FEDERAL COURT OF AUSTRALIA
Temwell Proprietary Limited ACN 082 656 157 v DKGR Holdings Pty Ltd (In Liq) ACN 062 778 616[2005] FCA 1403
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
AND
mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (ACN 091 375 950) v TEMWELL PTY LTD (ACN 082 656 157), SLADEMERE PTY LTD (ACN 082 656 139), SHEPRIDGE PTY LTD (ACN 082 696 077), GEOFFREY MICHAEL TAUBER, MORRY FRAID, ROGER ENRIQUEZ
V 663 of 2000
RYAN J
4 OCTOBER 2005
MELBOURNE
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IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
V 663 of 2000 |
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BETWEEN: |
TEMWELL PTY LTD (ACN 082 656 157) Applicant |
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AND: |
DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616) First Respondent |
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mCOM SOLUTIONS INC. Second Respondent |
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DRAGON VENTURES.COM INC Third Respondent |
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mCOM SOLUTIONS AUSTRALIA PTY LTD (ACN 091 375 950) Fourth Respondent |
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DAVID HAINS Fifth Respondent |
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ROBERT VAN ZANTEN Sixth Respondent |
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DRAGONVENTURES.COM LTD Seventh Respondent |
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RICHARD HAINS Eighth Respondent |
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IAN MORRIS KIEFEL Ninth Respondent |
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AND BETWEEN: |
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mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Cross-Claimants |
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AND: |
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TEMWELL PTY LTD (ACN 082 656 157) SLADEMERE PTY LTD (ACN 082 656 139) SHEPRIDGE PTY LTD (ACN 082 696 077) GEOFFREY MICHAEL TAUBER MORRY FRAID ROGER ENRIQUEZ Cross-Respondents |
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RYAN J |
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DATE OF ORDER: |
4 OCTOBER 2005 |
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WHERE MADE: |
MELBOURNE |
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The cross-claim be dismissed.
3. The proceedings stand over to a date to be fixed for receiving submissions as to the orders for costs which should be made in light of the reasons published this day.
4. There be liberty to any party to apply on not less than 48 hours notice in writing to the other parties.
Note: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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VICTORIA DISTRICT REGISTRY |
V 663 of 2000 |
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BETWEEN: |
TEMWELL PTY LTD (ACN 082 656 157) Applicant |
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AND: |
DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616) First Respondent |
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mCOM SOLUTIONS INC. Second Respondent |
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DRAGON VENTURES. COM INC Third Respondent |
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mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Fourth Respondent |
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DAVID HAINS Fifth Respondent |
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ROBERT VAN ZANTEN Sixth Respondent |
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DRAGONVENTURES.COM LTD Seventh Respondent |
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RICHARD HAINS Eighth Respondent |
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IAN MORRIS KIEFEL Ninth Respondent
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AND BETWEEN: |
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mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Cross-Claimants |
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AND: |
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TEMWELL PTY LTD (ACN 082 656 157) SLADEMERE PTY LTD (ACN 082 656 139) SHEPRIDGE PTY LTD (ACN 082 696 077) GEOFFREY MICHAEL TAUBER MORRY FRAID ROGER ENRIQUEZ Cross-Respondents |
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JUDGE: |
RYAN J |
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DATE: |
4 OCTOBER 2005 |
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PLACE: |
MELBOURNE |
REASONS FOR JUDGMENT
Table of Contents
(i) The development by DDS of the MTD
(ii) The Tauber and Fraid interests become lenders to DDS
(iii) Temwell becomes an investor in the Application Software
(iv) The Transaction Documents
(vi) DDS seeks to alleviate its financial difficulties
(vii) The heads of agreement of 31 January 2000.
(viii) The events of February 2000
(ix) The Sale of Business agreement of 1 March 2000
(x) Richard Hains’ letter of 7 March 2000
(xi) The meeting of 9 March 2000 between David Hains, Tauber and Enriquez
(xii) Events between 20 and 24 March 2000
(xiii) Elbaum’s report to shareholders and noteholders of DDS
(xiv) The letter before action on behalf of Temwell
(xv) Deed of release from Elbaum and DDS
(xvi) The institution of the present proceedings and interlocutory applications
(xvii) The “open offer” of 27 August 2001
(b) The claims for infringement of trade mark and breach of copyright
(c) The claims for contravention of the TPA or passing off
(d) Misuse of confidential information
(f) Failure to report and pay royalties
(g) Temwell’s claim of loss and damage
(a) Misrepresentation in contravention of the TPA
(b) Collateral abuse of process
Part III: The Expert Witnesses
(i) The applicant’s expert witnesses
(ii) Respondents’ Expert witnesses
Part IV: Resolution of the issues
(iii) Was Temwell’s discretion to withhold consent unfettered or exercisable only in good faith?
(iv) Are any of the respondents liable for inducing a breach of contract by DDS?
(vi) Infringement of Copyright
(a) Persistence in the denial of consent to the assignment from DDS to mCom Solutions
(b) Fluctuating and exaggerated claims as to the value of the Application Software
(d) Refusal to accept the open offer of 27 August 2001
(e) The joinder of the individual respondents.
(h) Conclusion on Abuse of Process
(ii) The cross-claim for misleading and deceptive conduct
Part V: Disposition of the Proceedings
Part I: The Facts.
(i) The development by DDS of the MTD
1 In 1993, Hector Daniel Elbaum (“Elbaum”) founded the first respondent DKGR Holdings Pty Ltd, formerly known as Dynamic Data Systems Pty Ltd (“DDS”). At all relevant times until some date after March 2000, Elbaum was the Managing Director and Chief Executive Officer of DDS. From 1994, DDS was engaged in the development of a mobile transaction device which it named the “MTD” and which later became a registered trademark. That registration subsequently lapsed. The MTD evolved from an analogue version through an MTD1000, then an MTD2000 to an MTD3000 which became developed to a point where European sales might have commenced early in 2000. The development included design of computer hardware and the writing of software including a source code. It occurred in consultation with representatives of the ANZ Bank. The MTD1000 utilised what Elbaum has called “a proprietary assembler driven operating system which ran together with the MTD1000 application software.” That operating system, as I understand it, was not capable of adaptation for use in conjunction with the MTD2000 or the MTD3000. The MTD2000 was the first version to use digital technology.
2 For the purposes of the MTD2000, DDS wrote an operating system known as “PIMPOS” (“Pre-emptive Interactive Mobile Payment Operating System”) which was subsequently used in conjunction with the application software as it developed for the MTD2000 and, later, the MTD3000. PIMPOS was custom-written to enable stable and secure electronic transmission of funds between merchants and co-operating financial institutions. To facilitate the certification of the MTD units to meet the requirements of various banks, a software development kit (“SDK”) was created to permit distributors of the product to write software adapting it for use within their own markets.
(ii) The Tauber and Fraid interests become lenders to DDS
‘APPOINTMENT OF FINANCIAL ADVISOR BY THE BORROWER COMPANY
The Borrower Company agrees that for the term of this Agreement it shall appoint the financial director of Spotlight Stores Pty Ltd as its financial advisor who shall have access to and be provided with copies of monthly financial and management reports of the Borrower Company.’
(iii) Temwell becomes an investor in the Application Software
4 At some time in 1998, an arrangement was proposed whereby $1.6 million clear could be made available to DDS and the exposure of the Lenders to DDS would be eliminated by 16 October 1998. That involved the Lenders’ providing $3 million towards a purchase and licence back transaction in respect of certain DDS software of which $1.1 million would be applied in reduction of the pre-existing loan to DDS. On the assumption that the software value were set at $15 million, depreciation for tax purposes could be claimed at 40% in each of the first and second years and 20% in the third, giving the resultant tax benefit a present value of at least $4.4 million. The “exposure gap” for the Lenders between the amount of that tax benefit and their total exposure of $4.6 million (existing loans of $1.6 million and $3 million being the purchase price for the software) was $200,000. That “exposure gap,” it was proposed, would be eliminated on 16 October 1998 by DDS reducing its loan account by $200,000 less any allowance for royalties paid. It was further contemplated that royalties, proposed at 3% of all sales products containing “the software components”, would be applied, first, to repaying the Lenders’ capital of $3 million then a 25% Internal Rate of Return and then in repayment of the loan funds advanced to the acquiring vehicle (which, it ultimately turned out, was the present applicant, Temwell Pty Ltd (“Temwell”)). It was further contemplated that, as those loan funds were repaid from royalties, DDS would repay the remaining $1.4 million “with capital freed as a result of loan repayments (less tax allowance 36%)”. The arrangement also contemplated that it could be wholly “collapsed” to ensure payment of $3 million plus an Internal Rate of Return to the Lenders together with repayment through DDS of the $1.4 million loan less payments already made. Throughout the implementation of this arrangement it was proposed that the loan agreement under which the current interest rate was 8.5% per annum should remain in force and should provide for interest to be paid at the same rate.
5 The proposal outlined above was prompted by Babcock & Brown, a merchant or investment bank, in August 1998 bringing to the attention of the ninth respondent, Mr van Zanten (“van Zanten”) and Mr Wingrove of DDS a press release by the Federal Treasurer announcing the withdrawal of Taxation Ruling IT26. That Ruling had related to depreciation and investment allowances for computers and included these paragraphs;
‘4. The costs of “software” or “programs” would normally be allowed as deductions to a purchaser in the year in which the costs are incurred. Such costs are accepted as revenue expenses deductible under s 51(1) of the Act. Further, items of computer software or programs would not qualify for investment allowance.
5. Where, however, the software is sold as an integral part of the computer system itself, for example, because of the technical nature of the computer system, the total computer system would be subject to depreciation and the investment allowance.’
6 The press release contained these paragraphs;
‘Government Response to the Withdrawal of IT26 and Announcement
The Government will legislate with effect from 10am AEST, 11 May 1998 (the time of withdrawal of IT26) to provide for systems and application software to be amortised at 40 per cent per year (that is, over 2 ½ years).
The new arrangements apply to expenditure incurred in relation to contracts entered into to acquire software after the withdrawal of IT26. It will also apply to expenditures on specifically commissioned and in-house development of software commenced after that time. Expenditures on in-house development, or commissioned software commenced or contracts entered into up to that time will continue to receive the previous treatment until 30 June 1999. Thereafter any such expenditure will be treated under the new provisions that are described below:
· all software purchases will be eligible for taxation amortisation over 2 ½ years at 40 per cent per year. However, the following exemptions will apply:
- if the (non-renewable) license period is shorter than 2 ½ years then taxpayers will be allowed to amortise their expenditure over this shorter period;
- taxpayers who stop using software within 2 ½ years of acquisition will be allowed an immediate deduction of the unrecouped expenditure at that time;
- software purchases up to $300 will be immediately expensed. Bulk purchases of software packages summing to more than $300, but individually valued at up to $300, will be covered by the new amortisation provisions;
· the cost of commissioning software or developing it in-house for own use will be capitalised until the project is completed. At that point, it may be amortised in line with the new provisions. This will ensure neutrality with purchased software. Should the commissioned or developed software be disbanded, capitalised costs will be deductible at that time; and
· the treatment of upgrades and maintenance will be in line with the existing application of the law for determining capital and revenue expenses. Broadly, expenditure on enhancing or upgrading the functional capacity of computer software should be treated on capital account. Expenditure that does not enhance functionality, such as maintenance, testing, code reviews, minor alterations/modifications and remedying defects should continue to be treated on revenue account.
Moreover, systems software that had previously been written off as part of the computer hardware (over 3.7 years under accelerated depreciation) will now be amortised over 2 ½ years.
The taxation treatment of software that attracts concessions under other parts of the law will remain unchanged.
The write-off rate of 2 ½ years strikes an appropriate balance between considerations that software is a capital asset expenditure on which should be amortised for taxation purposes - and the relatively short expected effective life of software arising from rapid developments in the information technology industry.
The proposed arrangements for software are broadly more generous than those applying in comparable overseas taxation jurisdictions. For example, New Zealand allows software purchases to be depreciated at 30 per cent straight line or 40 per cent diminishing value (equivalent to 3.3 years), the United Kingdom provides depreciation of 25 per cent diminishing value (equivalent to a 6-year write off). In Canada systems software receives either a 5 or 8 write off period (depending on the industry it is used in) while application software is depreciated at 100 per cent (which effectively results in a 2-year write off period due to Canada’s “half year rule”). The United States provides a 3-year write off for newly purchased software unless the taxpayer can show a shorter write off is appropriate.’
7 Mr Roger Enriquez (“Enriquez”) had previously been the Chief Financial Officer for the Spotlight group of companies. By September 1998 he was carrying on business as a financial adviser under the name “WealthMax Financial Services” through a company, Berd Investments Pty Ltd (“WealthMax”). At all material times since then, WealthMax, through Enriquez, acted as financial adviser to, and otherwise on behalf of, Temwell and the Spotlight group of companies which were controlled by, or associated with Morry Fraid. It will be recalled that by special covenant 5 of the Loan Deed quoted at [3] of these reasons, DDS had covenanted to appoint the financial director of Spotlight Stores Pty ltd as its financial adviser for the term of the loan agreement. That financial director was Enriquez.
(iv) The Transaction Documents
‘“Application Software” means all of the technology and information including (without limitation) all Intellectual Property Rights, processes, formulae, reports, software, blueprints, know-how and research data of DDS (including without limitation each of the items described in the First Schedule) as at the Settlement Date in connection with the application software and related programs for use on the MTD 2000 series mobile transaction device developed by DDS together' with all modifications thereto or enhancements thereof from time to time and whether created or generated by DDS from or as a consequence of the Development Program or otherwise;’
‘“Development Program” means the scope and timetable for the research, maintenance, development and commercialisation of the Application Software outlined in the First Schedule of the LRC Agreement as amended from time to time in accordance with the LRC Agreement;’
‘“Intellectual Property Rights” means any rights in respect of or in connection with any confidential information, copyright, trademarks, design rights, drawings, specifications, technical information, know-how, discoveries, operating procedures, technical, financial and commercial data and information and all other intellectual and industrial property rights whatsoever (whether or not registered or registrable) and includes any right to apply for the registration of such rights;’
‘“Purchase Price” means the amount determined by the Investors and notified in writing to DDS on the Purchase Price Determination Date PROVIDED THAT in making such determination the Investors shall take due account of the determination contained in the Valuation PROVIDED FURTHER THAT in any event the Purchase Price shall not be less than A$3,000,000 nor more than A$15,000,000;’
9 The “Purchase Price Determination Date”, in turn, was defined in the GTA as;
‘“Purchase Price Determination Date” means a date which is not more than seven (7) days after delivery of the final Valuation to Subco;’
It is accepted that whenever used in the Transaction Documents “Subco” refers to Temwell.
‘Unless otherwise expressly provided in any Transaction Document, no Party shall novate assign transfer or otherwise create any other interest or right in all or any of its rights and obligations under any Transaction Document without the prior written consent of each other Party.’
11 The Sale of Application Software Agreement included the following provisions;
‘2.1 DDS shall sell transfer and assign to Subco and Subco shall purchase and take from DDS on the Settlement Date all of DDS’ right title and interest in and to the Application Software free from all Encumbrances and upon and subject to the terms and conditions contained in this Agreement.
2.2 To the extent that the Application Software comprises or is the subject of any rights under the Copyright Act 1958 (Cth) DDS shall assign all its right title and interest in and to the same to Subco on the Settlement Date.
2.3 Purchase Price
2.3.1 The consideration for the sale and transfer of the Application Software by DDS to Subco as aforesaid shall be the Purchase Price.
2.3.2 The Purchase Price shall be payable to DDS:
2.3.2.1 as to three million dollars (A$3,000,000) on the Settlement Date; and
2.3.2.2 as to the balance of the Purchase Price within seven (7) days of the Purchase Price Determination Date or such later date as each Advance is provided under each Loan Agreement
2.4 Delivery
On the Settlement Date DDS shall deliver to Subco all such deeds, assignments or other instruments of transfer as may be necessary or reasonably required by Subco to vest in Subco title in and to the Application Software including (without limitation) title in and to all copyright subsisting in the Application Software and such evidence of authority to make such assignment or transfer as Subco may reasonably request.
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4. REGISTRABLE INTEREST
Subject to any express written agreement to the contrary between DDS and Subco, DDS shall maintain for the maximum period permitted at law, at its own expense and in DDS’s own name, registrations of Patents and any other registrable Intellectual Property Right relating to its proprietary Mobile Transaction Device (the "MTD"). DDS shall continue to use all reasonable endeavours at its own expense to progress all applications by it for Patents or any other registrable Intellectual Property Right relating to the MTD. DDS shall use all reasonable endeavours to apply for and obtain registration of any Patents and any other registrable Intellectual Property Right which shall be obtainable in relation to any development relating to the MTD. DDS shall use all reasonable endeavours to defend any challenge to the grant, renewal or validity of any Patent or other registrable Intellectual Property Right of DDS relating to the MTD. DDS shall use all reasonable endeavours to obtain relief from or against any entity which infringes in a material way any Patent or other registrable Intellectual Property Right of DDS relating to the MTD.’
‘2 LICENCE
2.1 Grant of Licence
Subject to the terms of this Agreement Subco grants a licence to DDS of the Application Software for the Licence Period.
2.2 (Exclusive) The Licence is given exclusively to DDS and Subco shall not licence any part of the Application Software to any other party during the term of the Licence.
2.3 (Assignment) DDS shall have the right at any time after the DDS Loan has been repaid in full to assign the Licence to a Related Body Corporate with the prior written consent of Subco which consent shall not be unreasonably withheld PROVIDED THAT DDS and its assignee enter into such documentation as may be reasonably required by Subco in connection with such assignment.
2.4 Royalties
2.4.1 (Royalties) In consideration of the grant of the Licence, DDS shall pay to Subco the following amounts :
2.4.1.1 four per cent (4%) of the first one hundred million dollars (USD$100,000,000) of LRC Proceeds earned by DDS during the term of the Licence; and
2.4.1.2 three per cent (3%) of all LRC Proceeds earned by DDS during the term of the Licence after the first one hundred million dollars (USD$100,000,000).
2.4.2 (Timing) The Royalties shall be calculated and paid on the last day of every calendar month by DDS to Subco in respect of the LRC Proceeds received by DDS in the month being two (2) months immediately prior to that month.
2.5 Further Term
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.
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3.3.1 (Report) Not later than 28 days after the first day of January and July of year during the Licence Period, DDS shall give Subco a Report on the progress and work performed in relation to the Development Program during the six months.
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5 COMMERCIALISATION
5.1 Appointment
DDS shall undertake (at the cost of DDS) the commercialisation of the Application Software during the Licence Period consistent with the Development Program and on the terms and conditions of this Clause 5.
5.2 Without limitation of DDS's rights DDS shall during the term of the Licence have the authority and the sole and exclusive right to:
5.2.1 undertake or arrange the distribution, production or marketing of the Application Software;
5.2.2 undertake or arrange the distribution, production or marketing of products utilising the Application Software;
5.2.3 undertake or arrange field upgrading, error correction, maintenance, development, modification, variation or testing of the Application Software;
5.2.4 sub-licence the Application Software;
5.2.5 howsoever and wheresoever use, copy sell, distribute, licence, sub-licence, copy, reproduce, export or otherwise commercialise in all cases on bona fide commercial terms any run-time copies of the Application Software and any modifications or variations of the Application Software in whole or part(s) whether itself or by delegation to any representative, employee, sub-distributor, sub-licensor or other entity in any capacity whatsoever; and
5.2.6 authorise and permit any other entity to perform any of the rights, powers and privileges provided for in Clauses 5.2.1 to 5.2.5 in this Agreement (both inclusive) or in this Clause 5.2.6.
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7.1 Undertakings
DDS undertakes to Subco as follows, except to the extent that Subco otherwise consents in writing.
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7.1.3 (Disposal) It will not sell, transfer, assign, lease, sub-license, part with possession of or otherwise dispose of or deal with all or any part of its rights under any Transaction Document or any interest in the foregoing or agree, offer, attempt or purport to do any such thing, other than as provided for by the Transaction Documents.’
13 Another of the Transaction Documents was a “Call Option Agreement” also dated 27 October 1998 which recited that Temwell had agreed to grant to DDS the right to require Temwell to transfer the Application Software to or at the direction of DDS. Clause 2 of the Call Option Agreement provided under the heading “OPTION”;
‘2.1 In consideration of, among other things, the payment of $1.00 by DDS to Subco (the receipt of which Subco hereby acknowledges):
2.1.1 Subco offers to DDS to sell the Application Software to or at the direction of DDS for the Sale Price (the “Sale Offer”); and
2.1.2 the Sale Offer is not revocable prior to the day following the Termination Date.
2.2 The Sale Price on the Purchase Date for the Application Software shall be the amount set out opposite that date in the First Schedule less the amount calculated on that date in accordance with the formula in the Second Schedule.
2.3 DDS may inform Subco of its decision to accept the Sale Offer by written notice substantially in the form of Annexure 1 signed by an Authorised Officer of DDS.
2.4 A notice given under Clause 2.3 must specify:
2.4.1 the Purchase Date which shall not be earlier than fourteen (14) Business Days after the date of such notice; and
2.4.2 the party (“Transferee”) to whom the Application Software is to be sold.
2.5 A notice given under Clause 2.3 is irrevocable.’
14 Clause 3 of the Call Option Agreement provided machinery for the payment of the Sale Price in the event of an exercise of the option. If the Transferee or a purchaser from the Transferee were a publicly listed company in Australia or the United States of America, part of the Sale Price was to be satisfied by the issue to Temwell of fully paid-up shares in that company. By cl 5 of the Call Option Agreement, Temwell gave, amongst others, these undertakings;
‘5.4 Subco will not encumber or transfer any of its assets and undertakings except as contemplated under the Transaction Documents.
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5.5 Subco shall not during the term of the Licence sell, transfer, assign or otherwise deal with or agree to deal with the Application Software, the Research Results or any Intellectual Property Right in respect of either of the same, save as provided for in this Agreement.’
15 The following Schedules were annexed to the Call Option Agreement;
‘FIRST SCHEDULE
Purchaser of Application Software from Joint Venture
10% return on $15 million
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Year |
Quarter |
Total A$Million* |
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1 |
1st |
15.38 |
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2nd |
15.76 |
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3rd |
16.15 |
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4th |
16.56 |
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2 |
1st |
16.97 |
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2nd |
17.4 |
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3rd |
17.83 |
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4th |
18.28 |
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3 |
1st |
18.73 |
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2nd |
19.2 |
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3rd |
19.68 |
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4th |
20.17 |
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4 |
1st |
20.68 |
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2nd |
21.19 |
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3rd |
21.72 |
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4th |
22.27 |
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5 |
1st |
22.82 |
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2nd |
23.39 |
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3rd |
23.98 |
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4th |
24.58 |
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* These amounts shall be reduced by the same proportion as the Purchase Price is less than A$15 million. |
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SECOND SCHEDULE
[formula to calculate future value of royalties paid]
Future Value of Royalties Paid
The Future Value of Royalties Paid will be calculated as follows:
For each year, the royalty payments made will be totalled by quarter but should the royalties paid during the year being calculated exceed US$1.25 million then the amount in excess of US$1.25 million for that year will not be counted except to the extent that an amount equal to 66% of that excess has not been applied to reduce the aggregate Principal Outstanding under each Investor’s Loan Agreement.
For each quarter until the date of calculation, a calculated rate of return of 10% per annum shall be applied to increase the value of the royalties. The total of all quarters of such increased values thus calculated since inception to that date of calculation will be the Future Value of Royalties Paid.
A practical example of the application of the above is contained in the attached table.’
16 The last of the Transaction Documents was a “Take-Out Option Agreement”, also dated 27 October 1998, which recited that DDS wished to grant to each of the “Investors”, identified as Sharsbury Pty Ltd and Sidstone Pty Ltd, an option to require DDS either to subscribe for the Subscription Shares or provide a subordinated loan to the Joint Venture. The Joint Venturers were parties to the Take-Out Option Agreement and were identified as Shepridge Pty Ltd and Slademere Pty Ltd. The Take-Out Option Agreement provided in cl 2 under the heading “SUBSCRIPTION OPTION”;
‘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.
2.3 Price
The Subscription Price on the Subscription Date for the Subscription Shares in each Investor’s respective Joint Venturer shall be the amount in respect of that date calculated in accordance with the formula in the First Schedule.’
17 There were then provisions in cl 3 governing the exercise of the subscription option and payment of the subscription price upon redemption of all of the shares owned in the relevant Joint Venturer by the relevant Investor.
18 The Take-Out Option Agreement then provided by cl 4 under the heading “Loan Option”;
‘4 LOAN OPTION
4.1 Loan Option
In consideration of, among other things, the payment of $1.00 by Subco to DDS (the receipt of which DDS hereby acknowledges):
4.1.1 DDS offers to lend to Subco an amount equal to the Loan Amount ("the Loan Offer"); and
4.1.2 the Loan Offer is not revocable prior to the day following the Termination Date.
4.2 Acceptance
4.2.1 Subco may accept the Loan Offer on or after (but not before) the occurrence of a Purchase Event.
4.2.2 Subject to Clauses 4.2.3 and 4.2.4, the decision of whether or not to accept the Loan Offer as a result of the occurrence of a Purchase Event shall be made at the absolute discretion of Subco.
4.2.3 Subco shall not be entitled to accept the Loan Offer if any Investor has accepted the Share Offer.
4.2.4 Subco shall not be entitled to accept the Loan Offer at any time after the aggregate income and capital returns received by the Investors since the date of this Agreement is more than the amount calculated in accordance with the formula in the Second Schedule.
4.3 Loan Amount
The Loan Amount on the Loan Date shall be the amount in respect of that date calculated in accordance with the formula in the First Schedule.
4.4 Exercise of Loan Option
4.4.1 Subco may inform DDS of its decision to accept the Loan Offer by written notice substantially in the form of Annexure 2 signed by an Authorised Officer of Subco.
4.4.2 A notice given under Clause 4.4.1 must specify the Loan Date which shall not be earlier than the Business Day after the date of such notice.
4.4.3 A notice given under Clause 4.4.1 is irrevocable.
4.5 Loan Terms
4.5.1 If the Loan Offer is accepted by Subco then DDS shall on the Loan Date provide a cash advance (the "DDS Loan") to Subco of the Loan Amount.
4.5.2 There shall be no interest payable by Subco on the amount outstanding under the DDS Loan.
4.5.3 Subject to Clause 4.6, after the DDS Loan has been made Subco will apply all monies as and when received from time to time in the following order of priority:
4.5.3.1 first, to the Investors in their respective Proportions by way of distribution of income and/or capital until such time as the aggregate income and capital returns received by the Investors since the date of this Agreement is equal to the amount calculated in accordance with the formula in the Second Schedule; and
4.5.3.2 secondly, to DDS in repayment of the DOS Loan.
DDS acknowledges and agrees that it shall not be entitled to make any claim or bring any action for the repayment of the DDS Loan until the whole of the moneys referred to in Clause 4.5.3.1 have been paid to the Investors.
4.5.4 At any time after the whole of the moneys referred to in Clause 4.5.3.1 have been paid to the Investors DDS shall be entitled by notice in writing to Subco to require the immediate repayment of the DDS Loan whereupon the Investors shall automatically be deemed to have accepted the Share Offer and:
4.5.4.1Subco is hereby irrevocably directed by DDS to (in satisfaction of Subco’s obligation to repay the DDS Loan) apply an amount equal to the DDS loan in satisfaction of the payment of the Subscription Price to or at the direction of each Joint Venturer in their respective Proportions; and
4.5.4.2the provisions of Clause 3.2 shall apply.
