FEDERAL COURT OF AUSTRALIA
Hydrocool Pty Limited v Hepburn (No 4) [2011] FCA 495
FEDERAL COURT OF AUSTRALIA
Hydrocool Pty Limited v Hepburn (No 4) [2011] FCA 495
CORRIGENDUM
1. In paragraph 543 of the Reasons for Judgment, in the second and third lines, the words and figures “AUD1,799,294, or alternatively AUD1,674,000” should be replaced with the words and figures “AUD1,543,910.55, or alternatively AUD1,436,400”.
2. In paragraph 544 of the Reasons for Judgment, in the first line, the notation “AUD1,799,294” should be replaced with the notation “AUD1,543,910.55”.
3. In paragraph 548 of the Reasons for Judgment, in the first line, the notation “AUD1,674,000” should be replaced with the notation “AUD1,436,400”.
4. In paragraph 558 of the Reasons for Judgment, in the first line, the notation “AUD270,000” should be replaced with the notation “AUD231,587”.
I certify that the preceding four (4) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Siopis. |
Associate:
Dated: 28 July 2011
IN THE FEDERAL COURT OF AUSTRALIA | |
DATE OF ORDER: | |
WHERE MADE: |
THE COURT ORDERS THAT:
1. The parties are to make submissions as to the form of orders and the costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.
WESTERN AUSTRALIA DISTRICT REGISTRY | |
GENERAL DIVISION | NSD 1754 of 2006 |
BETWEEN: | HYDROCOOL PTY LIMITED (ACN 067 525 366) Applicant
|
AND: | IAIN MACGREGOR HEPBURN First Respondent THERMOELECTRIC APPLICATIONS PTY LIMITED (ACN 112 217 124) Second Respondent PETER TERENCE CLARKE Third Respondent BENJAMIN BANNEY Fourth Respondent MONTAG DAVIS Fifth Respondent BRETT MANNERS Sixth Respondent ROBERT WEYMOUTH Seventh Respondent RITA CLARKE Eighth Respondent WATER MASTER LIMITED Ninth Respondent GARTH CLIFFORD RICHARDSON Tenth Respondent
|
JUDGE: | SIOPIS J |
DATE: | 16 may 2011 |
PLACE: | PERTH |
REASONS FOR JUDGMENT
1 At the beginning of 2004, the applicant, Hydrocool Pty Limited, was a company carrying on research and development activities in relation to thermoelectric technology. The research and development activities were carried out by four engineers. They were Mr Ben Banney, Mr Montag Davis, Mr Brett Manners and Mr Robert Weymouth. The engineers worked at premises leased by Hydrocool in Fremantle. I will refer to these gentlemen collectively as “the engineers”. Mr Peter Clarke, the third respondent, was also located at the Fremantle premises. In 2004, Mr Clarke, a senior engineer, held the position of research and development manager. The first respondent, Mr Iain Hepburn, the managing director of Hydrocool, was also located at the Fremantle premises.
2 Hydrocool was incorporated in 1994. By 2004, the shareholders of Hydrocool comprised Australian Technology Group Ltd (ATG), a company controlled by the Australian government, which held about 77% of the issued capital in Hydrocool, and two companies controlled by Mr Stephen Murphy, which together held about 23% of the issued capital of Hydrocool. These companies were Coolhydro (1) Pty Limited and Coolhydro (2) Pty Limited. Mr Donald Bourke, representing the interests of ATG, was a member of the board of directors of Hydrocool and Mr Stephen Murphy, representing the interests of Coolhydro (1) and Coolhydro (2), was also a member of the board of directors of Hydrocool. Dr David Teplitzky was a director and executive chairman of Hydrocool. Dr Teplitzky and Mr Hepburn were the only two executive directors of Hydrocool. The board meetings of Hydrocool were held in Sydney every two months or so.
3 By 2004, Hydrocool had registered a number of patents relating to the thermoelectric technology it had invented. In 1997, Hydrocool entered into a licence agreement with a Japanese company, Matsushita Refrigeration Company Ltd (referred to in trial as MARCO), for the manufacture and sale of Hydrocool’s first generation heat exchanger. The heat exchanger was used in a small domestic bar refrigerator and wine cooler which MARCO had developed. Hydrocool received a small amount from MARCO by way of annual royalties under the licence agreement. Later, Hydrocool also participated in a project with MARCO for the development of a sub-300 litre refrigerator freezer using thermoelectric, rather than compressor-based, technology. This led to Hydrocool producing a 126 litre refrigerator freezer prototype. However, this project did not lead to the receipt of any revenue for Hydrocool.
4 At the beginning of 2004, Hydrocool was also engaged in a research project with Symetrix Corporation, a company based in Colorado Springs, United States of America. The object of the research was to produce a more efficient peltier to be used in conjunction with Hydrocool’s heat exchanger. The board of directors of Hydrocool was of the view that there would be significant commercial advantages to Hydrocool if the Symetrix research achieved its objective. The Hydrocool board had supported the Symetrix research and contributed monies and the services of two of its engineers to the Symetrix project. Hydrocool was also in 2004, engaged in a research and development project to develop a CPU cooler device using its heat exchanger technology.
5 Hydrocool’s research and development activities had not led to the development of any substantial income producing assets. Hydrocool made a net loss in each of the years ended 30 June 2001 to 30 June 2004. For its working capital, Hydrocool depended upon grants from the Federal government and support from its principal shareholder, ATG. As at 30 June 2004, ATG had advanced to Hydrocool by way of an unsecured loan, the sum of AUD382,995. However, in 2003, the Australian government’s enthusiasm for research and technology investments had waned and it had directed that ATG divest all its technology investments by 30 June 2004.
6 By March 2004, Hydrocool was facing financial difficulties and there was talk of the need to make staff redundant.
7 In about May 2004, Water Master Limited, a New Zealand registered joint venture company, with a major Chinese shareholder, approached Hydrocool with a view to entering into negotiations with Hydrocool to develop a retail domestic product for the harvesting of water from air, using Hydrocool’s thermoelectric technology. The Hydrocool board assigned the responsibility for the day-to-day negotiations with Water Master to Mr Hepburn. Mr Garth Richardson represented Water Master in its day-to-day dealings with Mr Hepburn. By early July 2004, negotiations had progressed to the stage of Mr Hepburn forwarding to Mr Richardson a draft heads of agreement for a licence agreement between Hydrocool and Water Master, and another draft heads of agreement with Windsor Group Company Limited (Windsor), the Chinese company associated with Water Master.
8 On 16 July 2004, Mr Hepburn forwarded to Mr Clarke an email in which he stated that he had formulated a plan. Pursuant to that plan, Water Master would make the employment by Hydrocool of the Fremantle based employees for a term of two years, a condition of the proposed licence agreement, and Water Master would acquire the shareholding of ATG and then transfer part of that shareholding to himself, Mr Clarke and the engineers. The plan also contemplated that Mr Hepburn would remain the managing director, Dr Teplitzky would resign as executive chairman and Mr Clarke would replace Mr Bourke as a director of Hydrocool. Mr Hepburn advised Mr Clarke that the plan would have an “explosive effect” on the Hydrocool board and asked Mr Clarke to keep the plan confidential. Mr Hepburn did not tell the Hydrocool board about his plan.
9 In September 2004, Water Master advised Hydrocool that it would require the proposed heads of agreement to be amended to provide for a term that Hydrocool would employ Mr Hepburn, Mr Clarke and the engineers for a period of two years.
10 In October 2004, Dr Teplitzky wrote to Mr Richardson advising that Hydrocool would not agree to the term proposed by Water Master calling for the two year employment commitment from Hydrocool. Mr Richardson referred Dr Teplitzky’s email to Mr Hepburn. After then conferring by telephone with Mr Hepburn, Mr Clarke and the engineers as to the response he should make to Dr Teplitzsky’s email, Mr Richardson, using wording which had been provided to him by Mr Hepburn, advised Dr Teplitzky that Water Master would not enter into the proposed licence agreement with Hydrocool, in the absence of the employment commitment term.
11 On 19 October 2004, Dr Teplitzky dismissed Mr Hepburn during the course of a meeting in Perth. Mr Hepburn had anticipated that he may be dismissed at that meeting and, before going to the meeting, he had been provided with letters of resignation from each of Mr Clarke and the four engineers. During the course of the meeting, and immediately after he was advised by Dr Teplitzky that he had been dismissed, Mr Hepburn handed Dr Teplitzky the letters of resignation signed by each of Mr Clarke and the four engineers.
12 On 19 October 2004, a firm of accountants, Grant Thornton, took control of the Hydrocool premises in Fremantle and commenced the process of closing down Hydrocool’s operations in Fremantle and vacating the Fremantle premises.
13 In or about December 2004, Mr Hepburn, Mr Richardson and each of the engineers became shareholders in a company, Thermoelectric Applications Pty Ltd (TEA). Mr Clarke’s wife, Mrs Rita Clarke, also became a shareholder of TEA. Water Master became the owner of 300 shares of the 600 shares in the company. Mr Hepburn became the managing director, and Mr Clarke and Mr Richardson became directors, of TEA.
14 In October 2005, TEA announced that it had produced a prototype of a device for harvesting water from air using thermoelectric technology.
15 In 2006, Hydrocool commenced this proceeding against ten respondents. However, by the time of closing submissions, the proceeding comprised only claims by Hydrocool for compensation against each of Mr Hepburn and Mr Clarke, alleging breaches of fiduciary and statutory duties; and a claim against Mr Hepburn for the breach of a confidentiality agreement.
background
16 In August 2000, Mr Hepburn was appointed managing director of Hydrocool and employed by Hydrocool. At that time, ATG was the sole shareholder of Hydrocool.
17 In 2001, Dr Teplitzky told Mr Stephen Murphy, an accountant, that he was looking for investors to raise AUD2.5 million for Hydrocool to complete a refrigerator freezer project with MARCO. In June 2001, Mr Murphy incorporated two companies, Coolhydro (1) and Coolhydro (2). These companies then acquired shares in Hydrocool. Mr Murphy’s clients held shares in the two Coolhydro companies. Mr Murphy became a director of Hydrocool on 1 July 2001.
18 There were also employee options which had been issued. Each of Mr Hepburn, Mr Clarke and the engineers held options in Hydrocool. Although the evidence is not clear on the precise number of options held by each employee, it appears that in 2003, Mr Hepburn held over 100,000 options, Mr Clarke held over 50,000 options, each of Mr Banney, Mr Manners and Mr Davis held over 27,000 options, and Mr Weymouth held 50,000 options in Hydrocool.
19 By the middle of 2003, Hydrocool’s technology included a thermoelectric heat exchanger which Hydrocool had developed and patented. As mentioned, the heat exchanger and related patented Hydrocool systems were used, pursuant to a licence granted to MARCO, in a bar fridge. Hydrocool was in receipt, annually, of a small amount of monies by way of royalties paid by MARCO pursuant to this licence agreement.
20 Hydrocool had also developed a prototype fridge freezer, which was the world’s first refrigerator with freezer using thermoelectric technology.
21 At this time, Hydrocool was also working on the development of a unit for cooling the central processing unit of a computer. This technology was referred to as “the CPU cooling unit”. In 2004, Hydrocool submitted a prototype of this unit for review by Overclockers.com and had received a favourable review.
22 Further, in 2003, as mentioned, Hydrocool was also working in conjunction with Symetrix, on a research project. The research activities were undertaken in Colorado Springs under the direction of Dr Carlos Araujo of Symetrix – a close friend of Dr Teplitzky. Hydrocool contributed funds to this project and supplied the services of two of its engineers on secondment from Fremantle. During the term of their secondment, the two engineers resided in Colorado Springs and worked with Dr Araujo on the research activities. In 2002, Mr Davis and Mr Manners of Hydrocool were seconded to the Symetrix project in Colorado Springs. In 2003, Mr Banney replaced Mr Davis, and Mr Banney and Mr Manners continued working there until they returned to Fremantle in around August 2004. The purpose of the research was to develop a highly efficient peltier. A conventional peltier had a ZT (a measure of efficiency) of 1; the aim was to develop a peltier with a ZT of 2 or more. In short, the research was directed towards trying to decouple two variables which would allow the ZT to increase independently of the traditional theory that there was a coupling relationship between the variables. This was the breakthrough which the research was trying to achieve.
23 In the middle of 2003, the board of directors of Hydrocool comprised Dr Teplitzky, Mr Hepburn, Mr Murphy and Mr Bourke, who was also the chairman of ATG, and Mr Sashi Paul.
24 At a meeting of the board of directors of Hydrocool on 7 July 2003, Dr Teplitzky briefed the members of the board on the proposed “exit strategy” which would allow ATG to sell its investment in Hydrocool, following the Australian government’s decision to dispose of any research and development investments. Dr Teplitzky explained that he had identified some organisations (including some private individuals and merchant banks) which may be interested in arranging the acquisition by third parties of ATG shares in Hydrocool. The board minutes record that it was agreed that Hydrocool’s management did not have the discretion to represent ATG on the sale of its shares to possible interested parties.
25 At the meeting of the board of directors of Hydrocool held on 17 September 2003, Mr Hepburn advised that the worst case scenario was that Hydrocool would be able to fund itself until the end of March 2004, assuming that there was no research and development grant or further funds from a third party company.
26 At Hydrocool’s board meeting held on 31 March 2004, Mr Hepburn reported that Hydrocool’s management had revised the cash forecast and this had shown that Hydrocool would be in a position to fund its operations until around July 2004. Dr Teplitzky was still attempting to identify possible sources of further investment in Hydrocool. One of the possible sources of investment was a company, Emerson Electric Corporation, a United States company.
27 On 8 May 2004, Mr Richardson on behalf of Water Master, a company with which Hydrocool had not had previous dealings, sent an email advising that it was interested in exploring the prospect of using Hydrocool’s technology in a device to extract water from air, which Water Master wanted to develop.
28 Water Master is, and was, a company incorporated under the laws of New Zealand. At that time, its major shareholder was a company associated with Windsor, which was based in Hong Kong. Water Master was described as a joint venture company. Mr Richardson was at that time, a director and chief operating officer of Water Master and was engaged in the day-to-day management and operations of that company. The other members of the Water Master board were Mr Gordon Tse, Mr Michael Chung, Mr William Campbell, Ms Linda Chen and Mr Peter Hawkins.
29 By this time, Water Master had developed a device that made potable water by extracting water from air. The intended market for this device was the replacement of office water coolers that used refillable bottles. That device was compressor driven. Water Master wanted to consider making a small device for domestic use which used thermoelectric technology to extract the water from air.
30 Following Mr Richardson’s initial email to Hydrocool on 8 May 2004, further emails were exchanged between Mr Richardson and Mr Clarke, on behalf of Hydrocool.
31 Mr Hepburn sent an email on 31 May 2004 to Mr Clarke, stating that there was a question within the board as to the work which was to be done in Perth “given the extended time in CS”. The reference to “CS” was to Colorado Springs, the location of the Symetrix project. Mr Hepburn asked Mr Clarke to prepare a technical report pointing out all the work that had been done in Fremantle and was still needed to be done. Mr Hepburn concluded the email by saying: “We do not need renewed pressure for personnel reductions at this time”.
32 In early June 2004, Mr Hepburn prepared a letter for the Fremantle based staff to sign. This letter was referred to in the case as the “engineers’ letter”. The draft letter was addressed to the board of Hydrocool. The draft letter stated:
We have written this letter and have advised Iain Hepburn that he may or may not provide it to the Board at his discretion and judgement.
The purpose of this letter is to explain the attitude of the employees with respect to the past and future of the company.
All of us have been with the company for approximately four years, with some having been here in excess of that time.
During this period, we feel that, not only have we worked extremely well together as a team, but also that this team has remained intact in spite of the on-going financial uncertainty within the company.
It could be said that there have been occasions where common sense should have persuaded us to look elsewhere. We have not done so since we have remained motivated to see Hydrocool achieve both research success and commercial success on behalf of the shareholders who have supported the company.
We would also make that point that, notwithstanding this uncertainty, none of us have requested any securement of employment tenure, via an employment contract, which in the present day is now quite common.
We are unanimously hopeful in the work being carried out with Symetrix, but do however remain cautious in our opinion, until proof of theory, via the decoupling of Seebeck Coefficient and Electrical Conductivity is demonstrated via sample measurement.
This has always been our collective opinion. It is not negative it is just careful and cognisant of the facts.
We are also unanimous in our opinion that even when this breakthrough is achieved there is a long way to go to complete the optimisation process based on the proven theory and that this optimisation process, together with the integration of the convector, will require the full participation of all existing personnel.
We would go further by saying that, without the considerable expertise and knowledge within Hydrocool on module design, heat exchange modelling and convector integration, this work could not be carried out and hence value would not accrue for the company and hence ourselves as option holders.
The strength of our convictions in this regard is such that we intend to work for Hydrocool as a team or not at all.
Furthermore, we would like to take this opportunity of advising the Board that in the latter event, we think it is only reasonable that an appropriate redundancy payment of at least one month for each year of service be provided.
We would not intend to pursue this request if the company is unable to make payment due to lack of cash so long as our current team of employees remains in place for the reason stated above in italics. (Original emphasis.)
33 As stated in the body of the letter, Mr Hepburn intended to have this letter available to produce to the other directors, at the board meeting on 24 June 2004.
34 On 8 June 2004, Mr Richardson visited Hydrocool’s Fremantle operations, to further pursue Water Master’s interest in Hydrocool’s technology. On that occasion, Mr Richardson met with Mr Clarke, Mr Hepburn, Mr Weymouth and Mr Davis. Mr Richardson did not meet with Mr Manners and Mr Banney, because they were in Colorado Springs working on the Symetrix project. Mr Richardson spent most of his time speaking to Mr Clarke. The prospect of future meetings between Water Master and Hydrocool was discussed.
35 By an email dated 8 June 2004, Mr Hepburn, who had met with Mr Richardson, reported to Dr Teplitzky that Water Master was seeking “to convert their water cooler device from being compressor driven to being thermoelectric driven. The main reason being noise and unless they can reduce the noise they cannot sell into the residential home market”. The email also stated that:
They have done extensive investigations and are of the opinion that the expertise and technology of Hydrocool is required by them to achieve this conversion.
They have also expressed an initial interest concerning the possibility of making an equity investment in Hydrocool, which would secure them some rights to the enhanced ZT material IP, for the application of their water cooler.
36 On 9 June 2004, Mr Hepburn sent Mr Richardson an email to which was attached a copy of the Information Memorandum relating to the disposal of the ATG shareholding in Hydrocool. Mr Hepburn stated in his email to Mr Richardson that:
In summary, I believe that Hydrocool needs to be able to simultaneously carry out the following three activities:
1. Progress the important research program with Symetrix in order to achieve the fundamental breakthrough in TE material ZT values and subsequently the integration of our second-generation heat transfer technology with this new thermoelectric material.
2. Progress the commercialisation, via manufacture-under-license in China, of our CPU cooler devices.
3. Progress the prototyping and development of your thermoelectric-driven water cooler device.
Hydrocool currently retains all the necessary manpower and expertise to carry out the above activities.
As we discussed, our only difficulty is one of time and hence of funding.
We are therefore seeking, by way of an equity investment, additional working capital of US$1.5M, which will allow the company to conduct all three of these activities through to December 2005.
By that time, I would suggest that there will be significant progress with number one, number two will be cash flow positive and number three will be complete.
In general terms, I would see the possible investment by Water Master Hong Kong Ltd in Hydrocool Pty Ltd, perhaps being as follows:
* Between US$1.5 and 2M being a placement in Hydrocool for new shares. I believe (without any assurances) that I can persuade the Board to accept up to the level of $2M, at a price equal to the last issued price (A$1 per share).
* The granting to Water Masters of the exclusive and worldwide right to acquire a license for both the new thermoelectric material and the second-generation heat transfer technology (which will achieve freezing) for the application of your water cooler/dispenser product.
37 On 13 June 2004, Dr Teplitzky sent Mr Hepburn an email complaining of the “constant negative attitudes” of Mr Manners and Mr Banney (referred to in the email as “B&B”), about the Symetrix research project. The email stated:
I object to constant negative attitudes and it will matter little that you consider B&B participation as crucial. If the negative attitude does not cease, their participation will. What is crucial is Carlos positive participation. If B&B were terminated tomorrow it would be a very disappointing and serious setback. But they could be replaced. Carlos can not be. Good management certainly calls for full participation. But it does not allow constant negative comment and unsubtle criticism.
This time I am very serious – they either stop, or their employment will.
38 Mr Hepburn sent an email to Mr Richardson on 16 June 2004. In that email, Mr Hepburn stated that all ATG investments had been sold by the Australian government, except Hydrocool; and that the Australian government intended to remain a shareholder in Hydrocool for the time being. Mr Hepburn went on to say:
Confidentially between you and me, I feel that they would probably be just as inclined to sell in order to bring “political closure” to this whole matter…
39 Mr Hepburn also said that if the Australian government shareholding went below 51%, Hydrocool would lose its AUD1.9 million Start Grant.
40 On 16 June 2004, Mr Hepburn stated, in response to an email from Mr Richardson, that Hydrocool only had enough funding to carry on until December 2004 and that it was the company’s intention to issue new capital for at least USD1.5 million to allow the Symetrix research to continue beyond December 2004. Mr Hepburn suggested that the time to put in funding was now, because positive developments may cause an increase in Hydrocool’s share price.
41 On that day, Mr Hepburn also sent an email to Mr Paul and Dr Teplitzky stating that Water Master understood that Hydrocool would need a major injection of capital. He went on to state that the Water Master work would require “all our personnel and possibly some additional personnel” since it would be equal in scope to the work done to produce the fridge freezer prototype for MARCO.
