. NEC denied it received the 3 major modules completed by Entersys under the agreement. There was no full round of UAT performed on the 3 major modules which is a regular practice in the computer/IT industry. It is, further, a trade practice that the user would issue a certificate signed by the user certifying the product had passed the UAT as proof of acceptance by the user. NEC claimed that the 3 major modules developed by Entersys did not receive a UAT certificate, therefore, Entersys is not entitled to be paid the balance of HK$140,000. Further, as Entersys had failed to complete the project as agreed, NEC is entitled to refund the deposit of $140,000. NEC further counterclaimed for the loss it suffered in order to complete the MOL project which its own staff had developed for MOL to honour its agreement with MOL. NEC claimed its loss was $350,000. 22.At the defence’s final submission stage, Mr. Lee, counsel for NEC, informed the court that NEC is no longer pursuing the counterclaim of $350,000 against Entersys. The Defendant maintained that it should recover the 50% deposit of $140,000 paid to Entersys. The Issues 23.The issue is whether the Entersys completed the sub-contracted part of the MOL project and delivered the work on time to NEC. If it did, whether Entersys supported NEC on a back to back basis in the MOL project. And, whether the contract was repudiated? Findings 24.It was NEC’s case that there were delivery deadlines agreed between the parties, that Entersys would complete the 3 modules by the following days:-
25.It is not disputed that because of numerous changes to the specifications from MOL, NEC knew at an early stage that delivery would be delayed. It is not disputed that Entersys had been requesting NEC to obtain a postponement of the deadline for submissions. NEC admitted it had requested MOL for a postponement of the delivery dates. In any event, as both the Entersys and the NEC team were working at the office premises of MOL and had regular weekly meetings with the staff of MOL, the state of development of the 3 modules must be known to MOL. The email exchanges between Entersys, NEC and MOL clearly showed that MOL was regularly informed of the progress of the software development by Entersys. Furthermore, it was not disputed that Entersys’s Vincent Phan and Thomas Phan often directly communicated by email and other means with the staff of MOL. Email exchanges between the Entersys team working on the MOL project and the staff of MOL and the NEC team were often copied to all parties. Hence, when the first module of Leave Application was submitted by Entersys in mid August 2004, instead of the original deadline of 30 July 2004, it did not come as a surprise to either NEC or MOL. None of the email exchanges after the submission by Entersys of the Leave Application module referred to any complaints about the delay of this submission. There were enormous numbers of emails exchanged between 14 August and 17 August 2007 on the implementation of the software into the NEC system and the problems that appeared in the modules developed by Entersys. NEC attributed the problems to the malfunction of Entersys’s software while Entersys claimed the problem lied in the changes made in the DMS system developed by NEC which crashed with the software developed by Entersys. From the emails exchanged between the NEC and Entersys teams working on the MOL project between 14 August and 17 August, it is obvious the NEC team had repeatedly enlisted help from the Entersys team to solve the problems. At the same time, both Vincent and Thomas Phan had insisted in the emails exchanged that the software Entersys developed was working smoothly, but the NEC team had released the software to MOL without first testing it resulting in program “crashing”. The problems were solved eventually with the co-operation of Thomas and Vincent Phan by 18 August 2004. It was followed by a UAT that took place on 20 August 2004. 26.There was apparently no complaint about the delay on the delivery of the Claim module disclosed in the evidence. The only problem arising from the Claim module seemed to be with matters relating to types of currency claimed in overseas entertainment applications. 27.The evidence of Vincent Phan was supported by the emails exchanged at the time. They showed the Procurement module was completed and submitted to NEC on 2 September 2004, some 3 days after the original deadline of 30 August 2004. I cannot find in any of the emails, complaints about the delay in the delivery of this module even though there were anxieties expressed by Ms. Elsa Wong on 28 August 2004 as to when the Procurement module would be completed and ready for testing. There were email exchanges clearly referring to the Procurement Screen Dump Document version 3.3 forwarded by an attachment in the email dated 27 August 2004 from Entersys to NEC. This attachment is printed and exhibited at page 122 to 135 of Bundle B1. References to the submission of the System Analysis and Design Documentation version 1.1 was made in an email dated 2 September 2004 from Vincent Phan to Elsa Wong and Alan Lee of NEC (page 151 of Bundle B1). The System Analysis and Design version 1.1 is exhibited in page 152 to 177 of Bundle B1. 