4.6 Subco will on-lend the Loan Amount to each Investor in their respective Proportions and each Investor will firstly apply any amount so received in the reduction of the Principal Outstanding under its respective Loan Agreement.’
19 Clause 8 of the Take-Out Option Agreement provided;
‘EXERCISE OF OPTION
Neither the Loan Offer nor the Share Offer shall be capable of being exercised after any sale by Subco of the Application Software following any acceptance of the Sale Offer.’
20 The First and Second Schedules to the Take-Out Option Agreement were in these terms;
‘FIRST SCHEDULE
SUBSCRIPTION PRICE / LOAN AMOUNT
[formula]
Loan Amount
The Loan Amount will be equivalent to the Deposit placed with the Financier after deductions for repayments as permitted under Clause 6 of the Governing Terms Agreement and interest received as per Clause 3 of the Deposit Agreement.
The Loan Amount should at all times be equivalent to the aggregate Principal Outstanding under each Investor's Loan Agreement.
Subscription Price
The Subscription Price will be the total of
The Loan Amount
Plus
A$3.0 million
Plus
An amount equal to a 25% compounded Annual Return on A$3.0 million
Less
The future value of the royalty stream paid by DDS as per the Second Schedule of the Call Option Agreement.
This total is divided in the Proportions as per the First Schedule of the Joint Venture Agreement to apply for each Investor.
SECOND SCHEDULE
INVESTOR RETURNS
[formula]
Investor Returns
The calculation of aggregate income and capital returns by the Investors (combined) will be as follows:
A$3.0 million
Plus
An amount equal to a 25% compounded Annual Return on A$3.0 million
Less
The future value of the royalty stream paid by DDS as per the Second Schedule of the Call Option Agreement
This total is divided in the Proportions as per the First Schedule of the Joint Venture Agreement to apply for each Investor.’
(v) The Deloittes Report
‘In our opinion, as a result of the various agreements that are in place, the Application Software has a range of values depending on when the option to buy back the Application Software is exercised by DDS. Summarised below is the value of the Application Software, using the relief from royalty approach, assuming that the option is exercised at the end of the respondent years.
|
2000 |
2001 |
2002 |
2003 |
2004 |
|
|
$m |
$m |
$m |
$m |
$m |
|
|
Low |
2.8 |
2.3 |
3.3 |
5.0 |
6.9 |
|
High |
2.8 |
2.6 |
4.0 |
6.6 |
10.6 |
This compares to the value of the Application Software using the cost approach of $9.7 million. We are of the opinion that the relief from royalty approach is the most appropriate basis of valuation in this instance.
Furthermore, we note that in arriving at these values, we have disregarded any tax benefits that may arise as a result of this transaction.’
22 The documents supporting that opinion included cash flow forecasts from 2000 to 2004 based on “management’s global business plan” prepared in February 1999. That plan included actual sales revenues of $2,160,000 for the year ended 30 June 1998 and $2,033,000 for the seven months to 28 February 1999. The forecast sales revenues were for the year ending 28 February 2000, $20,800,000, for the year ending 28 February 2001, $77,800,000, for the year ending 28 February 2002, $141,900,000, for the year ending 28 February 2003, $204,000,000 and for the year ending 28 February 2004, $279,400,000.
(vi) DDS seeks to alleviate its financial difficulties
23 On 24 May 1999, GTM, Monit and Zacmore assigned to Palicave Pty Ltd (“Palicave”) all their rights, title and interest under the documents evidencing the loan to DDS including the deed of variation of 5 September 1996. Palicave, in turn, on 26 May 1999 notified DDS that the debt might be discharged by payment to Palicave of $1, 572,827.20 “plus costs plus interest”.
24 During 1999, DDS was exploring options for securing its listing on the NASDAQ Stock Exchange in New York. To that end, it enlisted the assistance of Banque Nationale de Paris (“BNP”). Through BNP, Elbaum and others controlling DDS were introduced to interests associated with one or more of the second respondent (“mCom Solutions”), the third respondent (“Dragonventures.com Inc”), and the fifth respondent (“David Hains”).
25 By the end of 1999 at the latest, DDS was experiencing severe financial difficulties. It had last paid royalties accrued under the LRC Agreement on 16 August 1999 when it paid $37,779 in respect of royalties which had accrued from January to May 1999. A cheque in payment of a further instalment of royalties was dishonoured by the ANZ Bank in about December 1999. Those financial difficulties prompted DDS to seek a further injection of capital by entering into an arrangement with an entity connected with David Hains.
26 In late 1999, BNP arranged a meeting between Elbaum, Mr Cattanach (“Cattanach”) another director of DDS and van Zanten representing DDS, a representative of the ANZ Bank and Michael Hains and another person who have been described by Elbaum as representing “Portland House interests.” The purpose of that meeting was to further BNP’s enquiries regarding the relationship between DDS and the ANZ Bank which, at that time, according to Elbaum, owned about 5% of DDS.
27 Later in the same month, the representatives of DDS were invited by Mr Mulholland of BNP and Michael Hains to a meeting at Portland House. Elbaum and Cattanach attended in company with a Mr Cleary who was then an adviser to DDS. According to Elbaum, David Hains arrived at the meeting 20 minutes after it started and “immediately took over the conduct of the meeting.” Thereafter, David Hains outlined the terms on which his or Portland House’s interests would invest $10 million in DDS with a view to procuring its listing on the NASDAQ Exchange.
28 At a later meeting to discuss heads of agreement, David Hains requested that representatives of Portland House be given free access to DDS’ documents for the purpose of conducting a “due diligence” investigation. That access was granted and the investigation was primarily carried out by the ninth respondent, Ian Morris Kiefel (“Kiefel”).
29 Another meeting was held on a Saturday morning at the Toorak home of David Hains attended only by him and Elbaum. In the course of that meeting, David Hains outlined a proposal for a takeover of DDS and indicated that he first required to be clear about the status of orders which it had obtained for the purchase of its product and to have an assessment made of its liabilities. To that end, discussions were held over the ensuing days between Kiefel and van Zanten who was then representing DDS. Later in the same week, a further meeting was held at Portland House to negotiate heads of agreement. As well as representatives of DDS and David Hains and Kiefel, that meeting was attended by Zeljko Ranogajec as a representative of Palicave which, it will be recalled, was the assignee of the loan by GTM, Monit and Zacmore to DDS.
(vii) The heads of agreement of 31 January 2000
‘2. The Vendor agrees to sell all of the assets to be transferred pursuant to this Heads of Agreement free from encumbrances to the Purchaser, and the Purchaser agrees to buy those assets on the terms and conditions set out in this Heads of Agreement, for consideration comprising:
(a) a cash payment in the amount of $18,000,000 (on the basis that the amount outstanding to the ANZ is $6,000,000. If the amount outstanding to the ANZ is less or more than $6,000,000 the cash payment amount shall be adjusted accordingly);
(b) the issue of shares in the Purchaser to the Vendor as set out in paragraph 21 below; and
(c) $6,000,000 pursuant to the ANZ facility referred to in 11(b)
and otherwise subject to the conditions herein, and as adjusted pursuant to paragraphs 5, 9 and 15 of this Heads of Agreement.
3. The Purchaser will not assume any of the liabilities of the Vendor, whether contingent or otherwise, save for employee liabilities as described below in paragraph 5 and liabilities assumed pursuant to paragraph 15.
4. At completion of the sale transaction, the additional funds loaned by ANZ pursuant to the increase in the line of credit as referred to at paragraph 1 above will be repaid.
5. The Purchaser will, at completion of the Sale transaction, assume all liabilities of the Vendors to employees as at 31 January 2000 comprising wages or salaries, annual leave, sick leave and long service leave and the cash consideration portion of the purchase price will be reduced on a dollar for dollar basis, for the total amount of the liability so assumed.
6. The assets to be transferred to the Purchaser will include:
(a) all rights of the Vendor to the intellectual property of and relating to the business of the Vendor;
(b) all intellectual property owned by the Vendor;
(c) any rights held by the Vendor to have intellectual property assigned to it; and
(d) any rights held by Palicave to have intellectual property relating to the business of the Vendor assigned to it.
The Vendor warrants that it will be able to transfer unencumbered title to this intellectual property to the Purchaser and that the intellectual property can be effectively used and updated commercially by the Purchaser.
… … … … …
11. Other than in respect of the matters provided in paragraph 1, this Heads of Agreement is conditional upon the following conditions precedent being satisfied to the reasonable satisfaction of the Purchaser:
(a) Within 14 days of the signing of this Heads of Agreement, Achi Racov visiting the Vendor and satisfying himself as to the technology and intellectual property owned or used by the Vendor.
(b) The ANZ agreeing to make available a secured loan to the Purchaser in the amount of and on terms and conditions no less favourable to the Purchaser than the existing ANZ facility of the Vendor (believed to be $6,000,000). The proceeds of this loan are to be applied by the Purchaser at Completion of the Sale transaction (in part payment of the cash consideration portion of the purchase price) to pay out the Vendor’s debt to the ANZ.
(c) The Purchaser satisfactorily completing its due diligence of the Vendor, its assets and business within 14 days after the provision of the 31 January 2000 management accounts.
(d) Temwell Pty Ltd (“Temwell”) providing written confirmation that application software, which they purchased from the Vendor, may be repurchased by the Vendor, or its successors or nominee (which class of nominee may include the Purchaser), at a price of no greater $4,000,000 within 12 months of the date of this Heads of Agreement.
(e) Temwell and Palicave providing all necessary consents to the sale contemplated by this Heads of Agreement.
… … … …
12. The Vendor warrants in favour of the Purchaser that it has good title to all assets to be sold to the Purchaser and agrees to indemnify the Purchaser against any claims thereto.
… … … … …
19. The entity to be nominated by the Purchaser as the actual transferee of the assets (“the Purchaser Entity”) will, immediately prior to the issue of shares referred to in paragraph 22 below, be a wholly owned subsidiary of Dragonventures.com Ltd. The structure and place of incorporation of the Purchaser Entity will be determined as soon as practicable after the date of this Heads of Agreement, but in any event within 21 days thereof. The entity in which shares are to be issued to the Vendor pursuant to paragraph 22 below will be the entity which is likely to be listed, having regard to that structure, being the Purchaser Entity or the holding company of 100% of the issued shares in the Purchaser Entity.’
(viii) The events of February 2000
31 To further the negotiations for the sale of DDS’s business, Elbaum wrote in these terms on 4 February 2000 to Dragonventures.com Ltd, “c/o David Hains, The Portland House Group of Companies”;
‘Dear David,
Please accept this letter as consent by Dynamic Data Systems for Dragonventures.com and its representatives to enter into discussions with the relevant parties concerning the Application Software Licence between Dynamic Data Systems and Temwell.
The contact people for the Licence are:
Dynamic Data Systems - Andrew Jacobson at Marshall Dent (9670 5000)
Temwell - Roger Enriquez (9684 7121)
Palicave / Zeljko Ranogajec - Stephen Polzynski at Gray Perkins (02 8235 1211).’
Copies of that letter were sent to, amongst others, Mr Jacobson and Enriquez who were named in it as “contact people”.
32 On 7 February 2000, Jonathon Wenig (“Wenig”) of Arnold Bloch Leibler (“ABL”) who were the solicitors then acting for Dragonventures.com Ltd, wrote the following memorandum to Mr Sharp (“Sharp”) of the same firm who, had acted for Temwell in the preparation of the Transaction Documents;
‘We act for Dragonventures.com Ltd (the "Purchaser"). The Purchaser has signed a heads of agreement relating to the purchase of the business and assets of DDS. As part of that process, the Purchaser wishes to secure DDS' rights to the application software technology which is currently owned by, and licensed by DDS, from, Temwell - your client.
As you are aware, as part of the arrangements which you put in place for your client, Temwell currently owns that software and has licensed it to DDS. Furthermore, Temwell has granted to DDS a call option in respect of the software. Under the sale agreement with DDS the Purchaser will acquire all of DDS' rights under and in respect of the call option. In addition, and to avoid any doubt or confusion, the Purchaser will obtain an irrevocable direction from DDS that any exercise by DDS of the call option will be in favour of, and will direct a sale in favour of the Purchaser.
As a condition precedent to the completion of the purchase by the Purchaser of DDS' business, the Purchaser requires:
1 An acknowledgment and consent from Temwell as to the purchase by the Purchaser of DDS' assets and business, including DDS’ rights under the Licence and Commercialisation Agreement between Temwell and DDS, and the Call Option Agreement.
2 Notice of confirmation from Temwell in favour of the Purchaser, that at any time during the term of the Call Option, the Purchaser (or its nominee being the party nominated by the Purchaser as the actual purchaser of DDS' assets) will, as a consequence of the purchase of DDS' rights under the Call Option Agreement, be entitled to purchase the Application Software for a price which will not in aggregate exceed $X. X shall mean the amount calculated in accordance with the formula in the Call Option Agreement, provided that in relation to the component of the formula which entitles Temwell to receive an additional 2% of the market value of the Application Software in addition to the sale price - Temwell shall acknowledge and confirm in favour of the Purchaser that market value for the purposes of that calculation shall not exceed the sale price calculated in accordance with the formula in the Call Option Agreement. For example, if the number calculated in accordance with the formula in the Call Option Agreement is $3.1 million, Temwell shall acknowledge that its total entitlement to consideration shall not exceed $3.1 million plus 2% of $3.1 million.
3 Notwithstanding any of the above, or anything contained in any of the agreements between Temwell and DDS and any other party, Temwell acknowledges and agrees that at any time for a period of 6 months from completion of the sale by DDS to the Purchaser of its business and assets, the Purchaser will be entitled to purchase the Application Software from Temwell for an aggregate price which will not exceed $3.1 million.
If you have any queries, please contact me.’
‘In response to the memorandum dated 7th February 2000 relating to the above, Temwell Pty Ltd's position is as follows :-
(1) Temwell acknowledges and consents to the purchase by Dragonventures.Com Ltd as to the purchase of DDS' assets and business, including DDS' rights under the Licence and Commercialisation between Temwell and DDS and the Call Option agreement.
(2) Temwell confirms in favour of the Purchaser (Dragonventures.Com Ltd or its nominee) that at any time during the term of the Call Option, the Purchaser will be entitled to purchase the Application Software at an agreed price (yet to be determined) in accordance with the schedules relating to rates of return within the Call Option Agreement and final valuations relating to the software.
(3) In regard to Point 3 of your memorandum, the position of Temwell is that it is not yet in a position to determine the final price as copies of final valuations have not yet been received by Temwell.’
34 On the next day, 23 February 2000, Sharp sent this facsimile message to Enriquez;
‘Further to your facsimile yesterday, David Hains has requested some clarity as to the investors’ expectations regarding the ultimate purchase price. Would you please provide a working example of the expected purchase price, assuming a value of, say $9.2 million (which I recall was the approximate valuation you mentioned last week).
Would you please forward this as a matter of some urgency.’
35 In response to that request, Enriquez, again “for and on behalf of” Temwell, replied to Sharp by facsimile dated 24 February 2000 in these terms;
‘In response to your facsimile received yesterday, I refer you to the first schedule in the Call Option Agreement attached, which calculates the purchase price based on a $15million valuation.
If the valuation is for example $9.2 million, the purchase price would be 61.33% of the relevant quarter (ie $9.2 m/$15.0m = 61.33%). The current quarter applicable is Year 2 Quarter 2 as the initial transaction occurred on the 27th October 1998.
This would mean that the purchase price would be 61.33% X $17.4m = $10,671,420. An adjustment would be made to this figure for royalties received to date, as per the agreement.
I hope this clarifies the position. These calculations are based on the current Call Option Agreement.
I suggest that a meeting should take place with David Hains in order to discuss the desired outcome of both parties. Please contact me if this can be arranged.’
36 A copy of that facsimile was forwarded on 25 February 2000 by Wenig’s secretary at ABL to David Hains. On the same day, Enriquez wrote to Sharp in these terms;
‘As discussed in our telephone conversation today, the investors in Temwell are basing the value of the software at $15.0m as per the original transaction. As the funding has not yet occurred in this transaction, the buy-back based on the first schedule would be as follows :-
Year 2 Quarter 1 $17.4m
Less outstanding funding $12.0m
Net purchase price of software $ 5.4m
====
As discussed, I believe we should arrange a meeting of both parties in order to finalise this matter’
(ix) The Sale of Business agreement of 1 March 2000
‘2.1 Conditions Precedent
The obligation of the Purchaser to complete the purchase of the Assets and the Business and to assume the other obligations to be assumed by the Purchaser pursuant to this Agreement is subject to and conditional upon the satisfaction or waiver by the Purchaser of each of the following conditions precedent:
2.1.1 ANZ increasing the current line of secured credit to the Vendor by a maximum amount of $1,400,000 to be advanced on a temporary basis;
2.1.2 Achi Racov being satisfied as to the extent, existence and utility of the Intellectual Property and the Application Software and that the Employees have accepted employment with the Purchaser in accordance with Clause 1.1.12 and Clause 4;
2.1.3 each of Zeljko Ranogajec, Palicave Pty Ltd, D & E and HDE [Elbaum] entering into a deed of release and indemnity with the Purchaser, in a form acceptable to the Purchaser, pursuant to which those parties acknowledge and agree that they have no interest in, or claims against any of the Assets or the Business, nor against the Purchaser, and indemnifying the Purchaser against any such interests or claims;
2.1.4 ANZ agreeing to make available to the Purchaser, for draw down at Completion, a secured loan of not less than the amount referred to in Clause 2.4.3 (with the establishment costs of such facility being borne by the Vendor) but otherwise in an amount and on terms and conditions no less favourable to the Purchaser than the existing facility granted by ANZ to the Vendor;
2.1.5 the Purchaser completing a due diligence review of the Vendor and the Business to its satisfaction within 14 days of delivery by the Vendor to the Purchaser of the Accounts;
2.1.6 Temwell providing written confirmation that the Application Software may be repurchased by the Vendor or its successors in title or its nominee (which may include the Purchaser) within 12 months of the date of the Heads of Agreement, at a price no greater than $3,500,000;
2.1.7 the Vendor giving to the Purchaser (or its nominee) an irrevocable appointment together with evidence that such appointment has been delivered to Temwell, which appointment shall appoint the Purchaser (or its nominee and no other person) as the Vendor’s appointee for the purchase of the Application Software pursuant to clause 2.1.1 of the Call Option Agreement entered into between the Vendor and Temwell on 27 October 1998 (each of the appointment and the evidence of delivery being in a form acceptable to the Purchaser);
2.1.8 each of Zeljko Ranogajec and Palicave Pty Ltd (ACN 080 402 535) confirming in writing to the Purchaser (in a form acceptable to the Purchaser) that all rights it may have in respect of any Intellectual Property are waived, relinquished or assigned to the Purchaser, including, without limitation the Application Software, or any rights under the Call Option Agreement between the Vendor and Temwell dated 27 October 1998 and/or pursuant to an agreement between the Vendor, Zeljko Ranogajec, D & E and HDE dated 20 May 1999;
2.1.9 Temwell (and any other parties to the arrangements pursuant to which Temwell purchased the Application Software) and Palicave Pty Ltd (ACN 080 402 535) providing all necessary consents to the sale of the Assets and the Business contemplated by this Agreement;
2.1.10 there is no material outstanding breach of this Agreement (including the Vendor's Warranties) by the Vendor;
2.1.11 no receiver, receiver and manager, official manager, liquidator or administrator has been appointed in respect of the Vendor and/or the whole or any part of the Assets or undertaking of the Business;
2.1.12 recognising that the Employees and the knowledge possessed by and information held by those Employees are critical to the success of the Business, the Purchaser requires as a condition precedent to Completion, that all of the Employees to whom an offer is made by the Purchaser, accept such offer of employment from the Purchaser for a period of three years from Completion (or such other term as the Purchaser shall determine) on terms and conditions agreed between the Purchaser and the relevant Employee;
2.1.13 the Vendor obtaining any consents necessary in relation to the transfer of the Assets to the Purchaser;
2.1.14 the respective lessors consenting in writing to the assignment by the Vendor (or D & E Consulting Pty Ltd, as appropriate) to the Purchaser of the Leases;
2.1.15 the respective lessors consenting in writing to the assignment by the Vendor to the Purchaser of the Equipment Leases; and
2.1.16 all leases for equipment (other than the Equipment Leases) under which the Vendor has possession of certain assets which it does not own and which are used in relation to the Business, including without limitation assets owned by HDE and/or D & E and used in the Business, being paid out by the Vendor and the Vendor acquiring unencumbered title to that equipment such that that equipment will form part of the Assets transferred to the Purchaser at Completion.
2.2 Non-satisfaction
The Conditions Precedent are conditions for the benefit of the Purchaser only.
If any Condition Precedent is not satisfied or waived by the Purchaser by the End Date, this Agreement shall, at the option of the Purchaser, be terminated with immediate effect by written notice given to the Vendor.’
38 Then followed these sub-clauses under the heading “Sale and Purchase”
‘3.1 Sale and Purchase
Subject to the provisions of this Agreement, the Vendor agrees to sell, transfer and assign to the Purchaser, and the Purchaser shall purchase and take from the Vendor, the Business and the Assets for the Purchase Price free from all Encumbrances.
… … …
3.3.1 The Purchase Price for the Assets and the Business is, subject to Clause 8.3, $18,000,000 plus the allotment and issue to the Vendor of 24,000.000 ordinary shares in the capital of the Purchaser pursuant to Clause 9.2. The Purchase Price is to be paid in accordance with Clause 2.4.
3.3.2 The Purchase Price shall be apportioned as determined by the Purchaser.’
39 The Sale of Business Agreement of 1 March 2000 included these definitions;
‘“DDS Software” means all computer software and related programs developed and owned by the Vendor or any Associate of the Vendor in connection with the Business, other than the Application Software;’
‘“Application Software” means the software and related programs for use on mobile transaction devices (together with all modifications thereto) (or enhancements thereof developed by the Vendor and sold to Temwell pursuant to an agreement entered into between them on 27 October 1998;’
‘“Assets” means all the assets of the Vendor used or owned in connection with the Business as at the Completion Date wherever they are located including (without limitation);
… … …
(k) any and all right, title to or interest of the Vendor in the Application Software, pursuant to the Licence Research and Commercialisation Agreement between Temwell and the Vendor dated 27 October 1998, the Call Option Agreement between Temwell and the Vendor dated 27 October 1998, or otherwise; and
(l) the Other Assets.’
40 According to Elbaum, he had been assured by David Hains during February 2000 that he (Hains) had “settled all issues” in relation to Temwell. But for that assurance, Elbaum said, he would not have permitted DDS to proceed with the deal. Moreover, Elbaum said, before signing the Sale of Business Agreement, he had been shown by Kiefel a copy of the letter from Enriquez dated 22 February 2000 quoted at [33] above and been told that all conditions concerning the consent of Temwell had been met.
(x) Richard Hains’ letter of 7 March 2000
‘Thank you for your facsimile of 22 February 2000 responding to our memorandum of 7 February 2000.
I note that upon receipt of your facsimile, and in reliance on the position reflected therein, we have proceeded to invest further funds in the business of Dynamic Data Systems Pty. Ltd. (“DDS”), and on 1 March 2000 we signed a formal Sale Agreement for purchase of DDS’ business and assets.
We note that while the party to the formal Sale Agreement is mCom Solutions Inc, a company incorporated in Delaware (and a wholly owned subsidiary of Dragonventures.com.Ltd), many of the Australian assets of DDS will be owned by mCom Solutions Australia Pty. Ltd. (ACN 091 375 950), a wholly owned subsidiary of mCom Solutions Inc.
DDS’ rights and interests under the Licence, Research and Commercialisation Agreement will be among those assets assigned to mCom Solutions Australia Pty Ltd.’
42 That letter was passed by David Hains to Wenig of ABL with a request to give a copy of it to “Temwell’s legal representatives”. It was then apparently passed to Sharp who faxed it to Enriquez, under cover of a note “I attach copy fax received from David Hains. Please contact me to discuss.”
(xi) The meeting of 9 March 2000 between David Hains, Tauber and Enriquez
43 On 9 March 2000 a meeting was held at David Hains’ office between David Hains, Tauber and Enriquez. According to David Hains, there was discussion of the price at which the Call Option could be exercised. Enriquez proposed a price of $5.4 million which Hains contended was incorrect. On David Hains’ version, Tauber and Enriquez did not indicate any readiness by Temwell to move below that price. However, Tauber and Enriquez assert that David Hains “gave the clear impression” that Temwell would be “bought out” for “a figure somewhere between $3.1 million and $3.4 million.” It is probable that David Hains mentioned those figures when disputing the correctness of Enriquez’s assertion that the formula yielded an exercise price under the Call Option Agreement of $5.4 million.
(xii) Events between 20 and 24 March 2000
44 Temwell was formally advised of the sale by DDS of its assets and business tomCom Solutions when this letter dated 20 March 2000 by Elbaum as “Chairman and CEO” of DDS was written to Enriquez of Temwell;
‘As discussed. I confirm that DDS is in the process of selling its assets to mCom Solutions Inc. for a combination of cash and shares in mCom Solutions Inc.
I also confirm that the mCom Solutions Inc. shares which will be held by DDS as part of this transaction, are to be distributed in proportion with the shareholding held by the shareholders of DDS within 6 to 8 months of settlement and prior to the listing of mCom Solutions Inc.’
45 After the letter of 20 March 2000 advising Temwell of the agreement to sell DDS’ business had been sent, Enriquez telephoned Elbaum to say that he (Enriquez) had made a very good deal with mCom Solutions. Elbaum made no enquiries of Enriquez about the nature of the “deal”.
‘Please check the attached and confirm it is as per the formula in the call option agreement.’
47 Settlement of the acquisition of the business of DDS by mCom Solutions was expected to occur at a meeting on 22 March 2000. That meeting was attended by Enriquez, Fraid, Mr Stankovich representing the ANZ Bank, Elbaum and van Zanten, together with Ms Renner of Deacons, the solicitors for DDS and Kiefel, Wenig and David Hains on behalf of mCom Solutions. Fraid indicated at an early stage of the meeting that, unless its rights to the Application Software were “bought out” by the purchasing interests, Temwell would not sign a deed of consent which had been proffered by Wenig to Enriquez on the morning of 22 March under cover of a letter noting that he attached “a simple form of consent deed which we would propose having Temwell execute at settlement this afternoon.” The recipient was invited to contact Wenig with any queries or comments. The proposed deed of consent included these provisions;
‘2. Temwell hereby consents to the assignment (pursuant to the Sale Agreement) by DDS to mCom (or a wholly owned subsidiary of mCom nominated by mCom) of its rights to the Application Software, including DDS’ rights under the Call Option Agreement and the LRC Agreement.
3. Temwell acknowledges that in addition to the assignment by DDS of its rights under the Call Option Agreement, to which Temwell has consented under this Deed, Temwell has been provided with a copy of an irrevocable appointment executed by DDS in favour of mCom pursuant to which DDS irrevocably appoints mCom (or mCom’s nominee) as DDS’ appointee for the purchase of the Application Software pursuant to clause 2.1.1 of the Call Option Agreement.
4. Temwell acknowledges and agrees that upon receiving notice from mCom (or a party nominated by mCom) exercising the Call Option, Temwell will comply with its obligations under the Call Option Agreement in favour of mCom (or the party nominated by mCom).