42 On 17 June 2004, Dr Teplitzky sent an email to Mr Hepburn in which Dr Teplitzky expressed strong concern at the idea of Water Master seeking equity. Dr Teplitzky advised that he wished to be directly involved in the negotiations.
43 On 18 June 2004, Mr Richardson sent an email to Mr Hepburn advising of his intended visit to Fremantle for further discussions. Mr Richardson said he would be accompanied by Mr Michael Chung, Mr Gordon Tse and Mr Chi Kong Luk. Mr Richardson referred to the following topics for discussion at the forthcoming meetings:
(a) the licensing of Hydrocool technology for use in the domestic market water maker;
(b) the manufacturing of new products in China for Hydrocool;
(c) investing in Hydrocool; and
(d) acquiring rights for the use of Symetrix/Hydrocool peltier technology improvements for all water from air applications and possibly the use of the same for power generation.
44 On 19 June 2004, Mr Hepburn responded to Mr Richardson‘s email. In his email, Mr Hepburn stated:
Some of my fellow directors may have thought that we supplied too much information too soon, but you needed all of it to make an initial decision.
My priority will be to play a “middle” role in our negotiations to make sure that any agreement we reach is good not only for Hydrocool but also for WaterMaster.
45 On 22 June 2004, Mr Clarke prepared a staffing plan for the Water Master project. It provided for, on a “best case” scenario, one engineer and one technician over a 12 month period. Mr Clarke estimated the labour costs of the engineer and the technician to be AUD60,000 and AUD45,000 respectively.
46 On 24 June 2004, there was a meeting of the board of directors of Hydrocool. Mr Hepburn went to the meeting armed with the engineers’ letter. However, he did not have to use the letter because at the board meeting, Dr Teplitzky said that he would issue an official letter of appreciation for the work done by the engineers on the CPU cooler project.
47 On the night of 24 June 2004, after the board meeting, Mr Hepburn prepared a document in relation to a strategy meeting which he intended to hold with Mr Clarke and the engineers, on the following day. The document stated:
1. Did not have to use the “collective” all of us or none of us letter.
2. However the Board remains apparently unwilling to understand the work being done here
3. I requested the Board to issue a letter of appreciation via David for the CPU cooler work
4. David has continually criticized the CPU project and an official letter of appreciation will come from him to the engineers with a separate one to me with many criticisms. Peter and myself will answer this second letter. The reason I wanted the official letter from the Board was to help to secure all of your positions. This was achieved.
5. Also not fully appreciative of the work done to get WaterMasters to the table nor the work to be done to develop a TE version of their cooler.
6. Instead the Board continues to support Carlos in the face of mounting evidence to suggest we should have serious doubts.
7. In the case of David, this is caused by his unexplainable confidence in Carlos notwithstanding his previous resignation from Ramtron. In the case of Steve, he has told his shareholders that Carlos will make them all rich and cannot rescind from this. In the case of Don he has similarly told the Government and also cannot retract.
8. We have fortunately got Carlos on record as saying the Dec 31st is bale out time if no proof of theory. This has been said in front of Emerson and David and submitted in writing by me to the Board.
9. My prediction is that we will have no proof by Dec 31st although I hope I am proved to be wrong.
10. In this event, I will be submitting to the Board and failing a positive reaction, then to the Government, that we pull out of the Symetrix project and also attempt to recover some of the fees paid. We have various written statements from Carlos which would support such an attempt.
11. Between now and then we will continue to do everything possible to make this project with Symetrix succeed
12. Ressult from conversation with Randall?
13. Result from ATG Board meeting regarding DON?
14. However, looking beyond December 31st and assuming that we will [be] out of funds by then if we cannot raise more money before then, we need to have a very clear plan of what needs to be done here in Australia:
1. Progress the CPU cooler, present a very good paper at ITC and use this position to secure a license agreement.
2. Progress the JV with WaterMasters and develop their TE Version so that we can earn license fees from that
3. At December 31st we may need to use another “collective” position to maintain the future of Hydrocool and this collective position would probably need to be adopted in order to:
To Pull out for Symetrix.
To perhaps purchase the company from the Government who by that time will be very truly tired of listening to the Hydrocool situation and will want to simply walk away with no liabilities.
48 On 25 June 2004, Mr Clarke forwarded by email to Dr Teplitzky and Mr Hepburn a draft detailed project plan for the Water Master project. The draft plan prepared by Mr Clarke, projected that the Water Master project would take 18 months with two engineers and two technicians/draftsmen working full-time during that period and one project manager contributing 25% of his time during that period. On the basis of this plan, Mr Clarke recommended a USD500,000 licence fee and a 5% royalty. Mr Clarke also recommended that as a negotiating strategy, Hydrocool should offer to bear the costs should the costs of the project exceed USD500,000.
49 On 28 and 29 June 2004, Dr Teplitzky and Mr Hepburn met with Mr Richardson and the other Water Master representatives. During the course of the meetings, Dr Teplitzky advised the representatives of Water Master that Hydrocool would require that Water Master pay a fee of USD1 million for the development work, with half payable on the signing of the agreement, with the balance payable in two tranches over 12 months. Dr Teplitzky said that the cost of the development work would be payable out of that fee.
50 During the meetings, Mr Richardson also raised the question of whether Water Master could invest in Hydrocool. Dr Teplitzky prepared a report on the meeting with Water Master to the board of Hydrocool dated 4 July 2004, based on the notes he had taken of the meeting. In his report of the meeting, Dr Teplitzky stated that he responded “very direct and strongly” to the suggestion that Hydrocool was interested in offering equity for the injection of funds. Dr Teplitzky said that he also stated that he was not authorised by the Hydrocool board to discuss equity, and no one else was either. Dr Teplitzky said that he told those present that Hydrocool worked only on licence fees and royalty fees and was not a manufacturing company.
51 The representatives of Hydrocool and Water Master agreed at the meeting that Hydrocool would draw up a heads of agreement. Mr Hepburn carried the responsibility for doing so.
52 On 1 July 2004, Mr Hepburn sent Mr Richardson a draft heads of agreement between Hydrocool and Water Master. In outline, the draft heads of agreement contained the following provisions:
(a) The parties would cooperate in relation to the design and development of the domestic water making device.
(b) Hydrocool would grant Water Master an exclusive worldwide licence for the HS5 technology for the application of water making devices.
(c) Water Master would pay a licence fee of USD1 million in three tranches; and Water Master would also pay a royalty fee of 5% for ex-factory total cost of the commercial domestic water making device, based on the number of devices manufactured.
53 On 5 July 2004, Mr Hepburn sent Mr Richardson, the draft heads of agreement between Hydrocool and Windsor Group Company Limited, incorporating the proposed terms of agreement. In outline, the proposed terms were:
(a) Windsor would be licensed to manufacture HS5 convector modules.
(b) Windsor would be licensed to supply these HS5 convector modules to Water Master to use only in the domestic water making device.
(c) Windsor would be licensed to manufacture the CPU cooler unit and to market and distribute the units.
(d) Windsor would pay a licence fee of USD500,000 on the execution of the final agreement, and also a royalty fee of 5% of the ex-factory total cost of the CPU cooler units.
54 Both draft heads of agreement provided for final agreements to be signed by 31 August 2004 and that future improvements to the HS5 convector modules or CPU cooler units by Hydrocool, including, improvements in peltier performance, as a result of the Symetrix research, would flow to Water Master and Windsor within the licences to be issued.
55 On 1 July 2004, Mr Richardson sent an email to Dr Teplitzky and Mr Hepburn. Mr Richardson expressed concern in relation to the CPU cooler unit licence fees. Mr Richardson also stated:
We really liked your team – you have very good people and we very much look forward to working with them closely in the future.
56 On 5 July 2004, Dr Teplitzky sent Mr Hepburn an email. This email relevantly reads:
1. I had a private letter from Carlos yesterday.
Amongst a number of issues, he asked me for details of the offer from Emerson for 7% of HPL equity in return for cash.
I do not appreciate being asked by Carlos or anyone else on confidential matters to HPL Board.
Cleary there has been some loose talk from Fremantle to Brett/Ben.
It is none of their business and they have no right to discuss such matters in Coloardo Springs.
In fact it is nobody’s business other than Directors, including the staff at Fremantle, and they should not be party to this information.
If I can not rely on confidentiality on matters I share with you, I will not pass these on.
57 By 5 July 2004, an invitation had been issued by Water Master for Mr Hepburn, Dr Teplitzky and Mr Clarke to visit Windsor’s factory in China. In the visa application letter of that date, signed by the Mr Chung of Windsor, he stated that Windsor had formed a joint venture with Water Master and that they had “decided to acquire the rights to new technology from a company based in Australia called Hydrocool Pty Ltd”.
58 On 5 July 2004, Mr Hepburn sent Mr Banney and Mr Manners an email in relation to the Symetrix project. It read as follows:
Further to our strategy discussions this morning, I would appreciate if you would prepare a confidential report over the next few months (aim to have complete by say October)
This report should be a chronological description of the work program with Carlos since the very beginning, which is when Brett first went to CS.
In addition to the general chronological history I am also looking for the details of how Hydrocool has done everything possible to help Carlos, even when we have sometimes disagreed and of how we have frequently had our suggestions rejected only to find that months later, they were valid and applicable.
I also need included the situations in which Carlos’s behaviour, attitude etc made the project difficult to progress.
I also need included details of where we have received incorrect advice from Carlos – for example the confirmation of active Ferro inclusions, which if more thought had been given, were never capable of being proven.
I want to be in a position at the end of this year of being able to report our factual and comprehensive side of the Colorado Springs story.
You may run drafts past both Peter and myself but nobody else.
Please be careful therefore when you transmit any drafts by email !
59 In an email to Mr Clarke dated 6 July 2004, Mr Hepburn stated:
I do not want Carlos or David to have any excuse between now and Dec 31st.
My draft wording for the condition which the employees might attach to any employment contract which Water Masters in their wisdom might request, given that we are asking them to pay a license fee 18 months ahead of when the licensed technology would actually be proven in practice, is as follows:
That the Board give due consideration to our collective request that, if there is no progress before November 30th on the proof of theory (ie Milestone One of the Start Grant) via sample measurements which repeat, then a comprehensive review of the entire Symetrix project be undertaken jointly by Hydrocool and Symetrix during December 04 with a view to:
• evaluating what has been achieved to date and the cost to do so
• determining if there is adequate justification to continue the project past the deadline previously set by Carlos of December 31st.
The only downside for HPL, which I can see to Water Masters requesting two year contracts for all employees, is the effect this would have on our balance sheet.
I will have to work out the numbers, but it will make us insolvent much earlier, how early I will determine. This in turn could force the GOV to get out before March.
We could ask for a major shareholder guarantee (from the GOV) as part of the employment contract but I do not think this would have any chance of flying and may bring unpredictable consequences immediately.
Let’s discuss more tomorrow. (Original emphasis.)
60 In an email dated 7 July 2004 to Mr Hepburn, Mr Clarke stated:
A detailed task and resources plan for water master project is attached. I will need 2 engineers and 2 technicians/draftsmen on the project for 18 months, plus about ¼ of my time for project management.
If we reserve Monty and Rob for other duties, eg cpu cooler, automobile cooler box etc (essential as we can’t commit 100% of our resources to the water master project) then that means preferably applying Brett, Ben, Norm and one additional hire for Water Master. If Brett and Ben remain in the US then we will need 3 additional engineers (an extra body to make up for lack of experience), one additional technician/draftsman, more like 50% of my time for project management and allocation of Monty to the project, reducing capacity to service other applications.
I can’t budget for materials costs yet until I have a better idea of the actual program.
61 Mr Hepburn advised Mr Clarke that he agreed with his assessment and requirements.
62 Mr Clarke then forwarded the detailed task and resources plan to Dr Teplitzky.
63 On 8 July 2004, Mr Hepburn sent an email to Dr Teplitzky about Mr Clarke’s plan. He said that it was too early to define clearly what would be needed to be done. Mr Hepburn went on to say:
I have looked at Peter’s proposal closely and I think it is a reasonable maximum guesstimate at this time but the fact of the matter if we do not know enough details at this time to make this analysis.
64 On 10 July 2004, Mr Richardson advised Mr Hepburn that he intended to send Mr John Christian, a technical expert, to Fremantle to carry out an independent technical review of Hydrocool’s technology, with Mr Clarke.
65 Mr Christian visited the Fremantle premises on 15 July 2004. Mr Christian met with Mr Weymouth and Mr Davis. Mr Manners and Mr Banney were still in Colorado Springs working on the Symetrix research. Mr Clarke was in Croatia. Mr Christian also met with Mr Hepburn.
66 Mr Hepburn prepared a report of Mr Christian’s visit which he sent to the other directors. The report included the following statements:
He [Mr Christian] made the point that Water Master was being asked to make full payment of an up-front license fee of US$1M now and hence in advance of Hydrocool being able to demonstrate that our technology could do what Water Master needed to be done and at an acceptable cost.
He sees the main risk of this situation for Water Master being the personnel in Hydrocool and the need to retain all of this expertise to make sure that the development program was on time and successful.
He sees this as important for both of us since the product will not sell and generate royalty, unless the development is done well in the first place.
67 Mr Hepburn also emailed to Mr Clarke a copy of this report to the board. However, in forwarding the report to Mr Clarke, Mr Hepburn had applied bold font to the last two sentences referred to in the previous paragraph. Mr Hepburn’s email to Mr Clarke read:
FYI
On the section Bolded, I have primed Jon to discuss with Garth.
68 On 16 July 2004, Mr Hepburn sent the following email to Mr Clarke:
Please keep this confidential…The main downside of this plan, is the explosive effect it would have on the Board and on particular David.
We would certainly create permanent destruction of any relationship with Symetrix and probably with David.
I am far from thinking that we should put this plan into action and I will not do so without all of us in agreement…
Plan:
I think it is understandable for Water Masters to require some assurance that the project to develop the TE Domestic Water Maker can be successfully completed on schedule.
In this regard, it is very clear that we would need to retain all our engineering expertise to do so. Jon Christian, their independent expert will advise Garth of this.
Therefore, given that WM are paying the license fee up-front, they need assurance that Hydrocool will retain this personnel expertise.
Therefore WM need Hydrocool to have two-year employment contracts with their employees. This has no downside for Water Masters.
This would have significant effect on the HPL balance sheet and would make the Government much more eager to get out…
I would predict that David Teplitzky and Don Bourke would resist such a requirement for employee contracts since they know this would concern their Gov masters. They would also reject simply to disagree.
However, if WM insist they would then be forced to ask the Gov and the answer would almost certainly be try to avoid at all costs.
In the event that they did agree (very unlikely) then perhaps the employees would be willing to sign two year contracts, knowing the general attitude of the Hydrocool Board to various matters.
WM could then offer the following alternative proposal to the Gov via ATG
WM offers to by the 77% of HPL from ATG at 10 cents per share (A$770,000)
Also to pay out the ATG loan of $350,000
Hence for just over A$1M WM gets ATG out and hence the Gov out.
All employee options are cancelled and instead WM provides 5% equity to the following personnel – (DT – subject to the Symetrix situation), IH, PC, MD. RW, BM, BB.
This WOULD allow me to secure two year contracts with all employees.
This would change our shareholding as follows: 47% to 42% with WM, 30 to 35% with HPL employees and 23% with CH
We would keep our Start Grant since less than 50% is owned by overseas entities.
…
David resigns as executive Chairman, may stay on as a director…
Garth or some other nominee is appointed non-executive chairman.
Don Bourke resigns.
Peter Clarke replaces him on the Board.
I firmly believe that the Gov remaining as a shareholder with ATG as their board nominee, is presently not beneficial in any way for Hydrocool.
They have only an objective to get out as soon as possible, without regard to the long term prospects of the company.
Equally I believe that the above outcome would be beneficial for the future of the company and hence in the future for remaining shareholders.
My concern is the unpredictable element of this plan and do we want Water Masters as a major shareholder so soon.
69 On 18 July 2004, Mr Manners, one of the engineers located in Colorado Springs working on the Symetrix project, prepared a report to Mr Hepburn in relation to the Symetrix research. Mr Manners complained about the “very poor methodology” used in the project. He also stated that the nature of the research had changed from “increasing ZT via thin films to increasing ZT by any method we can find”. He went on to say that he was not confident the project would produce a breakthrough, and was unwilling to be associated with such poor research practises any longer. He said that it was not his place to decide if Hydrocool should continue with the project.
70 On 23 July 2004, Mr Banney wrote to Mr Hepburn to similar effect.
71 On 1 August 2004, Mr Larry McMillan wrote to Hydrocool notifying it that it was necessary to suspend the Symetrix research for up to six months due to the illness of Dr Araujo.
72 In August 2004, after the suspension of the Symetrix project, Mr Manners and Mr Banney ceased working on the Symetrix research and departed from Colorado Springs to return to Fremantle. Mr Manners travelled back to Australia via Europe.
73 On 16 August 2004, Mr Clarke issued a report which was critical of the Symetrix project.
74 On 17 August 2004, Dr Teplitzky sent Mr Hepburn an email headed: “Discussion with Carlos CONFIDENTIAL”, complaining of the negative attitudes to the Symetrix project from Fremantle over the previous few months. Dr Teplitzky also asked Mr Hepburn to produce a business plan and budget for the work to be undertaken at Fremantle.
75 On or about 20 August 2004, at an annual general meeting of Water Master, the shareholders of Water Master expressed support for the Water Master project. Mr Richardson emailed Dr Teplitzky in the following terms:
Our AGM concluded with good shareholder support for the Hydrocool proposal.
We can now proceed to discuss the Heads of Agreement with the comfort of this support…
I hope to expedite this matter but I cannot be sure how long it may take.
We are excited about the prospect and our shareholders now share that same excitement.
76 Further, on 20 August 2004, Mr Richardson sent Mr Hepburn an email attaching Water Master’s invitation letter to Dr Teplitzky, Mr Hepburn and Mr Clarke to visit Windsor’s factory in China. Mr Richardson suggested in the email, that Mr Hepburn forward the invitation to Dr Teplitzky.
77 Following the receipt of Mr Richardson’s email, however, Mr Hepburn sent to Mr Richardson an email in which Mr Hepburn suggested to Mr Richardson that the visit to China be limited to a technical visit only, and, therefore, that only Mr Clarke and himself should come.
78 Mr Hepburn’s email stated:
Peter and I will proceed to obtain our visas.
Given that we will have a signed Heads of Agreement prior to this visit (that condition has been imposed upon me by the Hydrocool Board) I view the main objective of this visit as being technical. Peter and I need to gather all required technical information from yourself and your engineers to commence work in Perth.
Final terms of the license agreement can be handled by myself in China, in consultation with the Hydrocool Board.
I remain concerned about anything, which might jeopardise the creation of a good relationship between Hydrocool and your Chinese partners.
Given all of the above I think it is best for both Hydrocool and Water Masters that this visit be seen as a technical visit and hence that only Peter and myself come.
I suggest that to achieve this, that you send me an email along the following lines, after we have concluded the Heads of Agreement.
now that the Heads of Agreement is finalised the main purpose of your visit to China will be to discuss the prototype design and development project in detail and gather all the required technical information. This may take several days and hence we suggest that there is only a need for Peter Clarke and yourself to visit.
Let me know what you think
79 Later that day, Mr Richardson responded by email to Mr Hepburn’s email in the following terms:
Understand Iain,
Looks good.
I will comply as you suggest.
This email will self-destruct in 5 minutes time.
80 On 21 August 2004, Mr Richardson sent an email back to Mr Hepburn which adopted Mr Hepburn’s suggestion that the invitation to visit China exclude Dr Teplitzky. The email also included the following statements:
As you know, I was quite taken aback during our meetings in Perth, when at one point in my conversation with David, he was particularly insistent to the point where he lost his temper over a relatively minor matter.
We have always viewed the engineering staff at Hydrocool as critical to the development of our domestic device and equally the management of this resource by Peter Clarke and yourself. As such we will be seeking some assurances that you and your staff will be available to work on our project through its entirety.
With regard to the visit by Hydrocool personnel to China…(w)e would recommend that both Peter and yourself make this visit and I do not see the need for anyone else at this time.
Due to the above issues I would be most appreciative if all communications with Hydrocool could be conducted directly with yourself, since I believe that you understand our way of doing business and we already see eye to eye on most aspects of this project.
81 Shortly after receiving a copy of Mr Richardson’s email, Mr Hepburn forwarded it to Mr Clarke. The email stated:
See email from Garth pursuant to my conversations with him. This should solve our problem.
82 On 25 August 2004, Mr Hepburn replied to Dr Teplitzky’s confidential email of 17 August 2004, that complained about Fremantle’s negative attitude to the Symetrix project and that requested a business plan from Mr Hepburn, by inserting highlighted responses into the text of Dr Teplitzky’s email. In response to the request for a business plan and budget, Mr Hepburn said that a “detailed work schedule and resources plan for the Water Master project has already been supplied”.
83 Mr Hepburn sent a copy of Dr Teplitzky’s confidential email of 17 August 2004 and his responsive email of 25 August 2004 to Mr Clarke and each of the engineers, other than Mr Manners, saying: “Hold your breaths for the reply to this one!”
84 On 25 August and 26 August 2004, Dr Teplitzky attended a meeting in Colorado Springs with Dr Araujo and Mr McMillan about the Symetrix project.
85 On 25 August 2004, Mr Bourke sent a memorandum to Mr Hepburn (with copies to Dr Teplitzky and Mr Murphy) asking Mr Hepburn to prepare a comprehensive report for the next board meeting. Mr Bourke said that the report should include a report on the current status of the negotiations in relation to the Water Master project. The memorandum went on to state:
6. The Board obviously need detail projected P&L and cash flow arising from the proposed programs, which will need Board approval.
Part of this financial planning should include a comprehensive status of the START Grant.
