FEDERAL COURT OF AUSTRALIA

Temwell Pty Ltd (ACN 082 656 157) v DKGR Holdings Pty Ltd [2003] FCA 806

TEMWELL PTY LTD (ACN 082 656 157)  -v-  DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616),  mCOM SOLUTIONS INC, DRAGON VENTURES. COM INC, mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950), DAVID HAINS, ROBERT VAN ZANTEN, DRAGONVENTURES.COM LTD, RICHARD HAINS  and  IAN MORRIS KIEFEL

V 663 of 2000

RYAN J

5 AUGUST 2003

MELBOURNE

THE COURT ORDERS THAT:

1.         The affidavit of June Wilson sworn 26 July 2002 and each of the affidavits of Peter Rayner respectively sworn 31 July 2002 and 9 May 2003 and the several exhibits to the said affidavits of June Wilson and Peter Rayner be removed from the file.

2.         The applicant have leave further to amend the further amended statement of claim by appending to paragraph 46 thereof particulars of loss and damage conforming with those set out in the further amended further and better particulars of loss and damage filed herein on 17 June 2003 but excluding paragraph (iii) thereof.

3.         The respondents’ costs thrown away as a result of the orders made in paragraphs 1 and 2 hereof and the costs of all parties of and incidental to the hearings on 18, 19, 23 and 24 June 2003 be reserved.

Note:    Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR RULINGS ON ADMISSIBILITY OF EXPERT EVIDENCE

The present form of the statement of claim

1                     The third further amended statement of claim filed on behalf of the applicant (“Temwell”) discloses several courses of action which I have endeavoured to outline in what follows.  This outline does not reflect arguments which might be advanced by either side as to whether each cause of action as pleaded is available as a matter of law or can be made out in the light of evidence which has been filed in affidavit form or may be adduced in the course of the substantive hearing.  The outline has been furnished solely to permit an understanding of the competing contentions as to the admissibility of certain expert evidence and my rulings on those contentions. 

2                     Temwell agreed, by a Sale of Application Software Agreement in October 1998, to purchase what has been called “the Application Software” from the first respondent (“DDS”) for a price between $3 million and $15 million to be determined in accordance with a Governing Terms Agreement (“GTA”).  Pursuant to the Sale of Application Software Agreement, Temwell acquired copyright in, and all confidential information in connection with, the Application Software.  Further, pursuant to a Licence Research and Commercialisation Agreement (“LRCA”), Temwell granted a licence to DDS to maintain, develop and commercialise the Application Software on terms that DDS should pay Temwell royalties calculated in accordance with the last mentioned agreement.  The various documents evidencing the transaction between Temwell and DDS are collectively referred to in the third further amended statement of claim as “the Transaction Documents.”

3                     On 24 March 2000, DDS sold its business to the second respondent, mCom Solutions Inc (“mCom”) and assigned all its rights in the Application Software to mCom.  That assignment, it is alleged, was made without the consent of Temwell and in breach of the Transaction Documents.  It is further alleged that one or more of mCom, the fourth, fifth and seventh respondents procured the breach by DDS of the Transaction Documents.  As well, it is alleged, further or alternatively, that one or more of the fifth, eighth and ninth respondents was implicated as a joint tortfeasor in procuring the breach by DDS of the Transaction Documents. 

4                     A separate cause of action relied on by Temwell is for infringement of the “MTD Mark” under which DDS had developed and marketed electronic point of sale systems as, for example, those known as “MTD 1000” and “MTD 2000”.  It is then alleged that, since the purported assignment in late March 2000, either or both of mCom and the fourth respondent (“mCom Solutions”) have reproduced copies of the Application Software or part thereof and sold systems under the MTD Mark without the permission of Temwell and thereby infringed the copyright in the Application Software.  That infringement is alleged to have been authorised or permitted by one or more of the fifth, sixth, eighth and ninth respondents.  There are corresponding allegations against mCom and mCom Solutions of contraventions of the Trade Practices Act 1974 (Cth) and passing off and that one or more of the fifth, sixth, eighth and ninth respondents have aided and abetted, counselled or procured or been knowingly involved in, those contraventions of the Trade Practices Act.

5                     Another cause of action pleaded is for misuse by DDS of confidential information constituted by the source code or codes for the Application Software (“the MTD source code”).  That misuse is said to have been constituted by the unauthorised provision of a copy of the MTD source code to mCom or mCom Solutions or both of them and to have been in breach of the GTA.  The breach by DDS of its duty of confidence is said to have been procured or induced by one or more of mCom, mCom Solutions and the third, fifth and seventh respondents.  It is further alleged that one or more of the fifth, sixth, eighth and ninth respondents caused, procured or induced one or more of mCom, mCom Solutions and the fourth and seventh respondents to procure or induce the breach by DDS of the GTA. 