5. Temwell agrees to exercise all powers available to it, do all acts, matters and things and sign, execute and deliver all documents and instruments which may be necessary or reasonably required to give full force and effect to the provisions of this Deed.’
48 When he was told by Kiefel at the settlement meeting of 22 March that no “buy out” would occur on that day, Fraid asked for Sharp of ABL to come to the meeting. When that occurred, Fraid and Enriquez consulted Sharp who, according to Fraid, advised them that the deed of consent was not contrary to their interests and that mCom Solutions would eventually “buy out” their rights to the Application Software.
50 At a meeting on the day after the abortive settlement meeting of 22 March 2000, David Hains, according to Elbaum, said that he had “encountered big problems with Temwell and the ANZ”, and that he would have to advance from the cash resources of his group $3.5 million to satisfy Temwell’s demand and $6 million to satisfy those of the ANZ Bank. Again according to Elbaum, David Hains said that those payments would only be made if DDS and Elbaum were to agree to forego all or most of the shares in the acquiring vehicle which they were to receive under the Sale of Business Agreement. Elbaum replied that the deal was at an end and left the meeting. During the same day, according to Elbaum, he continued to insist that he would not proceed with the Sale of Business Agreement while matters remained unresolved with Temwell. Elbaum also claimed that he had been assured by Kiefel that those matters had been resolved and that this had been supported by the personal assurance of David Hains. However, because of David Hains’ threat to dilute the equity of the DDS interests in the acquiring vehicle, Elbaum telephoned Fraid and told him that “the deal with mCom was off”. On Fraid’s recommendation, Elbaum approached Levi Mochkin, a stockbroker, who was seen as another potential partner or investor because of his interest in “technology issues”. Elbaum met with Mr Mochkin in company with two senior representatives of the ANZ Bank on the evening of 23 March. However, no concrete alternative proposal for financing the continuation of DDS’ business emerged from that meeting.
51 Early on the morning of 24 March 2000, Wenig sent by facsimile this letter to DDS with a copy to Vivi Renner of Deacons;
‘I refer to the Sale of Business Agreement between Dynamic Data Systems Pty Ltd (“DDS”), mCom Solutions Inc (“mCom”), Hector Daniel Elbaum and D & E Consulting Pty Ltd dated 1 March 2000 (the “Sale Agreement’).
On behalf of mCom, I hereby notify DDS that each of the conditions precedent to the Sale Agreement have either been:
1 Satisfied to mCom’s satisfaction; or
2 Waived by mCom.
There are several conditions which will be satisfied at completion by the execution by DDS of documents which DDS is contractually required to execute under the Sale Agreement (eg the irrevocable appointment document for the purposes of the Call Option), and others (such as third party consents) which will be satisfied at Completion by the handing over of releases upon payment of funds.
Accordingly, mCom requires that DDS attend at settlement at 10 am this morning at our offices, and complete the purchase of the Assets under the Sale Agreement - as DDS is contractually bound to do under the Sale Agreement.
If you have any queries, please contact me.’
52 On instructions from Elbaum, Ms Renner replied in these terms to the letter just quoted;
‘SETTLEMENT
We have been asked to reply to your 24 March 2000 letter to the directors of Dynamic Data Systems Pty ltd
Before they can agree that the proposed settlement should proceed, would you please confirm that the ANZ Bank will be paid $6,000,000 from loan funds without the equity to be issued to Dynamic Data Systems Pty Ltd in mCom Solutions Inc being reduced or diluted beyond 49.9 per cent in order to fund this payment or to provide additional working capital except as contemplated by clause 10.5 of the Sale of Business Agreement (ie to provide working capital over and above the $11,000,000 of loan funds contemplated to pay out the ANZ Bank and by clause 10.3.1 of the Sale of Business Agreement).’
53 As a result of that exchange of correspondence, Wenig caused this letter dated 24 March 2000 to be sent to the Directors of DDS;
‘Settlement
By countersigning this letter, mCom Solutions Inc confirms in favour of DDS that:
1 the $6 million to be paid to the ANZ Bank at Completion will be funded out of debt provided by Dragonventures.com Ltd. The term of that $6 million loan will be until the earlier of the date 12 months from the date of this letter, or the listing of mCom Solutions Inc. The $6 million loan will be on terms no less favourable to mCom as the terms of the loan (in particular in relation to interest) referred to in clause 10.3 of the Sale Agreement. This $6 million loan is provided in addition to the loan referred to in clause 10.3 of the Sale Agreement; and
2 mCom Solutions Inc will not issue shares in a manner which contravenes the provisions of the Sale Agreement.’
54 That letter was countersigned by Elbaum as an authorised signatory of DDS. The settlement of the Sale of Business Agreement occurred on 24 March 2000 when payments were made out of the purchase price of $18 million to satisfy the liabilities of DDS to Palicave ($1,835,807.24), Temwell ($37,013.47 for accrued royalties), the State Revenue Office (for unpaid payroll tax), the Australian Taxation Office (for unpaid group tax), the Australian Securities and Investments Commission ($120) and the ANZ Bank ($8,183,590.11). Out of the proceeds of settlement an additional sum of $750,000 was paid to Mr Ranagajec personally at the direction of DDS apparently in satisfaction of a liability to him assumed by DDS pursuant to a deed made 14 February 2000. A balance of $5,737,055.73 was paid out of the settlement proceeds to DDS.
‘3. The rights of the Vendor to the Application Software pursuant to the terms of the Licence, Research and Commercialisation Agreement (“LRC Agreement”) between the Vendor and Temwell Pty Ltd (ACN 082 656 157) (“Temwell”) dated 27 October 1998 are included in the sale of the Assets, and will be transferred to the Purchaser pursuant to the Sale Agreement on the Completion Date. If for any reason, at any time following the date of this Agreement, Temwell claims that it did not adequately consent to such assignment, or that for any other reason, the assignment was invalid, the Vendor agrees that it will sub-licence any rights it holds to the Application Software to the Purchaser (or a party nominated by the Purchaser):
(a) at the Purchaser’s option to be exercised by the Purchaser at any time in its absolute discretion by written notice to the Vendor;
(b) for consideration which in aggregate shall not exceed $10; and
(c) on terms which will include an undertaking that the Purchaser will not do anything or act in any manner pursuant to the sub-licence, which will cause the Vendor to be in breach of the LRC Agreement, and the sub-licence will include an indemnity from the Purchaser in favour of the Vendor supporting this undertaking.’
(xiii) Elbaum’s report to shareholders and noteholders of DDS
57 On 31 March 2000, Elbaum, again as Chairman of Directors and Chief Executive Officer of DDS sent this circular letter to its shareholders and convertible noteholders;
‘As you are aware, continued delays in getting DDS’ main product, the mobile transaction device, on the market has resulted in threats to the solvency of DDS. As a consequence, DDS has on 24th March 2000 sold its assets, technology and business to mCom Solutions Inc, a U.S. based mobile commerce systems and solutions provider, for a consideration comprising part cash and part shares in mCom Solutions Inc.
DDS was advised in this transaction by law firm Deacons Graham & James.
The sale enabled DDS to settle its considerable debts to its creditors, the Australian Taxation Office and the State Revenue Office and successfully removed the immediate threat of foreclosure of the company.
The sale transaction has now settled and the Board of Directors is currently assessing the financial position of the company and is engaged, in consultation with its advisors, in putting together a strategy for the company on a go forward basis.
The Board of Directors expects to present that strategy to you in the near future. In the meantime, the Board of Directors thank you for your patience in this very difficult time.’
(xiv) The letter before action on behalf of Temwell
‘Unauthorised Purported Assignment of Software Rights under Licence
We act for Mr Morry Fraid and Mr Geoff Tauber as well as Temwell Pty Ltd and their associated entities.
We have recently been provided with instructions in relation to what we believe might be an unauthorised dealing with Mobile Eftpos Application Software ("the software") owned by our client, Temwell Pty Ltd ("Temwell"). Based on our preliminary instructions, we note the following:
1. On or about 27 October 1998 our client licensed to Dynamic Data Systems Pty Ltd, now known as DKGR Holdings Pty Ltd ("DDS") certain rights to the software.
2. Under the Licence Agreement, the business was exclusive to DDS and DDS could only assign the licence to a Related Body Corporate with Temwell's consent.
3. Throughout February and March 2000, DDS entered into negotiations relating to or affecting the software with mCom Solutions Inc and its related entities ("mCom") ("the mCom sale").
4. To facilitate the mCom negotiations, our client was approached by DDS in relation to a "buy-out" of the software, where mCom would buy the rights to the software from Temwell. Negotiations took place during February and March 2000 and a buy-out price was discussed on numerous occasions.
5. A settlement date was arranged for the mCom sale and the buy-out of the software for 22 March 2000 ("the settlement"). The day before the settlement however, our client received a deed by facsimile which requested that our clients consent to the assignment of the software from DDS to mCom with no advantage, financial or otherwise, to our client and inconsistent with our client's belief that it was being "bought-out" of the software. Our clients refused to sign the deed and thereby put DDS and mCom on notice that Temwell did not consent to the assignment.
6. On 22 March 2000, our clients attended the settlement and again placed all parties associated with the matter on notice that Temwell did not consent to the assignment of the software. The settlement did not take place.
7. Notwithstanding our clients' clear position in this matter, it now appears that DDS might have wrongfully assigned the rights which it held to mCom without our clients' knowledge or consent.
If that is so, our clients consider DDS to be in breach of the Licence Research and Commercialisation Agreement dated 27 October 1998 by purporting to assign its interest in the software to you (if that be the case), without our clients' consent. Our clients further consider mCom to be using the software contrary to our clients' legitimate rights. Until we are able to properly investigate this matter and advise our clients, we require that you provide, by 4.00pm, Wednesday 10 May 2000:
(a) a copy of any documentation which purports to deal with the software in a manner inconsistent with DDS's rights and obligations under the licence arrangements and, in particular, any contracts and other documentation passing between DDS and mCom relating to the software;
(b) without admission that any valid assignment has been effected, a written undertaking that mCom will abide by all of the terms, conditions and obligations imposed on DDS, under the licence arrangements, including the obligations of confidence, protection of intellectual property rights, non-competition and the research, development, commercialisation and accounting obligations;
(c) detailed written advice as to whether and, if so how, mCom has dealt with our clients' software following the purported assignment on 24 March 2000.
Unless we receive the information, documents and the undertaking requested above by the required time, our clients will be forced to approach the Court to protect their interests, including making an application for injunctive relief and obtaining compensation from DKGR.
Our clients reserve all of their legal rights.’
59 A letter in substantially identical terms was written by the same solicitors on the same date to the Directors of DDS.
(xv) Deed of release from Elbaum and DDS
60 After various disputes about whether the mCom interests had received what they had contracted for under the Sale of Business Agreement, Elbaum entered into a Deed of Release to which DDS was also a party. On Elbaum’s account, that was done under threat of legal proceedings which he could not afford to defend.
(xvi) The institution of the present proceedings and interlocutory applications
61 On 31 August 2000 Temwell instituted the present proceedings against the first to sixth respondents. In the course of a directions hearing on 16 February 2001 an application by Temwell for an interlocutory injunction was foreshadowed. Eventually, on 23 March 2001, Merkel J made an order by consent;
‘… upon the Second, Fourth, Fifth, Sixth and Seventh Respondents by their Counsel, undertaking permanently by their employees or agents or otherwise to cease making, or authorising the making of, a substantial reproduction of adaptation of the Computer Program known as “MTD2000” (provided that nothing in this undertaking applies to the computer program known as “MTD3000”).
……
1. Until 4.00 pm on 30 March 2001 or further order, the Second, Fourth, Fifth, Sixth and Seventh Respondents by their employees or agents or otherwise be restrained from selling, licensing or exploiting the computer program known as “MTD3000”, or authorising such sale, licensing or exploitation.
……’
62 That injunction was later discharged by a further consent order made by his Honour on 18 April 2001 which imposed, in lieu of the earlier injunction, the following restraint on the same respondents;
‘The Second, Fourth, Fifth, Sixth and Seventh Respondents (“the mCom Respondents”) by their employees or agents or otherwise be permanently restrained from making, or authorising the making, of a reproduction or adaptation of any part of the Application Software as defined in clause 1.2 of the Governing Terms Agreement a copy of which is Exhibit GT10 to the affidavit of Geoffrey Tauber sworn on 10 April 2001 and filed herein (provided that nothing in this injunction applies to any version of the computer program known as “MTD3000”, in existence as at 18 April 2001, and any modifications which are made for the sole purpose of meeting the specifications of customers).
……’
(xvii) The “open offer” of 27 August 2001
‘1. A permanent undertaking on behalf of themselves, their servants and agents that they will:
(i) refrain from copying either the MTD 2000 or MTD3000 Application Software;
(ii) refrain from using the mark ‘MTD’;
2. For the purposes of this offer the MTD Application Software referred to is the latest version of the MTD3000 Application Software a copy of which will be provided under paragraph 3.
3. mCom Solutions Australia Pty Ltd will deliver to the Applicant or its solicitors a compact disk containing the latest version of the MTD3000 Application Software within seven business days of the communication of the acceptance of this offer in writing by the Applicant or its solicitors.
4. mCom Solutions Australia Pty Ltd to retain any copies of the MTD3000 Application Software and all products containing the MTD2000 or MTD3000 Application Software upon which royalties have been paid pursuant to the terms of the Settlement Deed dated 18 April 2001. mCom Solutions Australia Pty Ltd to be free to sell or otherwise dispose of such copies and products as it sees fit.
5. mCom Solutions Australia Pty Ltd will pay royalties payable by mCom Solutions Australia calculated at the rate of 4% on actual receipts from sales of the MTD2000 or MTD3000 products or any product which includes any part of the MTD3000 Application Software within seven business days of the communication of the acceptance of this offer in writing by the Applicant or its solicitors.
6. mCom Solutions Australia Pty Ltd will pay the Applicant’s costs of the Further Amended Application dated 1 May 2001 to the date of this letter on a party and party basis, such costs to be agreed, in default of agreement those costs to be taxed by the Registrar.
B. As against the first, sixth and seventh respondents, the Applicant shall discontinue the claim with no order as to costs, the intent being that each party will bear his or its own costs.
C. This offer as set out in A and B remains open for acceptance until 4.00 pm on 7 September 2001. It is an open offer and will be used by us on the question of costs, at an appropriate time.’
Part II: The Pleadings
64 On 31 August 2000 Temwell commenced proceedings in this Court against DDS, mCom Solutions Australia (both of which are in liquidation), Dragonventures.com Inc and mCom Solutions as well as David Hains and van Zanten. Each of Temwell’s pleadings and those of the respondents have been frequently and extensively amended and additional respondents have been joined. As well, certain of the respondents have instituted a cross-claim alleging abuse of process. To identify the many issues which require resolution, it is necessary to analyse the pleadings in some detail.
(i) The Statement of Claim
66 The first cause of action, against DDS, is related to the assignment by DDS of all of its rights in the application software to mCom Solutions. That assignment, it is alleged, was made without the consent of Temwell and in breach of the Transaction Documents. In seeking to make out that cause of action, reference is made to the meeting of 22 March 2000 recounted at [47]-[49] above and the failure of the participants to agree on a price to be paid to Temwell for the Application Software. At par 19 of the statement of claim it is alleged that, at that meeting, “Fraid stated that in the absence of agreement on a sale price for an immediate sale, the applicant would not consent to any assignment of the rights in the Transaction Documents”. Absence of consent is next said to have been established by Wenig’s having sent a draft deed of consent to the assignment to Enriquez on the morning of the 22 March meeting after which, it is alleged, Fraid refused to sign and has never signed the deed and, secondly, told those present at the meeting that he would not consent to the assignment. It is then pleaded in the alternative that Temwell had withdrawn any consent which it may have given. That alternative allegation was introduced during the course of the hearing when Temwell amended the relevant parts of its statement of claim to include the following paragraph;
‘21A Alternatively, if the Applicant had by the terms of the letter of Mr Enriquez to Mr Sharp dated 22 February 2000 consented to the assignment by the First Respondent to the Second and/or Fourth Respondent of its rights under the Licence Research and Commercialisation Agreement and the Call Option Agreement, which is denied, then such consent was withdrawn on 22 March 2000, prior to the settlement of the Sale of Business Agreement between the First Respondent and Second Respondent.’
By way of particulars, it is said, amongst other things, that consent had been withdrawn before the meeting of 22 March 2000 because “[Temwell] did not execute the [Deed of Consent]”.
67 It is also alleged at par 23 of the statement of claim that one or more of mCom Solutions, mCom Solutions Australia and van Zanten, knowing that Temwell had not given consent to DDS “jointly and/or severally caused, procured or induced [DDS] to breach the Transaction Documents”. Moreover, at par 24, Temwell also alleges that one or more of David Hains, Richard Hains or Kiefel as directors of mCom Solutions, mCom Solutions Australia and Dragonventures was implicated in the conduct complained of in par 23 of the statement of claim.
(b) The claims for infringement of trade mark and breach of copyright
68 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”, “MTD 2000” and “MTD 3000”. It is then alleged that, since the purported assignment in late March 2000, either or both of mCom Solutions or mCom Solutions Australia have reproduced copies of the Application Software in breach of s 36 of the Copyright Act 1968 (Cth). That infringement is said, at par 28, to have been “authorised or permitted” by one or more of David Hains, van Zanten, Richard Hains and Kiefel.
(c) The claims for contravention of the TPA or passing off
69 There are also corresponding allegations against mCom Solutions and mCom Solutions Australia of contraventions of ss 52 and 53(c) and (d) of the Trade Practices Act 1974 (Cth) (“the TPA”) and, further or alternatively, of passing off and that one or more of David Hains, van Zanten, Richard Hains or Kiefel “aided and abetted, counselled or procured”, in breach of s 75B of the TPA, the contraventions of that Act imputed to either or both of mCom Solutions and mCom Solutions Australia.
(d) Misuse of confidential information
70 Another cause of action pleaded by Temwell is for misuse by DDS of the confidential information in the Application Software “as constituted by the source code or codes … (“the MTD source code”). That misuse is said to have been constituted by the unauthorised provision of the MTD source code to either or both of mCom Solutions and mCom Solutions Australia. At par 35, Temwell alleges that such disclosure was in breach of cl 7 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 Solutions, Dragonventures.com Inc, mCom Solutions Australia, David Hains and Dragonventures.com Ltd. It is also alleged that one or more of David Hains, van Zanten, Richard Hains and Kiefel caused, procured or induced one or more of mCom Solutions, mCom Solutions Australia, Dragonventures.com Inc and Dragonventures. com Ltd to procure or induce the breach by DDS of the GTA. Paragraph 38 charges one or both of mCom Solutions and mCom Solutions Australia with unlawfully using the 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.
71 Paragraphs 39A-G allege that, by purporting to assign the Application Software to mCom Solutions, DDS wrongfully converted to itself the MTD source code which conversion is alleged to have been procured or induced by one or more of mCom Solutions, mCom Solutions Australia, David Hains and Dragonventures.com Ltd. Further or alternatively, it is alleged in par 39 H that one or more of David Hains, Richard Hains and Kiefel procured, or induced the procuring of, the conversion alleged against mCom Solutions, mCom Solutions Australia and Dragonventures com Ltd. Paragraphs 39 I and 39 J allege conversion of the MTD source code by either or both of mCom Solutions and mCom Solutions Australia and make corresponding allegations of involvement in that conversion of one or more of David Hains, Richard Hains and Kiefel.
72 There are then, in pars 39 K and 39 L allegations that the acts of DDS said to constitute the alleged conversion were in breach of the LRC Agreement and the GTA which breaches had been procured by one or more of Dragonventures.com Inc., mCom Solutions Australia, David Hains and Dragonventures.com Ltd. That procuring of breaches by DDS is in turn alleged in par 39M to have been procured or induced by one or more of David Hains, van Zanten, Richard Hains or Kiefel.
(f) Failure to report and pay royalties
73 Paragraph 40 alleges a failure by DDS to provide a report and pay royalties due under the LRC Agreement as a result of which Temwell, on 29 August 2000, gave notice of default. Paragraph 43 acknowledges that some reports and payments of royalties had been remitted by mCom Solutions and mCom Solutions Australia but asserts that these were not accepted by Temwell in lieu of the obligations of DDS. It is also alleged in par 44 that a further breach of the LRC Agreement was procured by one or more of mCom Solutions, Dragonventures.com Inc, mCom Solutions Australia or Dragonventures.com Ltd allowing DDS itself to purport to make the report and pay the royalties.
(g) Temwell’s claim of loss and damage
74 Paragraph 46 of the fifth further amended statement of claim alleges;
‘By reason of the matters aforesaid, the applicant has suffered loss and damage and will continue to suffer loss and damage unless the conduct is restrained by this Honourable Court.’
75 Temwell’s case for loss and damage is to be found in the second further amended further and better particulars of loss and damage filed on 24 December 2003. Temwell claims (i) loss of profits arising from the alleged misuse of the confidential information and (ii) damages flowing from the loss of control of the Application Software in the sum of $14.203 million being the value of the Application Software determined as at 24 March 2000 pursuant to formulas in the First and Second Schedule of the Call Option Agreement. As an alternative to the sum of $14.203 million, Temwell claims (1) $11.145 million in accordance with the relief from royalty method set out in the Wilson Report but subject to the discount rate identified by Rayner or (2) $5.398 million being the market value of the Application Software as at 24 March 2000 or (3) a sum between $4.5 and $5 million being the value of Temwell’s entitlement under the Take Out Option agreement as at 24 March 2000 as determined by Rayner or (4) repayment of Temwell’s original investment of $3 million or (5) $3,217,500 being the value of the benefit obtained by the mCom respondents from the allegedly unauthorised use of the software. This figure was calculated by Cattanach. In addition, the applicant also seeks interest to the date of judgment of 2%.
(ii) The Defence
76 The further amended defence of mCom Solutions, mCom Solutions Australia, David Hains, van Zanten and Dragonventures.com Ltd and further defence of Richard Hains and Kiefel was filed on 28 August 2003. The defence of those respondents asserts that the assignment by DDS of all its rights in the Application Software was made with Temwell’s consent. That contention is supported in the following ways;
(a) at par 17(b)(i) the respondents rely on Tauber’s admission that Temwell gave “conditional consent” to the assignment of the Application Software.
(b) at par 17(b)(ii) the respondents contend that, if Temwell was to be paid at settlement, there was no need for Temwell to give consent to the sale as Temwell would cease at settlement to have any interest in the Application Software;
(c) at par 19(b) the relevant respondents also plead that neither Enriquez nor Fraid advised the relevant respondents at the meeting held on 22 March 2000 (1) that the consent given by Enriquez in his letter of 22 February had been withdrawn or (2) that the respondents were not entitled to proceed with the purchase of the DDS business on the basis set out in the letter of 7 March 2000.
(d) at par 21 the respondents contend that Dragonventures.com Ltd acted “in good faith” upon the assumption that the letter of February 2000 constituted Temwell’s written consent to the purchase by mCom Solutions of the rights of DDS under the LRC Agreement and the Call Option Agreement.
(e) paragraph 21A responds to Temwell’s pleading that it withdrew its consent. The respondents plead that the letter of 22 February 2000 constituted consent which once given (i) Temwell was not entitled to withdraw and (ii) which Temwell did not in fact withdraw on 22 March 2000 as alleged.
(g) at par 21(h) the respondents also plead that Temwell is estopped from denying that it gave its consent to the assignment or the purchase of the business of DDS and the rights of DDS under the LRC Agreement.
77 At par 22B(C), the relevant respondents contend, amongst other things, that if Temwell, did withdraw its consent, it did so for a collateral purpose – “namely so as to compel a buy-out of Temwell’s interest … in the Application Software” by mCom Solutions. The respondents plead that this purpose was inconsistent with the discretionary criteria for the withholding of consent because “Temwell had no ability pursuant to the Transaction Documents to compel the purchase of the Application Software by DDS, whether pursuant to the Call Option or on any other basis”. At par 23, mCom Solutions, mCom SolutionsAustralia and Dragonventures.com deny that they procured or induced DDS to breach the Transaction Documents and further assert that there was no breach by DDS of its contractual obligations to Temwell by reason of the assignment in favour of mCom Solutions. As well, David Hains, Richard Hains and Kiefel deny that they procured or induced all or any of mCom Solutions, mCom Solutions Australia or Dragonventures.com Ltd to breach the Transaction Documents.
78 At par 24A, mCom Solutions denies that it has infringed the MTD Trademark. Specifically, it is contended at par 24A(b), “the designation ‘MTD” is and was a generic title for mobile transaction devices and is not, and never was, distinctive of any business reputation or good will belonging to Temwell”. mCom Solutions further does not admit that it has, since the day of the assignment, reproduced copies of the Application Software. Alternatively, it is pleaded, if (as is not admitted) either or both of mCom Solutions and mCom Solutions Australia did reproduce copies of the Application Software, such reproductions “were made in good faith in the belief that Temwell had given its consent to the assignment and that, accordingly, the making of the reproduction was lawful pursuant to the terms of the LRC Agreement, as validly assigned” to mCom Solutions. By pars 25(g)-(i) mCom Solutions and mCom Solutions Australia plead that Temwell rejected their open offer to (1) deliver to Temwell the latest version of the MTD 3000 Application Software and (2) pay Temwell royalties at a rate of 4% for sales of the MTD 2000 or MTD 3000 product. Accordingly, those respondents contend that Temwell is not entitled to the relief sought in relation to the alleged breach of copyright.
79 At pars 29 and 30, the relevant respondents deny that their conduct amounted to a contravention of the TPA. At par 31 it also denied that Temwell is the owner of the confidential information in the Application Software. Specifically, at par 31(b) the respondents contend that the source code or codes for the Application Software did not constitute “confidential information” as “prior to March 2000 any “information” comprising the Application Software source code was in the public domain”. By par 32(a), the same respondents admit that DDS provided details of the Application Software source code to mCom Solutions but say further at subpar 32(b) that mCom Solutions believed in good faith that Temwell had provided written consent to the assignment and, consequently, that Temwell had “given its permission to the provision to mCom Inc of a copy of the Application Software”. At pars 33-39, the relevant respondents deny all other allegations made by Temwell in relation to confidential information.
80 The same respondents also deny those allegations in the statement of claim going to loss and damage. At par 46(b) they contend that, if there was any conduct on the part of the respondents which was wrongful (which is denied) “Temwell suffered no loss by reason thereof”. Further, at par 47 the same respondents contend that;
‘… if Temwell suffered any damage (which is denied) then the amount of such damage is required to be reduced by the balance of the Purchase Price (to a maximum of AUD$12 million) under the Sale of Application Software Agreement, which balance remains unpaid.’
(iii) The Cross-Claim
81 A further amended cross-claim was filed on behalf of mCom Solutions and mCom Solutions Australia on 13 September 2002. It names as cross-respondents Temwell together with Slademere Pty Ltd (“Slademere”), Shepridge Pty Ltd (“Shepridge”), Tauber, Fraid and Enriquez. The cross-claim involves two causes of action: contravention of s 52 of the TPA and the tort of collateral abuse of process.