Obviously the company has only limited financial resources. Part of the review is to examine each cost and person’s contribution and determine:
a. whether we can afford them; and
b. do they have the right skill set to do the job at hand?
7. It is obvious that there has been a break down and dysfunctionality in the relationship between you and the CEO/Chairman.
The Board needs to understand how the company is going to operate in a functional manner.
You and David should meet and put all the issues on the table. As grown men I would expect that the majority of the issues are resolved between yourselves, but unsolved issues are brought to the Board for final decision.
8. The Board will need to consider recommendations from you and Dr Teplitzky as to how any additional financial resources required can be funded.
86 Mr Hepburn forwarded a copy of this memorandum to Mr Clarke under cover of an email, in which Mr Hepburn stated:
No surprises here but you can see that he is still raising the aspect of reducing or changing or our personnel.
The end of Aug progress report will need to cover all the information he asks for in this letter plus we will need to emphasise yet again that the Water Masters project will essentially need all the personnel whom we currently have.
87 On 26 August 2004, Mr Clarke sent by email to each of the engineers, as a pro forma draft letter, a letter addressed to Mr Hepburn, as managing director, advising that the writer, Mr Clarke’s wife, wished to exercise the options she held in Hydrocool. The letter stated that the writer wished to exercise her options in part as per section 4 of Appendix A, Option Conditions; and subscribe for 10 ordinary shares, and attached a cheque. Mr Clarke’s covering email said:
A form of words that you might like to use.
88 It is to be inferred that each of the engineers and Mr Hepburn gave a notice to similar effect to exercise a small number of his options. This is because on 2 September 2004, Mr Hepburn signed a document which was headed: “Resolution of Directors of Hydrocool Pty Ltd”. The document stated that it was resolved to approve the allotment of 100 shares to Mr Hepburn, each of the engineers and Mr Clarke’s wife, Mrs Rita Clarke. In fact, there had been no meeting of the board of directors on 2 September 2004, or at all, approving any such allotment of shares, nor had any such resolution been passed by the board of directors of Hydrocool.
89 On 5 September 2004, Dr Teplitzky prepared a memorandum addressed to the shareholder representatives of Hydrocool. Dr Teplitzky complained of the defiant attitude of Mr Hepburn and sought confirmation of his own authority by the shareholders to manage the company. Dr Teplitzky described a number of possible actions that the company could take in response to Mr Hepburn’s conduct. One of the possible actions was headed: “Dismiss the Managing Director/Relocation in Sydney”. The memorandum contemplated that such an action may lead to the resignation of “one or two of engineering staff and R&D Manager”. Dr Teplitzky said that the staff could be replaced in time, but not at that time. Dr Teplitzky recommended not taking that step at that time.
90 On 6 September 2004, there was a meeting of the shareholders of Hydrocool. They were represented by Mr Bourke and Mr Stone on behalf of ATG, and Mr Murphy on behalf of the two Coolhydro companies. The shareholders considered Dr Teplitzky’s memorandum and confirmed support for Dr Teplitzky in his dealings with Mr Hepburn. The meeting agreed that every effort should be made to reactivate a working relationship between Dr Teplitzky and Mr Hepburn, and to this end, Dr Teplitzky was authorised to set an action plan for Mr Hepburn. Further, it was agreed that Mr Bourke would also write to Mr Hepburn expressing the concern of the shareholders that Mr Hepburn had not addressed the matters raised in Mr Bourke’s memorandum of 25 August 2004. The representatives of the shareholders agreed that Mr Hepburn needed to produce a detailed business plan to the next meeting of the board of directors which, among other things, would outline the costs of completing the development of the CPU cooler project and the Water Master prototype.
91 In accordance with the agreement reached at the shareholders’ meeting, Mr Bourke sent a letter to Mr Hepburn dated 7 September 2004. The letter stated that shareholders were very concerned about the direction and focus of the company. The letter stated that the relationship between Dr Teplitzky and Mr Hepburn was “totally dysfunctional and is unacceptable”. It also said that the research and development being conducted by Symetrix was vital to Hydrocool and must continue. One technician from Fremantle was to be located in Colorado Springs to assist in the measurement of the results of the research. The letter went on to state that Dr Teplitzky, solely, was to manage the relationship between Symetrix and Hydrocool, and Mr Hepburn’s contact with Symetrix and related companies, was to cease forthwith. The letter also stated that Mr Hepburn’s July/August monthly report had not adequately addressed the issues that were essential to the company’s future. The letter asked Mr Hepburn to provide cost estimates and time frames for the marketing of the company’s technology and a comprehensive cash flow statement for achieving a break even position. Mr Bourke’s letter also stated that the shareholders regarded Dr Teplitzky as the senior executive.
92 On 7 September 2004, Mr Clarke sent Mr Hepburn an email attaching a draft letter. The email was titled “Water Master guarantee” and said “Suggested draft attached”. The draft letter attached stated:
Water Master intends to enter into an agreement with Hydrocool Pty Ltd for the development of a domestic water drinking unit which freezes water from air. The cooling power required will be provided by a thermoelectric system which Hydrocool will design and develop using Hydrocool’s proprietary technology.
This development project is to be carried out over an 18 month period with funds being provided by Water Master as part of a licence agreement with Hydrocool. The success of the development project, both in performance and in timeliness, depends to a large degree on the application of Hydrocool’s existing technology and experience and on the development expertise of Hydrocool’s research and development team based in Fremantle.
Upon execution of the agreement between Water Master and Hydrocool, Water Master will be liable for payments to Hydrocool for the life of the project. This puts Water Master at risk and there needs to be some level of guarantee to ensure that the development project will be carried out with the application of expert and experienced personnel. As with most R&D companies we believe the technical value that Hydrocool brings to the project is partly in its proprietary technology but more so in the capability of its personnel. This project will be extending Hydrocool’s technology into new areas and we need assurances that not only will Hydrocool’s best managers and engineers be placed on the project but that there is some assurance that they will remain with the project until it is completed.
Thermoelectrics is a field that few engineers are experienced in and we do not have the time frames available to suffer lengthy delays while new engineers or managers are trained.
We also seek assurances that the funds provided by Water Master will be used exclusively for the development of the drinking water technology during the life of the project. We do not wish to see them being used to support other activities the company may undertake during the life of the project. At the conclusion of the project any excess funds of course may be used for whatever purpose Hydrocool sees fit.
93 By a letter to the board of directors of Hydrocool dated 7 September 2004, Water Master advised that it was prepared to sign the heads of agreement sent on 1 July 2004, with various changes. One change proposed was that a licence fee of USD750,000 was to be paid in three tranches and a royalty fee of initially 3%, but reducing to 2.5%, was to be paid, once the production exceeded 10,000 units per month.
94 Another change was a requirement for an employee commitment. The letter relevantly read:
3. Safeguard the required Expertise
The development of our domestic water-making device depends on the ability of your team of engineers to successfully apply their knowledge and expertise in the design and development process. From the analysis so far done, we may or may not need to use your patented convector heat exchange technology and instead may use the more simple single fluid circuit or both. In either case, we view continued engineer involvement as a very crucial factor for us.
Consequently we would need the following clause added to the agreement.
Hydrocool provides a written undertaking from all of the current Fremantle-based employees that they will remain employed with Hydrocool until the Water Master design and development project is completed.
95 This letter was sent as an attachment to an email from Mr Richardson to Mr Hepburn.
96 On 8 September 2004, Mr Hepburn sent an email to Dr Teplitzky and Mr Murphy, which recommended acceptance of the proposed amendments to the heads of agreement put forward by Water Master.
97 On 9 September 2004, Dr Teplitzky sent an email to Mr Hepburn. Dr Teplitzky said that Mr Hepburn would have received Mr Bourke’s note on management responsibilities. Dr Teplitzky went on to state that Mr Manners was to be seconded to Symetrix and was to return to Colorado Springs. Dr Teplitzky also said that he would review the proposed amendments to the heads of agreement from Water Master and get back to Mr Hepburn. Dr Teplitzky also sought a “credible development plan” from Mr Hepburn costing the Water Master project. Dr Teplitzky asked how it was possible to decide if the proposed amendments were “OK” if they had no idea of the cost of undertaking the development.
98 Dr Teplitzky also expressed his dissatisfaction at the fact that Water Master had come to the 28 and 29 June meeting seeking equity and stated:
It took me some time to get the message through that there was no one authorised to negotiate such a basis and that we are a work for fee/licence for fee company only.
99 In the email, Dr Teplitzky went on to express his concern that Mr Hepburn had previously suggested that the whole of the proposed licence fee be earmarked for the Water Master project. He said that the fee was a licence fee and would be spent as the board and management of Hydrocool saw fit.
100 Dr Teplitzky also said that Water Master appeared to have ignored the proposed licence agreement with Windsor relating to the manufacture of the HS5 convector modules; and that it was no use selling a licence to Water Master, if there was no one to make the convector modules that would be used in the water making devices.
101 Mr Hepburn forwarded Dr Teplitzky’s email of 9 September 2004, to Mr Clarke and the engineers with the comment: “Received today – we need to discuss”.
102 Later on 9 September 2004, Mr Hepburn replied by email to Dr Teplitzky’s email to him. Mr Hepburn stated that Hydrocool needed to grab the Water Master deal with both hands before Water Master withdrew the deal. Mr Hepburn also copied his responsive email to Mr Clarke and the engineers.
103 On 10 September 2004, Mr Hepburn made a detailed response to Dr Teplitzky’s email. The response also included comments from Mr Clarke. This email was also copied to Mr Clarke and the engineers.
104 Shortly before 14 September 2004, Mr Hepburn forwarded to Dr Teplitzky, the reports, referred to previously, of Mr Banney, Mr Manners and Mr Clarke, criticising the Symetrix research project. Mr Hepburn asked Dr Teplitzky to distribute the reports to other members of the board of directors.
105 By an email dated 14 September 2009 to Dr Teplitzky, Mr Hepburn asked for his confirmation that he had distributed the reports to Mr Bourke and Mr Murphy. Mr Hepburn went on to state that the engineers were seeking his assurance that the board of directors would vote on the future of the Symetrix project, after the reports had been carefully reviewed. Mr Hepburn copied this email to Mr Clarke and the engineers.
106 By an email dated 15 September 2004, Dr Teplitzky responded to Mr Hepburn by saying that the reports would be distributed at his discretion, and it was none of the engineers’ business what the board of directors did, or voted on. Mr Hepburn underlined those sentences in Dr Teplitzky’s email, and copied Dr Teplitzky’s email to Mr Clarke and to each of the engineers with the following comment:
I have to say that his comments which I have underlined are for me the most infuriating and the most unacceptable I have seen in business in thirty years.
Arrogance, ignorance and insensitivity to the extreme.
We need to discuss what action should be taken if he does refuse to distribute.
107 On 17 September 2004, Mr Clarke sent Mr Hepburn a document containing “redrafted and expanded manning descriptions” for the Water Master and CPU cooler projects. Mr Clarke envisaged two new staff members being hired as engineers. There were now to be four engineers on the Water Master project including two new engineers, and two existing engineers and one new engineer for the CPU cooler project.
108 On Saturday, 18 September 2004, Dr Teplitzky sent Mr Hepburn an email about the amendments to the heads of agreement proposed by Water Master. The email said:
Amendment – it will not guarantee current staff as stated. Will consider “appropriate staff to complete development at HPL discretion”
109 The email also stated that Dr Teplitzky required Mr Manners to visit Symetrix in Colorado Springs for a couple of weeks to carry out measurements and transfer his knowledge of measurement procedures to Symetrix employees.
110 On Sunday, 19 September 2004, Mr Hepburn forwarded Dr Teplitzky’s email to Mr Clarke and the engineers, stating:
We will need to discuss on Monday.
111 On 19 September 2004, Mr Hepburn sent an email to Mr Richardson which stated that Dr Teplitzky had advised that he was not prepared to accept the required commitment from all current employees and instead wanted to replace the wording by “appropriate staff to complete development at HPL discretion”.
112 Mr Hepburn’s email went on to state:
I need to talk to you about this since firstly I can tell you with absolute certainty that unless we do retain all of the current employees we would not have the expertise to successfully complete the project. This expertise cannot be replaced even if we wanted to These guys have been working on our technology and the application of it for the last five years. They are the same team which produced the prototype for Marco and whether we go with the convector or the SFC we need every single one of them.
David simply does not like the employees to have any say in any matter.
Secondly, I am not sure if Peter would accept the responsibility of the project unless he knows that he has the required engineers available.
I will discuss with Peter on Monday morning.
113 Mr Hepburn copied this email to Mr Clarke, inviting him to discuss the email on Monday – which was the next day. On that day, Mr Hepburn sent Mr Clarke an email stating that it would help if Mr Clarke drafted an email to Mr Richardson expressing his view on the necessity of retaining all the current employees for the Water Master project. Mr Hepburn asked Mr Clarke to let him see the email before he sent it to Mr Richardson.
114 On 20 September 2004, Mr Clarke drafted the email requested by Mr Hepburn. The email read as follows:
I understand there has been some communication between yourself and Hydrocool regarding the staffing required to successfully carry out the development of the thermoelectric “water from ice from air” prototype.
The current Hydrocool staffing is:
Monty Davis Applications/Design engineer
Rob Weymouth Applications/Test engineer
both of whom you met in Fremantle
As well as:
Brett Manners Research/Development engineer
Ben Banney Research/Development engineer
Brett and Ben have recently returned from the US and have expertise particularly in modelling and analysis.
Brett has been involved intensively in developing the single fluid circuit concept over the last couple of years and assisted Monty in modelling for the demonstration prototypes recently tested.
I can assure you that all of the engineers are highly motivated to bring your project to a successful conclusion. They were all involved in the MARCO prototype project and it was a disappointment for all of us when that did not proceed commercially. We see your project as an excellent opportunity to get the technology we have all worked so hard on finally out into the market place as a commercial product.
I believe that all of these engineers are going to be required by Hydrocool to carry out your project successfully. Monty and Rob will also have responsibilities in finalizing development of the CPU cooler heat exchanger devices as they will most likely be used as essential componentry on your project. I expect to hire additional new engineers as well to enable timely completion of all of our projected work for the rest of 2004 and through 2005.
I can assure you of my 100% commitment to the project as well, provided I get the support I need from the Board to apply the resources necessary to carry it to completion.
115 After Mr Hepburn had seen and approved Mr Clarke’s draft letter, Mr Clarke emailed that letter to Mr Richardson on 20 September 2004.
116 On 20 September 2004, Mr Hepburn responded to Mr Clarke as follows:
Peter, I have just read this again at home and it was a very good email. Also wanted to make mention of my appreciation for your support and advice through this difficult period.
117 On 20 September 2004, Mr Clarke prepared further budgets for the Water Master and CPU projects. The Water Master project was costed at AUD585,500. The Gantt chart showed that four engineers were required to May 2005, with two engineers required from July 2005 onwards. The CPU project was costed at AUD548,000.
118 On 21 September 2004, Dr Teplitzky sent an email to the other directors of the Hydrocool board, which attached two papers. The first paper stated that it was a summary of what Dr Teplitzky discussed at his August 2004 meeting in Colorado Springs with Dr Araujo. The second paper was a paper requested by Mr Bourke, which set out alternative strategies regarding Hydrocool’s future. Dr Teplitzky’s covering email stated:
My position is that I support completing a deal with Water Master as long as we can get a few mentioned amendments, solely as a means of staying financial longer to enable us to pursue the Symetrix R&D and hope we do achieve the elusive milestone of proof of concept. Unless we also complete a license for CPU system, and perhaps at least one other license, we won’t even complete the Watermaster development before running out of money. As you will read, I have been unable to get any interest in purchase of ATG shares and associated injection of funds into HPL (without dilution to other shareholders) until we can demonstrate the ZT milestone, and show that the establishment at Fremantle can be sustained on a break even basis from licenses of current technology.
Our only upside is the Symetrix project (if successful) and so I want to give this the maximum time to succeed.
119 Two alternative strategies were identified by Dr Teplitzky in the second paper. The first alternative was maintaining the Fremantle operation and engaging in the Water Master project. The alternative strategy referred to in the paper, was to close down the Fremantle operation, terminate all staff at Fremantle, and retain Dr Teplitzky as the sole employee. In this case, Hydrocool would not continue with the Water Master project.
120 Dr Teplitzky stated that Hydrocool would, on current projections, and in the absence of a further source of revenue or funding, run out of money in the first scenario by August 2005, not completing the Water Master project; and in the second scenario, by April 2005. Dr Teplitzky recognised that there were a number of obstacles facing the successful licencing of the CPU cooler unit.
121 One of the desired amendments to the Water Master heads of agreement referred to by Dr Teplitzky in his email of 21 September 2004, was the rejection of Water Master’s requirement to guarantee that existing employees would be available full-time for the duration of the project, and the acceptance by Water Master, of Hydrocool’s proposal that it would allocate appropriate experienced personnel to the project.
122 On 21 September 2004, Mr Hepburn wrote to Mr Richardson commenting:
Further to this email I have discussed the situation with Peter and he is rather firm in his belief that without the confirmed commitment from all the current engineers, he would not be able to do a good job on the prototype. In fact, he is reluctant to accept the project unless he is sure he can succeed.
I am sure that David will be trying to persuade the Board that Hydrocool needs to be able to take people off the Water Master project at its discretion whenever and for whatever reason.
Am I correct in assuming that Water Master will not proceed without the employee commitment as stated in the draft HOG?
123 On 21 September 2004, Mr Richardson emailed Mr Hepburn stating:
You are correct in your assessment. Without Hydrocool’s employee commitment our very large investment in this project would be at risk. We believe that the real value of Hydrocool’s technology is resident in its employees. Without them we do not believe Hydrocool would have the ability to complete this project. Hence our request for this simple assurance to be embodied in the HOA.
124 Later on 22 September 2004, Mr Hepburn sent Dr Teplitzky, Mr Murphy and Mr Stone an email, which reported, inter alia:
The employee commitment is a deal-breaker for Water Master…
125 Mr Hepburn’s email went on to say of the employee commitment that this was “something [Water Master] have said from the very beginning”. Mr Hepburn also included in that email, an extract from Mr Richardson’s email of 21 September 2004. Mr Hepburn forwarded his email to Mr Clarke and the engineers.
126 On 24 September 2004, there was a meeting of Hydrocool’s board of directors in Sydney. Present at the meeting were Dr Teplitzky, Mr Hepburn, Mr Bourke, Mr Murphy and Mr Stone. At the meeting, Mr Hepburn described the proposed activity of the company. He presented a cash flow forecast for the period ending December 2005. This reflected Hydrocool deriving income from the licence fee payable under the proposed Water Master licence agreement, a licence fee and royalties under the proposed Windsor licence agreement, and from a licence fee payable in respect of a second licence agreement which Mr Hepburn predicted would be entered into in relation to the CPU cooler project in 2005. Mr Hepburn did not include any proposed payments being made to Symetrix in connection with Hydrocool’s participation in the Symetrix project.
127 At the meeting, Mr Hepburn voted against the continuation of payments for the Symetrix research project until there had been a review of the project.
128 Mr Hepburn secretly taped the proceedings at the board meeting. A transcript of the board meeting was in evidence. Notwithstanding, the existence of a transcript, there was controversy as to what instructions were given to Mr Hepburn at that board meeting, in relation to the employee commitment amendments sought by Water Master. I will deal with the controversy later in these reasons.
129 It is uncontroversial that after the board meeting, Mr Hepburn obtained a draft from the law firm, Abbott Tout, which relevantly included three new clauses for the Water Master heads of agreement relating to the employee commitment, and a draft of the proposed undertaking to be given by the employees affected (the Key Employee Undertaking). The proposed new clauses provided as follows:
3.5 Pending execution of the Final Agreement, the Key Employees will give Water Master the Key Employee Undertaking.
3.6 Subject to the provisions of clause 3.7, HPL undertakes to Water Master that HPL will not undercut the benefit of the Key Employee Undertaking by terminating the services of the Key Employees prior to 31 December 2005 on the grounds of redundancy.
3.7 Nothing in clause 3.6 precludes HPL from terminating the services of the Key Employees prior to 31 December 2005 for cause eg unsatisfactory performance or misconduct.
130 The Key Employee Undertaking provided:
We, the undersigned, all being employees of HPL:
(a) undertake in favour of Water Master that we will continue in the employment of HPL until at least 31 December 2005, but subject to the terms of our respective service contracts with HPL and to the right of HPL to terminate those services contracts on the grounds of unsatisfactory performance or misconduct;
(b) acknowledge that Water Master has entered into the Heads of Agreement on the basis (amongst other things) of our assurance that we will remain in the service of HPL until 31 December 2005.
131 At the 24 September board meeting, the directors also discussed the exercise of options by the employees and the issue of shares consequent thereon. Mr Bourke, unaware of the resolution signed by Mr Hepburn dated 2 September 2004, stated that shares were not to be issued to the employees until they signed a document acknowledging that they understood Hydrocool’s precarious financial position. After Mr Hepburn stated that he understood that the company secretary had already issued the shares, Mr Bourke and Mr Murphy stated that the shares should not have been issued by the company secretary because there had been no resolution of the board of directors giving authority to issue the shares. Mr Hepburn did not disclose that he had signed the resolution bearing the date 2 September 2004, authorising the issue of the shares.
132 On 27 September 2004, Mr Hepburn emailed Mr Richardson stating:
Garth, Just to confirm my telephone conversation with you.
At our Board Meeting, the following was decided:
I have been advised to progress the agreements (HOG and License Agreement) with Water Master and in this regard to take the following action.
Have our lawyers review the draft HOG and suggest some wording for the employee commitment matter, which will satisfy all three parties, Water Master, Hydrocool Board and Hydrocool employees. I expect to have this back from our lawyers by tomorrow night and then I will seek final director approval so that I may execute the HOG on behalf of Hydrocool and send to yourself. I am to get this all done before the end of this week.