6                     Paragraph 38 of the third further amended statement of claim charges one or both of mCom and mCom Solutions with unlawfully using confidential information to make use of the MTD source code and par 39 alleges that one or both of them hold the software and resultant profits as constructive trustees for Temwell.  Paragraphs 39A and following allege that, by purporting to assign the Application Software to mCom, DDS wrongfully converted to itself the MTD source code which conversion is alleged to have been procured or induced by one or more of the second, fourth, fifth and seventh respondents.  Further or alternatively, it is alleged by par 39H that one or more of the fifth, eighth and ninth respondents procured, or induced the procuring of, the conversion alleged against mCom, mCom Solutions and the seventh respondent, Dragonventures Com Ltd.

7                     There are then, in pars 39I and 39J, allegations of conversion of the MTD source code by either or both of mCom and mCom Solutions together with corresponding allegations of involvement in that conversion by the fifth, eighth and ninth respondents.  It is next alleged, in pars 39K and 39L, that the acts of DDS said to constitute the alleged conversion were in breach of the LRCA and the GTA which breaches were procured by one or more of the third, fourth, fifth and seventh respondents.  That procuring of a breach of contract is, in turn, alleged in par 39M to have been procured or induced by one or more of the fifth, sixth, eighth and ninth respondents. 

8                     The next section of the third further amended statement of claim alleges a failure by DDS to provide a report and pay royalties or to carry out a development program as required by the LRCA as a result of which Temwell, on 29 August 2000, gave notice of default.  Although it is acknowledged that some reports and payments of royalties had been made by the mCom respondents, they are said not to have been accepted in lieu of the obligations of DDS.  It is then alleged in par 44 that the further breach by DDS of the LRCA was procured or induced by one or more of the second, third, fourth and seventh respondents.

9                     Paragraph 46 of the third further amended statement of claim alleges;

‘By reason of the matters aforesaid, the applicant has suffered loss and damage and will continue to suffer such loss and damage unless the conduct is restrained by this Honourable Court.’

It is proposed that the particulars of loss and damage discussed below should be appended to the paragraph just quoted. 

Admissibility of expert evidence

(a)   Ms Wilson

10                  In the first half of May this year, submissions were addressed on behalf of the second and fifth to ninth respondents (“the mCom respondents”) to the admissibility of evidence of two witnesses claimed by Temwell to be experts.  That evidence was contained in an affidavit by June Wilson sworn 26 July 2002 and two affidavits by Peter Rayner sworn respectively 31 July 2002 and 9 May 2003.  For the mCom respondents it was contended that those affidavits contained irrelevant material or deposed to matters in respect of which the deponents had not been qualified as experts.

11                  After the mCom respondents had developed their arguments, Counsel for Temwell indicated, on 19 June 2003, that it no longer intended to rely on the affidavit of June Wilson sworn 26 July 2002.  Instead, it was indicated, Temwell proposed to rely on a report prepared by Ms Wilson in June this year.  Accordingly, I shall confine my consideration of the admissibility of Ms Wilson’s evidence to that report.  On 15 May 2003, Temwell was given leave to file further affidavits which was exercised by the filing of an affidavit by Ms Wilson to which was exhibited her report of June 2003.  By the same order of 15 May 2003, Temwell was directed to file and serve particulars of the loss and damage alleged in par 46 of its third further amended statement of claim.

12                  In her report of June 2003, Ms Wilson set out her understanding of the “background to the claim” and identified her role as being “to carry out a valuation of the Application Software as at 24 March 2002.”  She claimed to have determined the fair market value of the software as at that date by applying a “relief from royalty” method.  In summary, she arrived at a valuation within the range $9.6 million to $11.2 million, by taking into account the following components:

13                  In the latest version of her report, Ms Wilson relies heavily on what she calls “the mCom forecasts” which were contained in a six-page document marked “List Confidential” and dated 16 March 2000.  Ms Wilson’s understanding of the provenance of that document and an indication of the use which she has made of it is set out in this passage from section 2.1 of her report;

‘I have been instructed on 18 June 2003 that the mCom respondents in the proceeding have advised that the mCom forecasts were used by mCom in submissions to the ANZ Bank for financing for mCom, but that these forecasts were prepared by existing DDS staff and represent their assessment of the likely profits and cashflows over the two years following 16 March 2000.  I am furthermore instructed that enquiry concerning the matter, following matters revealed by the mCom respondents on 18 June 2003, has indicated that Mr Robert van Zanten, the General Manager of DDS (who shortly after the 16 March 2000 became General Manager of mCom) was very likely the person who played the predominant role in the preparation of the mCom forecasts.  I have prepared my report on the basis that the mCom forecasts represent an accurate and reasonable assessment of the matters contained therein.  Should these instructions change, I will need to reconsider my opinion to have regard to the matters in the mCom forecasts which are said not to be accurate and reasonable.’

14                  Ms Wilson’s reliance on the forecasts in the document of 16 March 2000 has been criticised by Mr Delany of Counsel for the mCom respondents as the expression of a purported expert opinion based on facts which cannot be proved by Ms Wilson herself or on assumptions as to facts which cannot be identified or proved in some other way.  It was pointed out that the document of 16 March 2000 will not, of itself, be admissible to prove the truth of its contents;  Myers v Direction of Public Prosecutions [1965] AC 1001;  Ramsay v Watson (161) 108 CLR 642.