(a) Misrepresentation in contravention of the TPA
(b) Collateral abuse of process
83 The allegation of abuse of process commences at par 42 of the cross-claim. It is alleged that, if Temwell did consent to the purchase of the assets and business of DDS, including DDS’ right title and interests under the LRC Agreement “then, the issue and maintenance of this proceeding by Temwell on the instructions of Fraid and/or Tauber is an abuse of process”. In this context, the cross-claim is formulated, at par 51, as follows;
‘51. Temwell issued and Fraid and Tauber caused Temwell to issue the proceeding and to prosecute it on the basis that Temwell had not given its consent to the assignment:
(1) with the predominant purpose of co-ercing mCom Inc to ‘buy out’ Temwell in relation to the Application Software:
(a) pursuant to the Call Option which mCom Inc was not obliged to do; and / or
(b) at the buy-back price of $5.4. being a “buy out” which Temwell knew it could not compel even assuming the exercise of the option under the Call Option Agreement at a price to which it was not entitled; and
(2) not with the predominant purpose of obtaining the relief sought in the proceeding.’
84 Accordingly, the cross-claim seeks, amongst other relief, damages for abuse of process as well as such further or other orders as the Court deems appropriate by reason of the abuse of process.
85 The cross-respondents, while admitting the allegations which they have asserted in their statement of claim, have denied liability to the cross-claimants on each of the causes of action pleaded in the cross-claim.
Part III: The Expert Witnesses
86 Opinion evidence was adduced from several witnesses on each side. Some of those witnesses, like Mr Goldstein and Mr Ivry, had also been protagonists or participants in the events leading up to the acquisition by mCom Solutions and mCom Solutions Australia of the assets and business of DDS. Others, like Ms Wilson and Mr Rayner, whose evidence was directed to calculating or estimating the loss or damage allegedly sustained by Temwell, were retained after the institution of the present proceedings. Those witnesses expressed independent opinions, at least in the sense that they were uninfluenced by earlier associations with any party or by involvement in the development of the MTD 3000 or in “due diligence” investigations of the business of DDS.
87 It is convenient at this point to summarise the evidence adduced on each side from the principal expert witnesses because of the way that evidence contributed to the identification of the issues discussed below as requiring resolution. Although the expert evidence was not always determinative of the issue to which it was directed, its reception was influential in the analysis which underlies Part IV of these reasons.
(i) The applicant’s expert witnesses
88 Mr Zeev Goldstein (“Goldstein”) is an Israeli computer software engineer whose experience extends over twenty years. From 1999, he had been a principal of Cubic-C Ltd (“Cubic-C”) which was involved in developing mobile point-of-sale payment technology. He had been introduced to the MTD project in late 1999 by Mr Achi Racov who was then an employee of the NatWest Bank of the United Kingdom. Mr Racov told Goldstein that a wealthy Australian businessman, David Hains, was interested in buying the MTD project. Mr Racov also indicated that there might be a prospect of co-operation between Cubic-C and the developer of the MTD project on which the “Hains family” was then conducting “due diligence”. Accordingly, at the request of the prospective purchasers, Goldstein made two visits to Melbourne, one from 4 - 7 February 2000 and the second from 13 - 17 March 2000. Whilst here, he was asked by David Hains to investigate the MTD device and to consider what it would take to make it a world leader in its field. During the same period, Goldstein was introduced to Mr Yaron Ivry (“Ivry”) who was also working on the due diligence investigation. As well, Goldstein had several meetings with David Hains and “other Portland House people”, including Mr Racov, Andrew Bigelow and Michael Hains. David Hains, he said, took a leading role in those discussions.
89 Using, in part, notes made by Goldstein, Ivry prepared a “Due Diligence Report” dated 6 February 2000, although Goldstein believes that it could not have been prepared before the middle of that month. Goldstein also orally conveyed to David and Michael Hains the impressions he had formed of the MTD technology, including what he regarded as its shortcomings.
90 One feature of the MTD technology which Goldstein regarded as significant was the interdependence between the application software and the PIMPOS operating system. The latter was dedicated to the particular hardware created for the MTD device the application software for which was designed for use solely with the PIMPOS operating system.
91 In the course of his second visit to Melbourne, Goldstein attended another meeting at Portland House with David Hains and another person when he was told that “there was a problem with the copyright in the operating system because Temwell might own it and have rights to royalties.” After David Hains had raised the possibility of developing a program to by-pass the operating system, Goldstein recommended against that course because it would take too long and it would be better to retain the existing operating system software.
92 Whilst in Melbourne, Goldstein had seen an example of the MTD3000 processing a demonstration transaction. He later witnessed a similar demonstration which Mr Racov gave to the Bank Leumi in Israel. Goldstein’s second visit to Melbourne was undertaken at the request of Mr Racov who indicated that the Hains family was interested in pursuing an exchange of shares between Cubic-C and the entity formed to acquire the MTD business and in appointing him, Goldstein, as the “overall co-ordinator of the software side of the joint project.”
93 After carrying out investigations at the offices of DDS, Goldstein formed the view that the software programming which had been undertaken in connection with the MTD project had been of a high standard. He told David Hains that it would take a few months to overcome the programming shortcomings and Hains indicated that he would arrange for close liaison between the programmers, particularly David Conn, and Goldstein. That happened and Conn and Goldstein communicated regularly by email over the ensuing four months. According to Goldstein, David Hains furnished him with his (Hains’) personal mobile telephone number and invited him to telephone if he wanted to discuss any matters. As a result, Goldstein reported to David Hains from time to time on progress on the MTD project. He also mentioned to him the Cubic-C project. As well, Goldstein gave this account at par 29 of his affidavit of 6 June 2003 of a further discussion between himself and David Hains;
‘David Hains also said to me during my second visit that he was not very familiar with software businesses, but that he had business associates who were making large amounts of money from technology businesses, and he did not want to miss out on the technology boom. He also said to me that he was going to invest $36m in the MTD project, and he asked me whether I would do so if it was my money. I said I would, but subject to making the improvements to the software which I was recommending. David Hains also said to me that he planned to act as manager of the MTD project during its start-up phase under his control.’
94 After his return to Israel from Melbourne, Goldstein travelled to London where he spoke to both Richard Hains and Achi Racov. Racov indicated that he intended to set up his own software development business under the name “Ithaca” to undertake enhanced software development for the MTD unit and also the development in Israel of a proposed new generation MTD terminal which Goldstein suggested should be called “the Slim Terminal”. Goldstein expressed interest in these suggestions and continued to work in Israel on the “Slim Terminal” concept. However, no arrangement was arrived at between Goldstein and any interest represented by Racov. Some of the meetings in London were attended by Richard Hains who advised Goldstein that he had incorporated, or was in the process of incorporating, Dragonventures (presumably the third respondent, Dragonventures.com Inc). Email communications between Goldstein and the DDS programmers ceased after some months. According to Goldstein, one of the last emails he received contained minutes of a board meeting of mCom Solutions Australia which revealed that it intended to use the “Slim Terminal” concept but without any participation by Goldstein. After Goldstein complained by conference telephone to David Hains and Racov, Hains gave him his word that mCom would not use the “Slim Terminal” option without his (Goldstein’s) involvement.
95 Goldstein also deposed that, in the course of reviewing the MTD3000, he had looked at the source code for the MTD2000 and concluded that many modules of the former had been directly copied from modules of the latter, although there were marked differences between the pinpad modules and the communication modules of the two versions. Goldstein also observed two versions of the source code for the PIMPOS operating system, the first of which was to be used with the MTD2000 application program and the second of which was to be used with the MTD3000 application program.
96 Goldstein went on to express the opinion that the MTD3000 software which he had observed in February and March 2000 had a number of elements which were designed to assure it of a long commercial life. It was designed to support both debit and credit cards, and was compatible with the EMV technology developed by Europay MasterCard and VisaCard. The introduction of a common European currency, the Euro, provided scope for transactional use of the device and there were strong marketing opportunities in China and third world countries which did not have extensive networks on fixed line telephone services. Goldstein also expressed the opinion that the MTD3000 would have particular appeal in Asian markets because it was resistant to the fraudulent use of credit and debit cards. It was compatible with both types of cards as well as with “smart cards” which used memory chips rather than magnetic strip encoding. It was also noted that the MTD device was compatible with GSM mobile telephones which have become the most popular form of that technology in use throughout Europe and the United States. Moreover, it was readily adaptable to alternatives like CDMA. Those features led Goldstein to form the opinion that “there was every reason to think in March 2000 that the MTD software and unit had significant potential for longevity.”
97 Goldstein then went on to note that changes in the market for mobile transactions documents have been slowed by the resistance of banks to the adoption of new technology and banks’ adherence to traditional types of debit and credit cards. The banks’ insistence on rigorous and complicated processes for certification and approval has meant that the introduction of mobile transaction devices has not been as rapid as might have been expected. However, acceptance of the devices by restaurateurs, taxi operators and delivery service businesses has been so widespread in the United States and Europe over the past two years that Goldstein had the opinion that, in the long term “as retailing trading shifts increasingly away from cash transactions, the mobile transaction device may replace the manual cash register entirely.” From that opinion, Goldstein reasoned that, with the improvements he had recommended, the MTD3000 would, in March 2000, have had a marketable life of at least five years and would have continued in use in the form in which it was in 2000 for at least another three years from 2004.
98 Goldstein then considered the concepts of “modification” and “enhancement” as to which he deposed in par 48 of his affidavit affirmed on 6 June 2003;
‘As part of the natural development of a project of this kind, it is constantly upgraded to improve efficiencies and provide greater utility. I regard these developments, from a software perspective, as being in the nature of modifications or enhancements. It is common for application software and operating system software to be developed through many versions but still have the attribute of a modification or enhancement.’
99 Those references led Goldstein to postulate that a constant process of modification and enhancement, including changes which he had recommended, would extend the commercial life of the software and hardware for the MTD 3000 by a further five years beyond that which he had earlier attributed to it.
100 Goldstein then made an estimate of the time needed to re-create the software for the MTD on the assumption that there was available the hardware but no software at all. He then drew on his experience with the software for the Cubic-C prototype which had taken twelve months to write. Thereafter, the further development of the Cubic-C software to operational stage had taken about a further two years. All of that programming work had occupied six or seven highly qualified programmers full-time. Accordingly, Goldstein regarded a period of three years as “reasonable” for writing, from the beginning, software for a device to be used for mobile electronic funds transfers. However, he went on to opine in par 51 of his affidavit affirmed on 6 June 2003;
‘The writing of the software in the MTD case would definitely take longer because of the problem of the writing of the special operating system software as well as the special problems of writing software for newly created hardware. The completion of any application software would depend on the creation of a stable operating system platform. The operating and application software would need to be integrated, and then adapted to the precise requirements of the hardware. For the purposes of assessing a clean re-write, having regard to what I observed in respect of the MTD software in February/March 2000, I assess that this re-writing process would take approximately three years and possibly longer, having available a staff of at least five or six highly skilled programmers.’
101 Goldstein disagreed with a contrary opinion expressed by another expert witness, Mr Farrar, who had been employed as a programmer by DDS and later mCom Solutions Australia that a complete re-writing of the MTD3000 application software would take 1600 programmer hours. His reasons for that disagreement were explained as follows in par 52 of his affidavit of 6 June 2003;
‘Having regard to the application programme which I saw in February/March 2000, I do not agree that it would take a programmer 1600 hours to do a clean write of the MTD 3000 application software assuming the availability of the PIMPOS operating system software. There are significant complications in one person undertaking this work alone because of the many skills that would be involved. For example, the initial phase in the writing of the application software would be a design phase where the design of the software would be conceived. It would then be necessary to have regard to the various highly specialised security and encryption issues involved in the writing of software of this kind. The debugging and testing phase would, in itself, take months. I would have thought a more realistic estimate for a clean re-write of the application software (where the operating system software was available) would involve a team of six people for about one year or say eighteen months for a team of three people. I could not conceive of how a person could write the whole of the application software for the MTD 3000 alone in 1600 hours.’
102 Ms Wilson (“Wilson”) is a partner of the accounting firm Ernst & Young and holds the degree of Bachelor of Arts with Honours from Manchester University. She is also an Associate of the Institute of Chartered Accountants in England and Wales and a principal in the Melbourne Corporate Finance division of the accounting firm, Ernst & Young. Wilson’s expertise, which has been acquired over 20 years in industry and professional service firms is in, among other areas, the compilation of equity valuations for privately owned companies. By letter dated 6 December 2001, the applicant’s solicitors wrote to her in order to engage Ernst & Young to prepare a report on the value of the MTD application software for use in this proceeding.
103 In a more detailed recital of her instructions in Part 2 of the Report, Wilson noted that she had been instructed to value the Application Software as at 24 March 2000 and to prepare the valuation without reference to a valuation prepared by Deloittes as at February 1999 which had been completed in April 1999; see [21] above. She also noted that she had been instructed to utilise certain documents and other materials which had been provided to her, including a 6 page document dated 16 March 2000 (“the mCom Forecasts”). Her instructions about the mCom Forecasts were summarised in these terms;
‘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.
104 Wilson also indicated that she had been instructed to assume that the mCom Forecasts had been prepared “during the due diligence process that mCom carried out on the DDS business and products in or around March 2000.” Her further assumptions in respect of the mCom Forecasts were expressed as follows;
‘I have assumed that the mCom forecasts accurately reflect the views of the personnel involved in the due diligence process in relation to the expected future sales of the MTD units incorporating the Application Software over the two-year period ending 31 March 2002. As indicated, on 18 June 2003, I was advised that the person who was likely to have had the key role in the preparation of the mCom forecasts was Mr Van Zanten. This indication has not caused me to change any of the detail in the version of my report I prepared on 16 June 2003, although I have sought to correct and add some matters (which are indicated by underlining). I have not performed any kind of verification exercise upon these forecasts nor have I had access to the persons responsible for their preparation.’
105 Under the heading “Selection of Appropriate Valuation Methodology”, Wilson indicated that she was concerned to ascribe to the Application Software its fair market value as at 24 March 2000. She defined “fair market value” as “the amount that would be negotiated in an open and unrestricted market between a knowledgeable, willing but not anxious buyer and a knowledgeable, willing but not anxious seller, acting at arm’s length.” She then indicated that she considered that the most appropriate method of valuing the Application Software was the “relief from royalty” method. Her description of that method and her reasons for preferring it were contained in this passage from p 10 of the Report;
‘The relief from royalty method is, in my experience, a commonly used method for the valuation of computer software. It involves the quantification of a notional royalty payment that a competitor would be willing to pay to use the software.
The value of the asset is determined by calculating the value of the prospective notional royalty income that would be generated over the expected useful life of the asset. It usually involves the establishment of three key variables:
· Future sales;
· A comparable royalty (based on the nature of the asset and the industry in which it is employed); and
· An appropriate capitalisation or discount rate.
Difficulties with this method include the selection of a comparable royalty rate. It is often difficult to make a useful comparison across assets and industries. In addition, the royalty rates surveyed may be old and out-of-date, or may incorporate other factors than use of the asset.
These issues do not apply in the case of the Application Software. As the Application Software is subject to a licence agreement, the actual royalty rates set out in the Licence Agreement can be adopted.’
106 Under cross-examination, Wilson conceded that she had no material by way of comparable market information for adopting the royalty rate of 4% on the first US$100 million in sales set out in the LRC Agreement.
107 Wilson then went on to explain that, because she was not aware of any transaction involving software comparable to the Application Software, a “market based approach” to the valuation was not available to her. She also explained why she had rejected a “cost-based approach” as an appropriate method of valuation and gave these reasons for adopting a relief from royalty method;
‘I have adopted a future earnings based approach to value the Application Software as at 24 March 2000, specifically, a relief from royalty approach.
I consider this approach to be the most appropriate as it takes into consideration the future economic benefits to which Temwell was entitled by virtue of the ownership of the software.
Furthermore, the relief from royalty method incorporates the actual royalty rates agreed upon by the parties to the Licence Agreement.’
108 By the application of that method, Wilson claimed to have determined a fair market value for the Application Software which was said to be “the net present value of the expected future royalty stream arising over the expected term of the Licence Agreement.” The two variables which had been fixed on in order to arrive at a fair market value were described thus in Part 5.2 of the Report;
‘The key variables I have determined in order to arrive at a fair market value are:
· The expected after tax royalty receipts: calculated by applying the royalty rate (stipulated in the License Agreement) to forecast sales revenue over the initial five year period of the Agreement (and applying an appropriate rate of taxation); and
· An appropriate discount rate, taking into account the required rate of return, the risks associated with the forecast cash flows and the time value of money .
I have also considered:
· Whether a value should be attributed to the possibility that the licence term would be extended beyond the initial five year period, given that the licence is renewable (but subject to agreement) by either party at the end of the initial licence term; and
· The impact (if any) of the Call Option Agreement on the fair market value of the software as at 24 March 2000.’
109 In Part 5.3 of the Report under the heading “Expected Royalty Receipts”, Wilson noted that the mCom Forecasts comprised a profit and loss account, balance sheet and cash flow statement for the years ending 31 March 2001 and 31 March 2002. She then observed;
‘I have not been provided with any forecast information for periods subsequent to 31 March 2002. In order to calculate royalty receipts for the period between 1 April 2002 and 15 October 2003, I have therefore made certain assumptions regarding future sales. My calculations and assumptions are set out below.
110 There was then reproduced a table setting out Wilson’s calculation of expected after tax royalty receipts over the period from 1 April 2000 to 27 October 2003. The forecast after tax royalties for the year ended 31 March 2001 were $431,000, for the year ended 31 March 2002 $2,647,000, for the year ended 31 March 2003 $3,485,000 and for the 7 months ended 31 October 2003 $2,454,000. The key assumptions underlying those forecasts were identified as follows;
‘Key Assumptions:
1. Actual sales for the five months ended 31 March 1999 and the year ended 31 March 2000 are relevant to the calculation of royalty receipts (as the percentage applies to sales within the license period on a cumulative basis). They are not taken into account for valuation purposes, other than as a factor that I have taken into consideration in my review of forecast sales and my selection of an appropriate discount rate.
2. The detailed monthly forecasts for FY02 indicate that the author/s of the mCom forecasts expected sales to grow to a level of around $12 million per month by February/March 2002. At this stage, monthly sales growth had stabilised at around 5%. I have assumed that in the year ended 31 March ~, monthly sales of approximately $12.5 million would be maintained, giving annual sales of $150 million.
3. For the seven months ended 31 October 2003 (the remainder of the license period) I have assumed an overall increase in sales of 5% compared to FY2003, This results in average monthly sales of $13.125 million and equivalent annual sales of $157.5 million. Sales for seven months are $91.875 million. I note that the growth rates built into the mCom forecasts are aggressive (refer section 6.2.2) and rely on significant take up of wireless technology versus use of more established landline terminals.
4. Royalties have been calculated as stipulated in the Licence Agreement, i.e. with a two-month time delay (based on sales in the two months prior to the month in question).
5. I have assumed an exchange rate of AUD$1/USD$0.6 for the purposes of calculating the USD$100 million sales threshold for royalty calculation purposes. The AUD/USD exchange rate ranged between 0.60 and 0.61 during March 2000. (Source: Bloomberg).
6. I have assumed a corporate tax rate of 34% for the year ended 31 March 2001, being the tax rate applicable for tax years ending 30 June 2001; and a 30% tax rate thereafter. (The effective tax rate at 24 March 2000 was 36%, but these announcements in relation to the tax rate applicable to future periods had been made).
Details of monthly sales revenues and related royalty calculations are set out in the detailed valuation model attached as Appendix I.’
111 The next section of the Report dealt with selection of a discount rate used in a valuation exercise. The discount rate was defined as “the rate an investor could expect to obtain by investing in other investments with comparable risk. The discount rate is effectively the opportunity cost of capital.” The assumptions which Wilson made in this context were then set out a follows;
‘I have been asked to assume that, as at 24 March 2000, the business of DDS (now controlled by mCom) was focussing on the MTD 3000 as its primary product. This version of the MTD had several advantages over the MTD 2000 (refer detailed commentary in Section 6). The MTD 3000 had not been commercialised, whereas the MTD 2000 had been sold to the market (albeit in lower than expected volumes).
Given that DDS was about to commercialise the MTD 3000, following commercialisation of the MTD 2000, I have assumed that DDS was at this point in the early expansion phase. Consequently the returns to an investor in the Application Software (the key product of DDS) would be highly reliant on the achievement of forecast sales. As this income stream was yet to be established, I consider it unlikely that an investor would be able to attract a significant amount of debt funding for an investment at this stage.
For the purposes of my valuation, I have therefore assumed that an investment in the Application Software as at 24 March 2000 would be entirely equity funded.
The cash flows relating to expected royalty receipts have been calculated on a post-tax basis. I have selected a post-tax cost of equity to apply to these cash flows of between 27.5% and 32.5%, on the basis set out below.’
112 Wilson then drew on her own observations and experience to express the opinion that, in 2000, “venture capital returns required for investments in businesses in the early expansion stage range between 40% and 50%. This compares to 20% to 30% for investments in the expansion stage.” She next postulated a series of matters which she believed that an equity investor in the Application Software would consider. Taking all of those matters into account, she concluded that an appropriate cost of equity for an investment in DDS as at March 2000 would be around 30%. In order to provide a range of values, she utilised a discount rate 2.5% above and below this rate, ie a range of 27.5% to 32.5%. It was next indicated in the Report of 19 June 2003 that the selected discount rate had been applied to the expected royalty receipts over the remainder of the initial five year licence period. That application had been the subject of detailed calculations which had been set out in Appendix 1 to the Report. The key assumptions built into those detailed calculations were said to be;
· ‘The remaining portion of the initial five year licence period runs from 1 April 2000 to 31 October 2003;
· That cumulative sales (for the purposes of calculating royalty receipts) as at 1 April 2000 were approximately $3.6 million (refer section 6.2.2);
· Royalty receipts are received two months after the sales achieved for a particular month, in accordance with the terms of the Licence Agreement; and
· As cash is received on a monthly basis, I have used a mid-period discounting convention (rather than all cash receipts occurring at the end of a financial year).’
113 Wilson then concluded that applying a discount rate from 27.5% to 32.5% to the expected after tax royalty receipts to 31 October 2003 yielded a net present value within the range $5,342,000 to $5,718,000.
114 Assumptions were then made about an extension of the licence term beyond the initial five years expiring on 31 October 2003. Those assumptions were expressed as follows;
‘As long as the Application Software is maintained and kept up to date in technological terms, as at 31 October 2003 Temwell could expect to receive royalty receipts for a further period of time, assuming renegotiation of the licence terms and conditions. This assumption is supported by the fact that under the terms of the original Licence Agreement, DDS was to continue to develop the software over the five-year period and as a result ensure that it remained commercially viable.’
115 Wilson then quoted some statements which had been made by Goldstein and Dr Goldschlager and made this assumption;
‘Taking both Mr Goldstein’s and Mr [sic] Goldschlager’s comments as experts into consideration, I have assumed that the Application Software has a further useful life of ten years. Mr Goldstein anticipates a life (beyond 2003) of a further eight years. Mr Goldschlager refers to a life of ten years or “even much more”. The fact that DDS was committed to constant evolution of its products (including the software) supports this assumption.’
116 To calculate “the value of royalty receipts accruing to Temwell” for the 10 years after October 2003, Wilson;
· ‘Assumed that monthly sales of $13.125 million (refer section 5.3.2) would continue until October 2013. This is equivalent to annual sales of $157.5 million, being assumed sales for FY04;
· Taken into consideration the fact that it had been announced (as at 24 March 2000) that the corporate tax rate would decrease from 36% to 34% for the financial year ending 30 June 2001 and would further decrease to 30% for financial years thereafter;
· Calculated the after-tax royalty stream for the ten year period from I November 2003 to 31 October 20 13, assuming the appropriate effective tax rate as outlined above; and
· Calculated the net present value of the ten-year income stream utilising a discount rate of 27.5% to 32.5%.’
117 She noted that she had not increased the discount rate as she considered that she had been conservative in allowing no real growth in annual sales and assessed the net present value of royalty receipts by Temwell from 1 November 2003 until 31 October 2013 as set out in the following table;
|
‘Application Software |
Low |
High |
|
Extended licence period - 10 years |
($000) |
($000) |
|
Net present value of after tax royalty receipts from 1 Nov 2003 to 31 Oct 2013 (10 Years)’ |
4,259 |
5,458 |
118 In the next section of the Report, the effect of the Call Option Agreement was set out and Wilson expressed this conclusion;
‘In summary, the Call Option Agreement does not have an impact on the cash flows generated by DDS and the royalty stream attaching to those cash flows. It is an arrangement that restricts the sale of the Application Software in the open market for a five-year period. I have taken this restriction into consideration in my selection of an appropriate discount rate in Section 5.4.’
119 In Section 6 of the Report headed “Background to the Valuation”, Wilson reviewed a number of features of DDS and the Application Software including competition and business risks facing DDS in the financial year 2000. The latter were noted as including;
· ‘Participation in a highly competitive market that had a number of existing fixed terminal operators, who were also seeking to enter the wireless EFT /POS market segment;
· The DDS products required certification in each country prior to the products being sold in these geographic markets. The process for gaining approval differed from country to country and could be difficult and time consuming;
· Acceptance of the technology by the market. In 1999, a segment of merchant users did not use EFT/POS machines. Sales were anticipated to come from initial take-up by these users and also a shift from users of fixed terminal technology to wireless machines;
· New technology: the DDS products were highly reliant on the most recent technology available however certain components (wireless, power and chip sets) were available to all competitors. A competitor could develop a product that provided a better alternative to those developed by DDS;
· Loss of key personnel. The departure of the software developers involved in the product development, sales managers involved in establishing distribution channels and key executives such as Daniel Elbaum (managing director) would have had a significant impact on the business; and
· Dependence on key suppliers. DDS obtained core components from key suppliers and a re-certification process was required if there was a change in key components used in the products.’
120 Sub-section 6.2 of the Report under the heading “Financial Information” noted that the key assumptions as disclosed in a Global Business Plan prepared by DDS management in February 1999 included the following;
‘Sales: sales growth is expected to stabilize over the five year forecast period as the market matures. Significant increases in the number of units sold anticipated between FY00 and FY03 (14,800 up to 213,000). Prices over the forecast period are expected to decrease as volume of units increase (average selling price per unit in FY2000 USD$902, falling to USD$552 in FY04) and reflect decreasing component costs. Management considered unit sales forecasts to be conservative, based on take-up of units in the fixed line market at the time. Distribution agreements signed or under negotiation in 1999 implied sales of around 64,000 units per annum across Australia, New Zealand and Asia.
Margins: component prices are related to the volume of purchase (core components comprise a terminal, PIN pad and communications modules). Cost of goods sold is USD$700 per unit based on 1,000 unit orders. A gross margin of around 30% has been built into the profit forecasts.
Profitability: FY00 (year I) absorbs the cost of setting up the distribution and sales business. As volume builds, profitability increases. The major costs for DDS relate to marketing and distribution.
Capital requirements: management estimated that $10 million in capital was required at the beginning of the forecast period to fund marketing ($3.1 million), product development ($3.5 million), working capital and other requirements ($3.4 million).’
121 Reference was then made to monthly profit and cash flow forecasts for the two years ending 31 March 2002 which had been contained in the mCom forecasts. In that context it was noted;
‘Actual sales in FY98 were approx. $2.1 million and in FY99 $2.8 million. Sales declined in the nine months to 31 March 2000 to $0.9 million (full year equivalent $1.2 million). I am instructed that sales at this time were much lower than anticipated due to the incidence of Y2K. Banks and other target markets for DDS focused their attention on this issue and hence the take-up of the MTD 2000 was minimal.