133 On 27 September 2004, Mr Richardson sent an email to Mr Hepburn which stated:
…Our board is keen to move to a shareholding position in Hydrocool in the near future if the Aus Government is prepared to sell.
I advised our board that you will be preparing a position whereby a management buy out by the staff of Hydrocool might be included with a Water Master purchase of shares thereby ensuring that Water Master became at least a 50% plus shareholder. We all favor this as employees who are also shareholders work better as partners.
Our board asked me to ensure that in this eventuality you would remain as the CEO of Hydrocool. They (all of us actually) feel very comfortable and happy with yourself. I trust this would not be a problem for you.
134 Later on 27 September 2004, Mr Hepburn forwarded Mr Richardson’s email to Mr Clarke and the engineers, under cover of an email which said:
See email from Garth below.
This is progressing from an idea in my head, to an idea put in Garth’s head, to an option, to a likely outcome.
I would like to have a meeting this morning to discuss the issues which I see need to be solved/considered.
In this way we can all collectively think of the best strategy to employ during the visit to China and beyond.
I feel strongly that whatever strategy we employ we all need to think it is the best one.
This is going to be an interesting situation and we will need to tread carefully.
135 On 28 September 2004, Mr Hepburn responded by email to Mr Richardson in the following terms:
…all of the Hydrocool employees are not keen to see ATG/Fed Government simply replaced by another shareholder who can bring no value to the company. It is unarguable that ATG have not been able to provide any value or help with our technology or its commercialisation. We have had many years of that and I am convinced that it has held us back.
In contrast to this, we feel very strongly that both Water Master and Windsor can bring significant opportunities and hence future value to Hydrocool by way of helping us to progress and to commercialise our technology. This is why we are so keen for such a shareholder outcome to be achieved. It will benefit all parties, Water Master, Windsor and Hydrocool.
Our lawyer called me tonight and said he will have a draft to me tomorrow which satisfies all of the Water Master concerns and requirements (expressed in your letter of offer) and at the same time is reasonable for Hydrocool to accept or more accurately will be unreasonable for Hydrocool not to accept. I will send this to the other directors tomorrow with my strong advice that we should now execute. I will copy this communication to you. Regards Iain.
136 On 29 September 2004, Mr Richardson emailed Mr Hepburn:
This is all good news and I agree we are a very good fit and in particular yourself. It is rare these days to find someone in business you feel totally comfortable with as a future partner.
137 On 29 September 2004, Mr Hepburn forwarded the Abbott Tout draft amended heads of agreement and Abbott Tout’s covering letter of advice to the other directors. In his covering email, Mr Hepburn reported on his dealing with Abbott Tout and that Abbott Tout had advised that the employee commitment clauses were reasonable for all parties. Mr Hepburn went on to say that he did not believe that in the absence of the employee commitment provisions binding Hydrocool, Water Master would execute the heads of agreement, nor would the employees provide the commitment sought by Water Master. Mr Hepburn asked the directors to review the document and confirm that Hydrocool would execute the document.
138 Mr Hepburn’s email went on to say:
Water Master has been awaiting our decision for a period of three weeks and they are becoming concerned at this delay.
This draft will satisfy all their requirements and I am confident that they would immediately finalise the attached document and the license agreement to follow.
139 Mr Hepburn also forwarded a copy of his email and attachments, to Mr Clarke and the engineers and Mr Richardson.
140 In his covering email to Mr Richardson, Mr Hepburn included the reference to Abbott Tout’s advice and that he had recommended that the directors accept the clauses. Mr Hepburn stated that he hoped his co-directors were sufficiently reasonable to accept his advice.
141 On 1 October 2004, in response to Mr Hepburn’s email of 29 September 2004, Mr Murphy emailed Mr Hepburn and the other board members in the following terms:
I have reviewed the revised HOA for Water Master and believe that the new clauses, and Schedule of Undertaking concerning the Key Employees, satisfies all our respective requirements and I am happy for the HOA to be signed in this form.
142 Later that day, Mr Hepburn forwarded Mr Murphy’s email to Mr Richardson and suggested that Mr Richardson attend to having Water Master execute the heads of agreement. Mr Hepburn went on to say:
I will then present the Agreement to David and Don as “take it or leave it but this is the final offer”
This is assuming that they do not confirm their agreement beforehand.
I will then have the Agreement signed by Hydrocool and all of the Hydrocool engineers and send one fully signed copy back to you.
143 Also on 1 October 2004, Dr Teplitzky sent an email to Mr Hepburn in the following terms:
I believe the HPL Board made it very clear that any issue you wanted to bring to the Directors, should be directed through me as Executive Chairman. In recent days you have chosen to communicate on matters you were perfectly aware were contentious without first raising with me. In particular the Heads of Agreement for Watermaster in regard to the staff employment. I am currently taking legal advice as to whether the proposed wording is consistent with the clearly stated policy of the Board. I would have wished to have resolved this with you before requesting approval from the Board. I advise you that I will not accept this flouting of a Board directive any longer, and you should take this as a warning as unacceptable behaviour of the Managing Director of this company.
144 Mr Hepburn responded to Dr Teplitzky by saying that at the board meeting, Mr Bourke had specifically asked him to send the draft heads of agreement to members of the board as soon as he had taken advice from Abbott Tout, and that is what he did. Mr Hepburn said that he rejected Dr Teplitzky’s allegation as a proper basis for the issue of a warning.
145 On 2 October 2004, Dr Teplitzky sent an email asking Mr Hepburn to supply him with each of the employee’s terms and conditions of employment so that he could obtain legal advice. Mr Hepburn complied with that request. Mr Hepburn forwarded Dr Teplitzky’s email to Mr Clarke and the engineers and said that he feared that they were heading towards a stand-off on the Water Master agreement.
146 Mr Richardson responded to Mr Hepburn’s email of 1 October 2004, by seeking further amendment to the Water Master heads of agreement. Mr Richardson stated that Water Master would like the word “domestic” replaced wherever it appeared in the heads of agreement, because Water Master did not want Hydrocool to be at liberty to licence the technology for other water from air machines which were not related to domestic use. Mr Richardson said that:
It would be appreciated if Water Master would be the only company that develops water for air products using Hydrocool’s technologies.
147 Mr Richardson made some specific proposals to change the wording of the heads of agreement.
148 On 2 October 2004, Mr Hepburn advised Mr Richardson that he agreed to the changes and asked Mr Richardson to print out two copies of the heads of agreement with the changes incorporated, sign the heads of agreement and courier the copies to him. Mr Hepburn told Mr Richardson that Dr Teplitzky and Mr Bourke were “still going back and forward with each other on various clauses”, but that he was comfortable that they had an agreement which was fair to both companies.
149 On 4 October 2004, Dr Teplitzky sent Mr Hepburn an email. The email referred to cl 3.6 of the proposed terms of the heads of agreement drafted by Abbott Tout in the following terms:
All the directors I have spoken to have a problem with this clause, and I have as yet not had complete legal advice and sign off as to whether this condition contradicts the Board policy as stated in the minutes, or any issue covered in their letters/contracts of appointment. I am hoping to finalise all this with the Solicitor on Tuesday, so your advice would be appreciated.
150 Dr Teplitzky also referred, in the email, to the importance of Mr Hepburn preparing a business plan for the Water Master and the CPU cooler projects. Dr Teplitzky emphasised the need to have an assurance as to the developmental costs for the Water Master project before any heads of agreement could be signed.
151 Mr Hepburn copied that email to Mr Clarke saying that he was close to not being able to work with Dr Teplitzky anymore. Mr Hepburn went on to say that calling a meeting of shareholders to consider their draft resolution was looking inevitable. The reference to the meeting of shareholders was a reference to Mr Hepburn, Mr Clarke and the engineers’ intention to call a meeting of the shareholders of Hydrocool, at which it was proposed to move resolutions which criticised the board’s policy in relation to the Symetrix project, and which supported their views of the direction Hydrocool should take.
152 On 4 October 2004, Dr Teplitzky had a telephone conversation with Mr Richardson. He later sent an email to Mr Richardson stating:
It was good to chat to you and hear your progress. I understood you to say that you would be comfortable with the proposed agreement containing the undertaking to Water Master of only those current HPL employees who are to work on the Water Master project, remaining until at least December 2005. Employees not involved in the project can not also give an undertaking as it does not refer to them. I believe this is also totally acceptable to the HPL Board, although HPL is not a party to that undertaking.
For its part HPL can only agree terms for its employees that are consistent with their current employment terms, and that allow HPL to determine those conditions. Would you be comfortable if we deleted clause 3.6 as we are unable to determine whether redundancy is relevant to this contract with you. We have a problem with this, and it would help to get final approval if this clause was removed.
We would be happy to add a clause in which we undertake in a contractual sense that HPL will at all times during this Water Master development at Fremantle, ensure that the highest qualified, most relevant, and experienced personnel will be provided by HPL.
153 Mr Richardson did not reply immediately to Dr Teplitzky’s email but sent a copy of Dr Teplitzky’s email to Mr Hepburn and said:
I am not going to respond to it tonight. I will do so tomorrow but only after you have had a chance to give any further advice.
154 On 4 October 2004, Mr Hepburn responded to Mr Richardson’s email, which he copied to Mr Clarke and the engineers, in the following terms:
Garth,
Thanks for this.
Please standby on your reply to David until I have a meeting with our engineers in the morning.
I suspect that there will be some developments from this meeting, which will influence what should be done. I shall advise you further, via telephone, after the meeting.
regards Iain.
155 On 4 October 2004, at 10:13 pm, Mr Hepburn sent an email to Mr Clarke and the engineers, which stated, relevantly:
…During a Water Master Management meeting on Monday in China which was to approve execution of the HOA as revised by Abbott Tout, David again called Garth to discuss the suggestion that Hydrocool only needs to provide the commitment from two to six employees. See separate email from Garth.
I no longer think we can depend on any good faith from David on this employee commitment issue. He is clearly trying to get around it instead of appreciating that it is something which the company absolutely needs and hence should be grateful for.
If we are to stand on this issue I think the time is now or never.
We should meet on Tuesday morning and call Garth and advise him what to do.
Presently my feeling is that we should issue the notice of General Meeting and unanimously withdraw all offers for the one year commitment.
As I said if we do not do that now, I think that we will lose this leverage for good.
At the same time we advise Garth, that he should reply to David as follows – [“We confirm that our previous offers to finalise the Heads of Agreement was made subject to the commitment from all six of the Fremantle based employees, comprising of four engineers and Peter Clarke and Iain Hepburn. This position remains unchanged for reasons already explained in our previous correspondence. We understand that the commitment from your employees, while previously thought to be sorted out, is now quite unclear and your telephone call has served to confirm that. Consequently we feel obliged to withdraw our offer until this matter is both clarified and certain.”]
156 Mr Hepburn then stated: “Let’s review where we are on Tuesday and then decide what to do”.
157 There was a meeting between Mr Hepburn, Mr Clarke and the engineers at the Fremantle premises on 5 October 2004, and during the meeting they participated in a telephone conference with Mr Richardson, who was on a speaker telephone.
158 On 5 October 2004, Mr Richardson sent an email to Dr Teplitzky which adopted the text proposed by Mr Hepburn. The email stated:
Dear David,
On further consideration after our phone conversation yesterday we confirm that our previous offer to finalise the Heads of Agreement was made subject to the commitment from all of the six Fremantle based employees, comprising of four engineers and Peter Clarke and Iain Hepburn. This position remains unchanged for reasons already explained in our previous correspondence.
We understand that the commitment from your employees, while previously thought to be resolved, is now quite unclear and your telephone call has served to confirm that.
In addition we have today discussed the employee commitments directly with the Hydrocool Engineers in Perth and we regret to advise you that all of them have decided not to provide any commitment to Water Master due to the current situation within Hydrocool.
Consequently we now feel obliged to withdraw our offer until this matter is both clarified and certain.
We would ask that the Board of Hydrocool be advised as such and we would also mention again that our preference is to continue communicating with Hydrocool via Iain Hepburn as confusion sets in when more than one person is involved.
159 On 5 October 2004, Mr Hepburn sent an email to Mr Murphy and Mr Bourke advising that Water Master had withdrawn its offer to licence Hydrocool’s technology and making complaints about Dr Teplitzky. Mr Hepburn copied this letter to Mr Clarke and the engineers.
160 Also, on that day, Dr Teplitzky, unaware of Mr Richardson’s email withdrawing the Water Master offer, sent Mr Hepburn an email saying that he and Mr Stone would be visiting the Fremantle premises to completely resolve all issues outstanding in relation to the heads of agreement. Dr Teplitzky also said that he wanted to discuss the development plan and costs with Mr Clarke and spend time with the engineers who were to work on the project.
161 Further, on 5 October 2004, Mr Hepburn prepared two documents. One document was a notice calling a general meeting of shareholders of Hydrocool to consider four resolutions. Two of the resolutions were critical of the Symetrix research and sought to restrict further funding of the research. The other two resolutions were critical of Dr Teplitzky and called for an expression of no confidence in Dr Teplitzky for among other things, his attitude to the employment commitment in the heads of agreement called for by Water Master. The notice shows that it was intended that it would be signed by Mr Clarke, Mr Manners, Mr Davis, Mr Banney, Mr Weymouth and Mr Hepburn. The second document was a memorandum addressed to the shareholders of Hydrocool criticising Symetrix research and blaming the withdrawal of the Water Master offer on Dr Teplitzky.
162 On 6 October 2004, Dr Teplitzky and Mr Stone visited Hydrocool’s premises in Fremantle, to meet with the staff. Before that meeting, however, Mr Clarke sent Mr Davis, one of the engineers, an email saying that at the meeting with Dr Teplitzky he would be “playing down” the progress made on the CPU cooler project to extend the time frame and hence the costs past December 2004. Mr Clarke asked Mr Davis not to disagree with Mr Clarke about this in front of Dr Teplitzky.
163 On 6 October 2004, Dr Teplitzky met with the engineers at the Fremantle premises. During the meeting, the engineers told Dr Teplitzky that their refusal to give an undertaking to work for the company until December 2005, was not permanent and the withdrawal could be reversed if Hydrocool allowed the Water Master project to proceed properly resourced. During these discussions, Dr Teplitzky referred to the Symetrix research and suggested that a breakthrough was imminent. Dr Teplitzky also raised the possibility of moving the Hydrocool operations conducted in Fremantle to Sydney and retaining a partial staff. Dr Teplitzky and Mr Stone also met with Mr Clarke.
164 On 13 October 2004, Dr Teplitzky sent a memorandum to Mr Burke and Mr Murphy. That memorandum set out a detailed timetable which contemplated the termination of Mr Hepburn’s employment and the closure of the Fremantle premises.
165 Dr Teplitzky, Mr Bourke and Mr Murphy conferred on 15 October 2004. They decided that Mr Hepburn’s employment should be terminated and the Fremantle premises and operations should be shut down. Further, on that day, Dr Teplitzky invited Mr Hepburn to attend a meeting with Dr Teplitzky at the Rydges Hotel in Perth on the following Tuesday, 19 October 2004.
166 Following the receipt of Dr Teplitzky’s invitation, Mr Hepburn informed Mr Clarke and the engineers that he had been invited to the meeting, and that he might be dismissed at this meeting. Each of the engineers and Mr Clarke then gave Mr Hepburn a letter of resignation dated 19 October 2004, to be given to Dr Teplitzky, if Dr Teplitzky dismissed Mr Hepburn. Each letter gave notice of one month, and offered to accept payment in lieu of serving one month’s notice. Each letter, other than that signed by Mr Clarke, criticised the board of directors and/or Dr Teplitzky.
167 Further, on 18 October 2004, Mr Hepburn also amended the draft resolutions which he had previously drafted, to be considered at a proposed meeting of shareholders, to include a resolution calling on the Auditor-General to investigate the circumstances surrounding the resignation of all the Hydrocool engineering staff. Mr Hepburn sent Mr Clarke an email asking him to have the notice calling for the shareholders meeting signed by the intended signatories. The notice was subsequently signed by Mr Hepburn, Mr Clarke and all of the engineers.
168 On 18 October 2004, Dr Teplitzky attended a meeting with representatives of Grant Thornton, an accounting firm, and Jackson MacDonald, a law firm. He instructed the representatives to take steps to close down the Fremantle operations, including cancelling the lease, paying out entitlements to staff, demolishing the cool room and store and cancelling all phones. Mr Dermott McVeigh, who gave evidence, was one of the consultants employed by Grant Thornton, who attended the meeting with Dr Teplitzky.
169 On 19 October 2004, Mr Hepburn met with Dr Teplitzky at the Rydges hotel. At the meeting, Dr Teplitzky advised Mr Hepburn that his employment was terminated with immediate effect. Mr Hepburn then handed to Dr Teplitzky the letters of resignation from Mr Clarke, Mr Banney, Mr Davis, Mr Manners and Mr Weymouth.
170 Mr Hepburn then left the meeting with Dr Teplitzky and telephoned Mr Clarke from the Rydges hotel, and asked Mr Clarke to pay the sum of AUD33,280 to a nominated bank account, as his annual bonus payment. Mr Clarke paid the sum to the bank account nominated by Mr Hepburn. Mr Hepburn also asked Mr Clarke to send a notice calling a meeting of the shareholders of Hydrocool, at the instance of the “minority shareholders” in Hydrocool, namely, Mr Clarke, the engineers and himself. The notice proposed the consideration of five resolutions which had been drafted by Mr Hepburn.
171 On 19 October 2004, representatives of Grant Thornton entered Hydrocool’s Fremantle premises and in accordance with Dr Teplitzky’s instructions, took control of the office.
172 Mr Clarke and the engineers continued to work until 12 November 2004 and assisted in the closure of the Fremantle operations, and premises. Grant Thornton supervised the closure of the Fremantle premises.
173 In November 2004, at the invitation of Mr Richardson, Mr Hepburn, Mr Clarke and the engineers, visited the Windsor factory in China.
174 On 15 December 2004, TEA was incorporated in Western Australia. Water Master was allotted 300 shares. Each of Mr Banney, Mr Hepburn, Mr Manners, Mr Weymouth, Mr Davis, Mr Tse and Mrs Clarke (for the benefit of Mr Clarke) was allotted 49 shares. The directors of TEA included Mr Hepburn, Mr Richardson and Mr Clarke.
175 On 14 March 2005, pursuant to a share sale deed, ATG sold all of its shares in Hydrocool to the companies under the control of Mr Murphy, selling 424,730 shares to Coolhydro (1), 373,270 shares to Coolhydro (2), and 7,000,000 shares to Coolhydro (3) Pty Ltd, also a company under the control of Mr Murphy. Mr Bourke and Dr Teplitzky ceased to be directors of Hydrocool in March 2005. Since March 2005, Mr Murphy has been the sole director of Hydrocool.
176 In July 2005, Hydrocool entered into a licence agreement with Hydrokinetics Pty Ltd for the purpose of commercialising Hydrocool’s technology. Hydrokinetics is a company controlled by Mr John Skillecorn, and in respect of which, Mr Skillecorn is a director. The licence agreement granted Hydrokinetics an exclusive licence to use Hydrocool’s technology. The agreement provided for the payment to Hydrocool of a licence fee of AUD62,000 and royalties of 5% on the ex-factory price of any units that were manufactured using Hydrocool technology.
177 In October 2005, Mr Hepburn announced that TEA had developed a water harvester.
178 I make findings in terms of the matters of fact set out in [16]-[177] above.
hydrocool’s claims
179 Hydrocool made the following claims against Mr Hepburn and Mr Clarke.
180 Hydrocool contended that in mid-2004, Mr Hepburn conceived of a plan, with the complicity of Mr Clarke, whereby the continued employment of Mr Hepburn, Mr Clarke and the engineers would be secured and once secured, they would all be allocated a substantial stake in Hydrocool. The plan involved employment contracts being, in effect, forced on Hydrocool by Water Master, an intended licensee. Mr Hepburn’s objectives, said Hydrocool, would be achieved through Mr Hepburn’s dealings and negotiations with Water Master’s director, Mr Richardson, which to the extent necessary, would be conducted surreptitiously and without the knowledge of the Hydroccol board of directors, and contrary to the board’s wishes.
181 Hydrocool went on to contend that Mr Hepburn and Mr Clarke, thereby, placed themselves in a position of conflict between their interest, respectively, in implementing Mr Hepburn’s plan, under which each of them and the engineers would benefit, and their duty to act in the interests of Hydrocool, which, in this case, was represented by the shareholders, ATG and the two Coolhydro companies.
182 Further, said Hydrocool, Mr Hepburn, with the assistance of Mr Clarke, set about implementing Mr Hepburn’s plan by engaging in a series of related activities.
183 First, it was said that Mr Hepburn, with the assistance of Mr Clarke, acted to influence Water Master to make it a condition of its entering into the licence agreement, that Hydrocool agree that it would continue the employment of Mr Hepburn and Mr Clarke and the engineers for a term of two years. It was also said that Mr Hepburn, in the course of dealing with Mr Richardson, disclosed Hydrocool’s confidential business information.
184 Secondly, Hydrocool said that Mr Hepburn, with the assistance of Mr Clarke, encouraged and fostered a collective approach by Mr Clarke and the engineers in opposition to the board, and in support of the implementation of Mr Hepburn’s plan. Hydrocool referred to this as a “them against the Board” attitude. In aid of this objective, said Hydrocool, Mr Hepburn disclosed on many occasions, Hydrocool’s confidential business information to Mr Clarke and the engineers.