15                  The present case is said to be even stronger against admissibility of the document of 16 March 2000 because it contains, not assertions of existing or past facts, but projections as to future sales. There has been no undertaking by Temwell to file an affidavit from Mr Van Zanten, the presumptive author of the document of 16 March 2000 who is the sixth respondent or to call him as a witness.  In any event, it is contended, neither Mr Van Zanten nor Mr Kiefel, the ninth respondent, could be qualified as an expert able to express an opinion as to future levels of sales of the Application Software.  In support of that contention, it was pointed out on behalf of the mCom respondents that there was no recognised field of specialised knowledge” concerning the fledgling market for “mobile electronic transaction devices” let alone for one of their components.

16                  I am not persuaded, as things stand, that either Mr Van Zanten or Mr Kiefel necessarily lacked the expertise to express an opinion as to the likely levels of future sales of a product in the development of which they were intimately involved.  As I understand it, the case which the applicants will seek to make at trial is that Mr Van Zanten had, for some time, been the general manager, business development, of DDS and, on its sale to mCom and mCom Solutions, had become general manager of those companies.  Mr Kiefel is alleged to have been treasurer, secretary and Australian officer of mCom Solutions.  In my view, those facts, if proved, would permit a finding that the presumptive author of the document of 16 March 2000 had sufficient experience of the operations of the business successively conducted by DDS and mCom to qualify as an expert for the purpose of predicting future levels of sales to be achieved in that business;  see eg Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd (2000) 120 FCR 146 at 151.  Similarly, the positions occupied by Mr Kiefel, even if they commenced only after mCom acquired the business of DDS, provide a basis from which it can be said that he possessed the expertise to endorse or qualify the document of 16 March 2000 at least to the extent necessary to permit a finding as to the validity of the methods adopted in compiling that document.

17                  Of course, these conclusions say nothing about the weight to be attached to the projections contained in the document of 20 March 2000.  They may be demonstrated at trial to have been based on some erroneous or irrelevant matter or have failed to take account of some concededly relevant consideration.  In that event, their utility for calculating the value of the Application Software will be diminished or even eliminated, correspondingly affecting the weight to be attached to Ms Wilson’s opinion.  However, these are matters going to weight, not admissibility.

18                  As noted at [9] of these reasons, Temwell has sought leave to make a further amendment to the present form of its statement of claim by appending to par 46 the following particulars;

‘The Applicant claims the following loss and damage:

(i)        The loss of profits referred to in paragraph 38 of the Third Further Amended Statement of Claim;  and/or

(ii)       Damages flowing from the loss of control of the Application Software occasioned by the wrongful purported sale in March 2000 between the First Respondent and the mCom Respondents, as follows: -

(a)       The Applicant claims the sum of $15.362 million being the value of the Application Software determined as at 24 March 2000 pursuant to the formulas in the First and Second Schedules of the Call Option Agreement (calculated in accordance with the matters set out in the Expert Report of June Wilson dated 16 June 2003 (“the JW Report”) and the First Amended Expert Report of Peter Rayner dated 16 June 2003 (“the PRI Report”), as set out in section 10).

(b)       Alternatively to (a) above, the Applicant makes the following alternative claims for: -

1.         the market value of the Application Software as at 24 March 2000 in the sum of $13.35 million.  This sum has been calculated in accordance with the matters set out in the JW Report - wherein she calculates the market value of the Application Software based on the relief from royalty methodology, but subject to the adjustment identified by Peter Rayner in the PR 1 Report in relation to the discount rate to be applied (at section 7, with his conclusions about the adjusted figure at section 10);

2.         the value of its Take Out Option Agreement entitlement (valued at 24 March 2000) in the range between $4.5 million and $5 million (calculated in accordance with the matters set out in the Supplementary Expert Report of Peter Rayner dated 16 June 2003 (“the PR 2 Report”), in his answer to question 2);

3.         payment of its original investment of $3 million;  or

4.         the value of the benefit obtained by the Second and Fourth to Ninth Respondents in wrongfully obtaining and making use of the Application Software for themselves, without the authority or permission of the Applicant, such benefit being in the nature of the saving to them of not having to create the Application Software, as it existed at the time of the settlement of the sale transaction between the Second and First respondent.  The amount claimed is such amount which the said Respondents would need to have expended in order to have available to them the Application Software, as it existed on 24 March 2000.  It is estimated that the work in recreating the Application Software would take three years, utilising a staff of five or six highly skilled programmers - per the evidence of Zeev Goldstein (affidavit dated 6 June 2003 at paragraphs 50 - 52)).  Taking the cost structure of DDS, the cost of wages for six senior software programmers in March 2000 was $975,000 per year (CB 1069) plus an additional 10% for a proportion of overhead cost (at $97,500 per year) - per the evidence of Kenneth Cameron Cattanach (affidavit dated 16 June 2003), giving a total expense of $1,072,500 per year, or $3,217,500 over three years.

(c)        Plus interest to the date of judgment calculated in accordance with the Australian Bank Bill Swap rate plus 2%, as referred to in the PR 2 Report - in the answer to question 3.