Furthermore, I am instructed that at this stage DDS had made the decision to push the newly developed MTD 3000 product in preference to the MTD 2000. I have assumed that FY01 sales represent the first year of sales of the MTD 3000. I have assumed that this largely explains the much lower mCom forecast for FY01 of $25.7 million, compared to the February 1999 forecast of $77.8 million. I have then assumed that the FY02 sales of $110 million represent further market acceptance and take-up of the MTD 3000.
I have relied on the mCom forecasts for the purposes of calculating expected royalty receipts. I have been instructed to assume that these documents show forecasts which were used by mCom in seeking finance from the ANZ Bank for its new business and are presumed to be accurate and reasonable with respect to the business of DDS which it acquired.
My assumptions in this regard in no way verify these forecasts and I have taken the risks attaching to the forecast sales figures into consideration in my selection of the discount rate in section 5 of this report.’
122 The body of the Report concluded with this Section 6.3 under the heading “Further Matter”;
‘I have been asked on 18 June 2003 to comment on one further matter. In my Report dated 12 December 2001, I made various observations about further information I would require to prepare a valuation as at March 2000 and as at December 2001. At the time, I was considering various methodologies for carrying out such a valuation which depended on the nature of the information available. I did not know what information precisely would be available.
Having regard to the information which I have had available to me for the preparation of this report, I believe that it has been adequate for the purpose of undertaking a relief from royalty valuation (making the assumptions which I have indicated). I have received financial statements for DDS for 1998 and 1999. I have not been restricted in carrying out my valuation by not having financial accounts for DDS to March 2000. I have not required management accounts for DDS. I was given the “latest” business plan, being the Global Business Plan of 1999 (upon which I have relied). I have been given details of distribution and licence agreements (referred to in section 6.1.4 above). I have been given forecasts to March 2002.’
123 Mr Rayner (“Rayner”) is a chartered accountant with over 25 years experience including involvement in the valuation of intellectual property. He also conducted his own business under the name “Bob’s Holdings Pty Ltd” which had been a direct participant in the sale of computer products on the internet.
124 In a report dated 19 June 2003 exhibited to his affidavit sworn on the same day, Rayner noted that he had;
‘been asked to consider the amount of Temwell’s claim for loss and damage on the basis that the effect of the unlawful conduct of the mCom respondents ……… was to deprive Temwell of the value it otherwise had in the Application Software ……’
He expressly disavowed any attempt to complete “a formal valuation of the Application Software owned by Temwell.” However, he noted that a valuation had been completed by Deloittes in April 1999 and a review of that valuation had been completed by Wilson in February 2002. It was further noted that;
‘In June 2003, June Wilson completed a second valuation which employs forecast results for DDS apparently prepared by mCom during its due diligence review of DDS. I have considered this valuation in the form as at 16 June 2003 and as at 19 June 2003 in my work below. My comments herein concerning Ms Wilson’s report are directed to the 19 June 2003 version of the report.’
125 Under the heading “Market Value”, Rayner’s report of 19 June 2003 recited;
‘For the purposes of my opinion, "value" is defined as the price that could be negotiated in an open and unrestricted market between a willing, knowledgeable but not anxious buyer, and a willing, knowledgeable but not anxious vendor acting at arms length, each believing they have complete information with respect to the asset being sold and neither being under a compulsion to buy or sell.
It is important to note that the value of any asset is derived from the future returns expected to be obtained from ownership of the asset. Generally, ownership is synonymous with control of the asset but this is not always the case. Further, it should also be noted that the past, in terms of prior returns or amounts paid for an asset, is generally irrelevant. Different investors will have different views as to the likely returns and perceived risks of those returns expected from any asset and thus its value. It is therefore clear that the concept of value is inherently subjective and the valuation process is a subjective process.
126 Rayner then went on in his report to note that he had been asked to assume that the definition of “Application Software” in the GTA included both the operating system and the application software. He also excluded from the task he was to undertake any consideration of the value, if any, of the MTD trademark. The report recited, as well, that it incorporated amendments of previous versions of reports furnished by Rayner on 31 July 2002 and 9 May 2003 and had been made following an analysis of the earlier reports made in submissions to this Court from 12-15 May 2003.
127 After setting out Rayner’s assumptions about the nature of DDS and its business, the report of 19 June 2003 proceeded to give an overview of the electronic payment industry, some of which had been derived from a published work by Frost & Sullivan called “The Global Electronic Fund Transfer/ Point-of-sale Terminals Market, 1999.” The report also drew on a “Nilson Report” for the 12 months to December 1999 and a “Lafferty Report” entitled “Mobile Financial Services, Banking on the Move” which had been published by Robyn & Beatrice Arnfield in Dublin in March 2000. As well, reference was made to the NASDAQ Composite Index as the leading stock market index for technology related stocks which had almost trebled in value from September 1998 to March 2000 where it had peaked above 4,500 points. Although it had declined in the ensuing six months, it was still more than double its value of two years earlier. This was said to be a “clear indication that the stock market placed substantial value on companies in the technology sector, including companies in the payments industry.”
128 Section 5 of Rayner’s report of 19 June 2003 was devoted to an analysis of the major participants in the EFTPOS industry including the competitors of DDS. In it were noted several acquisitions, capital raisings and share price movements affecting certain participants in the global transaction processing industry.
129 Section 7 of Rayner’s report of 19 June 2003 contained “observations” on Wilson’s final report. It was noted that she had adopted Relief from Royalty (“RFR”) as her primary valuation method. Rayner agreed that RFR was the appropriate method to select. However, he went on to caution that;
‘a major inherent weakness of the RFR approach is that it only determines the value of the asset from the perspective of a hypothetical licensor, in this case, Temwell. The resulting amount represents only some of the total value of the asset. This is because where an asset's use is licensed by one party to another, there is effectively a sharing of the economic benefits (and thus value} expected to be, or actually, generated by the asset. This sharing comes from the different capabilities and desires of the parties. For example, the owner of an identifiable intangible asset may choose to license the use of that intellectual property for a particular jurisdiction, where they either cannot, or don't want to, be involved in conducting a business that commercially exploits the IP .
In the circumstances of valuing the Application Software owned by Temwell, this RFR approach is correct as there was an actual licensor ("Temwell"} who had no intention of being directly involved in the day to day requirements necessary to commercialise the IP and a licensee, DDS, who was prepared to undertake such day to day commercialisation activities: so the market value being determined using this approach reflected the existence of both these parties. Consequently, intuitively, the value of the application software is the sum of the value to Temwell and the value to DDS. This fact is important to note in the light of the current claim where the Temwell license may or may not have continued to exist. In short, if the license did not continue, then the amount of the Application Software's value to Temwell as licensor may be, and probably was, significantly greater than the amount determined by Wilson. Why is this the case? Simply, and ignoring market transactions and other matters I discuss further below, because I consider the amount of the royalty Temwell may have been able to negotiate would probably have been greater than that under the license existing pursuant to the Temwell transaction.’ (original emphasis)
130 Rayner’s specific comments on Wilson’s final report were in these terms;
‘June 2003 Report
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 forecast 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 rates 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 that discount rates in the range of between 20% to 25% are appropriate to determine the market value of the software.’
131 Although earlier versions of his report contained a “summary of and commentary on” Deloittes’ valuation dated 29 January 2001, that section was deleted from the final report of 19 June 2003. Section 8 of that report contained a commentary on the value of the mCom transaction by which was meant the agreement whereby mCom Solutions acquired the business and undertaking of DDS. After noting that Dragonventures.com Ltd had provided debt and equity funding to mCom Solutions amounting to $19,402,000, Rainer concluded;
‘On this basis, if [Dragonventures.com Ltd] had prepared accounts consolidating the mCom group (which it controlled), the loan would have been eliminated and the value of the investment (represented by the various underlying assets) should have been recorded at some $18 million.
Finally, since the only asset of mCom immediately post the transaction was the business of DDS, this results in a value of some $36 million being attributable to this business by the original mCom shareholders.’
132 Section 9 of Rayner’s final report set out a list of “review of valuation indicators” which were said to be “matters concerning valuations and sales in the IT industry” which he had considered in forming his conclusion. Under the heading “Valuations”, that summary referred only to Wilson’s valuation of 19 June 2003 which was noted as being in the range $9.6 million to $11.2 million. The other portion of that summary under the sub-heading “Transactions / Market Valuation” noted a series of acquisitions, capital raisings and market capitalisations from December 1998 to February 2001. The value of those transactions was indicated as ranging from A$5 million to US$1.5 billion. The conclusion which Rayner drew in Section 9 of his report was expressed in these words;
‘Having reviewed market place transactions and valuations of companies in the above categories, it is apparent that the market placed considerable value on companies operating in these sectors. Established fixed line terminal suppliers were attempting to either convert their fixed line terminals to mobile terminals, purchase companies that possessed the mobile technology, or enter into alliances with companies that were developing mobile technology.
Companies that were operating as resellers of terminals technology, that could be considered to be peripheral players in the sector, were attracting considerable investor activity and the market was placing a premium on them. I believe that this view is confirmed by, and itself supports, the willingness of mCom to attribute a consideration of $36 million to the mCom transaction, wherein it sought to obtain a transfer of DDS’s contractual rights under the Transaction Documents.’
133 In Section 10 of the final version of his report, Rayner identified “two possible scenarios to consider when placing a value to Temwell at March 2000.” Those were described as follows;
‘1. The COA provisions applied and the maximum value Temwell could expect to receive for the application software was constrained by the COA. In short, the value Temwell was deprived of by the mCom respondents, assuming effective ownership and control over the Application software, was the amount that Temwell should have received pursuant to the proper exercise of the COA (“Scenario 1”). In this regard, it is worth noting here my opinion that it would have been reasonable to assume - at 24 March 2000 - that there was an increased probability of the COA being exercised. This increased probability is indicated by the mCom transaction where an apparently well funded company purchased the DDS business with the purported intention of providing the financial and other resources required to successfully commercialise the Application Software and related technology, and which was anticipated to involve a listing. For a listing to take place, I believe that ownership of the Application Software would be sought to be secured. My view is that the market, indicated by mCom, rated the DDS rights under the Transaction Documents highly, and that the obtaining of licence rights was only a step along a path which would lead to the exercise of the COA if listing was to be seriously pursued.
2. The value that could be obtained from a hypothetical purchaser interested in purchasing either the application software only or the application software and all of the assets of DDS (“Scenario 2”). This scenario assumes the following:
a. given the market transactions occurring in relation to payments industry companies, software and products, Temwell recognised the value of its asset (the Application Software) and independently searched for and identified or was approached by a hypothetical purchaser prepared to pay a premium for the DDS/Temwell assets; and
b. Temwell and DDS were on co-operative terms and DDS would agree with Temwell receiving more from this transaction than the capped amount resulting from DDS exercising the COA.’
134 However, Rayner went on to note that, following the discussion which had occurred in this Court from 12 to 15 May 2003, he proposed to confine his consideration to Scenario 1. The report then continued;
‘As I noted previously, in order for the COA provisions to apply, the final value of the Application Software had to be determined by an independent valuer and this value accepted within seven days by Temwell and DDS. I understand this final value was not determined. However, for the purpose of resolving Scenario 1, I have set out below my determination of the final value. In calculating this value, I have employed the same methodology and forecasts used by Wilson in her June 2003 report, with the only difference being a lower discount rate range of between 20% to 25%. This results in a range of values for the software of A$12.1 million to A$14.6 million at 24 March 2000. The mid-point of this range is A$13.35 million and I have employed this amount as the final value for the purposes of the COA.
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 factors 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 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. (original emphasis)
On the basis of these factors and assumptions the value under Scenario 1 is A$15.363 million calculated as follows:
A$15,481,900
Less A$ 119,071
= A$15,362,829
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.
135 The final section of Rayner’s report of 19 June 2003 made these six points under the heading “CONCLUSION”;
‘I was asked to consider the following specific question:
“On the assumption that the effect of the DDS/mCom transaction created deprivation in value for Temwell, what is the amount of that deprivation?”
Following revisions to my report, I wish to express the following conclusions which now arise:-
1. I assess the value of the mCom transaction at A$36 million.
2. I agree with the views of June Wilson concerning errors in the Deloittes report, and agree with her that the Relief from Royalty method provides an appropriate basis for valuing the Application Software in the hands of a licensor. Further, in the circumstances of Temwell and its ownership of the Application Software, the royalty amount is defined in the licence agreement so there is no need to attempt to identify an appropriate comparable royalty; this strengthens the validity of the methodology used here.
3. I consider that the discount rate which should be employed to determine the market value of the Application Software at 24 March 2000 is in the range of between 20% to 25%. The use of the discount rate, (which I consider is necessary) results in a difference in value to that determined by June Wilson (assuming the correctness of all other matters in her calculation) of between A$2.5 million and A$3.4 million.
4. I have determined the value of the exercise of the COA in March 2000, and arrived at the figure of A$15.363 million.
5. If the value I have determined for the Application Software of some A$13.35 million had been accepted as the final value, then the investors in Temwell would have had borrowings of some A$10.35 million.
6. I consider the amount of the deprivation in value occasioned to Temwell is some A$15.363 million.’
136 There is also exhibited to Rayner’s affidavit sworn 19 June 2003 an amended supplementary report. At the forefront of that supplementary report, Rayner noted that he had been asked “to consider the amount of Temwell’s claim for loss and damage on the basis that the effect of the unlawful conduct of the mCom respondents …… was to deprive Temwell of the value it otherwise had in the Application Software (as defined in the Agreements).” After noting that it had been prepared to take account of matters raised in the course of submissions before this Court between 12 and 15 May 2003 and matters raised in the substantive further amended report also dated 19 June 2003, the supplementary report stated the following three questions as those which Rayner had been asked to consider;
‘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 15th 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 Temwel1 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 “REI 7” 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.’
137 There was then set out Rayner’s understanding of the effect of the Call Option Agreement and the Take Out Option Agreement after which he answered Questions 1 and 2 as follows;
‘QUESTION 1 - Value of the Application Software under the Take-out Option Agreement
The TOOA provides Temwell with the opportunity to require DDS to subscribe for shares in the Joint Venture companies that own Temwell. In completing this calculation, I have determined the amount payable under the First Schedule based on the investment amount of $3 million plus an amount compounded annually at 25%. Since the Final Value had not been agreed by Temwell I have only employed the $3 million paid to DDS in this calculation. On this basis the amount payable is $9,155,273.
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 14 October 2003, being the first date the TOOA could be exercised. On this basis the Future Value of the royalty stream is $169,202.
Under the Subscription Option, applying the Subscription Price formula set out in the First Schedule of the TOOA, I consider that Temwell and/or the Investor Companies would be entitled to the following amount if they had exercised the TOOA on 14 October 2003 (and employing only the $3 million payment to DDS):
|
Investment amount compounded at 25% annually |
$9,155,273 |
|
Less |
|
|
Future value of the royalty stream |
$ 169,202 |
|
TOOA Entitlement |
$8,986,071 |
I believe that this calculation provides a necessary stepping stone to the answering of Question 2 which follows.
QUESTION 2 - What value would I ascribe to the rights of Temwell under the Transaction Documents including the TOOA Entitlement, at 24 March 2000.
I have been requested to express my opinion on the value I ascribe to the rights of Temwell under the Transaction Documents subject to the matters set out above. For the purposes of my opinion, "value" is defined as the price that could be negotiated in an open and unrestricted market between a willing, knowledgeable but not anxious buyer, and a willing, knowledgeable but not anxious vendor acting at arms length, each believing they have complete information with respect to the asset being sold and neither being under a compulsion to buy or sell. I have considered the value of Temwell's rights under the Transaction Documents to a third party and set out an analysis of my findings below.
Temwell's rights relate to the ownership of the Application Software, any future royalties derived from the licensed use of the software and any proceeds derived from the subsequent sale of the Application Software under the Transaction Documents or to a third party.
In the first instance, I consider the value I would ascribe to Temwell's rights at 24 March 2000 would be in the range between the value a third party would ascribe to the likely COA proceeds at that date and the present value of the TOOA, discounted for both time of receipt and the probability of it being able to be exercised. The issues for Temwell in accessing any such value would have been:
(a) solvency of DDS;
(b) DDS ability to exercise the COA; and
(c) third party factors.’ (original emphasis)
138 The supplementary report then discussed each of those factors in turn and, after references to a commercial lending rate for large businesses of 8.65% and a risk free rate of interest of 6.45%, both as at March 2000, it adverted to “market premium.” It was then concluded;
‘If an investor could obtain a secured return of 8.65% pa and an expectation of a return on equity investment in a reputable listed company of 12% to 14% pa, it is reasonable to assume that the return required by a third party to acquire Temwell's rights under the TOOA Entitlement payable by DDS would be at least, if not more than, the equity return. On balance, I consider that such a third party would employ discount rates in the vicinity of 16% to 18% to determine the amount they would pay to Temwell at 24 March 2000 to obtain its rights at that date. Further, while such an investor might wish to receive a higher return (reflected by the use of higher discount rates), it is important to recognise that any such hypothetical transaction would reflect negotiations between the parties with each attempting to maximise its position. Accordingly, whether Temwell would accept a significantly lower price (implying higher discount rates) is a matter for conjecture. In my opinion based on my experience as outlined in my biographical details (in my first report) and from my following the IT asset sale market over the last ten years as part of my day to day work, the range of 16% to 18%, (representing as it does premiums of 28% to 33% over expected equity investment returns from reputable listed companies) represents a reasonable assessment of the type of compromise that can be expected to result from negotiations between willing buyers and sellers.
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 $8986,071 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 results 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.’ (original emphasis)
139 As to Question 3, Rayner’s final supplementary report arrived at the following results after applying three different interest rates;
|
‘BBSW bank bill rate + 2% capitalised each 60 days (Average 7.15%) |
$4,071,470 |
|
Commercial Interest rate for lending in October 1998 (8.05%) |
$4,255,730 |
|
Australian Tax Office General Interest Charge (average 12.6%) |
$5,280,631’ |
140 On those three rates of interest, Rayner considered the first to be the most appropriate and the third, Australian Tax Office rate, to be the least appropriate to select.
141 The final version of the supplementary report ended with these observations under the heading “Other Matters”;
‘I am advised that on 20 May 1999 DDS granted an exclusive option to Palicave Pty Ltd to purchase the Application Software on the same terms and conditions as nearly as practical as apply to the option on the part of DDS contained in the COA between DDS and Temwell.
I have considered this Palicave option and its implications with respect to the two Scenarios discussed in my amended report dated 9 May 2003. In terms of the Scenario 1 value of $17.281 million, the Palicave option has no implications for Temwell, other than the fact that Palicave may have been a source of funds to enable DDS to exercise the COA. This opinion results from my assumption that the Palicave option could only be exercised in the event DDS had exercised the COA.
In terms of Scenario 2, this outcome could only occur as a result of cooperation between DDS and Temwell, meaning both COA and TOOA being set aside. If this occurred, then I consider that DDS would have negotiated suitable compensation for Palicave agreeing to cancel its option. Such compensation would most likely be similar to the capped returns available to Palicave under the option.
Finally, I do not consider that DDS would have a basis or incentive to object to any transfer/sale of Temwell’s rights as contemplated in Question 2. This opinion results from my expectation that Temwell would have been selling a right to receive proceeds payable pursuant to the TOOA and such a sale would not impact upon DDS’s rights under the various agreements. In terms of a liquidator, assuming the COA could not be exercised, he/she would have no ability to impede any rights transfer by Temwell.’
142 This witness (“Goldschlager”) was formerly a professor of computer science at Monash University from 1991 to 1996. Since then he has been an executive or director of companies, including one now known as Software Communication Ltd, which have been engaged in internet publishing and website design and maintenance. He has also acted as a consultant in relation to computer copyright and internet and on-line services.
· ‘the MTD3000 computer program version that I looked at was a substantial adaptation of the MTD2000 computer program;
· the two computer programs are essentially different versions of the same computer program;
· there are many lines which are identical in the two versions, including a spelling mistake and a grammatical error which have clearly been carried through from one computer program to the other; and
· copyright notices of Dynamic Data Systems ("DDS"), the First Respondent in this proceeding, were in certain places left intact and not replaced with a copyright notice of one of the mCom Respondents.’
‘22. In my opinion, the MTD3000 computer program contains essential and core parts which are adaptations of the corresponding parts of the MTD2000 computer program. There is a high degree of copying ranging from 42% in one file to as high as 96% in another. Central parts of the MTD2000 have been copied and adapted to create the MTD3000. The MTD3000 computer program is a version of the MTD2000 computer program.
23. In comparing the MTD2000 and MTD3000 computer programs, I have found that there is more copied than just simply the lines of computer program code. The lines are copied in the same sequence and order. Indeed, the whole architecture and structure of the two computer programs is the same. Both programs have been divided into corresponding components and sub-components so that they exhibit the same logic and structure. This entire architecture has been copied in addition to the copying of large amounts of code.
24. In my opinion, it would be very difficult and time consuming to write the MTD3000 computer program entirely from scratch. If a technical team were to start from scratch without prior knowledge of the architecture of the MTD2000 computer program, many man-years of effort would be required to produce a detailed technical specification, let alone writing and testing the actual MTD3000 computer program code. An enormous amount of know how and intellectual property has been carried across from the MTD2000 to the MTD3000 computer program.’
145 Exhibited to his further affidavit sworn 5 March 2003 was an additional report by Goldschlager of the same date in which he recited that he had been “asked to comment on whether, and, if so, in what way the PIMPOS program is a related program to the “application software” (noting the reference to “application software and related programs” in the definition of “Application Software” in the GTA).” After that recital, he observed;
‘I will use the ordinary English meaning of the word as I am not aware of any special technical meaning in a Computer Science setting. I note that the Concise Oxford Dictionary defines "related" as "connected, allied".’
146 The same report then noted;
‘ …… PimpOS is part of the software inside the DDS MTD 3000 device. PimpOS is an acronym for "Pre-emptive Integrated Mobile Payment Operating System". This software was written to enable the device to support electronic transactions including EFTPOS.
I have looked at a version of the PimpOS source code, which has been provided to me on the CD-ROM labelled MTD3000 9/3/01. I understand that PimpOS was written for use in conjunction with the MTD2000 and MTD3000 application programs.
The PimpOS software organizes the basic and fundamental functions in the computer such as scheduling tasks which need to be carried out, organizing the computer's storage, and formatting Electronic Funds Transfer messages. The MTD 2000 and MTD 3000 would be completely unusable without this or equivalent software.
The higher level application software that is written for the MTD 2000 and MTD 3000 devices would repeatedly call upon the services of the PimpOS and would be entirely reliant on those services. For example, the PimpOS would be used to send a transaction to the bank, or to send information to the printer. The application software would be unusable without the PimpOS or equivalent software.’
147 The report then adverted to affidavits in these proceedings by David Conn and Graham Farrar, noting that both deponents had said that;
‘… the PimpOS and the Application Software “were written in tandem with one another by two programming groups working in consultation with each other. They progressively developed an Interface Specification document to coordinate their efforts. Such a document generally specifies what subroutines of the PimpOS can be called by the application software, what those subroutines achieve, and what information is passed back and forward.’
148 In this part of the same report, Goldschlager then concluded;
‘The essential financial transaction function could not be performed by either separately, but needed both together. It is therefore my opinion that the two pieces of software are "connected" and "allied". They are connected by the Interface Specification document. They are allied in that they were developed in tandem to perform a common function. I am of the view that the PimpOS software is a related program to the MTD 2000 application software. Similarly, it is my view that the version of PimpOS which runs in the MTD 3000 is a related program to the MTD 3000 application software.’
149 In the next section of the same report, Goldschlager proceeded to comment on an affidavit by Yaron Ivry which had been filed in these proceedings on 2 September 2002. In that context, it was observed that a process of re-writing the application layer and OSE layer of the MTD 3000 would be likely to produce a better software product faster and easier than when the software was first written. However, Goldschlager pointed out, “achieving a better software product by writing it a second time is contingent on the availability of adequate documentation about the first version to the writer of the second version.” The Schedule to Ivry’s affidavit was said to make several references to the availability to the writer of the second version of information about the first version. References were then made to certain parts of the Schedule to Ivry’s affidavit as supporting that view. The report then ended its review of Ivry’s affidavit by stating;
‘In his Affidavit at paragraph 27, Mr Ivry states: "In my experience such an exercise generally produces a superior, more efficient and more effective product." This would not be the case if the re-write of the software were undertaken from scratch. The improvements in the software the second time around occur because important information learned while producing the first version of the software is then captured in the documentation and used for the second version.
Since the proposed re-writing was based on and dependent on information from the original version of the software, the cost of writing the original software in the first place is likely to have been considerably higher than the cost estimate obtained by Mr Ivry. The cost of writing the original software would be more comparable to the cost of starting again from scratch.
Furthermore, Mr Ivry's estimated cost includes the "Application and OSE layers" which are parts of the software, but it does not appear to encompass the full software including PimpOS. If the PimpOS were also to be included in Mr Ivry's suggested re- write process, then the cost estimate would be much greater again.’
150 In the final section of the same report, Goldschlager stated that he had undertaken a further comparison of files which were part of the Application Software on the CD-ROMs identified in the passage quoted at [143] above. The results of that further comparison were set out and it was concluded;
‘The comparisons in the tables above comprise roughly half of each Application program. The other half was not compared since the files names did not match.
These are substantially the same types of results that I have described in my earlier Affidavit dated 10 April 2001, only more of the same. Therefore I come to the same conclusions which are described at paragraphs 20 to 24 of my earlier Affidavit.’
151 Another report by Goldschlager dated 16 June 2003 was exhibited to an affidavit which he swore on 16 June 2003. In the first section of that report, Dr Goldschlager made these comments on the reports by Mr McGregor dated 2 and 8 April 2003 (see section (ii)(c)below).
‘1. I have perused Mr Peter MacGregor’s Initial Report dated 2 April 2003 and his Supplementary Report dated 8 April 2003. I have found the analysis of terms and his commentary on general computer matters to be reasonable and consistent with normal usage in the software community.
2. I note Mr MacGregor’s statement that a competent programming team could carry out a clean rewrite of the application software given, among other things, “adequate documentation of the operating system, especially its API”. This statement, assuming the availability of documentation and the API, is relevant in comparing the costs of a re-write with the considerably higher costs of writing the software for the first time.’
152 In the next section of the same report, the witness identified several matters which may require application software to be modified and then expressed this opinion;
‘6. For this reason, successful commercial software is not usually a static object, but rather is a constantly evolving product. Application software is generally kept up to date by taking advantage of new hardware facilities, listening to customer feedback, and adding additional value to the software, often in the form of added features.
7. The anticipated life of application software therefore depends on employing the services of computer programmers and other software professionals. Such a team is required in order to keep adapting the software and keeping it up to date and commensurate with its competitors.
8. Where this approach is used, application software can enjoy a lifespan of years and even several decades. Usually, such an evolution is in effect a series of adaptations of the software. In many examples of such evolution of which I have knowledge, one can see a significant amount of the computer code from each previous version carried across to the next version, sometimes with alterations and sometimes with new lines of code added.
9. The lifetime of software such as the MTD software could in principle extend over a period of ten years or even much more. The software lifetime depends on a commitment to keep evolving the software.’
153 Examples were then given of amendments or modifications to the MTD application software which had occurred in the past or which might have been expected to occur in the future and Goldschlager concluded;
‘12. The lifetime of the software will depend upon periodically producing adaptations to keep the software in line with new technologies and changing user needs and expectations.’