185 Hydrocool went on to contend that in acting in the manner referred to in the preceding paragraphs, Mr Hepburn and Mr Clarke breached their respective fiduciary duties to Hydrocool, and acted in contravention of s 182 and s 183 of the Corporations Act 2001 (Cth). Alternatively, in relation to Mr Clarke, Hydrocool contended, in its closing submissions, that Mr Clarke knowingly participated in Mr Hepburn’s breach of his fiduciary duty, and aided and abetted Mr Hepburn to contravene the statutory duties which Mr Hepburn, as a director of Hydrocool, owed under s 182(1) and s 183(1) of the Corporations Act, or had induced, or been directly or indirectly knowingly concerned in, or a party to, the contraventions. In so doing, alleged Hydrocool, by reason of s 182(2) and s 183(2) of the Corporations Act, Mr Clarke contravened s 182(1) and s 183(1) of the Corporations Act.
186 Hydrocool contended that the conduct of Mr Hepburn and Mr Clarke, in breach of their respective duties, in relation to the employment commitment issue, caused the Water Master licence agreement not to be concluded. Hydrocool claimed that it, accordingly, lost the opportunity to earn the licence fees and royalties that would have been paid to Hydrocool under that agreement. Hydrocool claimed equitable compensation, alternatively, compensation under s 1317H of the Corporations Act, in relation to these lost opportunities to earn profits from the water from air project in the sum of AUD2,438,294, alternatively, AUD2,313,000.
187 Hydrocool also contended that the failure to conclude the Water Master licence agreement caused it also to lose the opportunity to commercialise its CPU cooler technology and to enter into agreements with Windsor and other companies. Hydrocool also claimed AUD970,500, or alternatively AUD443,426.18 in respect of the loss of opportunity to earn profits from the commercialisation of the Hydrocool CPU cooler technology.
188 Hydrocool contended that the conduct of Mr Hepburn and Mr Clarke in relation to fostering, among the Fremantle based employees, a “them and us” attitude against the board of Hydrocool, caused the en masse resignation of the engineers. Hydrocool contended that the en masse resignation of the engineers caused Hydrocool to lose the opportunity to earn royalties under its licence agreement with Hydrokinetics, in relation to approaches made to Hydrokinetics about the use of Hydrocool‘s technology by two United States companies, Thetford Corporation (Thetford) and Marlow Industries Inc (Marlow). Hydrocool, in its final submissions, claimed the sum of AUD300,000 in respect of the loss of opportunity to earn royalties in relation to Thetford, and AUD16,500 in relation to Marlow. Alternatively, said Hydrocool, the Court should award a nominal sum of AUD75,000 for those lost opportunities.
189 Hydrocool also contended that by reason of the en masse resignation of the engineers, Hydrocool was required to re-establish its technology, and incurred expenses in doing so. Hydrocool claimed AUD256,844, as comprising the time costs and expenses of Mr Skillecorn and time costs of Mr Murphy in re-establishing Hydrocool’s technology.
190 In relation to its claim that Mr Hepburn disclosed Hydrocool’s confidential business information to Mr Richardson, Hydrocool contended that, in addition to this conduct forming part of the course of conduct which contravened his fiduciary and statutory duties, Mr Hepburn also, breached a confidentiality agreement, which Hydrocool claimed it had entered into with Mr Hepburn.
191 Hydrocool alleged the confidential business information which Mr Hepburn disclosed, comprised:
(a) the fact that Hydrocool’s principal shareholder, ATG, was obliged to sell its shareholding by 31 December 2004;
(b) the fact that Hydrocool was experiencing, or was about to experience, cash flow problems; and
(c) the contents of board discussions and legal advice received by Hydrocool.
192 Hydrocool did not, at trial, claim any discrete relief founded on the claim that Mr Hepburn breached the alleged confidentiality agreement. Rather, I understood the gravamen of Hydrocool’s contention to be that Mr Hepburn disclosed Hydrocool’s confidential information to Mr Richardson, as a means of enlisting Mr Richardson’s support in the implementation of Mr Hepburn’s plan.
193 I will, accordingly, consider Hydrocool’s claims in relation to the alleged misuse of the confidential business information by Mr Hepburn, in the context of whether Mr Hepburn breached s 182 and s 183 of the Corporations Act.
194 There was an issue at the trial as to whether Mr Hepburn ever signed a confidentiality agreement with Hydrocool. Mr Hepburn said that he had not signed such an agreement. Hydrocool was unable to adduce into evidence any such agreement. Dr Teplitzky gave evidence that Mr Hepburn had told him that he had signed a confidentiality agreement. However, Dr Teplitzky’s evidence was that Mr Hepburn made the statement that he had signed the confidentiality agreement, at a time when Mr Hepburn had not yet commenced employment with Hydrocool. Further, Dr Teplitzky was not able to produce any copy of any confidentiality agreement signed by Mr Hepburn.
195 I find that Hydrocool did not establish, on a balance of probabilities, that Mr Hepburn did sign the confidentiality agreement alleged by Hydrocool.
196 Finally, Hydrocool claimed from Mr Hepburn the payment of the sum of AUD33,280 and interest. This claim arose from the fact that Mr Clarke, on the instructions of Mr Hepburn, paid to a bank account nominated by Mr Hepburn, the sum of AUD33,280 on the day that Mr Hepburn was dismissed, on the basis that Mr Hepburn was then entitled to a bonus payment in respect of the 2003/2004 financial year.
amendments to the defence
197 At the commencement of the trial, Mr Hepburn and Mr Clarke sought leave to amend their respective defences by the insertion of a paragraph in the defence (para 64A of Mr Hepburn’s defence and para 56A of Mr Clarke’s defence) which contended that Hydrocool should be denied relief on the grounds that it had “unclean hands” because Hydrocool had, in its dealings with Water Master, engaged in unlawful conduct, including misleading or deceptive conduct, and breached its contractual duty to each of Mr Hepburn and Mr Clarke and the engineers, not to do anything likely to destroy the relationship of confidence between employer and employee.
198 I refused Mr Hepburn and Mr Clarke leave to make the proposed amendment on the grounds that the amendment was pleaded at too high a level of generality. I also found that, in light of the serious nature of the allegations made against the directors of Hydrocool and the consequential delays which would ensue if the amendments were allowed, the application for leave to amend was made too late. I relied on the principles in the case of Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175. However, notwithstanding that I refused leave to amend their defences, much of Mr Hepburn’s and Mr Clarke’s closing submissions read as if I had granted leave to amend their defences.
199 I did, however, give Mr Hepburn and Mr Clarke leave to amend their respective defences to plead that, if each of them breached any duties (which each denied), he acted honestly at all times, having regard to all the circumstances of the case, and that the Court should relieve each of them wholly from liability pursuant to s 1318 of the Corporations Act.
the applicant’s witnesses
Dr David Teplitzky
200 Dr Teplitzky is the former executive chairman and director of Hydrocool. Dr Teplitzky gave evidence in person.
201 Mr Hepburn and Mr Clarke attacked the credibility of Dr Teplitzky. One criticism of his evidence was founded on an answer which Dr Teplitzky gave in cross-examination, when being asked his view of the consequences of shutting down the Fremantle operations. The impugned answer was:
You asked me the question about – whether it would lead to the resignation of Mr Clarke. That matter did not enter my head at all…
202 Mr Hepburn and Mr Clarke contended that by giving this answer, Dr Teplitzky sought to mislead the Court, because there were at least two documents which showed that before 19 October 2004, Dr Teplitzky contemplated the possibility that Mr Clarke may resign or that his employment would be terminated. One was a memorandum to the shareholder representatives of Hydrocool dated 5 September 2004 and another was a confidential note to Dr Araujo and Mr McMillan of Symetrix drafted in August 2004.
203 In my view, however, the evidence of Dr Teplitzky when read in its full context, does not support the contention that Dr Teplitzky was seeking to mislead the Court into believing that it had never crossed his mind that there was a prospect that if the managing director was dismissed, or the Fremantle premises were closed, Mr Clarke’s employment would also cease.
204 Earlier in his cross-examination, Dr Teplitzky had given answers to the effect that he would not be surprised if Mr Clarke resigned if Mr Hepburn’s employment was terminated, or if the premises in Fremantle were closed. Further, the full answer which Dr Teplitzky gave was as follows:
That matter did not enter my head at all, and subsequently I was not surprised when Mr Clarke did resign.
205 Mr Hepburn and Mr Clarke also impugned the character of Dr Teplitzky.
206 First, during the trial, it was contended that during 2004, Dr Teplitzky was a director of Symetrix and that Dr Teplitzky had not disclosed a conflict of interest when the matters affecting Symetrix were discussed at the board of Hydrocool. This contention was based on a statement in an affidavit of Dr Teplitzky that he was a director of Symetrix in 2004. During his cross-examination, Dr Teplitzky said that he became a director of Symetrix in early 2004.
207 However, after the trial was adjourned pending the making of closing submissions, Hydrocool applied to reopen its case to lead evidence that demonstrated that Dr Teplitzky was not, in fact, a director of Symetrix during 2004, as he had previously said.
208 At a hearing on 18 August 2010, I gave Hydrocool leave to reopen its case and Hydrocool called evidence from Ms Sue Doucette. Ms Doucette gave evidence by videolink from the United States. Ms Doucette deposed that, since 1993, she had been the controller of Symetrix and, since 2007, the business manager of Symetrix. Ms Doucette produced documents from Symetrix’s records which recorded that Dr Teplitzky was appointed a director on 1 June 2006. This document was consistent with annual franchise tax reports filed pursuant to the laws of the State of Delaware. Ms Doucette gave evidence that she had, herself, in June 2006, typed the Symetrix document which evidenced the appointment of Dr Teplitzky as a director from 1 June 2006. I accept the evidence of Ms Doucette. I find that Dr Teplitzky was not a director of Symetrix during 2004 and 2005.
209 Accordingly, I reject the contention that Dr Teplitzky was affected by a conflict of interest in 2004, by reason of him being a director of Symetrix.
210 It was also suggested that Dr Teplitzky withheld information from the board of Hydrocool. It was said that he had not included in his report to the directors of Hydrocool that he had advised Dr Araujo and Mr McMillan that it was his view that he would need to remove the role of Fremantle in relation to the Symetrix project, and that he doubted whether Mr Hepburn and Mr Clarke would remain with the Symetrix project or Hydrocool.
211 It was said that Dr Teplitzky acted improperly by not mentioning this discussion when he reported to the board of Hydrocol on his visit to Symetrix.
212 In light of the fact that the content of the information touched upon the future employment of Mr Hepburn, it cannot be said that it was improper of Dr Teplitzky, not to disclose that aspect of his visit to Symetrix, but rather to refer the gravamen of his discussion on this topic, to the representatives of the shareholders of Hydrocool, as he did in early September 2004.
213 There was also some criticism in relation to Dr Teplitzky’s evidence about sending a confidential memorandum to Dr Araujo and Mr McMillan, but when the evidence which Dr Teplitzky gave on the second day of the hearing is examined, it is apparent that Dr Teplitzky accepted that he had sent the memorandum to Dr Araujo and Mr McMillan.
214 A third criticism of Dr Teplitzky’s conduct was that he misled Water Master in relation to the purpose for which the licence fee payable by Water Master, would be used. Mr Hepburn and Mr Clarke said that during the course of negotiations with Water Master, Dr Teplitzky said that “the cost of the development will be paid out of that fee”. It is then said, that Dr Teplitzky did not intend to use the licence fee only for the purpose of meeting the development costs of the Water Master project. This allegation is based on the fact that Dr Teplitzky wrote to Mr Hepburn saying that the licence fee would be used in the manner that the company thought fit, and that Dr Teplitzky contemplated that some of the fee might be used to fund the Symetrix research and development.
215 Mr Hepburn’s and Mr Clarke’s submission is not accepted.
216 Dr Teplitzky’s impugned statement made during the negotiations, is not inconsistent with using the licence fee both for the Water Master project and other company purposes. Further, the Water Master heads of agreement did not contain a provision that confined the use of the monies comprising the licence fee, only for the purpose of funding the Water Master project.
217 Accordingly, I reject the contention that Dr Teplitzky’s evidence should be rejected on the basis of these criticisms of his conduct.
218 Mr Hepburn and Mr Clarke also criticised Dr Teplitzky’s evidence in relation to the closing down of the Fremantle operation.
219 At para 34 of his first affidavit, Dr Teplitzky said that, at the time that he dismissed Mr Hepburn, he did not anticipate that there would be an en masse resignation of the engineers, and he had intended to discuss with the engineers the possibility of them relocating to Sydney.
220 At para 35 of his first affidavit, Dr Teplitzky went on to say that if the engineers were not prepared to relocate to Sydney, it was his intention to maintain the operations in Fremantle under the control of a new managing director and himself to ensure that the Water Master project would be satisfactorily completed.
221 Mr Hepburn and Mr Clarke criticised the evidence in para 35 of Dr Teplitzky’s affidavit, because contemporaneous documentation showed that before he dismissed Mr Hepburn on 19 October 2004, Dr Teplitzky had already instructed Grant Thornton to close down the Fremantle operations.
222 I accept the contention of Mr Hepburn and Mr Clarke.
223 Although, in general, Dr Teplitzky gave his evidence to the best of his ability, his evidence in relation to the closing down of the Fremantle operations, is to be approached with caution.
Mr Stephen Murphy
224 Mr Murphy is the sole director and company secretary of Hydrocool. Mr Murphy gave his evidence in person.
225 Mr Hepburn and Mr Clarke criticised Mr Murphy’s evidence in two main respects. First, it was suggested that Mr Murphy failed to distinguish accurately between the effect of cl 3.5 and cl 3.6 of the draft heads of agreement. Secondly, it was said that Mr Murphy misstated the basis on which Mr Hepburn expressed his opposition to the continued funding of the Symetrix project, at the 24 September 2004 board meeting.
226 In my view, neither of the criticisms justifies an adverse credibility finding in relation to Mr Murphy’s evidence.
227 Mr Murphy appreciated that one of the clauses (cl 3.6) precluded Hydrocool making the employees redundant. However, he was of the view that the clause (cl 3.5) which called upon the employees to give an undertaking to Water Master to remain with Hydrocool for the duration of the Water Master project, in some way potentially affected Hydrocool, and he said that Hydrocool had no power to stop employees from leaving. Mr Murphy appreciated that it was the employees who were giving the undertaking to Water Master, but, in the manner in which he could not recall, he believed that there was some link between cl 3.5 and cl 3.6. Whereas, legally speaking, there may not have been any such link, Mr Murphy’s belief that there was such a link, does not amount to an attempt to mislead the Court or to give false evidence, and does not afford a basis for making an adverse credibility finding against him. I do not accept that in giving his evidence, Mr Murphy refashioned his evidence, as Mr Hepburn and Mr Clarke contended.
228 The same is true in relation to the fact that Mr Murphy initially misstated the basis upon which Mr Hepburn had, at the 24 September 2004 board meeting, expressed his opposition to the further funding of the Symetrix project. After Mr Murphy examined the transcript of the board meeting, Mr Murphy conceded that he had made a mistake. In my view, Mr Murphy’s initial evidence amounted to no more than an understandable mistake in recollection, which does not afford a basis upon which to make an adverse credibility finding against Mr Murphy.
229 During his cross-examination, Mr Murphy was prepared to make reasonable concessions, and I find that Mr Murphy gave his evidence to the best of his ability.
Dr Michael Bellstedt
230 Dr Michael Bellstedt is a thermal engineering consultant. He gave evidence by videolink and was cross-examined. Dr Bellstedt gave expert evidence relating to the technical aspects of the commercialisation of the CPU cooler unit and the water from air device.
231 Dr Bellstedt’s credibility was not impugned.
Mr Paul McGrath
232 Mr Paul McGrath is a marketing consultant. Mr McGrath gave evidence by videolink and was cross-examined. His expert report addressed the potential market for CPU coolers and commercial water from air manufacturing devices. No issues of Mr McGrath’s credibility arose in the case. However, during cross-examination, Mr McGrath had some difficulties in justifying the opinions expressed in his report, particularly, in relation to the addressable market for CPU cooler units. In its closing submissions, Hydrocool only relied on isolated parts of Mr McGrath’s report.
Mr John Skillecorn
233 Mr Skillecorn gave his evidence in person.
234 Mr Hepburn and Mr Clarke did not impugn the credibility of Mr Skillecorn’s evidence. However, criticism was made of the skill and competence of Mr Skillecorn in relation to his attempts to commercialise the Hydrocool technology after 2005. I deal with that criticism later in the reasons.
the respondents’ witnesses
Mr Iain Hepburn
235 Mr Hepburn gave his evidence in person.
236 I have later in these reasons, dealt with, and rejected, important elements of Mr Hepburn’s evidence. These elements include his denial that the idea of Water Master insisting upon the employment commitment as a term of the Water Master heads of agreement emanated from him, his explanation of the “idea” to which he referred in his email of 27 September 2004 to Mr Clarke and the engineers, his evidence in re-examination that he was authorised by the board at the 24 September 2004 meeting, to enter into the Water Master heads of agreement without first getting the approval of the directors to the Abbott Tout draft amendments.
237 In relation to these aspects of Mr Hepburn’s evidence, I have given reasons for rejecting the evidence. Primarily, the evidence was rejected because it conflicted with contemporaneous documents.
238 However, particularly damaging to Mr Hepburn’s credibility, in my view, was the fact that he took advantage of the opportunity given to him by his counsel, to adopt a construction of the transcript of the board meeting of 24 September 2004, which was contrary to the instructions which the board gave him, and which was contrary to his contemporaneous understanding of those instructions. The fact that Mr Hepburn was prepared to tailor his evidence in this way when he perceived that there may be some advantage to him in doing so, substantially undermined his credibility.
239 Mr Hepburn’s evidence is to be approached with caution.
Mr Peter Clarke
240 Mr Clarke gave his evidence in person.
241 Mr Clarke was an evasive witness. In an approach to giving evidence similar to that adopted by Mr Manners, and to a lesser extent, Mr Weymouth, Mr Clarke said that he had no recollection or no specific recollection, of many of the significant emails and events relating to Mr Hepburn’s plan, the events which occurred at the Fremantle premises in relation to the Water Master project, and the activities in which he engaged in opposing the board and Dr Teplitzky. Mr Clarke also sought to downplay his interest, and involvement, in Mr Hepburn’s plan. Mr Clarke deposed that Mr Hepburn was in the habit of sending him emails which comprised “musings” by Mr Hepburn.
242 The contemporaneous evidence is at odds with the detached role which Mr Clarke sought to portray. I do not accept that Mr Clarke had such a limited recollection of the emails and events to which he deposed. He is a relatively young man and has been personally involved in this litigation for a number of years. In my view, Mr Clarke used this technique as a stratagem to avoid giving candid evidence.
243 Mr Clarke’s evidence must be approached with caution.
Mr Mark Heazlett
244 Mr Heazlett was a director of ATG in late 2004. Mr Heazlett gave evidence by videolink of the reports which ATG received during 2004, regarding the focus of Hydrocool’s business activities and plans. Mr Heazlett’s credibility was not impugned.
Mr Dermott McVeigh
245 Mr McVeigh was employed by Grant Thornton at the time that Grant Thornton was engaged by Dr Teplitzky to take control of the Hydrocool premises in Fremantle on 19 October 2004. Mr McVeigh gave his evidence in person. Mr McVeigh’s credibility was not impugned.
Mr John Christian
246 Mr Christian visited the Fremantle operations of Hydrocool on 15 July 2004, for the purpose of carrying out an inspection and reporting to Mr Richardson as part of a due diligence exercise by Water Master in relation to the proposed licence agreement. Mr John Christian gave his evidence by videolink from New Zealand.
247 Mr Christian was cross-examined about the circumstances in which he had made his affidavit in this case. He said that he had no documents from which to refresh his memory before making his affidavit. Mr Christian said that Mr Hepburn had telephoned him and discussed aspects of the case with him before he made his affidavit.
248 I have referred to an extract from Mr Christian’s cross-examination below. As emerges from that cross-examination, Mr Christian admitted that he may have tailored his evidence in accordance with what he had been told by Mr Hepburn.
249 I formed the impression that Mr Christian’s affidavit had been tailored in order to meet the requirements of the respondents’ case.
250 I place no weight on Mr Christian’s evidence.
Mr Brett Manners
251 Mr Manners was one of the engineers. Mr Manners gave evidence in person.
252 Mr Manners deposed that he did not have a recollection or only a limited recollection, of virtually all of the important emails and events in the case.
253 Mr Manners’ evidence was singularly and deliberately unhelpful. I do not accept that Mr Manners, a relatively young man, would have such a limited recollection of events, such as those in question in this case, which had such a dramatic impact on his professional life.
254 I place no weight on Mr Manners’ evidence.
Mr Robert Weymouth
255 Mr Weymouth was also one of the engineers. Mr Weymouth gave his evidence in person. Mr Weymouth also said that he did not recall receiving most of the important emails relating to the employment commitment issue, his and the other engineers’ relationship with Water Master, the activities of the Fremantle based employees in opposing the board and Dr Teplitzky, and the Symetrix project.
256 I do not accept that Mr Weymouth had a limited recollection of these matters. Mr Weymouth is also a relatively young man and has been actively involved in the interlocutory aspects of this case.
257 I approach Mr Weymouth’s evidence in relation to those matters with caution.
258 However, Mr Weymouth’s evidence was more helpful and candid in relation to other aspects of the case. This included the telephone discussion with Mr Richardson on 5 October 2004 and the withdrawal of the employee commitment, the meeting with Dr Teplitzky and the other engineers on 6 October 2004, and the lead up to the dismissal of Mr Hepburn and the en masse resignation of the engineers and Mr Clarke on 19 October 2004. Mr Weymouth also gave credible evidence in relation to the ongoing problems with the HS5 convector.