(iii)      In having regard to the loss and damage suffered by the Applicant, reference is also made to the comments made by Counsel for the mCom Respondents during the 12 September 2001 and 22 February 2002 Hearings in the Federal Court of Australia to the effect that the MTD 3000 software was at that time worthless.  Specifically the Applicant refers to the following:

·       The Transcript of Proceedings dated 12 September 2001:

▪       Page 25 Line 24 to Page 27 Line 6

·       The Transcript of Proceedings dated 22 February 2002:

▪       Page 12 Line 41 - Page 12 Line 44

▪       Page 17 Line 3 - Page 17 Line 11

▪       Page 17 Line 42 - Page 17 Line 44

▪       Page 24 Line 7

(iv)      The Applicant reserves the entitlement to give further or other particulars of loss and damage.’  (original emphasis)

19                  It will be recalled from the table set out at [12] of these reasons that a component of Ms Wilson’s assessment of the value of after tax royalty receipts was within the range $4,259,000 to $5,458,000 in respect of the ten years from 1 November 2003 to 31 October 2013.  It is then contended on behalf of Temwell that Ms Wilson’s assessment should be increased by applying the lower discount rate favoured by Mr Rayner.  The earlier period to which Ms Wilson expressed an opinion about the value of the expected royalty receipts was that ending on 31 October 2003 being shortly after 14 October 2003 when the LRCA was expressed to come to an end.  By the LRCA, Temwell granted a licence to DDS of the Application Software for the Licence Period which was defined in the GTA to mean “the period from the Settlement Date until 15 October 2003 or any such longer period as Subco (Temwell) and DDS may agree pursuant to Clause 2.5 of the LRCA Agreement.”  Clause 2.5 of the LRCA provided:

‘Subject to the terms of the Take-Out Option Agreement Subco and DDS may in their absolute discretion agree to extend the Licence Period by any length of time they may agree upon, and such further term will be deemed to be part of the Licence Period.’

20                  Ms Wilson’s report of June 2003 has, accordingly, been criticised by Counsel for the mCom respondents as proceeding on a false basis that Temwell had some right to have the LRCA extended for a further period of ten years from October 2003.  However, in Section 5.5 of her report of June 2003, Ms Wilson made these observations, so far as is relevant:

‘Under the terms of the Licence Agreement, Temwell agreed to grant a licence to DDS of the Application Software (exclusively) for a period of five years.  Under clause 2.5, and subject to the terms of the Take Out Option Agreement, Temwell and DDS may agree to extend the licence period by any length of time they may agree upon.’

21                  Those extracts make it clear that Ms Wilson’s valuation proceeds on the assumption, founded on the opinions expressed by Mr Goldstein and Prof. Goldschlager, that the Application Software would have a commercially productive life after October 2003 of ten years.  That assumption, as I understand it, does not depend on an agreement by DDS to extend the term of the LRCA, but on the readiness of DDS or some other equally capable licensee to exploit the assumed residual value of the Application Software for a further ten years from October 2003.  The relevant part of Ms Wilson’s opinion also assumes that Temwell would have derived royalties over the whole of that further ten years on annual sales of $157.5 million which she assumed for the fourth year of the LRCA.  That assumption seems to rest on several other implied assumptions including one that DDS, or the presumed new licensee, would continue to maintain the market appeal of the MTD 3000 to a level at which the assumed volumes of sales could be preserved.  Whether those further assumptions can be substantiated will have to await an evaluation after cross-examination of the evidence of other experts like Mr Goldstein and Prof. Goldschlager.  However, I am not persuaded that cl 2.5 of the LRCA renders Ms Wilson’s evidence in relation to the period after October 2003 irrelevant or otherwise inadmissible.

(b)        Mr Rayner

(i)        The further amended Rayner Report of 19 June 2003

22                  Mr Rayner is a Chartered Accountant holding the degrees of Bachelor of Arts and Master of Business Administration and a Graduate Diploma of Applied Finance and Investment.  As well as experience in a large accounting firm, he has had experience in conducting his own technology business and now conducts a “boutique” corporate advisory practice focusing on the “mid-cap” sector of the market.  He also claims to have had considerable experience in “the valuation and commercialisation of Intellectual Property”.  In his report dated 19 June 2003, Mr Rayner referred to Ms Wilson’s report of June 2003 which, he noted, “employs forecast results for DDS apparently prepared by mCom during its due diligence review of DDS.”  After reviewing the activities of the major competitors of DDS and developments in the “payment industry”, Mr Rayner’s report noted that, in her report, Ms Wilson had employed the relief from royalty (“RFR”) “approach as her primary valuation methodology”.  Mr Rayner’s “critique” of the Wilson report is encapsulated in the following paragraphs:

‘In June 2003 June Wilson prepared a report which set out her opinion with respect to the value of the Application Software as at 24 March 2000.  In preparing this report, she was instructed to utilise certain documents and other materials including forecast financial information which was apparently used by mCom in seeking finance from the ANZ Bank in relation to its acquisition of the business of DDS during March 2000.  In her report, she stated that she had been instructed to assume that the mCom forecasts were prepared during the due diligence process that mCom carried out on the DDS business and products in or around March 2000.  I have reviewed this report and my comments on its methodology and conclusions are set out below.