154 By way of further comment on Ivry’s evidence, Goldschlager reiterated that the cost of creating software for the first time was likely to be considerably greater than the estimated cost of re-writing it. That was explained by noting that, in re-writing, a programmer could take advantage of solutions devised during the original writing of problems raised by the task. Finally, in that report, the opinion was expressed that the cost of first writing a program in Australia would be significantly higher than re-writing the same program in India where labour costs are much lower.
(ii) Respondents’ Expert witnesses
155 This witness it will be recalled, collaborated with Goldstein in conducting the technical aspects of the “due diligence” investigation of DDS’ business before the mCom interests acquired it. He has had extensive experience in information technology in the banking and finance sector and has recently worked as an independent consultant and as Head of Technology of a venture capital company based in the United Kingdom.
156 In his affidavit affirmed 23 August 2002, Ivry expressed the opinion that much of the delay in introducing the MTD 3000 to the market had resulted from poor GSM antenna reception and poor battery life. In pars 20 to 13 of the same affidavit it was deposed;
‘10. In May 2001 I carried out a detailed assessment and investigation of the cost which would be incurred and the likely duration of a project being a newly written [sic] of the Application layer and OSE layer of the MTD3000. If such parts of the application layer of the MTD3000 were newly written by persons outside mCom and not involving any persons who had worked for DDS, it was anticipated the product would be improved.
11. The MTD3000 has three operations sections:
(1) Pin Pad – about 30 modules (secured area), including application that runs the LCD, keypad, magnetic strip reader and DSP (encryption).
(2) Terminal – about 10 modules (non-secured area), including applications that run the printer, GSM, ICC (Smart Card), RTC (Real Time Clock) and power.
(3) Communication – about 5 modules, running the power supply, RS232 Port, GSM modem and printer.
12. The operating system PIMPOS is written in assembler language and runs on the terminal CPU / Memory. The application layer runs on the pin pad with the exception of a few maintenance and utility modules that run on the terminal section.
13. The application layer code consists of about 50,000 lines of C-Code in about 40 source files. Each application structure is modular, with modules communicating via the PIMPOS call mechanism. Each module has a standard entry point with a switch statement routing messages to the appropriate function, depending on the signal code.’
157 Ivry then indicated that he had tried to ascertain the time and cost required to write the application layer and the OSE layer of the MTD 3000 so as to replace software modules and sub-modules and improve the CPU’s efficiency. That investigation led him to conclude that the process was likely to take six to eight months and he considered it reasonable to expect completion in about October 2001 of testing before re-certification.
158 Ivry further deposed that he had identified an experienced Indian company, KPIT Infosystems Limited (‘KPIT”) as able to carry out the writing of software for the application and OSE layers for which KPIT had provided a final written quotation of US$69,966. Ivry also proposed that another Indian company, independent of KPIT, would be retained to test and verify the new code. Taking account of the quotation from KPIT, and adding a component for testing and verification after making provision for travel, contracted labour in Australia, project management fees and contingencies, Ivry estimated the total cost of the “re-write” at US$198,000. He then ventured this alternative estimate on the assumption set out in par 26 of the same affidavit;
‘I have recently reviewed my assessment on the assumption that what was required was a complete application new design and code development exercise. That is, assuming new code for Application and OSE layers. For Australia and New Zealand I estimate the cost to be US$172,708. I estimate 33 weeks for Australia for the process and 21 weeks for New Zealand. A new code per ISO 8385 specification is estimated at US$70,000 and about 25 weeks.’
159 In a further affidavit affirmed 29 July 2003, Ivry deposed that he had examined the hardware and design of the MTD 3000 and understood that the PIMPOS operating system was designed in combination with the hardware to provide the high level of security required by banks for processing debit and credit transactions. He agreed with Goldstein that alternative application software could have been created to run on the MTD 3000.
160 On the issue of longevity of the MTD software and hardware, Ivry agreed with Goldstein that technology commonly has a life of five years and disputed Goldschlager’s view that the life of the MTD software could extend to ten years or more. He concluded in par 22 of his second affidavit that his estimate of a clean “re-write” noted at [158]above had not taken account of Temwell’s claim to own the PIMPOS operating system as well as the Application Software and OSE layers and “without access to the PIMPOS operating system it would not be possible to complete the code at the quoted time and cost referred to in my earlier affidavit.”
161 With respect to Goldschlager’s opinion as to whether intellectual property rights in the Application Software extended to the PIMPOS operating system, Ivry acknowledged that the Application Software was unusable without the operating system but deposed in the last paragraph of his second affidavit;
‘…… However, I disagree that the intellectual property rights of the Application Software can be extended to the Operating System. If that were the case then every software house developing applications on MS Windows would claim ownership to the Operating System from Microsoft. If the logic underlying Mr Goldschlager’s argument is pursued then because the hardware is unusable without the software as they are related components, then the product is related to the production line, and the production line is related to the inventory, and the inventory is related to sales and customers etc. I think the analysis postulated is fundamentally flawed.’
162 This witness (“Hansen”) holds a Diploma in Electronics Engineering from the Royal Melbourne Institute of Technology. After working with the Australian Defence Department, he had extensive experience in EFTPOS technology with Ericsson in Australia and later Europe and then with Verifone in Europe. In 1998 he helped set up, and became a principal of, GemWare Technology LLC (“GemWare”). He had been involved in discussions with Elbaum and DDS, first when Verifone was a supplier of PIN pads to DDS. Later, in December 1999 he procured GemWare to become a distributor of the MTD 3000 to be produced by DDS and noted that to that end “David Conn, an engineer and employee of DDS, spent many months working in the GemWare office in Chesham in England seeking to develop the product for the world market.”
163 In pars 11 and 14 of an affidavit sworn 30 January 2003, Hansen expressed as follows his opinion of the reasons for the delay in bringing the MTD 3000 to market;
‘11. I procured a number of pilot orders with signed GemWare distributors for the MTD3000. The fulfilment of those pilot orders was dependent upon ensuring that the MTD3000 was certified for the bank acquirers in those countries. Without the relevant bank certification no sale could take place. Every country has different entry barriers for certification and distributors of the MTD3000 were required to procure certification of the product in each of the respective countries. The differences in each country’s certification requirements related to different standards for communications, protocols, security requirements, and methods of handling security keys (if required). Before certification could be applied for and obtained, the terminal had to have stable hardware, operating system and Application development system.
… …
14. There were real problems with the operating system which is one of the three central elements of a product like the MTD3000. The other two elements are the hardware and the application software. As stated above, for certification purposes the application software had to be written in accordance with the requirements of each country. It was originally anticipated through my discussions with David Conn that it would take four to six weeks to write the application software to the point where certification could be obtained In fact, that time frame was not achieved. The operating system was never stable enough to finish the application software to operate it. I recall that representatives of Gem Ware, including myself, showed a number of distributors the MTD3000 product. Those distributors indicated that they were not interested in the product because the operating system was in such a poor state which in turn affected the application software.
164 In a second affidavit sworn 12 April 2003, Hansen criticised certain assumptions made by Rayner as to the share of the relevant market which the MTD 3000 was likely to enjoy. Hansen saw that market as being for EFTPOS devices including fixed line terminals using Wide Area Network (WAN) communication and those using a Local Area Network (LAN) communication together with wireless terminals using both WAN and LAN communication. Hansen described the MTD 3000 as a WAN wireless terminal designed to be portable and considered that products in that category represented 20% of the total wireless terminal devices. He instanced some seventeen other WAN products which had been released in France, Israel, Korea, Australia, USA, UK, Italy and Japan between 1996 and 2002.
165 After noting that the “Operating System” and Application Development Environment are generally designed and developed by the terminal supplier, Hansen went on to depose in pars 13-18 of his second affidavit;
‘13. The Application Program for an individual product is generally written most efficiently and cost effectively in the country where it is to be distributed and operate. The reasons for this are:
(a) The writing of the code generally takes less time than the certification testing time with the acquirer
(b) Programmers within the distributor country are more likely to be experienced with the local requirements, nuances of specifications and individual preferences of the acquirer certification engineers
(c) Application Software Programs have to be maintained on an ongoing basis as ‘bugs’ are found and acquirer specifications change
(d) There are internationally many hundreds of Application Software Programs required to run on an Operating System. No existing terminal supplier has the programming resources to develop any but a few core applications.
………
15. (c) An Application Software Program would normally be clearly
defined by an EFTPOS industry name such as ANZ AS2805 version 1.07 (date). This is a single Application certified and for a specific acquirer (ie, ANZ Bank). In my experience, Application Software Program that has not been certified with at least one acquirer has very little commercial value.
16. By reference to the 1998 Transaction Documents it appears the only Application Software at that time developed related to ISO 8583 and AS 2805. There is no mention of any other internationally known EFTPOS application standard. The ISO 8583 Application Program is very complex compared with many of the US and European EFTPOS standard programs. An Italian or French programmer for example would simply start again and write the Application Software Program from scratch. It would be naïve to believe or proceed on the basis that the ISO 8583 Application Program could be the basis of all of the Application Programs developed for the international market. It follows that the majority of Application Software Program modules listed in the First Schedule are, in my opinion, of little value. Many modules as defined would not have been used to create Applications for MTD 3000 terminals sold in other countries around the world.
17. I have read the opinion of Goldschlager [REF: Goldschlager 5/3/2003 page 2] who argues that the Application Software and the Operating System are “related” programs. In the EFTPOS terminal industry and in the general IT world the two components are clearly separate both from a development point of view and commercially. An example of this is buying an Application Software package like Microsoft Word and expecting to also be provided with the Microsoft Operating System, Windows as an inclusion to what is supplied. Word can run Windows but so too can Excel and hundreds of other Application Software packages.
18. The definition of the ‘Application Software’ [REF: Governing Terms Agreement 1.2] states ‘ … with the application software and related programs for use on the MTD 2000 series mobile transaction device …’. The First Schedule to the agreement refers to ‘Modules forming Application Software which resides within the MTD 2000 …’. It does not appear there is any reference to an Operating System in the schedule although I am aware from reading his Affidavit Mr Elbaum states that the PimPOS Operating System had been written in 1996/97. Similarly, the transaction documents appear to make no reference to the MTD 3000 or any component part of it although I am aware from Mr Conn’s Affidavit that the MTD 3000 was already defined in early 1998 [REF: Conn 26/7/2002, 20].’
166 In the last section of his second affidavit, Hansen recounted his experience that application software programs are given away free, sold on a per copy licence basis or sold outright as source code. He explained this practice by saying that suppliers are content to make their profits from sales of terminals. He also deposed that, consistently with the same practice, DDS, in February 2000, gave to GemWare distributors in London free of charge “most of the updated software modules apparently performing the functions of the predecessor modules listed in the First Schedule” of the GTA.
167 This witness (“McGregor”) holds a degree in engineering from the University of Sydney and a graduate diploma in software engineering from the Royal Melbourne Institute of Technology. He has had extensive experience in the computer industry since 1961. He had been asked by the solicitors for the respondents, to give, having regard to industry usage, his opinion of the current meaning and (if different) the meaning in October 1998 of the following expressions:
(i) “source code”;
(ii) “application software”; and
(iii) “operating system”.
168 In his report dated 2 April 2003, McGregor first indicated that “source code” represented the version of a programming language in a readable form which is capable of automatic translation into a form known as “machine code” which can be recognised and executed by the processing unit of a computer. He referred, as being consistent with industry usage, to this definition from Australian Standard AS3611-1993:
‘source code. Computer instructions and data definitions expressed in a form suitable for input to an assembler, compiler, or other translator. Note: A source program is made up of source code. Contrast with: object code.’
169 At par 10 of the same report, McGregor related his opinion of the meaning of “source code” to certain features of the MTD 2000 and observed;
‘The source code of a large computer program or set of programs is typically organized into logically related blocks called modules, and each module can be stored physically on a computer disk as a file. For example, the MTD2000 CD contains approximately 179 files containing source code written in the C language and 12 files containing source code written in assembly language. The C language files on the MTD 2000 CD have a file-name extension [A file-name extension consists of the rightmost dot in the file name and all the characters following that dot. For example in the file name ‘pimpos.h’ the file-name extension is ‘.h’] .c or .h. The assembly language programs on the CD have a file-name extension .a51 or .inc.
170 As to “application software”, McGregor again called in aid the definitions in the Australian Standard and offered a schematic diagram not dissimilar from that reproduced at [210] below. That treatment occurs as follows at pars 11 and 12 of his report;
‘Australian Standard AS 3611-1993 defines application software as follows:
application software. Software designed to fulfil specific needs of a user; for example, software for navigation, payroll, or process control. Contrast with: support software; system software.
Support software and system software are defined in AS 3611 as follows:
support software. Software that aids in the development or maintenance of other software, for example, compilers, loaders, and other utilities. Contrast with: application software.
system software. Software designed to facilitate the operation and maintenance of a computer system and its associated programs; for example operating systems, assemblers, utilities. Contrast with: application software.
The relationship between the classes of software named in the above definitions is illustrated by the following diagram:
’
171 McGregor’s general observations on “application software” included the statements:
‘13. …… Designers of both application software and system software make use of the concept of software layers in order to achieve modularity, simplicity and robustness of design.
14. …… In some circumstances it may be appropriate to differentiate merely between two broad classes, namely system software and application software, while in other circumstances (for example in a programmers’ instruction manual) a much finer division might be appropriate.
15. While the term operating system refers to a class of system software whose purpose and nature are well understood in computer science, the boundaries of the class application software are less distinct, since an ‘application’ can be any field in which a computer can be used.
16. It would not be contrary to industry usage to classify a particular program broadly as application software if:
a. it is not part of an operating system; and
b. it is intended to perform a useful function within a particular field of application; or
c. it is intended to be used by a program that is intended to perform a useful function within a particular field of application.’
172 In relation to “operating systems” McGregor again drew on the Australian Standard definition which is in these terms:
‘operating system. A collection of software, firmware, and hardware elements that controls the execution of computer programs and provides such services as computer resource allocation, job control, input/output control, and file management in a computer system.’
173 However, he was inclined to doubt whether the inclusion in that definition of the words “firmware and hardware” was fully consistent with normal industry usage. In his experience, operating system “was usually referable only to software” and he quoted three authoritative definitions which supported that qualification. McGregor then went on to make this distinction between application programs and operating systems:
‘There is a distinct boundary between application programs and the operating system under which they are designed to run. This boundary is called the ‘application programming interface’ or API. The API provides a means by which application programs can call upon the services provided by the operating system and receive messages back from the operating system. The vendors of operating systems sometimes provide an information package, called ‘a Software Developers Kit’ or ‘SDK’, which can be used by application programmers who wish to write programs that will call on operating system services. The SDK contains (desirably) all the documentation needed to allow an application programmer to write course code which calls upon operating system services.’
174 He next ventured this diagrammatic representation of the structure of the application software and operating system which appeared to have been in the minds of the MTD designers. What he regarded as the operating system is shown in heavy outline.
175 In the second part of the same report McGregor responded to a request for an opinion as to which of the modules listed in the First Schedule to the GTA constituted “application software and/or operating system” for the MTD 2000 device or the MTD 3000 device. Based on an examination of a few lines of text from each of the relevant files, McGregor regarded it as reasonable to classify as “application software” each of the files listed in the following table;
|
‘Module Name in First Schedule |
Header File on MTD2000 CD |
Definition File on MTD2000 CD |
|
MTD |
mtd.h |
mtd.c |
|
PINPad |
pinpad.h |
pinpad.c |
|
Menu |
menu.h |
menu.c |
|
Config |
config.h |
config.c |
|
Journal |
journal.h |
journal.c |
|
Printman |
printman.h |
printman.c |
|
Display |
display.h |
display.c |
|
Host |
host.h |
host.c |
|
Utils |
utils.h |
utils.c |
|
Traninfo |
traninfo.h |
transinfo.c |
|
Reports |
reports.h |
reports.c |
|
200 |
anz200.h, ets׀200.h |
Anz200.c, ets׀200.c |
|
500 |
anz500.h, ets׀500.h |
anz500.c, ets׀500.c |
|
800 |
anz800.h, ets׀800.h |
anz800.c, ets׀800.c |
Table 1 Correspondence between modules listed in the First Schedule and source code files on MTD2000 CD.’
176 In the third part of his report, McGregor concluded that the programs listed in Table 1 could not be used in their present form without the PIMPOS operating system and that modifying them to run with a different operating system would “be a costly undertaking, if it is feasible at all.” Finally, McGregor ventured the opinion that a “competent programming team” could carry out a “clean re-write” of the application software to run the MTD 2000 or 3000 under the appropriate version of the PIMPOS operating system but without access to any of the existing application software.
Part IV: Resolution of the issues
(a) The claim
(i) Did Temwell consent to an assignment by DDS of its interests in the Application Software under the Transaction Documents?
179 Elbaum considered that the proper “contact person” for discussion about an acquisition of the interest of DDS in the licence from Temwell was Enriquez, although it must have been clear to Elbaum that the final decision of any matter of commercial significance or sensitivity affecting Temwell lay with Fraid and Tauber.
180 As early as 7 February 2000 Wenig wrote to Sharp, who was perceived then to be Temwell’s legal adviser and who had drawn the Transaction Documents, advising him that as “a condition precedent” to the purchase of DDS’ business, the purchaser required an “acknowledgement and consent” from Temwell to the purchase of DDS’ assets including its rights under the Transaction Documents. It is significant that the letter of 7 February 2000 did not express any intention then and there to “buy out” Temwell’s interest in the Application Software. It was concerned first to have an agreed “cap” or “ceiling” on the figure which the purchaser might be liable to pay to Temwell in the event of its exercising DDS’ rights under the Call Option Agreement. Secondly, the writer of the letter sought to reserve the right to the purchaser to acquire the Application Software from Temwell within six months of the completion of the purchase of DDS’ interest for an aggregate price of not more than $3.1 million. The reservation of that right, I infer, was intended to ensure that Temwell should not benefit by more than the current “book value” to it of its interest in the Application Software if the purchaser were to perceive that the value of the Application Software had been enhanced during the first six months as a result of the purchaser’s injection of capital and investment of time and effort in its further development.
181 Enriquez’ response of 22 February 2000 to Wenig’s letter was unequivocal. It was expressed to be “for and on behalf of Temwell” and contained in par (1) a clear acknowledgment and consent to the purchase by Dragonventures.com Ltd of the assets of DDS including the rights of DDS under the Transaction Documents. It is true that Enriquez did not affirmatively respond to par 2 of Wenig’s memorandum by agreeing to a formula which would “cap” the purchaser’s liability in the event of its exercising the Call Option Agreement. As well, Enriquez expressly refrained from indicating Temwell’s attitude to Wenig’s request for a right in the purchaser to acquire the Application Software within the first six months for an aggregate price of not more than $3.1 million. However, the responses to those second and third points were self-contained and in no sense detracted from the unequivocal grant of consent in par (1) of Enriquez’ response. The whole tenor of pars (2) and (3) of that response evinces a recognition that the consent given by par (1) enlivened in the purchaser the right acquired from DDS to activate the mechanism contained in the Call Option Agreement for acquiring from Temwell its interest as licensor in the Application Software. Accordingly, I regard Enriquez’s response of 22 February 2000 as embodying an affirmative and unambiguous assent to what had been requested by Wenig’s memorandum of 7 February . Enriquez’s response answered the description of “consent” in Bell v Alfred Franks & Bartlett Co Ltd [1980] 1 WLR 340 where Shaw LJ observed, at 347;
‘If acquiescence is something passive in the face of knowledge, what does “consent” mean? In the context of the contrast implicit in subsection (4), the only practical and sensible distinction that can be drawn is that if acquiescence can arise out of passive failure to do anything, consent must involve a positive demonstrative act, something of an affirmative kind. It is not to be implied, because the resort to implication betokens an absence of express affirmation. The only sense in which there can be implied consent is where a consent is demonstrated, not by language but by some positive act other than words which amounts to an affirmation of what is being done and goes beyond mere acquiescence in it. It may lead, in this context, to a false conclusion to speak of "implied consent," which is what the judge said was the proper inference to be drawn from the long history of acquiescence. I would prefer for myself to say "consent" involves something which is of a positive affirmative kind ….’
See also per Waller LJ at 350.
183 The parlous state of DDS’ finances, which Enriquez had been assigned to monitor and which was known to him from, at least, the late payment or non-payment of royalties under the LRC Agreement, was a powerful inducement to Temwell to consent in the terms of Enriquez’ response of 22 February 2000. Without such consent, the likelihood was that DDS would collapse and with it would evaporate any prospect of Temwell’s recouping its debt or investment. Like considerations, I infer, prompted the similar giving of consent at the same time by Palicave.
184 I do not attach to the presence in the Sale Agreement of 1 March 2000 of cl 2.1.9 reproduced at [37] above, the significance which Counsel for Temwell contended it should have. That “condition for completion” merely reflected cl 11(e) of the Heads of Agreement of 31 January 2005. One of the “necessary consents ….. contemplated by this Agreement”, which had clearly not been obtained by 1 March 2000, was that stipulated in cl 2.1.6 of the Agreement of that date to the effect that Temwell should provide written confirmation that the Application Software might be repurchased by DDS or its successor in title or its nominee (which might include mCom Solutions) within 12 months of 31 January 2000 at a price no greater than $3.5 million. Moreover, cl 2.1.9 extended the need for the provision of all necessary consents to those by Palicave although it seems to be accepted on all sides that the requisite consent from Palicave had been furnished unequivocally and unconditionally by 22 February 2000.
185 I am not persuaded that the preparation on 21 March 2000 by Wenig of a Deed of Consent by Temwell to mCom Solutions and its presentation to Fraid and Enriquez at the abortive settlement meeting on 22 March, detracts from the binding effect of the exchange of the memoranda of 7 and 22 February construed in the manner already indicated. A similar deed was presented to, and executed by, the other consenting creditor of DDS or investor, Palicave. The surrounding circumstances have led me to conclude that the Deed of Consent was prepared by Wenig out of an abundance of caution to accommodate the fact that, by 22 March, mCom Solutions had been identified as the eventual purchaser of DDS’ assets including its interests in the Application Software. Had it been perceived as the first, or only, instrument by which Temwell was to give a binding consent to the assignment of DDS’ interests in the Application Software, Wenig and those controlling mCom Solutions Inc would not have settled the purchase of DDS’ assets without the Deed of Consent having been executed by Temwell. In my view, the presentation of the Deed of Consent was seized upon by Fraid as an opportunity to extract, at the proposed settlement meeting of 22 March, an immediate payment for, or “buy-out” of, Temwell’s interest in the Application Software. Before the presentation of the Deed of Consent, the Temwell interests did not intend to be represented at the settlement meeting of 22 March because there was no expectation that Temwell would then and there receive any amount other than arrears of royalties due to it from DDS under the LRC Agreement. When it became apparent that no “buy-out” was to be offered on 22 March, Fraid, after consultation with Tauber, made an extravagant demand for Temwell to be “bought out” for $5.4 million and left the meeting without executing the Deed of Consent. That was despite his having received advice from Sharp that to do so would not be contrary to Temwell’s interests and would not jeopardise its entitlement should the purchaser exercise the rights available to DDS under the Call Option Agreement.
(ii) Did Temwell effectively withdraw its consent to an assignment by DDS of its interests in the Application Software?
186 This remains a live issue because of the conclusion reached in relation to issue (i) that Temwell had, on 22 February 2000, effectively consented to the acquisition by Dragonventures.com Ltd or its nominee of the interests of DDS in the Application Software pursuant to the Transaction Documents.
187 As noted at [66] above, Temwell’s statement of claim was amended during the course of the hearing to raise this issue as an alternative to the contention that Temwell had never consented to the assignment by DDS to Dragonventures.com Ltd or its nominee. It will be recalled that it is alleged in the further amended statement of claim that if such consent had been given it was “withdrawn on 22 March 2000, prior to the settlement of the Sale of Business Agreement between the first respondent and second respondent.” The particulars to that paragraph recite;
‘At about 1.30pm on 22 March 2000, Mr Wenig of Arnold Bloch Leibler, the solicitor for the Second Respondent, faxed to the Applicant a proposed Deed of Consent (CB4:1426), which stated:-
“2. Temwell hereby consents to the assignment (pursuant to the Sale Agreement) by DDS to mCom (or a wholly owned subsidiary of mCom nominated by mCom) of its rights to the Application Software, including DDS’ rights under the Call Option Agreement and the LRC Agreement.
3. Temwell acknowledges that in addition to the assignment by DDS of its rights under the Call Option Agreement, to which Temwell has consented under this Deed, Temwell has been provided with a copy of an irrevocable appointment executed by DDS in favour of mCom pursuant to which DDS irrevocably appoints mCom (or mCom’s nominee) as DDS’ appointee for the purchase of the Application Software pursuant to clause 2.1.1 of the Call Option Agreement.”
The Applicant did not execute the said Deed.
Furthermore, at the settlement meeting attended by Mr Fraid and Mr Enriquez for the Applicant and by representatives of the First and Second and/or Fourth Respondents, as well as the ANZ Bank, at the offices of Arnold Bloch Leibler in the afternoon of 22 March 2000, Mr Fraid stated to those present that Temwell would not sign any document or accept any agreement other than on the basis of a buy-out by mCom of its interest in the Application Software.
To the best of the knowledge of the Applicant, those present at the settlement meeting (in addition to Mr Fraid and Mr Enriquez) were Mr Kiefel and Mr Wenig (for the Second and/or Fourth Respondents), Mr Sharp (who attended for a limited time only – for the Applicant), Mr van Zanten (believed by the Applicant to be representing the interests of the Second and/or Fourth Respondents at the settlement meeting), Mr Elbaum, Mr Cattanach and Ms Renner (for the First Respondent), Mr Stankovich (for the ANZ Bank) and possibly other people the identity of whom the Applicant cannot recall.’
188 Temwell’s contentions under this head have been succinctly stated in the following paragraph of its final written submissions;
‘336. It is not pleaded by mCom that the consent had contractual effect. From an equity perspective, consent can be validly withdrawn at any time or, at the very least, prior to the act of assignment, in this present case as constituted by the settlement of the mCom transaction.’
190 There is a similar difficulty in erecting an implied withdrawal of consent on Fraid’s statement noted at [47] above that “unless its rights to the Application Software were ‘bought out’ by the mCom respondents”, Temwell would not execute the Deed of Consent. That is that Fraid acknowledged under cross-examination that he had not seen either Wenig’s memorandum to Sharp of 7 February or Enriquez’ reply of 22 February. Nor had he seen the letter from Richard Hains of 7 March 2000 which is set out at [41] of these reasons. He was therefore unaware on 22 March of the consent which the Court is invited to find was impliedly withdrawn by his conduct on that day on behalf of Temwell. His lack of knowledge of any consent also makes it entirely understandable that neither Wenig or Enriquez understood anything said by Fraid on that day as conveying a withdrawal of Temwell’s consent.
191 The consent which, for the purposes of this part of the argument is accepted to have been given, was contemplated by cl 15 of the GTA set out at [10] of these reasons. After it had been given, on the assumption which this submission requires the Court to make, Dragonventures.com Ltd and mCom Solutions acted on it to their detriment by advancing funds to DDS to the extent of $1.4 million. Similarly, DDS acted on the consent by assuming increased indebtedness to a new creditor.