Mr Garth Richardson
259 Mr Richardson was initially a respondent. Whilst he was still a respondent, Mr Richardson prepared a number of witness statements. One of those witness statements was dated 9 September 2009. However, after Hydrocool settled its claim against Mr Richardson, Mr Richardson was called as a witness by Mr Hepburn and Mr Clarke. Before giving evidence as a witness as part of Mr Hepburn’s and Mr Clarke’s case, Mr Richardson prepared another witness statement, dated 29 March 2010. This witness statement was tendered along with his previous witness statements.
260 Mr Richardson gave his evidence in person. Mr Richardson gave his evidence for the most part in a confident and jaunty fashion.
261 However, I noticed that his confidence and the demeanour changed when he was asked questions about the use of language which had been supplied to him by Mr Hepburn in his response to Hydrocool in relation to the requirement that Hydrocool continued to employ the engineers on the Water Master project. His jauntiness disappeared and his answers were stilted and unconvincing.
262 I set out below an extract from his cross-examination in relation to this issue:
No, good. You received an email from Dr Teplitzky and forwarded that, did you not, to Mr Hepburn?---I told them that he had called, yes.
Did – you were prepared to have your response to Dr Teplitzky prepared by Mr Hepburn?---Yes, yes, he told me a lot.
Did it strike you, at all, as a businessman and a company director yourself, as odd that the managing director of a company was drafting your responses to his own board in a hard fought commercial negotiation?---Yes, it was very, very clever this, it told me a lot of things about what was going on inside Hydrocool. When you asked the managing director the – my reply to the chairman – that told me a lot. I didn’t have to use it, but I did.
I’d suggest to you that it wasn’t a surprise to you at all at that time, because it is an echo of exactly what had happened on 20 and 21 August with the previous document. Mr Hepburn was in the habit of drafting documents for you, wasn’t he?---Yes, he was good at that.
263 Mr Richardson also gave evidence that the employment commitment idea emanated from discussions within Water Master’s negotiating group during the June 2004 negotiations in Perth, and Mr Christian. I have found that this evidence was inconsistent with contemporaneous materials, and have rejected it on that basis.
264 Mr Richardson’s evidence is to be approached with caution.
the employee commitment issue
265 At the forefront of Hydrocool’s case at trial, was the contention that Mr Hepburn acted in breach of duty, in furtherance of his plan to benefit himself, Mr Clarke and the engineers, by influencing Water Master to require that Hydrocool agree to a term in the Water Master heads of agreement, that Mr Hepburn, Mr Clarke and the engineers, be retained in employment by Hydrocool for a period of two years. This was referred to by the parties, at trial, as the employee commitment issue.
266 In relation to this contention, Hydrocool relied upon three causes of action against Mr Hepburn.
267 The first cause of action claimed that in breach of his fiduciary duty, Mr Hepburn failed to avoid a conflict between his interest in implementing his plan and his duty to act in the interests of Hydrocool. Hydrocool claimed that Mr Hepburn did not disclose his personal interest to the company; and, that, in his dealings with Water Master, he sought to prefer his interest and the interests of third parties, to his duty to act in the interests of the company.
268 The second cause of action claimed that Mr Hepburn contravened s 182(1) of the Corporations Act, by improperly using his position as a director with responsibility for the day-to-day dealings with Mr Richardson in relation to the proposed Water Master licence agreement, to gain an advantage for himself, Mr Clarke and the engineers.
269 The third cause of action claimed that in the course of engaging in his dealings with Water Master, Mr Hepburn contravened s 183(1) of the Corporations Act by improperly using information which he gained because of his position as a director of Hydrocool, to gain an advantage for himself, Mr Clarke and the engineers.
Breach of fiduciary duty
270 I deal first, with the claim that Mr Hepburn, in implementation of his plan, acted to influence Water Master to require the inclusion of the employment commitment term in the proposed Water Master heads of agreement, without disclosing his plan, nor his intention to implement the plan, nor his activities in furtherance thereof. In so doing, contended Hydrocool, Mr Hepburn failed to avoid a conflict between his interest and duty, and so breached his fiduciary duty to Hydrocool.
271 Mr Hepburn admitted in his defence that he owed fiduciary duties as a director of Hydrocool, including a duty to avoid a conflict of interest and duty. However, said Mr Hepburn, he did not, during the time when he was dealing with Mr Richardson, have the conflicting private interest alleged by Hydrocool.
Did Mr Hepburn have a conflict of interest and duty?
272 The first question, therefore, is whether Mr Hepburn had a conflict of interest and duty as alleged by Hydrocool. Hydrocool placed considerable weight on the content of Mr Hepburn’s email of 16 July 2004, in support of its contention.
273 Hydrocool contended, however, that even before 16 July 2004, when he sent his email to Mr Clarke, Mr Hepburn had developed a plan to secure the long-term employment of himself, Mr Clarke and the engineers, by using whatever strategy was available. However, said Hydrocool, by mid-July 2004, Mr Hepburn’s plan had evolved to a plan which included a stratagem whereby he would seek to influence Water Master to require the employment of himself, Mr Clarke and the engineers for the duration of the proposed Water Master project, as a condition of the Water Master licence agreement, as a means to secure his objective.
274 Mr Hepburn and Mr Clarke contended that no weight should be placed on Mr Hepburn’s email to Mr Clarke of 16 July 2004, as comprising evidence of Mr Hepburn’s undisclosed plan.
275 In cross-examination, Mr Hepburn deposed as follows:
Thank you. Now, just quickly, just follow through so we have the outline of the plan clear. It’s in bullet points and the fourth bullet point is:
Therefore, Watermaster need Hydrocool to have two-year employment contracts with their employees. This has no downside for Watermasters.
Correct?---That’s what it says.
Yes?---It probably wasn’t necessary.
No, but it was part of what you call your “plan”, that there should be two-year employment contracts with the employees?---You keep referring this to a “plan.” I would refer it to just a concept that I was putting down in writing so that I could think more about it, I could get some feedback from Peter. If it was a good idea either put it to the board. It is not a plan that was planned to be enacted.
I think you - - -?---It was an idea that was being formulated.
I think you will have to forgive me for that, Mr Hepburn, because at paragraph 6.22 of your statement which you swore was true this afternoon you said:
I started to formulate a plan in my mind which might achieve the objective.
?---Yes. It’s formulating a plan.
Yes, yes. Well, then I can call it a “plan,” may I not?---Please go ahead.
In the email itself just under where it says, “Regards, Ian,” it has got “plan:” and then a series of bullet points?---It is a plan.
Yes, thank you. The bullet points are the elements of the plan, are they not?---Correct.
276 In their closing submissions, Mr Hepburn and Mr Clarke referred to Mr Hepburn’s email of 16 July 2004, as nothing more than a “thought bubble” which was not intended to be acted upon.
277 For the following reasons, I do not accept this contention by Mr Hepburn and Mr Clarke.
278 I find that by around the middle of 2004, Mr Hepburn believed that Hydrocool’s parlous financial condition posed a threat to the continued employment of one or more of the Fremantle based staff; and that Mr Hepburn was then prepared to put pressure on the board of Hydrocool by such stratagem as he could devise, to secure the long-term employment of the Fremantle based staff.
279 That finding is founded on the contents of Mr Hepburn’s email of 31 May 2004 and the subsequent action which Mr Hepburn took, with Mr Clarke’s assistance, to produce the engineers’ letter. In his email of 31 May 2004, Mr Hepburn reported to Mr Clarke that questions were being raised at the board about the work output of the Fremantle based staff. Mr Hepburn went on to comment that: “We do not need renewed pressures for personnel reductions at this time”. Shortly, thereafter Mr Hepburn prepared the engineers’ letter which, in effect, threatened the board with the en masse resignation of the engineers if any one of them was made redundant. It is significant that in the engineers’ letter, Mr Hepburn stated that “the full participation of all existing personnel” would be required to complete the optimisation process in relation to any successes achieved by the Symetrix research. There is a similarity between this stratagem and the stratagem subsequently deployed, of asserting that all Fremantle based staff would be required for the Water Master project.
280 Although Mr Hepburn did not use the engineers’ letter at the June 2004 board meeting, the fact that he went to the meeting armed with that letter, and was prepared to use the letter if the need arose, demonstrated the seriousness of Mr Hepburn’s intention, at that time, to take action to secure the long-term employment of the Fremantle based staff.
281 I infer further that by 6 July 2004, Mr Hepburn had determined that the objective of securing the long-term employment of the Fremantle based staff, could be achieved by adopting a different stratagem, namely, by persuading Water Master to request, as part of the proposed licence agreement, that the Hydrocool employees be given two year employment contracts, as a response to Hydrocool’s request that Water Master pay an upfront licence fee. This inference is founded on the terms of Mr Hepburn’s email to Mr Clarke of 6 July 2004. In that email Mr Hepburn referred to a term benefiting the Hydrocool employees, as a term “which Water Master in their wisdom might request”. Mr Hepburn’s use of that ironic language further supports the inference that Mr Hepburn contemplated that it would be he who would be imparting the “wisdom” to Water Master.
282 The fact that Mr Hepburn had during the period from the end of May to the beginning of July 2004, continued to devote time and energy devising alternative stratagem whereby the board of Hydrocool could be pressured into securing the long-term employment of the Fremantle based employees, further supports the finding of the seriousness of Mr Hepburn’s intent to take action to secure the long-term employment of the Fremantle based staff.
283 Further, support for the inference that Mr Hepburn by July 2004, had devised a plan which he intended to implement, is to be found in the email which Mr Hepburn sent to Mr Clarke and the engineers on 27 September 2004, enclosing an email from Mr Richardson to Mr Hepburn.
284 Mr Hepburn’s email to Mr Clarke and the engineers stated inter alia:
See email from Garth below. This is progressing from an idea in my head, to an idea put in Garth’s head, to an option, to a likely outcome.
285 Mr Richardson’s email to Mr Hepburn advised that Water Master was keen to take a shareholding position in Hydrocool if ATG was prepared to sell its shares, and Water Master was favourably disposed to a management buyout by the Hydrocool staff - an important element of Mr Hepburn’s plan.
286 I infer from Mr Hepburn’s email, that Mr Hepburn had intended to implement his plan, and that he entertained a sense of pride in the progress he was making in that regard.
287 Mr Hepburn’s explanation in cross-examination, that the “idea” to which he referred was restricted to the prospect he had discussed with Mr Richardson in June 2004, of Water Master acquiring ATG’s shares, is unconvincing, and is rejected. It fails to deal with the additional element in Mr Richardson’s email, that Water Master was favourably disposed to the management buyout.
288 I find that by 6 July 2004, Mr Hepburn had formulated a plan, which he intended to implement, whereby he would use the opportunity afforded by Water Master’s desire to enter into contractual relations with Hydrocool, to achieve the objective of securing long-term contracts of employment for himself, Mr Clarke and the engineers. Associated with that objective was an objective of stopping further funds being expended on the Symetrix project after 31 December 2004. This would free up resources for the Fremantle based operations.
289 I find that by 16 July 2004 at the latest, bearing in mind that in Mr Hepburn’s memorandum of 24 June 2004, he was contemplating the possibility of a Hydrocool management buyout of the ATG shares, Mr Hepburn’s plan also included the securing of a substantial employee shareholding in Hydrocool and an attendant restructuring of the board, so that Mr Clarke would become a director of Hydrocool and he and Mr Clarke would then have substantially more influence over the affairs of Hydrocool than they then had.
290 I also infer from the findings of fact, that I have made below, as to the steps taken by Mr Hepburn in implementation of his plan, that Mr Hepburn intended to implement the plan, he later described in his email of 16 July 2004.
291 I also find that approximately two weeks prior to the visit of Mr Christian to Fremantle, Mr Clarke had advised Dr Teplitzky and Mr Hepburn that the Water Master project would require only two engineers, and that Mr Hepburn had agreed that Mr Clarke’s assessment was a “reasonable guesstimate”.
292 Further, it is apparent from the terms of Mr Hepburn’s emails of 6 July 2004 and 16 July 2004, that Mr Hepburn was aware that the long-term employment of the engineers would have an adverse effect on the balance sheet of Hydrocool, which was in a parlous financial position. In his email to Mr Clarke of 6 July 2004, Mr Hepburn acknowledged that long-term contracts of employment would cause Hydrocool to become insolvent sooner than would otherwise be the case.
293 It follows that I find that by mid-July 2004, before Mr Christian arrived in Fremantle for his visit, Mr Hepburn intended to use his position as managing director with responsibility for the day-to-day negotiations of the licence agreement with Water Master, to achieve objectives which would benefit himself, Mr Clarke and the engineers, which was in conflict with the duty he owed to Hydrocool, which was to act in its best interests.
294 Two further questions arise, namely, first, whether Mr Hepburn disclosed his plan, or his intention to implement the plan, to the board of Hydrocool; and secondly, whether Mr Hepburn took steps to implement the plan to have Water Master require the employment commitment as a term of the licence agreement.
Did Mr Hepburn disclose his plan, or his intention to implement the plan?
295 Mr Hepburn accepted that he did not disclose his plan, nor his intention to implement the plan, to the board of Hydrocool. I find that he never intended to disclose the plan, or his intention to implement the plan, to the board.
Did Mr Hepburn take steps to implement his plan to influence Water Master to require the employment commitment?
296 As mentioned, Hydrocool contended that, as part of the implementation of his plan, Mr Hepburn influenced Water Master to require that Hydrocool agree to the employee commitment as a condition of entering into the licence agreement with Hydrocool.
297 Mr Hepburn and Mr Clarke denied Hydrocool’s allegation. They contended that the employee commitment requirement was a requirement which emanated from Water Master, not from Mr Hepburn.
298 Mr Hepburn and Mr Clarke contended, in their closing submissions, that even before the visit of Mr Christian to Fremantle in July 2004, Mr Richardson had communicated a requirement that Water Master required all the engineers to be engaged throughout the term of the project. In support of that contention, Mr Hepburn and Mr Clarke relied upon the evidence of Mr Richardson.
299 Mr Richardson deposed that at the conclusion of the initial visit to the Fremantle premises in early June 2004, he explained to Mr Clarke and Mr Hepburn the importance to Water Master of freezing water from air. Mr Richardson said that Mr Clarke informed him that Hydrocool had recently built a thermoelectric refrigerator freezer for MARCO using the current team of engineers. Mr Clarke said that Hydrocool had two other engineers who were working in the United States on materials research with a company called Symetrix, and that those engineers had been helping Mr Clarke with modelling for the water maker project and would continue to be involved in the project.
300 In his witness statement of 29 March 2010, Mr Richardson said that during the course of the meeting on 28 and 29 June 2004, Dr Teplitzky proposed that Water Master pay a fee of USD1 million for developmental work, with half payable on the signing of the agreement and the balance in two tranches over 12 months. Mr Richardson deposed that he had a meeting with other members of the Water Master negotiating team at which concern was expressed at Hydrocool’s proposal that Water Master pay an upfront licence fee. Mr Richardson went on to depose that when the meeting with Dr Teplitzky, Mr Hepburn and Mr Clarke resumed, he said words, to the effect that, “we need to be sure that all staff will be available for the project”.
301 In his witness statement of 9 September 2009, Mr Richardson said that when confronted at the meeting by the request for the USD1 million licence fee:
the only thing I could think of at the time was to apply pressure to Hydrocool to provide some form of assurance that they would use all of its resources to undertake our project.
302 For the following reasons, I do not accept that Mr Richardson said anything during the course of the meeting on 28 and 29 June 2004, that conveyed the impression to the representatives of Hydrocool that Water Master would require all the staff to be available for the duration of the project, as a term of the proposed licence agreement.
303 First, the draft heads of agreement document which was prepared by Mr Hepburn, only a few days after the meeting of 28 and 29 June 2004, did not contain any mention of a requirement for Hydrocool to have all staff to be available for the duration of the project.
304 Secondly, Dr Teplitzky kept notes of the meeting on 28 and 29 June 2004, from which he prepared a report of the meeting for the board. There is no mention of Mr Richardson referring to the need for all staff to be employed for the duration of the project in that report. In light of Mr Hepburn’s statements in his email to Mr Clarke of 16 July 2004, that any such requirement would be strongly opposed by Dr Teplitzky, it would be reasonable to assume that had Mr Richardson communicated any such requirement during the meeting of 28 and 29 June, Dr Teplitzky would, at the very least, have made a note of this requirement. This is particularly so, in light of the fact that it is common cause that during that meeting, Dr Teplitzky expressed in emphatic terms his opposition to Mr Richardson’s proposal that Water Master take equity in Hydrocool. Dr Teplitzky recorded this exchange in his report to the board. I find that had Mr Richardson made any mention of a requirement that Hydrocool retain all the staff for the duration of the project, Dr Teplitzky would have expressed his disagreement with that proposal and would have recorded the exchange with Mr Richardson in his report to the board – just as he did in relation to Mr Richardson’s proposal to take equity in Hydrocool.
305 Thirdly, there is no mention of the employee commitment in the communications between Hydrocool and Water Master between 29 June 2004 and 15 July 2004, being the date of Mr Christian’s visit.
306 Fourthly, in the defences filed on behalf of Mr Richardson and Water Master, particulars are given as to when it was asserted that the request was made to Hydrocool for the employee commitment term. No reference is made in those particulars to a request being made at the meeting on 28 and 29 June 2004.
307 In support of their contention that the employment commitment term emanated from Water Master, Mr Hepburn and Mr Clarke also relied on the evidence of Mr John Christian, and Mr Hepburn.
308 Mr Christian deposed that after his visit to Hydrocool’s Fremantle premises, he advised Water Master that it needed to ensure that all Hydrocool staff were employed on the project. He said that he advised Mr Clarke and Mr Hepburn to that effect during his visit to the Fremantle premises in July 2004, and they advised him to convey that opinion to Mr Richardson.
309 Further, Mr Hepburn stated in his witness statement, that he played no part in, as he put it, “grooming” Water Master to insist on the employment commitment. In cross-examination, Mr Hepburn also denied the allegation that the idea of Water Master requiring the employment commitment had emanated from him.
310 I do not accept the evidence of Mr Christian and Mr Hepburn on this question.
311 First, it emerged during his cross-examination, that Mr Christian had a flawed recollection of the meeting in Fremantle. He referred to having had discussions with Mr Clarke at the meeting and to Mr Clarke and Mr Hepburn having suggested that he convey his opinion as to the need to ensure all Hydrocool staff were employed on the project, to Mr Richardson. The following exchange occurred during the cross-examination of Mr Christian:
So I want to suggest to you, Mr Christian, that Mr Clarke wasn’t there at all, at Fremantle, on the day of your visit. What do you say to that suggestion?---I met four people, all right, and Mr Hepburn – the one person that I do recall, all right. The other three people I couldn’t identify their names, I’m sorry.
So where did you manage to get Mr Clarke’s name from when you gave the specific evidence in paragraph 8 of your affidavit that you met the R & D Manager, Mr Clarke. Where did that come from if you can’t now recall their name?---Pass on that point.
So I want to suggest to you, Mr Christian, that at this time Mr Clarke was in fact in Europe holidaying, I think in Croatia. Does that – do you have any understanding one way or the other about that question?---Not at all, sorry.
I want to suggest to you that the reason that you put Mr Clarke’s name and described him as the R & D Manager, Mr Clarke, in paragraph 8 of your affidavit, first, was because Mr Hepburn suggested that you make sure you mention Mr Clarke?---That’s possible.
312 In fact, Mr Clarke did not attend any meeting with Mr Christian because Mr Clarke was in Croatia at the time. Further, Mr Christian admitted during cross-examination, that prior to drafting the affidavit, he had had discussions about the affidavit with Mr Hepburn. In light of these circumstances, I place no weight on Mr Christian’s evidence.
313 Secondly, the evidence is at odds with a contemporaneous email referred to at [67] above, which Mr Hepburn sent to Mr Clarke on 16 July 2004, in which Mr Hepburn advised Mr Clarke that he had “primed” Mr Christian to discuss the employment commitment issue with Mr Richardson.
314 Further, in his email of 16 July 2004, Mr Hepburn advised Mr Clarke that Mr Christian would advise Mr Richardson on the need to retain all the engineering expertise to complete the project on schedule. I infer that this advice was to occur as a consequence of Mr Hepburn’s “priming” of Mr Christian.
315 Further, that Mr Hepburn would “prime” Mr Christian to discuss the employment commitment condition with Mr Richardson is consistent with Mr Hepburn’s stratagem as expressed in his email to Mr Clarke of 6 July 2004, shortly before Mr Christian’s visit, of having Water Master request, as a condition of the licence agreement, a commitment by Hydrocool to give the staff a two year employment contract.
316 Also, had Mr Christian, in fact, held and expressed the view to Mr Hepburn that all Hydrocool staff were needed for the project, there would have been no need to “prime” Mr Christian to report that view; as the very purpose of Mr Christian’s visit was that he would report his honest opinion to Mr Richardson.
317 I place greater weight on the contemporaneous documentation as comprising a more accurate reflection of the events that occurred, than the oral evidence given by each of Mr Christian and Mr Hepburn years later; and when Mr Hepburn had an interest in defending himself against Hydrocool’s allegations of breach of duty.
318 I find, therefore, that during discussions in mid-July with Mr Christian in Fremantle, Mr Hepburn encouraged Mr Christian to include in his report to Mr Richardson, a statement that there was a need for Hydrocool to retain all its engineering expertise to ensure that the project was completed on time. This was, notwithstanding the fact, that only a week earlier, Mr Clarke had prepared a report for Mr Hepburn and Dr Teplitzky in which he estimated that the Water Master project would only require two engineers to work on the project, and that two of the Fremantle based engineers, Mr Davis and Mr Weymouth, should be reserved for other duties.
319 I also rely on the following items of evidence to support my finding that the idea that Water Master insisted on the employee commitment from Hydrocool as a term of the Water Master licence agreement, was an idea that emanated from Mr Hepburn.