In valuing the Application Software, Wilson determined the present value of the forecast after tax royalties attributable to the licensor (Temwell).  These forecasts royalties were calculated using the March 2000 product sales forecast and the Temwell royalty rates contained in the Application Software licence.  Separately, Wilson determined a terminal value for the Application Software which assumed the licence term would be extended beyond the initial five year period.  In determining this terminal value, Wilson considered the affidavit of Mr Zeev Goldstein (dated 6 June 2003) and a report prepared by Professor Les Goldschlager dated 16 June 2003, each of which contained commentary on the probable life of the Application Software.  I have independently reviewed these documents and consider it is appropriate to assume the value of the Application Software at March 2000 should include an element reflecting its likely life and use beyond the term of the initial licence.  In summary, I consider that Wilson has employed the correct methodology to value the Application Software at March 2000.  However, I do not agree with her on one key matter, namely, the discount rate she employs.

Wilson employs discount rates of 27.5% to 32.5% in her valuation.  At section 5.4, she sets out her reasons for these discount rates, in particular the comment, “I have therefore assumed that an investment in the Application Software as at 24 March 2000 would be entirely equity funded.”  This is my first point of disagreement in relation to her selection of discount rates;  namely, I believe that while Wilson was instructed to value the Application Software at 24 March 2000, she has employed in fact discount rates that are appropriate for the valuation of the DDS business.  I am of the view that the position of the licensor (owner) of the Application Software is markedly different to that of an equity investor in DDS;  particularly in terms of risk profile.  For example, such a licensor is not as fully exposed to the business operating and financing risks that are borne by the equity investor.  Further, the licensor derives income based on sales of the product and provided that the company continues to make sales it should continue to receive licence income.  This situation can be contrasted with that of the equity investor who can only expect to receive a return on investment based on profits after tax being available for distribution from the company.  In summary, I consider the risk profile of the licensor is considerably lower than that of an equity investor in DDS.

Further, I note and agree with Wilson’s comments with respect to venture capital return requirements in 2000 but again consider these apply to DDS as a whole as distinct from the perspective of the owner of the Application Software.  However, I consider the factors she has summarised as considerations for an investor in the Application Software actually support the proposition that the licensor’s (Temwell) risk profile was considerably lower than that of an equity investor in DDS.  Consequently, I consider the discount rates in the range of between 20% to 25% are appropriate to determine the market value of the software.’

23                  In Section 8 of his Report, Mr Rayner expressed an opinion that the value of the 24 million shares transferred by mCom to DDS at the time of mCom’s acquisition of the DDS business (24 March 2000) was at least $18 million.  That was essentially based on the assumption that, immediately after the transaction, the mCom companies had a net worth of $36 million and, as they had transferred half of that net worth to DDS in consideration of the acquisition of DDS’ business, including a transfer of DDS’ contractual reports under the Transaction Documents, it must be taken that the worth of the shares acquired by DDS was $18 million.

24                  Mr Rayner’s report then examined the value of what Temwell should have received on a proper exercise of the Call Option Agreement (“COA”).  That examination proceeded on the assumption, derived from using “the same methodology and forecasts used by Wilson in her June 2003 report” but using the lower discount range of 20 per cent to 25 per cent favoured by Mr Rayner, that an independent valuer for the purposes of the COA would have fixed on a final value of $13.35 million.  The further calculations are then explained as follows at p 33 of the Rayner Report:

‘The COA required that the sale price payable by DDS to Temwell would be determined as the difference between the final value plus a 10% annual return compounded quarterly and the royalties paid by DDS plus a similar 10% annual return.  These amounts were to be determined using the formula and amounts set out in the first and second schedules to the COA.  I have employed the approach in the schedules in determining the value under Scenario 1.  The specific factors and assumptions I have used are:

·        March 2000 represents the end of the second quarter in year 2, so the return capitalisation factor is 1.15969;

·        I understand that the sales achieved by DDS between October 1998 and March 2000 were A$3,664,480 resulting in royalties payable of A$146,579.  Of this amount, I understand that some $37,013 was not paid.  Consequently, in determining the Future Value of the royalty shown I have only recognised the $109,565.73 of royalties actually paid by DDS.  I have calculated the Future Value of the royalty stream payable by DDS to Temwell in accordance with the Second Schedule of the COA.  In completing this calculation I have employed the actual dates the royalty payments were made as the royalty payment dates, as set out in the schedule by Roger Enriquez.  I noted in the Sample schedule included in the Second Schedule that it was assumed that royalties paid during a quarter were paid on the first day of the quarter and the Future Value of the royalty is based on the time from the first day of the quarter to the date of the calculation.  For the purposes of my analysis, in applying the 10% return per annum (capitalised quarterly) to the royalty stream, the later date is 24 March 2000.  On this basis the Future Value of the royalty stream is $119,071.