28.The email exchanges between the staff of NEC in charge of the MOL project and Vincent Phan of Entersys between 27 August 2004 and 2 September 2004 clearly showed that there had been adjustments and queries from the NEC team on the MOL project leading to the delivery of the System Analysis and Design version 1.1 by Entersys on 2 September 2004. The deadline for the Procurement module was apparently set at the Procurement meeting, a summary of which had been set out in the 27 August 2004 email from Richard Cheung of NEC to Vincent Phan of Entersys (page 136 of Bundle B1). It is clear from the summary that at the meeting, the parties agreed Entersys would provide an improved version of the Procurement module for internal testing purpose on 2 September 2004. Entersys would also provide the screen dump sample PO output, the EDI format (xml) for the HR expenses and Procurement system by 30 August 2004, and the preliminary text plan for the HR expenses and Procurement system by 2 September 2004 and a full screen dump based on a number of criteria by 2 September 2004. The email exchanges between the NEC team and the Entersys team of 1 to 3 September 2004 clearly showed that the parties were working on the Procurement module software with the NEC team requesting clarifications on the operation of the Procurement module (page 178 to 193 of Bundle B2). In the email dated 8 September 2004 from Thomas Phan to Elsa Wong, he had apparently attached a MOL user list (page 194 to 199 of Bundle B2) which consisted further additions in accordance with the client’s list of users. 29.Ms. Wong relied on the email that she sent to Vincent Phan on 24 September 2004 as evidence of non-completion. It said:-
A two pages chart was enclosed at pages 201 and 202 of Bundle B2 with this email. She followed it up on 8 October 2004 with an email to Vincent Phan which said:-
In reply to Ms. Elsa Wong’s query on 8 October 2004, Thomas Phan sent an email on 11 October 2004, pointing out to Ms. Wong that the client had added new concepts and made new changes to the original design. He further added in the penultimate and last paragraphs:
30.That 11 October 2004 email was the last email exchange exhibited before Entersys’s invoice sent by email to NEC on 10 January 2007. According to Ms. Elsa Wong, she was waiting for Entersys to complete the outstanding matters in the Entersys software program even though she claimed NEC had been developing its own software to replace the 3 modules subcontracted to Entersys in April 2004. Entersys, on the other hand, claimed that it had completed the work on the 3 modules. Mr. Vincent Phan said in his evidence in Court that he was curious as to why he was not contacted further by NEC after 11 October 2004. He claimed he had tried to contact members of the NEC team but unfortunately they had all left the employ of NEC. Eventually, he managed to contact Ms. Elsa Wong at NEC and that was why he sent an invoice to Ms. Elsa Wong on 10 January 2007. 31.I find the evidence of both Mr. Vincent Phan and Ms. Elsa Wong unconvincing. It is clear to me they have failed to disclose the whole truth in Court. There were apparently no further exchanges between NEC and Entersys after 11 October 2004 until 10 January 2007, a period over two years and 3 months. Yet, Ms. Wong claimed that NEC had all along been waiting for Entersys to complete the software while NEC with the help of its own staff managed to develop a completely new software for MOL by January 2005. If that was the case, why did NEC fail to repudiate the contract between Entersys and NEC on the MOL project in early 2005 or at the end of 2004? The repudiation only came after Entersys sent an invoice to NEC on 10 January 2007. 32.On the other hand, Vincent Phan expressed surprise that he had not been contacted by NEC on the MOL project after October 2004. He was curious NEC did not contact him, this meant he knew the project had not been completed by Entersys and he had expected NEC to ask for Entersys’s assistance to complete the project, but NEC did not do so. He gave an incredible excuse that he was not able to contact the NEC staff in charge, yet in January 2007 he successfully contacted Elsa Wong who was still working at NEC. If the work was completed in September 2004, why did he send an invoice 2 years after the completion? 