320 First, as I have already mentioned, in his email of 27 September 2004 to Mr Clarke and the engineers, Mr Hepburn, in commenting on an email from Mr Richardson approving the engineers obtaining a stake in Hydrocool, confided in Mr Clarke that the process was progressing from an idea in his head, to an idea put in Mr Richardson’s head, to a likely outcome.
321 As previously mentioned, I reject Mr Hepburn’s evidence in cross-examination that the idea to which he referred in that email, was to Water Master buying ATG’s shares. I find that the idea to which Mr Hepburn was referring was the acquisition by the employees of a stake in Hydrocool – one component of Mr Hepburn’s plan.
322 In my view, Mr Hepburn’s 27 September 2004 email, accurately reflects the true position. This was that the idea that Water Master insist on the employment commitment as a term of the licence agreement - one of the two main components of the plan - was an idea that emanated with Mr Hepburn, which he then communicated to Mr Richardson.
323 Secondly, in his witness statement of 9 September 2009, Mr Richardson said:
In response to that pressure, Iain Hepburn suggested that we include some wording in the heads of agreement that provided some form of assurance to Water Master that the current engineers would stay with Hydrocool for the duration of our project. I trusted those engineers and felt that such an assurance could be depended upon.
324 Thirdly, on two important occasions, Mr Richardson was prepared to defer to Mr Hepburn’s suggestion as to how he should communicate with Hydrocool in relation to matters relating to the proposed Water Master licence agreement.
325 The first such occasion was when Mr Richardson deferred to Mr Hepburn’s suggestion contained in his email of 21 August 2004, that Mr Richardson limit Water Master’s invitation to visit China only to himself and Mr Clarke. In that same email, Mr Hepburn even went so far as to suggest the wording that Mr Richardson should use in the email which Mr Richardson should send to him advising that Dr Teplitzky was to be excluded from the visit to China.
326 The extent to which Mr Richardson was already, by that date, under the influence of Mr Hepburn, is apparent from the following matters.
327 First, only a day earlier, Mr Richardson had sent an invitation to Mr Hepburn to pass on to Dr Teplitzky to visit China, yet Mr Richardson was prepared to change his mind within one day of issuing the invitation, because the issuing of the invitation to Dr Teplitzky did not please Mr Hepburn.
328 Secondly, the fact that Mr Richardson stated, conspiratorially, that the “email will self destruct in 5 minutes”, demonstrates that Mr Richardson was prepared to be a party to, and an instrument of, Mr Hepburn’s surreptitious conduct vis-à-vis the Hydrocool board.
329 I observe, in passing, that counsel for Mr Hepburn and Mr Clarke contended that the statement in Mr Richardson’s email of 21 August 2004 to Mr Hepburn, that he had “always viewed the engineering staff at Hydrocool as critical to the development of the domestic device and equally the management of this resource by Peter Clarke and yourself”, was consistent with Mr Richardson’s evidence that he had made it known that he would require an assurance to that effect from, at least, the meeting of 28 and 29 June 2004. In light of my comments as to the circumstances in which Mr Richardson sent that email, and on Mr Richardson’s malleability, I place no weight on that self-serving statement as an accurate reflection of the position. I have already found that no such statement was made at the meeting of 28 and 29 June 2004.
330 The second occasion when Mr Richardson deferred to Mr Hepburn, was in October 2004. On that occasion, Mr Richardson sought advice from Mr Hepburn as to how he should respond on behalf of Water Master, to Dr Teplitzky’s email of 4 October 2004, rejecting the proposed cl 3.6 of the Water Master heads of agreement. When Mr Richardson received Dr Teplitzky’s email, Mr Richardson did not immediately respond to Dr Teplitzky. Rather, Mr Richardson copied Dr Teplitzky’s email to Mr Hepburn and then sought his advice as to how he should respond. Again, on that occasion, Mr Richardson was prepared to take Mr Hepburn’s advice; and, indeed, to use, in his response to Dr Teplitzky, the very words suggested by Mr Hepburn in his email of 4 October 2004.
331 I draw the following inferences from the fact that Mr Richardson was prepared to act on Mr Hepburn’s advice and that Mr Hepburn felt that he was at liberty to draft wording for Mr Richardson to use in his communications, on behalf of Water Master, with Hydrocool.
332 First, by 21 August 2004, at the latest, Mr Hepburn had sought the support of Mr Richardson for the implementation of his plan as identified in the email of 16 July 2004, and Mr Richardson advised Mr Hepburn that he was prepared to cooperate with Mr Hepburn in the implementation of the plan. In particular, by that time, Mr Richardson had advised Mr Hepburn that he was prepared on behalf of Water Master, to require that, as a condition of entering into the licence agreement, Hydrocool was to agree to continue to employ Mr Hepburn, Mr Clarke and the engineers for the duration of the project.
333 Secondly, acting under the influence of Mr Hepburn, and in accordance with his agreement to cooperate with Mr Hepburn in the implementation of Mr Hepburn’s plan, Mr Richardson sent to Hydrocool the emails of 21 August 2004 and 8 September 2004, referring to the employment commitment.
334 It follows that I reject the contention of Mr Hepburn and Mr Clarke that those emails comprise evidence of the fact that the employment commitment was an idea which emanated from Water Master.
335 It, also, follows that I find that, far from avoiding the conflict of interest and duty, Mr Hepburn sought by his surreptitious conduct in influencing Water Master to insist on the employment commitment as a term of the heads of agreement, to prefer his private interest and that of Mr Clarke and the engineers, to his duty to Hydrocool.
336 Further, it follows, that I find that Mr Hepburn, thereby, breached his fiduciary duty to avoid a conflict between his interest and his duty.
Section 182(1) of the Corporations Act
337 I now deal with Hydrocool’s claim that Mr Hepburn, in his dealings with Mr Richardson, breached his duties under s 182(1) and s 183(1) of the Corporations Act.
338 Section 182 of the Corporations Act provides as follows:
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
339 In the case of The Queen v Byrnes (1995) 183 CLR 501, Brennan, Deane, Toohey and Gaudron JJ said, in relation to the construction of the predecessor section to s 182(1) of the Corporations Act, that the test of impropriety was an objective test, and went on to say at 514-515:
Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case.
340 In the case of Chew v The Queen (1992) 173 CLR 626 at 634 (Chew), the majority of the High Court said that the reference to making improper use of one’s position “to gain, directly or indirectly, an advantage” in a predecessor section to s l82 of the Corporations Act, was a reference to purpose rather than cause. The majority (Mason CJ, Brennan, Gaudron and McHugh JJ) observed at 633:
It is a corollary of the interpretation which we favour that the accrual of an advantage or the suffering of a detriment is not an element of the offence. Thus, an officer who makes improper use of his or her office in order to gain an advantage is guilty of an offence, even if his or her purpose be thwarted as, for example, by the grant of an injunction preventing execution of an instrument or implementation of a transaction.
341 At 634, the High Court in Chew endorsed the trial judge’s direction that the impugned conduct “could amount to improper use of that position even if the person concerned believed it to be in the interests of the company”.
342 As to s 182(1) of the Corporations Act, Hydrocool contended that by surreptitiously influencing Mr Richardson to require that Hydrocool agree to the employment commitment as a term of the licence agreement, Mr Hepburn improperly misused his position as the director with responsibility for the day-to-day negotiation of the Water Master licence agreement, to gain an advantage for himself, Mr Clarke and the engineers.
343 I have found that during the course of his dealings with Mr Richardson, Mr Hepburn, without informing the board, or obtaining its consent, influenced Mr Richardson to require that Hydrocool agree to the employment commitment as a term of the proposed licence agreement.
344 I find that Mr Hepburn’s purpose in acting in this manner, was to gain an advantage for himself, Mr Clarke and the engineers, namely, by securing their long-term employment in circumstances where, to his knowledge, the long-term employment commitment would have adverse financial consequences for Hydrocool. As I have found, Mr Hepburn’s knowledge of the adverse impact of the employment commitment on the company’s financial state, is apparent from his email of 6 July 2004, where he stated that the two year employment commitment would make Hydrocool “insolvent much earlier”. This knowledge is further to be inferred from Mr Hepburn’s email of 16 July 2004 to Mr Clarke, in which Mr Hepburn stated that the costs of such long-term employment contracts would put pressure on the company’s balance sheet and that the revelation of his plan to the board would have an “explosive effect” on the board.
345 I also find, on the basis of those two emails, that Mr Hepburn was aware that the adverse financial consequences which the employment commitment would cause Hydrocool, may cause ATG to sell its shares, which, in turn, could lead to him and Mr Clarke acquiring greater influence over the affairs of Hydrocool. This would occur by ATG selling its shareholding to Water Master and Water Master then transferring a portion of its stake to Mr Hepburn, Mr Clarke and the engineers with a consequential advantageous restructure of the board of directors. For the reasons I have already given, I find that the achievement of this objective was also a purpose for which Mr Hepburn acted.
346 By reason of my findings in the preceding two paragraphs, I find that Mr Hepburn used his position as a director of Hydrocool with the responsibility for the day-to-day dealing with Water Master in relation to the licence agreement, to gain an advantage for himself, Mr Clarke and the engineers.
347 For the reasons which I have already given at [270]-[336] above, I have found that in seeking to influence Water Master to require Hydrocool to agree to the employment commitment, Mr Hepburn acted in breach of his fiduciary duty to Hydrocool. For that reason, I find that Mr Hepburn acted improperly within the meaning of s 182(1) of the Corporations Act.
348 However, in any event, even if the conduct of Mr Hepburn had not amounted to a breach of fiduciary duty, I would have found that, in seeking to influence Water Master to require Hydrocool to agree to the employment commitment, Mr Hepburn acted surreptitiously for his own advantage and the advantage of his allies, and, in the knowledge that the board of Hydrocool would not approve of his conduct; and on that basis, his conduct was improper.
349 Accordingly, I find, therefore, that Mr Hepburn acted in contravention of s 182(1) of the Corporations Act.
Section 183(1) of the Corporations Act
350 Hydrocool also claimed that Mr Hepburn used information which he had acquired because he was a director, for the purpose of obtaining an advantage for himself, Mr Clarke and the engineers.
351 Section 183 of the Corporations Act reads as follows:
(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
352 In support of this allegation, I understood Hydrocool to contend that Mr Hepburn improperly used the information he had obtained as a director of Hydrocool, by disclosing confidential business information to Mr Richardson as a means of engendering Mr Richardson’s confidence in him and procuring his cooperation in the implementation of Mr Hepburn’s plan.
353 Hydrocool contended that Mr Hepburn improperly disclosed to Mr Richardson the fact that ATG was required to dispose of its shareholding by 31 December 2004. Mr Hepburn did not dispute that he had disclosed this information to Mr Richardson but said that he did not act improperly in doing so, because he was authorised to do so. Mr Hepburn said that he was under instructions from Hydrocool to find buyers for ATG’s shares in Hydrocool, and find parties who were prepared to take equity in Hydrocool.
354 This contention is not accepted. The minutes of the meeting of the board of directors of Hydrocool on 7 July 2003, show that only Dr Teplitzky was to solicit interested parties for the purpose of acquiring ATG’s shares in Hydrocool. That this was the case, is further supported by the fact that Dr Teplitzky expressed strong displeasure when Mr Richardson raised the question of acquiring equity in Hydrocool at the meeting of 28 and 29 June 2004.
355 Mr Hepburn also contended that in June 2004, when he first disclosed the information about ATG being required to dispose of its shareholding, to Mr Richardson, the information was not confidential. However, the prohibition against improperly using information acquired as a director in s 183 of the Corporations Act, is not confined to information which is confidential (McNamara v Flavel (1988) 13 ACLR 619 at 625).
356 I find that Mr Hepburn obtained his information because he was a director of Hydrocool. I find that Mr Hepburn disclosed that information to Mr Richardson and continued, even after Dr Teplitzky’s admonition, to use the disclosure of that information, for the purpose of implementing that element of his plan which comprised the acquisition of a stake in Hydrocool, and the consequential enhanced influence over the affairs of Hydrocool. I infer this to be the case because of Mr Hepburn’s statement in his email to Mr Clarke of 27 September 2004. In that email, Mr Hepburn said, in response to Mr Richardson’s email expressing Water Master’s willingness to buy ATG’s shares and support for a management buyout, that this was an idea which he had put in Mr Richardson’s head and this idea was now becoming a likely outcome. I infer from this email, that Mr Hepburn’s purpose for disclosing the information and, thereafter, using that disclosure, was to gain the advantage to which I have referred.
357 Next, Hydrocool contended that Mr Hepburn misused the knowledge he acquired as a director, that Hydrocool was in a difficult financial position, by disclosing that fact to Mr Richardson.
358 I do not accept this contention. In my view, it was open to Mr Hepburn as the director of Hydrocool charged with the day-to-day dealings with Mr Richardson to disclose, as he did in June 2004, that Hydrocool only had sufficient funding to conduct its operations until December 2004. This was particularly the case when Water Master had signed a non-disclosure agreement with Hydrocool and was interested in establishing an ongoing cooperative relationship with Hydrocool. In my view, this was information which a potential participant in a joint business venture with Hydrocool, was entitled to know. In my view, it cannot be said that in disclosing this information to Water Master, Mr Hepburn acted improperly.
359 Thirdly, Hydrocool contended that Mr Hepburn disclosed to Mr Richardson information about what had transpired at the board of directors meeting of 24 September 2004 in relation to the employment commitment issue; and, thereafter, had continued to advise Mr Richardson on the position taken by each of the directors in relation to the employment commitment. It was also said that Mr Hepburn had disclosed the legal advice that Abbott Tout had provided to the directors in relation to the proposed amendments to the Water Master heads of agreement. It was contended that this was done for the purpose of Mr Hepburn implementing his plan.
360 Mr Hepburn admitted that he had disclosed that information to Mr Richardson, but contended that it was part of normal commercial negotiations, and, therefore, not improper.
361 I find that Mr Hepburn obtained this information because he was a director of Hydrocool. He was the director charged with dealing with Mr Richardson in relation to the question of the employment commitment issue, and his fellow directors and Abbott Tout communicated with Mr Hepburn in that capacity.
362 Mr Hepburn contended that it was not uncommon for a party to disclose legal advice received to the opposite party in a commercial negotiation. I accept that there may be circumstances where one party may quite properly, in the course of commercial negotiations, disclose legal advice for the purpose of seeking to persuade the other party to a particular point of view. However, in this case, I find that the purpose of Mr Hepburn’s conduct was to persuade Mr Richardson to execute the heads of agreement as an important step towards the implementation of Mr Hepburn’s plan.
363 Likewise, Mr Hepburn said that it was not uncommon for a negotiator on behalf of a company, to disclose, during the course of normal commercial negotiatons, the board’s view on a matter, the subject of the negotiation. In my view, this is not a sufficient answer. The question is the purpose for which the information was used. I find, in this case, that Mr Hepburn disclosed the content of the board proceedings on the employment commitment, and the directors’ subsequent communications to Mr Hepburn on that matter, to Mr Richardson for the purpose of implementing his plan; and, thereby, gaining an advantage for himself, Mr Clarke and the engineers. That this is so, is apparent from the disparaging comments Mr Hepburn made about his co-directors in the emails Mr Hepburn sent to Mr Richardson; and from his exhortation to Mr Richardson to sign and forward the heads of agreement to him, notwithstanding that he knew that all the directors had not approved the final terms.
364 The disclosure was improper as the directors had not consented to the disclosure of their communications about confidential board matters by Mr Hepburn to Mr Richardson. It was, also, part of a course of conduct in breach of Mr Hepburn’s fiduciary duty.
365 It follows that I find that Mr Hepburn contravened s 183(1) of the Corporations Act.
promoting collective action
366 Hydrocool also contended that, in seeking to achieve his objective of securing long-term employment for himself, Mr Clarke and the engineers, Mr Hepburn engaged in other conduct in breach of his duty to avoid a conflict between his interest and his duty to the company. Hydrocool alleged that Mr Hepburn fostered a “them and us” attitude vis-à-vis the board of Hydrocool, amongst the Fremantle based employees. Hydrocool said that Mr Hepburn had schooled the four engineers to be prepared to take collective action in support of the implementation of Mr Hepburn’s objective, and in opposition to the views of the other members of the board.
367 Hydrocool contended that Mr Clarke was also involved in assisting Mr Hepburn in this activity. I will deal with this claim later in these reasons.
368 Hydrocool also alleged that Mr Hepburn’s aforesaid conduct also amounted to contraventions of s 181 and s 182 of the Corporations Act.
369 Hydrocool went on to contend that this conduct caused the en masse resignation of Mr Clarke and the four engineers on 19 October 2004.
370 Hydrocool contended that, as part of the process of fostering the “them and us” attitude, Mr Hepburn disclosed to Mr Clarke and the engineers, confidential business information which he acquired in his capacity as a member of the board of Hydrocool.
371 Mr Hepburn and Mr Clarke did not, nor could not, in light of the overwhelming evidence, deny that Mr Hepburn sent, on a regular basis, email correspondence to Mr Clarke and the engineers which contained confidential business information such as documents relating to the board proceedings, and other correspondence, which Mr Hepburn received in his capacity as a director of the company. However, Mr Hepburn and Mr Clarke contended that Mr Hepburn was authorised by Dr Teplitzky to distribute this information to Mr Clarke and each of the engineers because Mr Clarke and the engineers were option holders in the company. Mr Hepburn and Mr Clarke referred to the fact that Dr Teplitzky had instructed Mr Hepburn to keep the employees fully informed of Hydrocool’s affairs after they became option holders in 2003. The instruction is contained in an email dated 7 February 2003, and states that the option holders need to be kept fully informed, so as to avoid the situation of them being disadvantaged in regard to their decision to exercise their options. Further, it was said that Mr Hepburn’s disclosures were permissible because the disclosures were made to the employees in their status as such, and were, thus, intra-company communications.
372 The first contention of Mr Hepburn and Mr Clarke cannot be accepted. The instruction by Dr Teplitzky to keep the employees informed of the affairs of Hydrocool did not amount to an instruction to Mr Hepburn to disclose information which he received on a confidential basis as a director of the company, without first obtaining the consent of the other directors. That Dr Teplitzky did not intend by issuing the instruction, to relieve Mr Hepburn of the obligation to keep board matters confidential is apparent from several subsequent emails sent to Mr Hepburn. One such example is an email dated 5 July 2004, wherein, Dr Teplitzky told Mr Hepburn that he had received a letter from Dr Araujo of Symetrix in which he demonstrated knowledge of confidential funding matters discussed at a board meeting. Dr Teplitzky expressed in strong terms his dissatisfaction at what appeared to be a disclosure by Mr Hepburn to the Hydrocool engineers working at Symetrix of confidential business information regarding a potential investor.
373 However, notwithstanding Dr Teplitzky’s admonition in that email, Mr Hepburn continued to forward confidential communications to Mr Clarke and the engineers. Among the emails that were passed on by Mr Hepburn to Mr Clarke and the engineers was an email from Dr Teplitzky to Mr Hepburn dated 17 August 2004, that was specifically marked “CONFIDENTIAL”. Further, the email was forwarded under cover of an email by Mr Hepburn which contained the tendentious comment: “Hold your breaths for the reply to this one” – a comment directed to engendering a hostile attitude to Dr Teplitzky. A further example of such a comment, is when Mr Hepburn included the words: “Arrogance, ignorance and insensitivity to the extreme” when referring to an email dated 15 September 2004 from Dr Teplitzky, which Mr Hepburn distributed to Mr Clarke and the engineers.
374 It is apparent from the tendentious language used by Mr Hepburn, when commenting on information in the emails that he forwarded to Mr Clarke and the engineers, that his purpose in forwarding the confidential business information was to engender support for the position which he was advancing, and to denigrate the position taken by Dr Teplitzky and the board. Plainly, by engaging in this conduct, Mr Hepburn was not engaged in a neutral exercise of keeping the employees informed of the affairs of Hydrocool, so that they were not disadvantaged in relation to any decision to exercise their options.
375 The second contention is rejected because the employees had no right, by reason of that status, to receive the information which was disclosed to Mr Hepburn in his capacity as a director.
376 Further, Hydrocool relied upon a number of instances where Mr Hepburn had promoted collective action by the engineers in furtherance of his plan, as comprising conduct in breach of his fiduciary duty.
377 These instances were:
(a) Mr Hepburn’s activities in June 2004, in drafting, and soliciting the engineers’ support for, the so-called “engineers’ letter”;
(b) the production in September 2004, of the so-called “letter of no confidence”;
(c) Mr Hepburn’s activities in September 2004, whereby he encouraged and facilitated the engineers to exercise their share options; and
(d) Mr Hepburn’s activities in October 2004, in drafting a notice requisitioning the holding of a shareholders meeting and attendant resolutions, and soliciting the support of the engineers for the calling of such a meeting.
378 I find that on 1 June 2004, Mr Hepburn, with the assistance of Mr Clarke, drafted the engineers’ letter in response to board discussions which queried the work which was being done in Fremantle in the context of the board having to consider whether to make staff redundancies. Mr Hepburn’s reaction to those discussions was recorded in Mr Hepburn’s email to Mr Clarke of 31 May 2004, when he stated that “we do not need renewed pressure for personnel reductions at this time”.
379 The engineers’ letter asserted that all Fremantle based employees were essential for the successful optimisation of any breakthrough in the Symetrix research project. The engineers’ letter went on to state:
The strength of our convictions in this regard is such that we intend to work for Hydrocool as a team or not at all.
380 I find that this letter was then circulated by Mr Hepburn and Mr Clarke to each of the engineers for the purpose of eliciting their support as a document to be used by Mr Hepburn at the Hydrocool board meeting in June 2004, to put pressure on the board not to terminate the employment of any of the Fremantle based employees. Mr Clarke described this letter to the engineers in his email of 17 June 2004, as “a last bullet to fire should it get nasty”.