On the basis of these factors and assumptions the value under Scenario 1 is A$15.363 million calculated as follows:

I note here my understanding that a loan facility existed enabling the joint venture parties to invest equity in Temwell but this issue does not bear upon the value of the Application Software to Temwell.  If the value I have determined of A$13.35 million had been accepted by Temwell and DDS as the final value (as defined in the various agreements), this would have resulted in the Temwell investors borrowing some A$10.35 million to fund the equity in Temwell and the completion of the software sale.’

In the light of all his calculations and assumptions, Mr Rayner concluded his report by opining that “the amount of the deprivation in value occasioned to Temwell is some A$15.63 million”. 

25                  Mr Delany for the mCom respondents argued that the latest report by Mr Rayner which I have just summarised relies solely upon a critique of the Wilson report of June 2003 but accepts a different discount rate to arrive at a different valuation figure.  Accepting that analysis for the purposes of the argument, it follows from the conclusion reached in [16] and [17] of these reasons that the projections contained in the document of 16 March 2000 are capable, if accepted, of providing a foundation for the expression of an expert opinion by Mr Rayner as well as by Ms Wilson.  As I understand it, the area of expertise of each of those witnesses is valuation generally, or, perhaps more narrowly, the valuation of intangibles such as rights to various forms of intellectual property.  I do not understand either of them to claim sufficient knowledge or experience of what is involved in the development of assets like the Application Software or of comparable sales of rights to intellectual property of that kind to be able to express an opinion on either of those bases.  Rather, they each claim, as a result of experience and specialised study, to be able to express an opinion about the appropriate techniques to be employed in valuing that kind of property.  As already indicated, a question will remain as to whether the facts or assumptions to which the recommended technique (RFR) has been applied can be sufficiently proved to make the resultant valuation reliable.  That, I consider, will turn on the weight to be attached to the projections in the document of 20 March 2002 which I cannot, on the information presently available, rule inadmissible.  It may also be that the disagreement between Ms Wilson and Mr Rayner as to the appropriate discount rate will not merely cast doubt on the opinion expressed by one or other of them but will impugn either or both the selection of the RRF method and the likelihood of the actual or assumed facts to which they have applied it.  However, as already explained, considerations of that kind go to weight rather than admissibility.  For these reasons, I am unable to rule Mr Rayner’s principal report of 19 June 2003 inadmissible.

(ii)       Rayner’s amended Supplementary Report of 19 June 2003

26                  By an amended supplementary report also dated 19 June 2003, Mr Rayner set out to answer three questions which he stated as follows, indicating, where appropriate, the assumptions which he had made, as required, in answering those questions:

‘Question 1:

What do I calculate is the amount which Temwell and/or the Investor Companies would have received pursuant to the Take-Out Option Agreement (“TOOA”) were the option contained within the TOOA to be exercised on 14 October 2003, the 15^th of October 2003 being the end of the “Licence Period” referred to in the Governing Terms Agreement dated 27 October 1998 (“the TOOA Entitlement”)?

Question 2:

What value would I ascribe to the rights of Temwell under the Transaction Documents including the TOOA Entitlement, at 24 March 2000, factoring in the following matters:

(a)   Were DDS to go into liquidation or become insolvent it would constitute an event permitting termination of the licence to DDS, leaving the title of the software remaining with Temwell but for the possible operation of the Call Option Agreement (“COA”); or

(b)   DDS was in a financial position to pay amounts owing under the Call Option Agreement or the Take Out Agreement.

I was requested to consider this question on the assumption that DDS was anticipated to be able to pay the TOOA Entitlement, and in the alternative consider this question on the basis that DDS’s capacity to make such payment was in doubt.  Further, I was instructed to assume the COA could not be exercised until Temwell had agreed on a valuation of the Application Software.

When considering Questions 1 and 2 above, I was requested to examine Clause 15 of the Governing Terms Agreement and assume the following:

(i)                 That Temwell was essentially a passive investor in the MTD product;

(ii)               That DDS or the liquidator of DDS would have no obvious basis or incentive for objecting to any transfer of Temwell’s rights as contemplated in questions 1 and 2.

Question 3:

If Temwell was to claim an entitlement to recover its original investment in the Application Software (being $3M) plus interest at an appropriate commercial rate for lending for commercial purposes, what do I consider to be the appropriate applicable interest rate?  In addition, I was asked to calculate the total amount of interest together with the principal sum by applying the appropriate interest rate or rates for the period to 30 June 2003 (an arbitrary date for calculation purposes).  This amount should be reduced by the amount received by Temwell in royalties under the Transaction Documents.

In responding to the above questions, I have been instructed to assume the amount of royalties which Temwell either did receive or was entitled to receive up to 22 March 2000 to be as calculated by Roger Enriquez in the final page of Exhibit “RE17” to his affidavit of 26 July 2002.  I was instructed these were the only royalty payments to be incorporated into my analysis.

I have also been instructed to assume the descriptions of Agreements contained in this Amended Supplementary Report as being correct, and have assumed this to be the position in expressing opinions arising from the descriptions of the Agreements.’