33.I find both Vincent Phan’s and Elsa Wong’s evidence unsatisfactory. Ms. Wong refused to disclose to the Court the true reason Entersys was told to vacate the MOL premises in early September 2004 and the nature of the work done by the staff of NEC to replace the software program developed by Entersys on the MOL project. NEC had further failed to show it had developed a completely new and different software program on the 3 modules from the one developed by Entersys. In order to succeed in its counterclaim for the $350,000 damages NEC claimed it had suffered due to the failure of Entersys to complete the project, NEC has to support its claim with particulars. In order to succeed in its defence that it was entitled to repudiate the contract due to Entersys’s failure to complete the project on time, the defence had to show further that the software program developed by Entersys did not work in spite of communications by emails and meetings of the parties on the Entersys software. Unfortunately, there was insufficient evidence adduced in support of its claim. 34.On the other hand, I am equally dissatisfied with the evidence from Entersys. It had failed to show the software system on the 3 modules was completed. From the emails exchanged, it is obvious that there were errors and bugs in the system developed by Entersys, as a result it failed to satisfy the requirements of MOL. Even though there might have been, at a late stage, further changes and additions to the specifications by MOL, these needed to be ironed out between Entersys and NEC and possibly with MOL. Instead of resolving these problems, it is obvious that Entersys simply failed to make sure the software system was working smoothly and was compatible with NEC’s DMS after 11 October 2004. Under the contract terms between Entersys and NEC set out in the Entersys’s quotation, Entersys was required to test the program and fix all bugs. Further, Entersys had also agreed to support NEC on a back to back basis under the contract. The somewhat cavalier attitude demonstrated by Entersys after 11 October 2004 clearly showed that Entersys had failed to support NEC on a back to back basis even though it might mean accommodating the changes made in MOL’s specifications. This could be dealt with easily if the parties were willing to support each other. Furthermore, item 8 of the Entersys’s quotation (page 50) provided that “an annual maintenance for software patch and bug fixing and email/voice support would be charged at 18% of the total contract price”. The fact that an annual maintenance clause had been included in the agreement indicated follow-up maintenance within 12 months of delivery of the software would be required. However, this clause of the contract did not take place. 35.There were further unresolved issues, such as Vincent Phan’s claim that he had downloaded the developed software of the 3 modules on a DVD and handed it over to the NEC team as well as leaving the completed software in the server at the office of MOL. Entersys failed to produce as evidence a copy of the developed software program in any form claiming it would take too much work and time to recover and compile the completed software. Elsa Wong, on the other hand, denied she had ever received a DVD from Entersys. She further claimed that she was not able to find the final completed version of the 3 modules in the server. Neither party produced as evidence a copy of the software which Entersys claimed it had developed and completed, or a copy that NEC claimed to be defective and unworkable. Both parties printed out different pages and versions of the software in the trial bundle but these could not be verified if they were the final version submitted or an earlier version. There is further no independent expert report produced by either party on whether the software developed by Entersys was completed and workable or not. The Court was asked simply to choose between the oral evidence of Vincent Phan and that of Elsa Wong on the completion of the contract work. 36.Due to the paucity of reliable evidence, I am not satisifed the Plaintiff had successfully proved it had completed the contract work under the 1 April 2004 contract and is entitled to the balance of the contract price. I am equally not satisfied that the Defendant had successfully shown it had rejected the work done by Entersys completely and that it had developed a completely new software on the 3 modules for the MOL project. Though Entersys’s speculation may well be correct that NEC had used the software program developed by Entersys and improved it by removing the bugs and errors using its own resources rather than developing a completely new software for the 3 modules from scratch, there is no evidence to confirm that was what happened. Because of the incomplete and unsatisfactory state of the evidence produced, I dismiss the Plaintiff’s claim against the Defendant, I also reject the Defendant’s defence and set off and dismiss the Defendant’s Counterclaim. 37.There will be no order as to costs. Each party shall bear its own costs.
Parties: Mr. Eric H.K. Leung instructed by Messrs. Michael Pang & Co. for the Plaintiff. Mr. Kevin K.F. Li instructed by Messrs. S.K. Wong & Co. for the Defendant. |