192 Those findings make applicable to the presumptive withdrawal of consent one of the conditions identified by Jordan CJ in New South Wales Trotting Club Ltd v The Municipality of Glebe (1937) 37 SR(NSW) 288, as making the consent irrevocable, namely that it has been acted on. His Honour said, in that case, at 305-306;
‘It was contended on behalf of the plaintiff company that the consent having once been given could not be retracted, or that, if capable of being retracted, the defendant council was precluded by agreement or by estoppel from retracting it in the present case. For the defendant council it was contended that its consent could be withdrawn at any time, and that it could not be precluded either by agreement or by estoppel from exercising a discretion in the performance of a public duty. Whether or not a consent once given can be retracted is a question not capable of being resolved by a general rule applicable to all types of consent. It must depend upon the circumstances of the particular case. Where the necessity to obtain the consent of some person in order to validate an act arises from the fact that the person’s ordinary legal rights would be infringed if the act were done without his consent, any consent given by him may be retracted at any time before something has occurred to make it irrevocable. This may occur where, for example, there has been a binding agreement not to revoke the consent, or where the consent has been acted on. Where, however, the necessity for consent occurs because a power to give or withhold it has been conferred on the person by some other person or by statute, it is necessary to consider the nature of the authority which confers the power, in order to determine whether a consent once given may be retracted.’ (emphasis added)
(iii) Was Temwell’s discretion to withhold consent unfettered or exercisable only in good faith?
194 Because of the conclusion reached in relation to issues (i) and (ii) above that Temwell had given unconditional consent to the assignment by DDS to Dragonventures.com Ltd or its nominee of its interest in the Application Software and had not effectively withdrawn that consent, it is unnecessary to consider this subsidiary question raised by the parties of whether Temwell had an unfettered discretion to withhold consent to the assignment or whether that discretion could only be exercised in good faith.
(iv) Are any of the respondents liable for inducing a breach of contract by DDS?
‘(a) The first respondent has breached clause 2.3 of the Licence Research and Commercialisation Agreement by purporting to assign its Licence to a body corporate other than to a Related Body Corporate
(b) The first respondent has breached clause 7.1.3 of the Licence Research and Commercialisation Agreement by purporting to sell, transfer, assign, lease sub-licence, parting with possession of or otherwise disposing or dealing with its rights under the Transaction Documents;
(c) The first respondent has breached clause 15 of the Governing Terms Agreement by purporting to assign, transfer or otherwise create an interest or right in all or any of its rights and obligations under the Transaction Documents without the prior written consent of the applicant.’
198 The sending to DDS of the “satisfaction and waiver” letter of 24 March 2000 cannot itself provide a foundation from which to impute to the respondents an intention to induce DDS to breach the Transaction Documents by settling, on that date, the sale of its business to mCom Solutions. A willingness to proceed with a contract with a vendor notwithstanding that certain conditions precedent to the purchaser’s liability thereunder have not been satisfied does not betoken knowledge or intention that a condition of a separate contract between the vendor and a third party will thereby be breached. That is not to say that waiver of a condition precedent in one contract and insistence on a vendor’s performance of that contract may not amount to procuring a breach of a condition in substantially identical terms of another contract between the vendor and a third party. However, I have pointed at [178] above to the significant and substantial differences between the conditions precedent numbered 11(a) in the Heads of Agreement of 31 January 2000 between DDS and Dragonventures.com Ltd and the corresponding conditions or terms of the Transaction Documents which were binding on DDS and Temwell.
199 Even if, contrary to the view which I take of the facts, the letter of 24 March had been based on an erroneous view of the applicable law, the evidence does not permit a finding that any person through whom mCom Solutions can be taken to have acted, principally Wenig, David Hains, Richard Hains and Kiefel, knew of the error and intended, by insisting on the view expressed in the letter, to compel DDS to act in breach of its contract with Temwell. Indeed, the state of the evidence suggests that Wenig prepared and sent the letter on his own initiative without reference to, or instructions from, any of the controlling minds of mCom Solutions. Moreover, the imputation that the letter was prepared and sent with the requisite knowledge or intention requires the further assumption that those responsible for it believed that Deacons, as solicitors to DDS, would not detect the error or would advise their client, in spite of it, to act in breach of its contract with Temwell. That further assumption is negatived by a letter of 16 June 2000 from Deacons to Meerkin & Apel, who by then were acting for Temwell. That letter contained these passages;
‘We have already written to you on 24 May 2000 pointing out that your allegations were misconceived and on 2 June 2000 referring to the fact that your correspondence makes no reference to your client’s consent to assignment dated 22 February 2000 and the course of dealing leading up to the settlement of the sale between DDS and mCom Solutions Inc. (“mCom”) of which your client has been aware.
In particular, our client understands that your client did not withdraw its consent.
As we have indicated to you previously, your client’s request and threats have been misconceived. The questions posed in paragraphs (a), (b), (c) and (d) on the second page of your letter dated 5 May 2000 are misconceived. The consent was provided and our clients have not threatened to breach or breached their obligations.
……
Again, the fundamental issue is the consent provided on 22 February 2000 and subsequent dealings the circumstances of which your correspondence fails to address.’
200 A subsidiary argument advanced on behalf of Temwell was to the effect that the execution by Dragonventures.com Ltd of the Heads of Agreement on 31 January 2000 and the Sale of Business Agreement on 1 March 2000 were the “first potential instances of inducement of breach” by DDS of its contract with Temwell. The resort to the phrase “potential instances” betrays the fallacy in that argument. The knowledge or intention discussed at [195] and [196] above which is an essential element of the tort, must, I consider, accompany the conduct alleged to constitute the breach. At the time of execution of both the Heads of Agreement and the Sale of Business Agreement, those controlling Dragonventures.com Ltd clearly knew that Temwell’s consent was required to the assignment of DDS’ interests under the Transaction Documents. That was why the provision of Temwell’s consent was expressed as a condition precedent to the liability of the purchaser under each of the Heads of Agreement and the Sale of Business Agreement. The possible waiver of the condition precedent could only be seen as part of an inducement to DDS to breach its contract with Temwell if the latter’s refusal of consent had been contemplated by those directing or advising Dragonventures.com Ltd on 31 January 2000 or 1 March 2000 respectively.
201 However, any contemplation of that kind is excluded by the fact that Wenig wrote to Sharp in the terms he did on 7 February seeking Temwell’s consent and, as I have found, was entitled to believe that such consent had been given by Enriquez’ reply of 22 February.
202 Similar considerations apply to the “dilution threat” said to have been made to Elbaum at the meeting on 23 March 2000. That threat was made, I find, because David Hains and the others advising mCom Solutions had discovered that the ANZ Bank would not allow the debt of $6 million owed to it by DDS to be transferred to the new vehicle which was to take over the business of DDS. That necessitated the interests associated with mCom Solutions raising an extra $6 million in debt or equity from their own resources in order to repay the loan from the ANZ Bank. Neither the making of the threat nor its withdrawal was directed to inducing DDS to settle the sale despite Temwell’s refusal of consent or its withdrawal of a consent previously given. Nothing had been said by either Fraid or Enriquez at the abortive settlement meeting of 22 March to the effect that Temwell had never consented to the sale or was withdrawing its consent. All that was then indicated by the Temwell interests was its desire to be “bought out” immediately and its refusal to execute the Deed of Consent. It is also significant in this context that, far from perceiving the “dilution threat” as an inducement to complete the sale in breach of the obligations of DDS to Temwell, Elbaum saw it as freeing DDS from the Sale of Business Agreement. That explains his approach, on the advice of Fraid, to Levi Mochkin as an alternative investor or lender of funds to keep DDS afloat.
203 For Temwell it was contended that the expression “Application Software” as defined in the GTA (see [8] above) should be construed as including all versions of the MTD 2000 and MTD 3000 application software and all versions of the PIMPOS operating system software as they existed at the time of agreement for the sale of DDS’ business on 1 March 2000 together with the physical source code for all such software. It was said that such an expansive meaning was dictated by the reference in the GTA to “all modifications thereto or enhancements thereof from time to time and whether created or generated by DDS from or as a consequence of the Development Program or otherwise”.
204 The definition of the “Development Program” in cl 1.16 of the GTA also reproduced at [8] of these reasons, was said to contemplate the continuing development of the Application Software into the future. Moreover, it was still being developed as late as July 2000; that is more than three months after mCom Solutions had acquired the business of DDS.
205 As well, the “Development Program” was recognised by the First Schedule to the LRC Agreement as involving the three components of maintenance, development or research and commercialisation.
206 These considerations were said to compel the attribution to “Application Software” of a wider connotation than it has according to ordinary usage within the relevant industry. The evidence of Dr Goldschlager gave some indication of that industry usage when he wrote in his report, extracted at [146] above that “the higher level application software that is written for the MTD 2000 and MTD 3000 devices would repeatedly call upon the services of the PIMPOS and would be entirely reliant on those services.” Consistently with that wider connotation, “Application Software” as used in the Transaction Documents was said by Counsel for Temwell to comprehend the software for versions of the MTD later than the MTD 2000, including the MTD 3000, the operating software being for the MTD 2000 and the MTD 3000 respectively, PIMPOS 1 and PIMPOS 2 and the source code for both the application software in the narrower, technical sense and the operating software (relevantly PIMPOS 1 and PIMPOS 2).
207 Counsel for the respondents contested the width ascribed by Counsel for Temwell to “Application Software.” They pointed to the actual text of the First Schedule to the GTA which recites;
‘FIRST SCHEDULE
APPLICATION SOFTWARE
Modules forming Application Software which resides within the MTD2000
MTD
PINpad
Menu
Config
Journal
Printman
Display
Host
Utils
TranInfo
Reports
200
500
800
Plus any modifications, extensions and Development of the above. Components of the above may be distributed with the Software Development Kit under licence to distributors appointed by DDS for the commercialisation of the products.
Related Programs
(whether forming part of the Software Development KIT or not)
Bank2000
Loader2000
Config2000
Developer2000
Template2000
Loader2000+
Software Development Kit (not including 3rd party development environment)’
208 That schedule, it was pointed out, contains no reference to the PIMPOS operating system which is not among the “related programs” listed in the second part of the Schedule. However, the definition in the GTA is not limited to “the Application Software and related programs.” It includes “all of the technology and information … of DDS in connection with the Application Software and related programs” (emphasis added). In my view, the PIMPOS operating systems have a sufficient connection with the Application Software (in the strict technical or industry sense) for the MTD 2000 and the MTD 3000 for them to answer the definition notwithstanding that PIMPOS 1 and PIMPOS 2 might also be capable of adaptation for use in conjunction with other, unrelated, application software in the industry sense.
209 It is not disputed that Temwell at no time itself exploited the Application Software however defined. It depreciated for tax purposes what it had acquired from DDS in 1998 and derived royalties or an entitlement to royalties as a result of having granted a licence back to DDS of the same property. However, that consideration does not detract from the fact that the Transaction Documents were conceived and formulated in part as providing a form of security to Temwell over the property for which it had notionally paid DDS $3 million. The intention which I impute to the parties to the Transaction Documents is that such security was to be analogous to a floating charge over the property as developed by DDS during the life of its agreement with Temwell. Hence, the reference in cl 1.2 of the GTA to “all modifications thereto or enhancements thereof from time to time”. A contrary interpretation would be a tacit encouragement to DDS to abandon at the earliest possible point the further development or enhancement of the MTD 2000 and concentrate its efforts on developing another unit, albeit one with some of the same related programs and similarly adapted for use with the same or a modified PIMPOS. According to the respondents’ argument, as I understand it, sales of the new unit would not carry royalties payable to Temwell or “LRC proceeds.” That would be to countenance a grave dilution of Temwell’s security to the point where it would have become worthless well before the end of the life of the agreement embodied in the Transaction Documents.
210 Counsel for the respondents also pointed to the following “functional pyramid” for the MTD 3000 which had been introduced into evidence by Temwell through Goldstein;
|
MTD 2000 FUNCTIONAL PYRAMID |
||||||
|
USER |
||||||
|
APPLICATION…. |
APCMDLIN |
ISO200 |
ISO500 |
ISOVOID |
REPORTS |
|
|
C DRIVERS / MODULES… |
TERMINAL |
PINPAD |
MENU |
CONFIG |
JOURNAL |
DISPLAY |
HOST |
PRINTMAN |
UTILS |
|
|
API LAYER…. |
DRCAPI |
OSCAPI |
APCAPI |
|
|
PIMPOS DRIVERS…. |
DRPOWER |
DRLATCH |
DRBUTTON |
DRLED |
DRBUT |
DRLOG |
DRD5001 |
DRPCMCIA |
DRM180 |
DRZ8530 |
DRPINPAD |
DRMODEM |
DRSDLC |
DRRPMNCL |
|
|
PIMPOS… |
OSBANK |
OSVECTOR |
OSBOOT |
OSCONTXT |
OSCOMMON |
OSTEXT |
OSLOCK |
OSEVENT |
OSMEMORY |
OSRTC |
OSSIGNAL |
OSTASK |
OSTIMER |
OSCONFIG |
OSFORMAT |
OSGRIMY |
|
MAIN OPERATIONAL HARDWARE BOARDS |
211 Goldstein claimed that the schematic diagram reproduced above was similar to one which he had seen on a wall at the premises of DDS. It was said by Counsel for the respondents, as I understood the argument, that the diagram demonstrates a marked degree of functional separation between the application software and the PIMPOS operating system which is represented by the layer second from the base of the pyramid. However, the pyramidal structure of the whole system and the references in the evidence to “interfaces” between the various layers of the pyramid has confirmed for me the impression of a sufficient degree of interconnection to support the conclusion that the PIMPOS operating layer and the layer comprising the “PIMPOS drivers” were part of the technology “in connection with” the application software (in the technical sense) represented by the layer at the top of the pyramid.
212 Nor is it to the point, in my view, that the Application Software, in the technical sense, was written by different employees of DDS (Paul Farrar, David Conn and Rupert Enright) from the author of the PIMPOS operating systems (Graham Farrar). Both developments occurring in parallel were created or generated by DDS and, for the reasons already explained, were part of the “application software and related systems” or sufficiently “in connection” therewith to be caught by the definition in cl 1.2 of the GTA.
213 Although it may be acknowledged in light of the evidence that the two levels constituted by the application software in the technical sense and the operating system were self-contained, that does not detract from the construction which I favour of the Transaction Documents. That entails that “Application Software” in the special sense used in the Transaction Documents comprehended, not only the modules residing in the MTD 2000 as identified in the First Schedule to the GTA, but all of “the technology in connection” with that application software and “related programs”. I take the latter phrase to refer to programs including those for operating systems that were developed for use in conjunction with, or in relation to the application software in the narrower sense. Similarly, I consider, that the source codes for both the application software (in the narrow sense) and the PIMPOS operating systems constituted “information … in connection with the Application Software” (in the wider sense) and “related programs for use on the MTD 2000 … developed by DDS together with all modifications thereto or enhancements thereof from time to time.”
214 The respective understanding by DDS and Temwell of the relevant technology was poles apart. As well, I regard the contract constituted by the Transaction Documents as imposing duties of utmost good faith on each of the parties. Against that background, I have not been assisted in construing the expression “Application Software” by the fact that Temwell at no stage obtained a copy of the modules or source codes identifying what it had acquired from DDS and was never satisfactorily able to identify how that technology had been modified or enhanced by DDS or mCom Solutions Australia during the life of the Transaction Documents.
(vi) Infringement of Copyright
215 This part of Temwell’s claim proceeds from the premise that it acquired ownership of the copyright in the Application Software pursuant to the Transaction Documents. From the conclusion which I have reached in relation to issue (v) about the width of the rights signified by the expression “Application Software” in the Transaction Documents, it follows that, as at 24 March 2000, Temwell had, subject to the licence back to DDS, all the rights within the meaning of s 15 of the Copyright Act 1968 (Cth) of the copyright in the application software (in the technical sense) and the PIMPOS operating system as developed to that date for use in connection with the MTD 3000 together with the source code for both applications. The continued development, after 24 March 2000, by mCom Solutions or mCom Solutions Australia of the same technology would, if it had occurred without Temwell’s consent, have constituted infringement of reproduction of Temwell’s rights as owner of the copyright.
216 However, throughout their comprehensive submissions under this head, Counsel for Temwell have acknowledged that, for an infringement to have occurred, it must have been without the consent or permission of Temwell. For the reasons explained in relation to issue (i), I have concluded that Temwell, on 22 February 2000, gave its unconditional and unequivocal consent to the assignment to Dragonventures.com Ltd or its nomine of its licence to reproduce or otherwise use or authorise the use of Temwell’s copyright in the application Software. Furthermore, as explained in relation to issue (ii) that consent became incapable of withdrawal by 24 March 2000.
217 This is not a case where the alleged infringer was unconscious of Temwell’s rights as owner of the copyright. Nor did the alleged infringer mistakenly believe that it had the consent of the owner of the copyright. Everything which mCom Solutions or mCom Solutions Australia did after 24 March 2000 by way of further development of the Application Software for the MTD 3000 was done in the belief, correct as I have held, that Temwell had consented to those companies succeeding to the rights and obligations of DDS under the Transaction Documents.
218 That finding of consent operates to exclude mCom Solutions and mCom Solutions Australia, not only from liability for direct infringement of Temwell’s copyright, but, from liability for authorising the use or development of the Application Software by others. That liability is contemplated by s 13(2) and imposed by s 36(1) of the Copyright Act. The same reasoning precludes liability for authorising any infringement from attaching to individuals like David and Richard Hains, van Zanten and Kiefel through whom mCom Solutions or mCom Solutions Australia acted.
219 These conclusions make inapplicable to any act of alleged authorisation of infringement occurring after 4 March 2001 the considerations enumerated in s 36(1A) which was inserted in the Copyright Act with effect from that date. They also make inapplicable to any conduct of mCom Solutions or mCom Solutions Australia the provisions of s 38(1) of the Copyright Act which stipulates;
‘Subject to Division 3, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, in Australia, and without the licence of the owner of the copyright:
(a) sells, lets for hire, or by way of trade offers or exposes for sale or hire, an article; or
(b) by way of trade exhibits an article in public;
if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright or, in the case of an imported article, would, if the article had been made in Australia by the importer, have constituted such an infringement.’ (emphasis added)
220 The positive conclusion which I have reached on the question of consent by Temwell makes it similarly unnecessary to consider the application of s 115(3) of the Copyright Act. That subsection, which has been pleaded by way of defence by mCom Solutions, provides;
‘Where, in an action for infringement of copyright, it is established that an infringement was committed but it is also established that, at the time of the infringement, the defendant was not aware, and had no reasonable grounds for suspecting, that the act constituting the infringement was an infringement of the copyright, the plaintiff is not entitled under this section to any damages against the defendant in respect of the infringement, but is entitled to an account of profits in respect of the infringement whether any other relief is granted under this section or not.’
221 The same conclusion also makes it unnecessary to determine what, if any, parts of the Application Software of which Temwell became the owner in 1998 had the requisite degree of originality to sustain its claim of copyright. The respondents raised this issue of whether Temwell had discharged the onus of proving originality in the sense discussed, eg, by Gibbs CJ in Apple Computer Inc v Computer Edge Pty Ltd (1986) 161 CLR 171 at 182-193. They further contended that Temwell’s failure to adduce evidence to establish the requisite originality precluded it from making out the second integer of infringement, namely that it has occurred in relation to a “substantial part” of the work in which copyright is alleged to subsist; cp, Data Access Corporation v Powerflex Services Pty Ltd (1999) 202 CLR 1 at 33 [85]-[86].
222 This part of Temwell’s claim is based on the use by mCom Solutions or mCom Solutions Australia after 24 March 2000 of the mark “MTD”. I accept that those initials constituted a trademark and were not merely a descriptive title or generic nomenclature for the class of goods known as mobile transaction devices; cp, Hornsby Building Information Centre v Sydney Building Information Centre (1978) 140 CLR 216 esp, per Stephen J at 230. Accordingly, I am prepared to assume that Temwell became the owner of the rights in the mark “MTD” by force of the Transaction Documents and the definition of “Intellectual Property Rights” in cl 1.24 of the GTA which is reproduced at [8] above and included “confidential information, copyright, trademarks …”
223 The definition of Application Software in cl 1.2 of the GTA imported that definition of “Intellectual Property Rights” into the Transaction Documents and, accordingly, comprehended, within the concept of “Application Software”, trademarks “in connection with the application software and related programs for use on the MTD 2000 series of mobile transaction device … together with all modifications thereto or enhancements thereof from time to time … .”
224 However, as with its claim for infringement of copyright, Temwell accepted at a number of points that its cause of action under s 52 of the TPA depended on an absence of its consent to the use by the respondents of the “MTD” mark. For instance, Counsel for Temwell contended, in the course of their written submissions, that “it was misleading and deceptive for [the mCom respondents] to advertise and sell such products under that mark where they did not have the consent of Temwell to do so” (emphasis added).
225 A similar implied concession underlay Temwell’s allegations of contraventions of s 53(c) and s 53(d) of the TPA in that the respondents’ use of the MTD mark falsely represented that their products or their business had a sponsorship or approval by, or affiliation with, Temwell which they did not have. Likewise, Temwell’s cause of action in passing off was acknowledged to depend on its establishing, amongst other things, “the unauthorised use of the same mark after 24 March 2000” (emphasis also added).
226 There is some force in the submission of Counsel for the respondents that the misrepresentation pleaded by Temwell could never be made out on the evidence. The plea of misrepresentation is to be found in par 29 of the fourth further amended statement of claim which alleges that either or both mCom Solutions and mCom Solutions Australia “have in the course of trade or commerce in Australia represented that they were entitled or authorised by the applicant to offer for sale and sell EFTPOS systems into which had been installed copies of the Application Software and/or to use in the course of trade the MTD mark”. Counsel for the respondents have made the point that there is no evidence that either mCom Solutions or mCom Solutions Australia represented to anybody that they or either of them had been authorised to do anything by Temwell. It may be, however, that the extract from par 29 which I have just quoted was intended to convey that mCom Solutions or mCom Solutions Australia, impliedly represented (contrary to the fact as Temwell would have it) that either or both of them had the authority of the legal owner of the intellectual property and other rights inhering in the MTD 2000 and the MTD 3000 to develop and market those devices.
227 However, nothing turns on whether this debate reveals a true deficiency of evidence or is founded on a mere pleading point curable by amendment. As indicated at [197] of these reasons, the fundamental premise of Temwell’s claims under this head, namely that it did not consent, or effectively withdrew its consent to the assignment from DDS to Dragonventures.com Ltd or its nominee, has not been made out. Accordingly, neither the claims under this head, nor the attempt to fix the individual respondents with accessorial liability in reliance on s 75B of the TPA, can be sustained.
‘7.1 Each party acknowledges and agrees that to the extent it is not already in the public domain the Application Software and any commercialisation strategy relating thereto is confidential information and except as set out in Clause 7.3:
7.1.1 no Party may whether directly or indirectly disclose divulge, sell, communicate to, use or publish or permit the disclosure, divulgence, sale, communication of use of or publication of all or any part of the Application Software and/or any commercialisation strategy relating thereto to for the benefit of any person, firm, partnership, corporation, trust or association in any way whatsoever other than pursuant to Clause 5.2.5 of the LRC Agreement;
7.1.2 each Party shall take all reasonable steps and otherwise use all reasonable efforts to protect and preserve the confidential nature and continued secrecy of that information and, in particular, shall take all reasonable steps necessary to prevent all or any part of the Application Software from passing into the public domain (except in relation to registering intellectual Property Rights as required or permitted by the Transaction Documents and prosecuting or defending the registration of the Patents); and
7. 1.3 no other Party may use or exploit that information except as expressly authorised in the Development Program or the LRC Agreement.’
229 Counsel for Temwell also accepted that one of the elements which an applicant seeking damages for breach of confidence must establish is that;
‘There has been an unauthorised use or disclosure of that information by the recipient or some other party to whom the information has been disclosed to the detriment of the party communicating it.’
230 Reference was made to evidence which tended to suggest that both DDS and the mCom respondents, after they succeeded to the business of DDS, had taken steps to preserve the MTD source as secret or confidential to the extent indicated as necessary by Gowans J in Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 49.
231 There is some confusion in Temwell’s submission as to what is alleged to have constituted an unauthorised use or disclosure of the presumptively confidential information. Its written submission recites;
‘404. As to the third element of the action, there can be no doubt that there has been an unauthorised use of that information by the Second and/or Fourth Respondent in the development, manufacture and sale of the MTD3000 and that this embodied substantially the same source code as had been transferred in the 24 March 2000 settlement. DDS disclosed or transferred this information to the Second Respondent in the settlement on 24 March 2000, and the Second Respondent then disclosed it to the Fourth Respondent shortly afterwards for the purposes of that entity continuing the development program in relation to the software. It appears that there was no formal agreement between the Second and Fourth Respondents as to the use of the intangible assets, including the Application Software, which the Second Respondent had allegedly obtained pursuant to the Sale Agreement of 1 March 2000,’ (emphasis added)
‘any rights in respect of or in connection with any confidential information … in connection with the application software and related programs for use on the MTD 2000 … together with all modifications thereto or enhancements thereof from time to time …’.
See the definitions of “Intellectual Property Rights” and “Application Software” quoted from the GTA at [8] above.
233 Clause 7.3 of the GTA, it will be remembered, was formulated as an exception to cl 7.1 quoted at [228] above. So far as is relevant, cl 7.3 stipulated;
‘7.3 Nothing in Clauses 7.1 or 7.2 shall restrict the disclosure of information.
7.3.1 where that information is already generally part of the public domain;
7.3.2 where that disclosure is expressly authorised in the Transaction Documents;
… …
7.3.8 for the purposes of any assignment or transfer permitted under the Transaction Documents.’
234 The assignment from DDS to Dragonventures.com Ltd was permitted under the Transaction Documents; provided that Temwell consented in writing as I have found it did; see cl 7.1 of the LRC Agreement reproduced at [12] above. It follows that an essential element of the cause of action for breach of confidence has not been made out. Accordingly, the attempt to fix the individual respondents with personal liability for that alleged breach must also fail.
235 Temwell’s invocation of this cause of action proceeds from the allegation, first, that DDS wrongfully converted the MTD source code when it assigned or transferred it to mCom Solutions. A second allegation of conversion of the same source code has been made against mCom Solutions and mCom Solutions Australia or one or other of them. Counsel for Temwell accept that conversion requires an intentional act of interference with goods or chattels “without lawful justification”; see Trindade and Cane, The Law of Torts in Australia 3rd Edn p137.
236 The source code has been fastened upon as the object of the alleged conversion because of the requirement for that tort to be committed in respect of a tangible item of property. It was further said that Temwell, as the owner of the source code, had an immediate right to possession of it pursuant to cl 2.1 of the Sale of Application Software Agreement which stipulated that DDS sold to Temwell “all of DDS’s right, title and interest in and to the Application Software free from all Encumbrances and upon and subject to the terms and conditions contained in this Agreement.”
237 Several difficulties confront Temwell in seeking to make good its reliance on this cause of action. The first is to formulate a satisfactory description of the tangible form said to have been taken by the source code. One manifestation of that form was said to be “electronic impulses that are fixed either in the hard disk of a computer or in some other form of storage such floppy disk or CD-ROM.” Another manifestation of the physical form of the source code was identified as a document created by printing out the electronic impulses said to inhere in the first form to create “a document containing valuable information in the form of computer code which can be read and understood by computer programmers.” However, there seems to be no limit to the number of copies of the source code which could be created in either of the forms suggested. For Temwell’s claim in conversion to succeed it would have been necessary for it to have had a present right to possession of each copy immediately on its coming into existence. However, that would have been inconsistent with the rights of DDS under the Transaction Documents eg, cl 5.2 of the LRC Agreement which is reproduced at [12] above.