27                  In his Supplementary Report, Mr Rayner then identified what he said were the rights of DDS under the Call Option Agreement (“COA”) and suggested that there would have been “a clear incentive for DDS to exercise its option under the COA as this resulted in a considerably lower payment to Temwell when compared to the payment due by DDS to Temwell under the TOOA.”

28                  In the next part of the Supplementary Report of 19 June 2003, Mr Rayner noted that, in the event that DDS was unable, or did not choose, by 15 October 2003, to exercise its rights under the COA, Temwell could take one of two alternative courses open to it under the TOOA.  The first (“the Loan Option”) was to require DDS to advance to Temwell an interest free loan of an amount calculated in accordance with the First Schedule to the TOOA.  Thereafter, Temwell was to apply future receipts of royalties by making payments, first, to the Investors in accordance with the Second Schedule to the TOOA and then to DDS in repayment of the loan.  Any remaining surplus, Mr Rayner inferred, was distributable to the Investors.

29                  The second alternative course identified by Mr Rayner (“the Subscription Option”) was to require DDS to subscribe for new shares in the joint venture companies which own Temwell.  The moneys so subscribed, calculated in accordance with a prescribed formula, were to be paid to the Investors whereupon DDS would become the owner of the issued shares in the companies which owned Temwell.  Mr Rayner chose to answer Questions 1 and 2 by assuming that the Subscription Option would be exercised because he considered that both options would provide the same return but, under the Subscription Option, “the return is immediate and not paid over time as it would be under the Loan Option”.  On the basis that the future value of the royalty stream was $169,202, Mr Rayner calculated that the net value of Temwell’s entitlement under the TOOA, assuming that the Subscription Option were exercised at the earliest possible date, 14 October, 2003, would be $8,986,071.

30                  From that calculation, Mr Rayner then proceeded, in his supplementary report of 19 June 2003, to assess the value of Temwell’s rights under the Transaction Documents, including the TOOA, as at 24 March 2000.  He identified the relevant factors to be taken into account in carrying out that exercise as being:

(a)        the solvency of DDS;

(b)        the ability of DDS to exercise its rights under the COA, and

(c)        “third party factors”.

31                  In relation to the first of those factors, Mr Rayner first assumed that DDS would have been insufficiently solvent to have exercised its rights under the COA and that some default would have occurred under the LRCA which gave Temwell unfettered ownership of the Application Software.  He further assumed that Temwell would work in conjunction with the administrator, receiver or liquidator of DDS (“the receiver”) to achieve a sale of the whole package of DDS’s intellectual property, including the Application Software.  He then concluded that it was;

‘… highly probable that if all of the DDS intellectual property, including the Application Software owned by Temwell, were available for sale at that time as a single package a considerable value would have been obtained for the total package, being a figure which would at least match the $36 million which I have assessed mCom paid to DDS for part of this package only.’

32                  Because of his understanding that Temwell had never accepted a final value for the Application Software, Mr Rayner assumed that any prospective purchaser of Temwell’s rights as at 24 March 2000 would have disregarded any rights which might have accrued to Temwell on the exercise by DDS or its receiver of the COA.  Then, under the heading “Third Party Factors” Mr Rayner considered what a willing but not anxious buyer would have paid for Temwell’s rights under the TOOA as at 24 March 2003.  After explaining the selection of discount rates to compensate for the risk inherent in such an investment, he concluded:

‘Based on these discount rates, I consider the sale value of the TOOA entitlement to a third party at 24 March 2000 was in the range between $4.5 million and $5 million.  This range has been determined by calculating the present value at 24 March 2000 of the TOOA payment amount (see above) of $8,986,071 receivable on 14 October 2003 using the discount rate of 16% and 18%.  The time lapse between the two dates is some 42.66 months resulting in discount factors of 0.568337 and 0.529857 for 16% and 18% respectively.  This result in a range of values of some $4.76 million to $5.1 million which I have rounded to $4.5 million and $5 million for the purpose of my opinion.’

33                  Mr Rayner saw the third question which he was required to answer as turning on an interest calculation on the initial sum of $3 million invested by Temwell on 27 October 1998 less royalties actually received.  On the assumption that the investment had been made with a monthly or sixty day compounding return to 30 June 2003 and applying three different available interest rates he arrived at the following result:

Mr Rayner then expressed his reasons for preferring the first of those calculations which resulted in the lower figure of $4,071,470.

34                  The supplementary Rayner Report of 19 June 2003 concluded under the heading “Other Matters” with a discussion of an option said to have been granted by DDS on 20 May 1999 to Palicave Pty Ltd to purchase the Application Software on terms substantially the same as those of the COA between DDS and Temwell.  As I understand it, Mr Rayner concluded, on the basis of an assumption that the Palicave option could only be exercised if DDS exercised its options under the COA, that the existence of the Palicave option had no implications for the opinions expressed in his principal report of 19 June 2003 or in the earlier parts of his supplementary report of the same date.