239 The most fundamental objection to Temwell’s succeeding on this issue is that the act of alleged conversion must be committed without lawful justification. The justification for DDS assigning the Application Software was the facility furnished by cl 7.1 of the LRC Agreement, to the extent that Temwell should consent in writing or as should be provided for by the Transaction Documents, to “sell, transfer, assign … part with possession of or otherwise dispose of or deal with all or any part of its rights under any Transaction Document or any interest in the foregoing.” That justification was perfected by the unqualified consent which I have found that Temwell gave through Enriquez on 22 February 2000. Similarly, the justification for any interference or dealing with the source code by mCom Solutions or mCom Solutions Australia was afforded by the same consent and DDS’ entry into the Sale Agreement of 24 March 2000 or its grant, on the same date, of the sub-licence referred to at [238] above.
240 For these reasons, the claim in conversion against each of DDS, mCom Solutions and mCom Solutions Australia must fail and the attempt to make the individual respondents liable for aiding and abetting or procuring the commission of the same tort falls with it.
241 Because of the conclusion reached in resolving some of the foregoing issues that no liability attaches to any of the respondents on any of the causes of action invoked against them, it is unnecessary to attempt an analysis of the complex questions which have been revealed by the competing arguments as to the loss or damage allegedly suffered by Temwell. However, because a consideration of the claims for damages throws some light on why Temwell failed to establish entitlement to any relief, and out of deference to the careful submissions addressed to the issue, I propose to make some brief general observations about it.
242 In relation to the cause of action of inducing a breach of contract, Counsel for Temwell submitted that it was necessary, first, to compare Temwell’s “actual position to the position it would have been in if the mCom respondents had not induced DDS to breach its contractual arrangements with Temwell as at the date of the wrongful conduct.” An assessment of damages in that way, it was said, would take account of the value of the Application Software lost to Temwell, “in particular the lost royalties on reasonably anticipated sales of product” and the loss of the benefit of either or both the Call Option and the Take Out Option.
243 As to the cause of action in conversion, it was submitted that the consequential losses incurred by Temwell included the loss of the asset constituted by the Application Software which flowed from the misappropriation of the source code. As I understand it, this argument starts from the premise that control of the source code was the “key” to exploiting the Application Software and that, upon losing control of the source code, Temwell was effectively deprived of the ability further to develop the MTD 3000 and derive income, probably in the form of royalties, from continuing sales of the device. However, as I have pointed out at [237] above, the evidence does not suggest that Temwell had an immediate right to possession of each copy of the source code as it was brought into existence. Such a right would have been inconsistent with the licence granted to DDS and the continuing obligations of DDS under the Development Program for further developing and enhancing the Application Software including, presumably, the source code.
244 Two measures were suggested of the damage allegedly suffered by Temwell as a result of the loss of the Application Software through the conversion of the source code. One was the “capitalised stream of further projected royalty earnings from the Application Software.” Another was what it would have cost Temwell to have had the Application Software made again. Reference was made to J & E Hall Ltd v Barclay [1937] 3 All ER 620 where, after conversion, certain prototype engineering equipment had been sold as scrap. There was no current market price for goods of that description which the plaintiff still wanted to use. Accordingly, the plaintiff was held by the Court of Appeal to be entitled to recover the cost of having replacement equipment made.
‘…… in a case such as the present, it seems to me that the particular position of the plaintiff has to be considered. Where we are dealing with someone who would have licensed the use of his confidential information, then almost invariably the measure of damages will be the price that he could have commanded for that information, and no question of loss of profits will arise, for the simple reason that he was always ready to allow someone else to manufacture at a price. If the plaintiff was a manufacturer who would have licensed another to use his secret then again he would, probably in all cases, be in the same position as the inventor who had sold it, because he would have exposed himself to competition and loss of profits for a price, the price for which he had sold the secret. …’
246 Similar considerations cast doubt on the validity of Rayner’s suggestion that a lower discount rate should apply to an owner of the Application Software as distinct from an equity investor in DDS. That suggestion contrasted, Counsel for Temwell said, “income by way of sales from income by way of a share of profits.” However, there was never a realistic prospect that Temwell would become an entrepreneurial owner of the Application Software. Its role was always, and would continue to be, that of a passive investor in, or creditor of, DDS or whatever successor entity had day to day control of the Application Software. In my view, it was a recognition of those limitations which prompted Enriquez and, to the extent that they considered it at all, Fraid and Tauber, to give the consent requested by those representing Dragonventures.com Ltd or the other intended purchaser. Given that DDS was insolvent, the injection of further funds and repayment of existing debt by such a purchaser was the only means available to Temwell of preserving any value at all in its interest in the Application Software.
247 Counsel for Temwell made similar submissions in relation to the measure of damages for the alleged infringement of copyright. The best measure of compensatory damages under s 115(2) of the Copyright Act, it was submitted, is that which most accurately reflects the loss in the particular circumstances of the case. One such measure, Counsel suggested, would be the loss of profits flowing from the deprivation of market opportunities due to the infringement. The evidence of Wilson as to the capital value of the royalty stream and that of Rayner as to the value of the Call Option and the Take Out Option were said to provide useful guides to the assessment of damages for infringement of copyright.
248 Additional damages were also claimed under s 115(4) of the Copyright Act which provides;
‘Where, in an action under this section:
(a) an infringement of copyright is established; and
(b) the court is satisfied that it is proper to do so, having regard to:
(i) the flagrancy of the infringement; and
(ia) the need to deter similar infringements of copyright; and
(ib) the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff's copyright; and
(ii) whether the infringement involved the conversion of a work or other subject-matter from hardcopy or analog form into a digital or other electronic machine-readable form; and
(iii) any benefit shown to have accrued to the defendant by reason of the infringement; and
(iv) all other relevant matters;
the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate in the circumstances.’
249 The conduct of the respondents was said to have been “flagrant” throughout because “they knew at all times of Temwell’s rights and that Temwell had not consented to any assignment by DDS of its rights under the Transaction Documents.” However, that contention is gainsaid by my finding, for reasons already indicated, that the respondents had sought and, on 22 February 2000, had obtained Temwell’s consent to the proposed assignment by DDS.
250 A further or alternative claim was made under s 116 of the Copyright Act for damages for conversion of any copy of the Application Software that was an infringing copy. I have already referred to the difficulty encountered in identifying, on the evidence, any copy of the source code, let alone of the Application Software as a whole, that can be said to have been made in infringement of any copyright vested in Temwell. In addition, by s 116(c) of the Copyright Act, a court is not to grant relief by way of damages for conversion of copyright unless it forms the opinion that relief in the form of compensatory damages under s 115 is not an adequate remedy.
251 In relation to the claim for misuse of confidential information, Counsel for Temwell submitted that the appropriate measure of damages would not be markedly different from that for the tort of inducing breach of contract. That would require the Court to quantify the value of the potential income stream from the Application Software under the LRC Agreement which was lost to Temwell, or the cost of reconstituting the Application Software after its misappropriation by the respondents. It was accepted that there could be no “double-counting” of damages by assessing the same loss forming part of two different causes of action.
252 The most accurate quantification of Temwell’s damages measured in the way suggested as most appropriate by the authorities canvassed in the course of Counsel’s submissions was said to be derived from the Wilson-Rayner methodology using the discount rate favoured by Rayner and limiting recovery to the end of the licence period. That was said to justify an award of $5.398 million plus interest.
(b) The Cross Claim
253 As indicated at [81] of these reasons, the amended cross-claim invokes two causes of action, one involving an alleged contravention of s 52 of the TPA and the other in tort for abuse of process.
254 The latter claim depends on an affirmative finding on the issue of Temwell’s consent to the assignment by DDS. That dependence has been accepted by Counsel for the cross-claimants who have acknowledged that “if there was no consent the Cross Claim based on abuse of process will fail.” It follows, in light of the findings in relation to Temwell’s claim made earlier in these proceedings on the issue of consent, that the cross-claim in abuse of process does not fail at the outset.
255 The authorities support the following identification by Counsel for the cross-claimants of these sub-species of abuse of process:-
(a) where the proceedings have been instituted to seek a collateral advantage beyond that offered by the law; Goldsmith v Sperrings Ltd [1977] 1 WLR 478.
(b) where the proceedings have been instituted to exert pressure to achieve an object outside the scope of the process: Grainger v Hill (1838) 4 Bing NC 212: 132 ER 769; Varawa v Howard Smith & Co Ltd (1911) 13 CLR 35 at 91.
(c) where the proceedings have been instituted to achieve a purpose other than that for which they were properly designed: Re Majory [1955] Ch 600 at 623.
256 According to Counsel for the respondents, the institution of the present proceedings by Temwell can be assimilated to Packer v Meagher [1984] 3 NSWLR 486. In that case, Hunt J was satisfied that the plaintiff’s dominant motive in commencing the proceeding for defamation was to enable him to investigate the conduct of a Royal Commission in which the defendant was Senior Counsel assisting. In support of that inference, his Honour instanced the discontinuance of the proceedings as soon as the defendant pressed for particulars of the alleged publication, the failure of counsel for the plaintiff to identify the particulars later relied on and the plaintiff’s failure himself to give evidence in relation to the issues raised by the defendant in his application to stay the proceedings as an abuse of process. His Honour then concluded, at 500;
‘All of these circumstances suggest to me very strongly that there may indeed have been a vindictive desire on the part of the plaintiff to make the defendant as uncomfortable as possible, for as long as possible, by having these proceedings hanging over his head in order to punish him for his part in assisting in the compilation of the report of the Royal Commission. Whether or not such a vindictive desire existed, I am nevertheless satisfied that the plaintiff’s proceedings were brought for the dominant ulterior and collateral purpose of investigating the conduct of Mr Costigan’s Royal Commission, and not to vindicate the plaintiff’s own reputation. I am satisfied that such a purpose is not one for which defamation proceedings are properly designed and exist. I am satisfied also that the defendant has succeeded in the task of establishing, upon strong evidence, that the plaintiff’s proceedings are an abuse of process.’
257 It was further contended on behalf of the cross-claimant that the ulterior purpose need not be the sole purpose in commencing or continuing the impugned proceedings; it is sufficient if it is the predominant purpose. Thus, it was observed in Williams v Spautz (1992) 174 CLR 509 at 529;
‘It has been suggested that the criterion for abuse of process is whether the improper purpose is the sole purpose of the moving party [See, eg, the use of the word “merely” by Isaacs J in Varawa (1911), 13 CLR, at p 91]. However, in more recent times it has been said, in our view correctly, that the predominant purpose is the criterion. That was the test applied by Lord Denning in Goldsmith v Sperrings Ltd [[1977] 1 WLR, at p 496; [1977] 2 All ER, at p 579] and by the English Court of Appeal in Metall & Rohstoff v Donaldson Inc. In giving the judgment of the Court in the latter case, Slade LJ observed [[1990] 1 QB, at p 469]:
“[A] person alleging such an abuse must show that the predominant purpose of the other party in using the legal process has been one other than that for which it was designed.”’ (original emphasis)
259 By way of drawing attention to the objective evidence which was said to provide a foundation for imputing to those controlling Temwell a predominant purpose in continuing this litigation which was ulterior to the purpose for which the process was designed, Counsel for the cross-claimants restated a number of passages from their submissions in opening the case on the cross-claim. It is convenient to examine the salient points made in those passages and assess the contribution which they are capable of making to discharging the onus of proof noted at [258] above.
(a) Persistence in the denial of consent to the assignment from DDS to mCom Solutions
260 Although I have come to the conclusion, after days of argument and evidence, that Temwell, on 22 February 2000 through Enriquez, gave the requisite consent to the assignment from DDS to Dragonventures.com Ltd, I am not persuaded that the effect of that consent was always so clearly known to the controlling minds and wills of Temwell as to found the inference that they at all times realised that the action was doomed to failure. For instance, the evidence noted at [189] above indicates that neither Fraid nor (probably) Tauber was aware until well after the proceedings had been instituted that the exchange of memoranda of 7 February and 22 February 2000 between Wenig and Enriquez had occurred.
261 It is also highly significant that in their defence filed, on 21 December 2000 the then legal advisers for the second and fourth to seventh respondents initially admitted the absence of consent by Temwell to the assignment from DDS. That admission was eventually withdrawn pursuant to leave granted by Merkel J on 13 September 2000 almost two years after the filing of the original defence containing the admission.
(b) Fluctuating and exaggerated claims as to the value of the Application Software
‘The purposes which legal proceedings are designed to serve are the protection or vindication of particular legal rights or immunities, the maintenance or affection of particular legal relationships, and the imposition or enforcement of particular legal penalties, liabilities and obligations. The means by which these purposes are achieved in a proceeding consist in the verdict which might be returned or the order which might be made in the proceeding, in the consequences that flow naturally from a verdict that might be returned or from an order that might be made (for example, the vindication of a plaintiff's reputation flowing from a verdict in a civil action for defamation) and in compromise of the claims made in the proceeding. The achievement of any of the purposes mentioned by any of the means mentioned is within the scope of the remedy for which a proceeding is designed. But a proceeding may be intended to produce and may be capable of producing results that are not within the scope of the remedy.’ (emphasis added)
(c) Failure to terminate the LRC Agreement for breach by DDS and thereby procure the return to Temwell of the Application Software
(d) Refusal to accept the open offer of 27 August 2001
265 The terms of this offer have been set out at [63] above. For the reasons explained in the last preceding paragraph, Temwell had no interest in receiving the latest, or any, version of the Application Software. The royalties, if any, at the rate of 4% on sales of the MTD 2000 and MTD 3000 by the mCom respondents would, by the date of the letter, have been minuscule compared with the damages which Temwell was then claiming in the action.
266 As already hypothesised, Temwell’s presumptive purpose, in pursuing the action, was to recover the value of the interest in the Application Software which was alleged to have been wrongfully taken from it in March 2000. It is only if the Court is persuaded that Temwell and its advisers knew or believed in August 2001 that it had no arguable prospect of making out that allegation that its rejection of the open offer can be called in aid to support the imputation of a predominant collateral purpose. I am not prepared to find that to have been the state of knowledge or belief, at that time, of Temwell and those controlling and advising it.
(e) The joinder of the individual respondents
267 The cross-claimants contend that this aspect of the proceedings illustrates that Temwell’s ulterior or collateral purpose in pursuing it was to so embarrass David Hains and the other individual respondents or otherwise oppress them by the demands made by the litigation on their time, financial resources and attention that one or more of them would pay a sum of money to Temwell to be rid of it despite knowing that all Temwell’s claims were spurious. The principal obstacle to the imputation of this predominant purpose to Temwell is that it continued to prosecute its claim long after refusing the open offer of 27 August 2001 when it must have been obvious that none of the individual respondents with the necessary resources would yield to Temwell’s coercion. The rejoinder might be made that the institution of this very cross-claim compelled Temwell to prosecute its claim to judgment to provide a colourable defence to the cross-claim. However, that analysis imputes to two hard-headed, experienced and successful businessmen, Fraid and Tauber, the quixotic decision to continue to accrue a huge liability for Temwell’s and the respondents’ costs of a claim which they knew could not succeed in order to avoid liability for, presumably, a much smaller amount in respect of the cross-claim and the costs thereof.
268 It has been further suggested under this head that Temwell’s claims against David Hains and Richard Hains personally were advanced and pursued in order to preserve recourse against solvent respondents by contrast with DDS. However, that strategy is not uncommon in actions under the TPA or for analogous causes of action where efforts are made to attach accessorial liability to directors or other individual protagonists to preserve the fruits of victory which would be denied to the applicant if the action were maintained solely against an insolvent, or doubtfully solvent, corporate respondent. Provided that the claims against the individual respondents are not manifestly unarguable, the claims against them will not, without more, be outside the scope of the remedy made available by the cause of action relied upon. The reasoning indicated at [262]-[263] above in respect of claims for exaggerated or exorbitant damages can be paraphrased to apply also to this suggested basis for imputing a collateral purpose to Temwell. The same basis, ie, the need to keep one or two financially responsible individual respondents in the litigation, also evaporates after the point has been reached when the applicant has presumably realised that the wealthy individual respondents will not succumb to the pressure being exerted through the allegedly abusive proceedings. From that point, the decision to persist in the litigation for the presumptively ulterior purpose would become quixotic for the reasons explained in the last preceding paragraph.
(f) Litigation as an attempt to compel a “buy out” of Temwell’s interest under the Transaction Documents
269 It has been urged under this head on behalf of the cross-claimants that those controlling Temwell, having seen, in the course of the negotiations to the end of March 2000, an opportunity for Temwell to have its interest under the Transaction Documents “bought out” for an amount in the range from $3.1 to $3.4 million which later vanished, instituted these proceedings for the ulterior purpose of compelling the “buy-out” which had not eventuated. It is true that Temwell seems impliedly to have recognised that it had no right to compel mCom Solutions, DDS or any other party to exercise the Call Option. Had it not recognised that inability, it would, presumably, have mounted a claim for specific performance of the Call Option Agreement. However, what I have called in [264] above “the alternative, legitimate, purpose to be imputed to Temwell”, that of recovering the value of what it believed had been lost to it in March 2000, was also to be achieved, like the desired “buy out”, by receipt of a substantial sum of money by judgment or compromise of its claim. That degree of similarity between the two purposes makes it that much harder for the cross-claimants to persuade the Court to adopt the analysis which results in the imputation of a purpose foreign to the design, or legitimate object, of the litigation.
‘There is no impropriety of purpose (whatever may be said of motive) when a plaintiff commences or maintains a proceeding desiring to obtain a result within the scope of the remedy, even though the plaintiff has an ulterior purpose -- or motive -- which will be fulfilled in consequence of obtaining the legal remedy which the proceeding is intended to produce. To amount to an abuse of process, the commencement or maintenance of the proceeding must be for a purpose which does not include -- at least to any substantial extent -- the obtaining of relief within the scope of the remedy.’
After referring to a passage from Varawa v Howard Smith Co Ltd (1911) 13 CLR 35, at p 91 his Honour continued:-
‘Putting to one side, then, the cases where the plaintiff intends to obtain relief within the scope of the remedy, the problematic cases arise when the plaintiff's purpose is to obtain some benefit, to impose some obligation or to affect some relationship otherwise than by verdict, by order or by compromise of the particular claims made in the proceeding. These are cases where the plaintiff's objective lies outside the relief which, if the proceeding were prosecuted to completion, might be obtained by verdict or by order.’
272 Counsel for the cross-claimants pointed to a number of matters which were relied on as supporting the inference of collateral purpose. None of those matters, as I understood the argument, was relied on as by itself permitting the inference to be drawn. Rather, they were “straws in the wind” which, viewed in combination with other indications of the same kind or with one or more of the factors discussed above, should persuade the Court, to its comfortable satisfaction, that the cross-claimants have discharged their onus.
273 One such matter was the letter before action of 5 May 2000 which is reproduced at [58] above. That was criticised for its failure to advert to the exchange of correspondence between Wenig and Enriquez on 7 and 22 February 2000 which was clearly central to the issue of consent on which the respondents have ultimately succeeded. I accept, on the basis of the authorities cited by Counsel for the respondents, that Temwell is liable for, and bound by, the actions and statements of its counsel and solicitors. However, the letter of 6 May 2000, assuming, without deciding, that it was disingenuous or deliberately elliptical, does not support an inference that the foreshadowed action would be commenced and prosecuted for a collateral purpose. Moreover, the letter was written at a time when Temwell’s newly retained solicitors were not as fully apprised of the available bases for the proposed action as they later became. In the same context, it is reasonable to infer that those standing behind Temwell may have perceived that ABL had, in February 2000, been confronted by a conflict of interest which entitled Temwell to distrust any advice or representation by that firm about the necessity or appropriateness of consent.
274 The fact that Temwell sought and obtained, by consent, an interlocutory, and later, a permanent injunction does not support the imputation of a collateral purpose. As pointed out at [271] above, Temwell had no extrinsic interest in damaging or frustrating the business of the mCom respondents. The applications for injunctions, in one or other of their forms, may have been conceived as applying a degree of pressure on the respondents to make a pecuniary offer of compromise but, as explained at [263] and [270] of these reasons, that does not take the prosecution of the proceedings outside the scope of the relief claimed.
275 Similar considerations apply to the threat allegedly made by Fraid to David Hains on about 9 June 2000 that Temwell might sell the Application Software to Ingenico, a French-based competitor of the mCom respondents which had already established itself as a developer of mobile transaction devices. If made, that threat was more consistent with an attempt, by means different from the present proceedings, to procure a payment which was within the scope of the relief sought in the same proceedings. In my view, the Ingenico threat was ancillary to the present proceedings and, at worst for Temwell, was neutral on the ascription of a predominant purpose in continuing to prosecute the action.
276 Counsel for the cross-claimants also adverted to other aspects of Temwell’s conduct of the proceedings which, as I understand it, were said to support the inference that they had been maintained for a collateral purpose. They have been referred to in the particulars to the relevant paragraphs of the cross-claim. They include Temwell’s collaboration with Elbaum and its payment of his costs of separate representation to a limited extent by Counsel in the proceedings. As well, Counsel instanced Temwell’s unsuccessful attempt to compel production for inspection of David Hains’ privately printed autobiography written well before the events with which the subject litigation was concerned. Another instance was what was called “the tortured history” of revisions of expert reports and a stream of fresh instructions to Wilson and Rayner requesting them to make new and doubtfully available assumptions in order to underwrite a successively larger and larger sum claimed as damages. In a related way reference was made to the fees, described as “enormous”, paid to some of Temwell’s expert witnesses.
277 I am prepared to assume, without deciding, that these criticisms or characterisations were justified. Even allowing that Temwell’s legal advisers may have been over-zealous in seeking to recruit the expert witnesses to the “Temwell team” and that Fraid’s Ingenico threat could be stigmatised as “sharp practice’, the matters just recounted do not, on balance, warrant an inference that the proceedings were maintained for a collateral purpose. They are at least equally consistent with a determination to apply every conceivable piece of pressure to extract a settlement in the form of a lump sum representing a substantial fraction of the damages claimed in the action, and, if that failed, to “win at all costs.”
(h) Conclusion on Abuse of Process
278 It will be apparent that I have not been persuaded that any of the foregoing considerations, alone or in combination, affords a basis for imputing to Temwell the requisite predominant collateral purpose. That part of the cross-claim therefore fails making unnecessary a resolution of the complex factual and legal questions which would be required for an assessment of the damages forming part of that cause of action. I should, however, observe in passing that, had I come to a different conclusion on the question of liability for collateral abuse of process, I would have had considerable difficulty in attributing the full amount of the loss claimed which is in excess of $7 million to the “cloud” over the marketing of the MTD 3000 constituted by the pendency of the instant proceedings. My strong impression is that a large part of the losses sustained by mCom Solutions Australia before it went into liquidation and by its parent company, mCom Solutions was attributable to adverse currency fluctuations, changes in distributorship arrangements and delays in developing the MTD 3000 to the point of obtaining certification by a sufficient number of participating banks. These difficulties were exacerbated, even after the mCom interests had injected a substantial amount of fresh capital, by the competitive pressures of a highly innovative capital intensive industry. The cross-claimants fell victim, not so much to the present proceedings, as to the dot.com “boom and bust” which had facilitated its absorption of DDS but eventually destroyed the whole business.
(ii) The cross-claim for misleading and deceptive conduct
279 The allegations disclosing this cause of action by the cross-claimants have been summarised at [82] of these reasons. Paragraph 18 of the further amended cross-claim alleges that the letter of 22 February 2000 from Enriquez on behalf of Temwell contained a representation to the effect there set out (“the Consent Representation”). It is next pleaded that, in reliance on the Consent Representation, mCom Solutions entered into the agreement of 1 March 2000 to purchase the assets of DDS and to take an assignment of its right, title and interest under the LRC Agreement and the Call Option Agreement. Reference is next made to mCom Solutions’ letter to Temwell of 7 March 2000, the meeting of 9 March 2000 between Enriquez, Tauber and David Hains, the abortive settlement meeting of 22 March 200 and the payment of $37,013.47 as arrears of royalties to Temwell and of $100,000 to the trustee of Enriquez’ family trust which occurred at the actual settlement meeting on 24 March 2000. Further acts done and payments made by mCom Solutions in reliance on the Consent Representation are then pleaded in par 29. It is next pleaded in pars 31 and 32 that;
‘31. If The Consent Representation was false (which is denied) and if, as contended by Temwell in the said letter of 5 May 2000 and this proceeding:
(a) Temwell was not in fact giving its binding consent to the purchase by Dragonventures.com Ltd or its nominee of the assets and business of DDS including DDS’ rights under the LRC Agreement and the Call Option Agreement;
(b) Temwell never consented to the assignment to mCom Inc of the right title and interest of DDS under the Transaction Documents;
(c) Temwell never intended to give, and never gave, such consent’
- then
(i) the Consent Representation and/or;
(ii) the conduct of the Cross-Respondents and each of them was false and misleading or likely to mislead and deceive.
32. The said conduct of Temwell and/or Enriquez and/or Tauber and/or Fraid in making the Consent Representation and engaging in the February/March conduct constituted misleading or deceptive conduct by each of Temwell, Enriquez, Tauber and Fraid in trade or commerce in contravention of section 52 of the Trade Practices Act.’
280 Then follow allegations of the ways in which mCom Solutions, through its investment in mCom Solutions Australia suffered damage in consequence of the conduct referred to in par 31 on the assumption that it had been misleading and deceptive.
281 It can be seen from that form of pleading that the cross-respondents’ engagement in misleading or deceptive conduct depends on the falsity of the Consent Representation. The denial of that falsity in the defence to the statement of claim was repeated in par 31 of the cross-claim. I have earlier found that Enriquez’ letter of 22 February 2000 constituted an affirmative and unequivocal consent by Temwell to the assignment by DDS of its right title and interest under the Transaction Documents to Dragonventures.com Ltd and was thereafter incapable of withdrawal; see [177], [182] and [191]-[193] above. As a result, the conditional premise of the cross-claimants case that the Consent Representation was a contravention of s 52 of the TPA cannot be made out.
282 Since neither limb of the cross-claim has been made out, it must be dismissed.
Part V: Disposition of the Proceedings
283 For the reasons which I have endeavoured to explain there will be orders that both Temwell’s application and the cross-claim by mCom Solutions and the other cross-claimants be dismissed. I shall stand the proceedings over to a date to be fixed to allow submissions to be made in respect of the orders as to costs said to be appropriate in the light of these reasons. I expect that, in aid of those submissions, each party with an interest in the question will file and serve written submissions. In case directions are required for the filing and service of those submissions or some further or other substantive orders are thought necessary, I shall reserve general liberty to apply.
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I certify that the preceding two hundred and eight-three (283) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. |
Associate:
Dated: 4 October 2005
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Counsel for the Applicant: |
Mr C D Golvan SC with Dr S Ricketson |
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Solicitors for the Applicant: |
Meerkin & Apel |
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Counsel for the mCom Respondents and Cross-Claimants: |
Mr J L Sher QC with Mr J Delany SC |
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Solicitors for the mCom Respondents and Cross-Claimants: |
Minter Ellison |
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Dates of Hearing: |
31 July, 1, 18 - 22 August inc, 1 - 5, 8 -12, 22 - 26, 29 & 30 September inc, 1, 7 - 9, 20 - 24, 27 - 31 October inc, 10 - 14, 17 - 20 November inc, 8 - 12, 15 - 17 December 2003 inc, 11 - 13, 23 - 27 February 2004 inc, 3 & 4 March 2004, 1 April 2004 |
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Date of Judgment: |
4 October 2005 |