35                  Mr Rayner’s supplementary report has been criticised by Counsel for the mCom respondents on the ground that it proceeds from a particular understanding of the legal effect of one or other of the Transaction Documents which Mr Rayner was not qualified to form.  It may be correct that, if that understanding is not one that is shared by the Court, then the premise for one or more of Mr Rayner’s conclusions will fall away.  However, it would be inappropriate, without the benefit of full legal argument, now to adopt a particular interpretation of one or more provisions of the Transaction Documents.  An occasion may arise in the course of the trial to resolve, as a separate question before cross-examination of the relevant witnesses, the construction of some provision on which a line of expert or other evidence is shown to depend.  Nevertheless, to acknowledge that as being a possible, or even likely, course is not to detract from the admissibility of the evidence of a commercial or accounting expert which is predicated on one of two or more available legal interpretations.  I therefore decline to exclude, on this ground, those parts of Mr Rayner’s supplementary report which have been the subject of the criticism just discussed.

36                  Similar considerations entail the same result in relation to a contention advanced on behalf of the mCom respondents based on the instruction to Mr Rayner by Temwell’s solicitors that;

‘In regard to the ANZ Acknowledgement, we ask that you assume that it has no bearing on the matters which you have raised in your expert reports, in particular with reference to your commentary on the termination of the LRC Agreement (dated 27 October 1998) in the event of the insolvency of DDS, having regard to the likelihood of a Notice of Termination being given under Clause 8.1.1 of the LRC Agreement.’

37                  If that assumption is shown by legal argument and the demonstration of relevant circumstances to be unfounded, then Mr Rayner’s opinion will, to the extent that it depends on that assumption, fall to the ground.  Whether that result obtains will have to await reception of the relevant evidence and an evaluation of the competing arguments.

38                  It was also contended on behalf of the mCom respondents that Mr Rayner’s analysis of the “Subscription Option” under the TOOA could not avail Temwell because that option was not exercisable for its benefit.  The entities entitled to accept any share offer which DDS might have been compelled to make were, so it was said, Sharsbury Pty Ltd and Sidstone Pty Ltd, neither of which is a party to the present action.  That contention appears to derive considerable force from the terms of cl 2 of the TOOA which, so far as is relevant, provides;

‘2.1      Subscription Option

In consideration of, among other things, the payment of $1.00 by each of the Investors to DDS (the receipt of which DDS hereby acknowledges):

2.1.1    DDS offers to each Investor to subscribe for the Subscription Shares in that Investor’s respective Joint Venturer for the Subscription Price (the “Share Offer”);  and

2.1.2    the Share Offer is not revocable prior to the day following the Termination Date.

2.2       Acceptance

2.2.1    Any one or more of the Investors may accept the Share Offer on or after (but not before) the occurrence of a Purchase Event.

2.2.2    The decision whether or not to accept the Share Offer as a result of the occurrence of a Purchase Event shall be made at the absolute discretion of each of the Investors.’

39                  “The Investors” are defined in the identification of the parties to the TOOA as Sharsbury Pty Ltd and Sidstone Pty Ltd.  As with the contention that Mr Rayner’s opinion has been invalidated in one respect by his disregard (on instructions) of the ANZ Acknowledgment, if, as a matter of construction, Temwell had no interest, either beneficially or as agent or trustee for others, in enforcing the Subscription Option, Mr Rayner’s analysis of that option will be irrelevant.  However, I am not prepared to anticipate the answer to that question of construction by ruling that part of his evidence inadmissible.

Conclusion

40                  For the reasons which I have endeavoured to explain, I have been unable to conclude at this stage of the proceedings that the opinion evidence of either Ms Wilson or Mr Rayner as contained in their several reports of June 2003, is inadmissible.  It may be necessary to revisit that question in the course of the trial when a clearer appreciation can be made as to whether there is admissible evidence supporting the various assumptions on which those opinions are founded.  As Heydon JA observed in Makitsu (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 743 “so far as the opinion is based on ‘assumed’ or ‘accepted’ facts, they must be identified and proved in some other way.”  As outlined above, acceptance of the opinions of Ms Wilson and Mr Rayner will depend on acceptable proof of the facts contained in the projections in the “mCom forecasts” of 16 March 2000 and the opinions expressed by Mr Goldstein and Prof. Goldschlager.

41                  It seems to be common ground that the opinions expressed earlier by Ms Wilson and Mr Rayner have been superseded by their latest reports prepared in June this year.  I shall therefore order that the affidavits exhibiting those earlier reports be removed from the file.  It also follows from the views expressed about proof of damage earlier in these reasons that Temwell should have leave further to amend its statement of claim to append to par 46 thereof the particulars of loss and damage reproduced at [18] above.  However, as I indicated in the course of argument, I do not regard it as appropriate to furnish particulars of loss and damage by reference to “comments” made by Counsel for the respondents during earlier interlocutory hearings.  The grant of leave shall therefore not extend to par (iii) of the proposed particulars of loss and damage.

42                  My provisional view is that the respondents should have their costs thrown away as a result of the substitution of the June 2003 reports of Ms Wilson and Mr Rayner for the earlier evidence of those witnesses.  However, to permit full argument at an appropriate point, I shall order that the costs of all parties of the hearings on 18, 19, 23 and 24 June 2003 and the costs of the respondents thrown away as a result of the orders made this day be reserved.

Associate:

Dated:              5 August 2003