381 As it transpired, however, it was not necessary for Mr Hepburn to produce the engineers’ letter at the 24 June 2004 board meeting. However, immediately after that board meeting, Mr Hepburn prepared a memorandum in anticipation of a meeting with the engineers and Mr Clarke the next day, in which he contemplated that it may be necessary to take further “collective action” at the end of the year to terminate the Symetrix project and, perhaps, to purchase the company from the government. I find that Mr Hepburn was aware that the en masse resignation of the employees would damage the ability of the company to develop its technology, and was prepared to use the threat of “collective action” in order to achieve his objective of securing the employment of the Fremantle based employees.
382 As to the letter of no confidence, I find that Mr Hepburn and Mr Clarke were both involved in the drafting and circulating of this letter to the engineers. The letter went through a number of drafts. The drafting process started after Mr Hepburn had received Mr Richardson’s email of 23 August 2004, in which he adopted Mr Hepburn’s suggestion that the visit to China should exclude Dr Teplitzky. Mr Hepburn sent Mr Clarke the original draft letter and Mr Clarke contributed to the content of the draft document as it evolved. The drafts were circulated to Mr Clarke and the engineers for the purpose of obtaining their support for the letter. On 27 August 2004, Mr Clarke engaged in an email exchange with Mr Davis about proposed changes to the draft letter.
383 The draft letter of no confidence was disparaging about the Symetrix project and expressed concern that the Water Master licence fee would be used to fund the Symetrix project. Further, the draft letter expressed no confidence in Dr Teplitzky. The draft letter, however, expressed support for Mr Hepburn’s conduct in keeping the employees informed about the affairs of the company and advised that, but for Mr Hepburn’s action, they would have resigned and sought employment elsewhere. The letter contemplated that it would be signed by the engineers and Mr Clarke in their capacity as shareholders; and stated that the signatories had asked Mr Hepburn to deliver the letter via the Hydrocool board.
384 The third instance of the promotion of collective action relied upon by Hydrocool, was Mr Hepburn’s and Mr Clarke’s conduct in organising the engineers to take up their share options. I find that each of Mr Hepburn and Mr Clarke was involved in assisting the engineers to exercise their options for the purpose of obtaining shares in Hydrocool.
385 I find that Mr Hepburn signed a minute of a meeting of the board of directors dated 2 September 2004, recording the passing by the board of a resolution to allot 100 shares to Mr Hepburn, each of the engineers and Mrs Clarke. In fact, the directors never passed any such resolution. The minutes were false. The issue of the shares was subsequently set aside.
386 I find that Mr Clarke distributed a pro forma letter to the engineers to use as the means to exercise the nominated options to acquire shares in Hydrocool.
387 I find that Mr Hepburn’s purpose in signing the minute authorising the issue of the shares to the engineers, was in furtherance of the implementation of his plan. As shareholders, the engineers would be in a position to call for a meeting of shareholders of Hydrocool at which resolutions could be moved to put pressure on the board to adopt Mr Hepburn’s objectives. I base this conclusion on the fact that this is what Mr Hepburn, Mr Clarke and the engineers subsequently did, and also, on the fact that the financial position of Hydrocool was, to their knowledge, parlous and was, therefore, an unattractive investment. Also, although the evidence on the precise number of options that each of Mr Hepburn, Mr Clarke (through Mrs Clarke) and the engineers held was not clear, it is apparent that they each held a substantially greater number of options than they exercised. I infer, therefore, that the engineers did not wish to become shareholders of Hydrocool for investment reasons.
388 The fourth instance of collective action relied upon by Hydrocool, was Mr Hepburn’s conduct in drafting and approving documents to be signed by the engineers in their capacity as shareholders calling for a shareholders meeting at which resolutions supportive of Mr Hepburn’s plan, and critical of the board, were to be proposed.
389 I find that on 5 October 2004 and 18 October 2004, Mr Hepburn drafted a notice calling for a general meeting of shareholders and also a document containing resolutions to be put at the proposed general meeting of shareholders. The proposed resolutions were critical of the Symetrix project and sought to restrict further funding for that project and were also critical of Dr Teplitzky’s opposition to the Hydrocool employment commitment term in the heads of agreement. The format of the notice calling for a general meeting of shareholders contemplated that it would be signed by Mr Hepburn, Mr Clarke and the engineers.
390 I find that Mr Clarke circulated those draft documents to the engineers for the purpose of obtaining their approval to engage in the collective action contemplated, namely, the calling of a general meeting of shareholders, at which the proposed resolutions were to be put.
391 In my view, the distribution by Mr Hepburn of confidential business information to Mr Clarke and the engineers and the four instances of the promotion by Mr Hepburn of collective action by the engineers, is to be viewed as a course of conduct by Mr Hepburn carried on for the purpose of building a solid and unanimous position among the Fremantle based employees, for the implementation of his plan to secure the long-term employment of himself, Mr Clarke and the engineers and to promote the restructuring of Hydrocool in a manner in which the employees would have a stake and he, along with Mr Clarke, would exert greater influence over the affairs of Hydrocool than he then did.
392 I infer this from the following facts and circumstances:
(a) the engineers’ letter sought to secure the long-term employment of the Fremantle based staff by asserting the need for all the Fremantle based employees to be employed in the optimisation process of any successful breakthrough in the Symetrix research and threatening en masse resignation;
(b) there were complaints in the letter of no confidence and the draft resolutions that were directed towards limiting funding of the Symetrix project on the grounds that the continued funding of that project would threaten the continuation of the Fremantle based projects; and
(c) the draft resolutions proposed to be put at the meeting of shareholders, complained about Dr Teplitzky’s opposition to the employment commitment term in the draft heads of agreement.
393 The duty that Mr Hepburn owed Hydrocool was to advance the interests of the company – in this case represented by the interests of the three shareholders. The purpose for which Mr Hepburn disclosed this information to Mr Clarke and the engineers and engaged in his conduct promoting the collective action, was to advance his interest and those of Mr Clarke and the employees; and to oppose the position which was articulated by the rest of the board - which included representatives of all three shareholders. By disclosing this information, and engaging in the conduct to promote the collective action referred to, Mr Hepburn breached his duty to avoid a conflict between his interest and his duty to Hydrocool.
394 It follows that I find that Mr Hepburn breached his fiduciary duty.
Section 182 and s 183 of the Corporations Act
395 For the reasons given in [366]-[394] above, I also find that by disclosing the confidential business information and engaging in the conduct referred to in those paragraphs, Mr Hepburn, in contravention of s 182(1) of the Corporations Act, improperly used his position as a director of Hydrocool, for the purpose of advancing his interest and the interests of Mr Clarke and the engineers. I find that the conduct was improper because, as I have found, by engaging in that conduct, Mr Hepburn failed to avoid a conflict between his interest and his duty.
396 I also find, for the reasons given at [366]-[375] and [391]-[394] above, that in disclosing the information to Mr Clarke and the engineers, which Mr Hepburn obtained in his capacity as a director, Mr Hepburn acted in contravention of s 183(1) of the Corporations Act. His conduct was improper because, as I have found, it was part of a course of conduct carried on in breach of his fiduciary duty to avoid a conflict between his interest and his duty. It was, in any event, improper, because the information related to communications which were confidential, and the parties to those communications did not give their consent to the disclosures.
397 In addition, some of the communications were expressly forwarded to Mr Hepburn on a confidential basis, which Mr Hepburn ignored.
398 During cross-examination, Mr Hepburn sought to justify his actions on the basis that he was entitled to act in, what he perceived to be, the interests of the company, as opposed to what the shareholders perceived were the best interests of the company. Mr Hepburn also sought to justify his actions on the basis that he was entitled to act in the best interests of the employees.
399 Those contentions are rejected. First, as is apparent from the authorities referred to above, it is no defence to a finding that, objectively, a director has acted improperly, for the director to contend that, subjectively he believed that he was acting in the best interests of the company. However, as I have already found, Mr Hepburn was conscious of the fact that the board would oppose the implementation of his plan. Further, as I have found, Mr Hepburn was aware that the long-term employment commitment which he influenced Water Master to require, would harm the financial position of Hydrocool. This is apparent from his emails of 6 July and 16 July 2004. Accordingly, I do not accept that Mr Hepburn subjectively believed that it was in the best interests of the company that his plan was implemented. As I have mentioned, Mr Hepburn put his interest, and those of Mr Clarke and the engineers ahead of Hydrocool’s interests.
400 Secondly, the duty of a director is to act in the best interests of the company and not its employees.
401 In any event, I do not accept that Mr Hepburn was acting only in the interests of the employees. As I have found, Mr Hepburn was acting in support of the implementation of a plan which would secure his employment as well as, the employment of Mr Clarke and the engineers; and which would also provide him with greater shareholder support and influence in the conduct of the affairs of the company, than he then had.
the case against mr clarke
402 Hydrocool claimed that Mr Clarke owed a fiduciary duty to Hydrocool, which he breached by failing to avoid a conflict between his duty and his interest.
403 Mr Clarke was an employee and not a director of Hydrocool. Therefore, it is incumbent upon Hydrocool, to establish a specific basis for the claim that Mr Clarke owed fiduciary duties to Hydrocool. Hydrocool did not plead any facts in support of that claim other than that Mr Clarke was the research and development manager of Hydrocool. In closing submissions, Hydrocool contended that Mr Clarke was a senior employee and technical officer, and that Mr Hepburn used Mr Clarke’s skills in preparing budgets and technical reports to present to the board. It was, therefore, to be inferred, said Hydrocool, that the board placed trust and confidence in Mr Clarke.
404 Hydrocool did not seek to define or limit the scope of the fiduciary duty said to be owed by Mr Clarke, by seeking to mould that duty by reference to any one or more of the terms of Mr Clarke’s contract of employment, or to any functions that he performed thereunder. Rather, it was contended that Mr Clarke owed a fiduciary duty, in a general sense, by reason of his position as a senior employee who prepared budgets and technical reports for Mr Hepburn to use at board level. In my view, these facts are not sufficiently specific to establish that, in addition to his existing contractual duty of loyalty, Mr Clarke had also undertaken, in carrying out his duties generally, to act for, or on behalf of the company, or solely in its interests. It follows, that I find that Hydrocool did not establish that Mr Clarke owed the fiduciary duty to Hydrocool which it alleged.
405 In its closing submissions, Hydrocool also contended that Mr Clarke had knowingly assisted Mr Hepburn, a fiduciary, with knowledge of Mr Hepburn’s dishonest and fraudulent design. Hydrocool referred to this claim as a claim brought under the second limb of Barnes v Addy. However, in the case of Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [170], the High Court stated that an allegation of knowingly participating in a dishonest and fraudulent design was a serious allegation which should be pleaded and particularised, and the assessment of the claim made by reference to the Briginshaw considerations. Mr Clarke contended that no such allegation had been pleaded by Hydrocool against him.
406 In my view, Mr Clarke’s contention is to be upheld. There is no claim pleaded against Mr Clarke in Hydrocool’s amended statement of claim which alleges that Mr Clarke knowingly participated in Mr Hepburn’s dishonest and fraudulent design. Further, no such claim was identified in Hydrocool’s statement of issues filed before the commencement of the trial. Nor was it referred to in Hydrocool’s written or oral opening submissions.
407 It follows that Hydrocool is not at liberty to pursue a claim against Mr Clarke, founded on that cause of action.
408 Hydrocool also claimed that Mr Clarke acted in contravention of s 182(1) of the Corporations Act by improperly using his position as an employee of Hydrocool to gain an advantage for himself, Mr Hepburn and the engineers. Alternatively, Hydrocool contended that Mr Clarke was involved in Mr Hepburn’s contravention of s 182(1), within the meaning of s 182(2) of the Corporations Act. It is convenient to deal with the latter aspect of the claim first.
409 For Hydrocool to establish that Mr Clarke was knowingly concerned in Mr Hepburn’s contravention of s 182(1), it is necessary for Hydrocool to show that Mr Clarke knew the essential facts constituting Mr Hepburn’s contraventions of s 182(1) of the Corporations Act (Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 at [334] (Adler)).
410 I find that Mr Clarke did have actual knowledge of the essential facts constituting Mr Hepburn’s contraventions of s 182(1). I find that Mr Clarke was aware of Mr Hepburn’s plan. Mr Clarke was the recipient of Mr Hepburn’s emails of 31 May 2004, 6 July 2004 and 16 July 2004. Mr Clarke was, accordingly, aware that if Mr Hepburn’s plan was implemented, he would benefit in the sense that he and Mr Hepburn would become directors and shareholders in a restructured company comprised of shareholders more likely to support his views and those of Mr Hepburn. Contrary to Mr Clarke’s evasive evidence in relation to whether he recalled these emails, I find that Mr Clarke was aware of the contents of the emails and, therefore, aware of Mr Hepburn’s plan.
411 I also find that by reason of the contents of the emails of 6 July and 16 July 2004, Mr Clarke was aware of the fact that, the implementation of the plan in relation to the employment commitment would adversely affect the financial position of Hydrocool. I also find that Mr Clarke was aware that Mr Hepburn did not intend to disclose the plan to the board because the plan would have an “explosive effect” on the board. Further, Mr Clarke knew that Mr Hepburn was acting surreptitiously because Mr Hepburn required him to keep his plan, revealed in the 16 July 2004 email, confidential.
412 I find that Mr Hepburn kept Mr Clarke fully informed of his dealings with Mr Richardson and Water Master by forwarding to Mr Clarke his email correspondence with Mr Richardson. In so doing, Mr Hepburn from time to time, updated Mr Clarke on the steps which he had taken to implement the plan. One example of this, is that Mr Hepburn advised Mr Clarke of the fact that he had “primed” Mr Christian to raise the question of the employment commitment with Mr Richardson. A second example is when Mr Hepburn advised Mr Clarke in his email dated 27 September 2004, that the idea was one which had progressed from an idea in his head to one put in Mr Richardson’s head to a likely outcome.
413 I find that Mr Clarke took steps to assist and support Mr Hepburn in the implementation of his plan. As set out above, I find that Mr Clarke played an active role in drafting the engineers’ letter and the letter of no confidence. I also find that Mr Clarke distributed those two draft letters and solicited support from the engineers for the proposed collectivist action evident in those letters. Mr Clarke also facilitated the exercise by the engineers of their options by drafting and forwarding a pro forma letter for the engineers to use to communicate their desire to exercise their options. Mr Clarke also distributed the notice requesting a meeting of shareholders which was drafted by Mr Hepburn, and also solicited the support of the engineers for the collectivist action contemplated in that document.
414 Further, Mr Clarke responded positively to Mr Hepburn’s request that he draft and send to Mr Richardson a letter which stated that all four of the Fremantle based engineers would be required to work on the Water Master project. At Mr Hepburn’s request, before sending the letter to Mr Richardson, Mr Clarke first forwarded a draft of the letter to him for his consideration. Mr Hepburn approved the sending of the letter.
415 On 20 September 2004, Mr Clarke sent the letter to Mr Richardson setting out in detail the role performed by each of the engineers. The extent of Mr Clarke’s support for Mr Hepburn in the implementation of his plan, is evident from the email which Mr Hepburn sent to Mr Clarke on 20 September 2004, wherein Mr Hepburn said that he had just read Mr Clarke’s letter to Mr Richardson again, and wanted to express his appreciation to Mr Clarke for his “support and advice throughout this difficult period”.
416 Further, Mr Clarke also received Mr Hepburn’s email of 4 October 2004, which called on him to attend a meeting with Mr Hepburn and the engineers “to call Garth to advise him what to do”. Mr Hepburn’s email stated that his present feeling was that they should unanimously withdraw all offers, previously made, to give Water Master a commitment to stay with Hydrocool for the duration of the Water Master project, which was contemplated as a condition of the Water Master heads of agreement. Mr Hepburn said that if they did not do this, they would “lose this leverage for good”. Mr Clarke attended the meeting the next day with Mr Hepburn and the engineers. They all participated in a telephone conference with Mr Richardson, and Mr Clarke along with Mr Hepburn and the engineers, each agreed to withdraw their commitment to work for Hydrocool for the duration of the Water Master project. Consequently, Water Master withdrew its offer to enter into the Water Master heads of agreement.
417 Accordingly, I find, on the basis of the findings of fact made above, that Mr Clarke was knowingly concerned, in Mr Hepburn’s contravention of s 182(1) of the Corporations Act.
418 In those circumstances, I find that, by reason of s 182(2), Mr Clarke contravened s 182(1) of the Corporations Act.
419 In my view, the same facts and circumstances, constituted an improper use by Mr Clarke of his position as an employee, under s 182(1) of the Corporations Act.
420 In my view, Mr Clarke did not contravene s 183(1) of the Corporations Act, because the disclosure of the information by Mr Hepburn in breach of his duty under s 183(1) of the Corporations Act, were the acts of Mr Hepburn alone.
causation
421 Hydrocool contended that by reason of the breaches of duty of Mr Hepburn and Mr Clarke, Hydrocool did not enter into the licence agreement with Water Master which it was, in October 2004, in the process of negotiating, and so lost the opportunity to earn profits.
422 Hyrdrocool also contended that the breaches of duty in relation to the fostering among the engineers of a collective attitude antagonistic to the views of the board and in favour of Mr Hepburn’s plan, caused the en masse resignation of the engineers and Mr Clarke.
423 I will deal below with the appropriate causation principles to apply in the claim for equitable compensation founded on breach of fiduciary duty.
424 However, it is first necessary to deal with an issue raised by Mr Hepburn and Mr Clarke, which calls for making a factual finding. I refer to the closing submissions of Mr Hepburn and Mr Clarke under the heading: “Conclusion of Water Master agreement and repudiation by Dr Teplitzky”. I took these submissions to contend that the loss to Hydrocool of the Water Master licence agreement was the product of Hydrocool’s own actions which broke the chain of causation between any breaches of duty by Mr Hepburn and Mr Clarke.
425 In short, Mr Hepburn and Mr Clarke contended that, pursuant to the authority which he was given by the board of Hydrocool, Mr Hepburn concluded an agreement with Water Master which included cl 3.6 and, thereafter, Dr Teplitzky repudiated the agreement in the course of a conversation with Mr Richardson on 4 October 2004. The assumption underlying this contention is that at the Hydrocool board meeting of 24 September 2004, the board authorised Mr Hepburn to conclude the Water Master heads of agreement without further reference to the members of the board.
426 I do not accept that contention.
427 Mr Hepburn’s and Mr Clarke’s contention is founded on a distinction which they sought to draw between the heads of agreement and the licence agreement with Water Master. The contention is that the board authorised Mr Hepburn to conclude the heads of agreement without the need for the directors to first review the Abbott Tout clauses comprising the employment commitment, but that the board insisted on reviewing the clauses before the execution of the licence agreement.
428 The contention is founded on evidence given by Mr Hepburn in re-examination in respect of his understanding of the board’s instructions. In re-examination, Mr Hepburn was taken to the following extract of the transcript of the board meeting, and Mr Hepburn said that this was the basis on which he understood the board to have authorised him to conclude the heads of agreement, without first getting the approval of the board:
DB: What we’ve agreed is Abbott Tout has to agree the heads of agreement. Second, Abbott Tout will put forward a licence agreement.
IH: No they’ll put forward some wording in the heads of agreement to cover this employee commitment situation.
DB: Yeah but also they’re going to review the heads of agreement because what I want to avoid is a situation where you put a heads of agreement in and then you ask them to write up-
IH: No, no I understand, they’ll review the Heads of Agreement as it stands, add to it a clause that satisfies everyone on the employee commitment issue.
DB: And if there are two or three or four things that should be put in the heads of agreement they will give them to you to negotiate into the Heads of Agreement.
IH: Correct, correct.
DB: And then once you got that signed, you flip into getting a full contract.
IH: And that will be reviewed by the Board before I put it before Water Master.
DB: And presumably Abbott Tout before it goes to the Board.
429 I place no weight on that evidence. It was given in response to a highly artificial reading by his counsel of the extract from the transcript. In closing submissions, senior counsel for Hydrocool, described the manner in which counsel for Mr Hepburn read the extract as a “theatrical and tendentious” misreading of the board’s discussions. I agree with that characterisation.
430 As I have said, the fact that Mr Hepburn chose to give that evidence in re-examination demonstrates opportunism on the part of Mr Hepburn and redounds adversely to his credit.
431 This finding of opportunism on the part of Mr Hepburn is based on the fact that during his cross-examination, Mr Hepburn was referred to a number of extracts from the transcript of the board meeting and was then asked this question:
Now, it’s quite clear to you, is it not from the result of all of that that the process that you were instructed to follow was to indicate this issue as discussed at the board meeting to Abbott Tout and to get Abbott Tout to do some drafting of what they thought was the way to resolve it and then put that drafting to the board, whether through Dr Teplitzky or not, and not put it to the employees or to the – or Watermaster without the prior agreement of the board. That’s a clear understanding is it not that you have?---My understanding was to get Abbott Tout to draft it. Have the board approve it and at the same time try to get the deal done as soon as I could. And if that meant that I tried to achieve some of these things simultaneously it was only because I wanted to get the deal done as soon as I could.
432 Further, the contemporaneous evidence demonstrates that Mr Hepburn did, in fact, refer the Abbott Tout clauses to each member of the board before asking Mr Richardson to sign the heads of agreement.
433 Also, the contemporaneous evidence shows that Mr Hepburn knew that the board had instructed him to refer the Abbott Tout clauses to each of the directors as soon as they were available for the purpose of obtaining their approval before agreeing to the heads of agreement with Mr Richardson.
434 This is apparent from the email which he sent Mr Richardson on 27 September 2004, in which Mr Hepburn advised Mr Richardson of what had occurred at the Hydrocool board meeting on 24 September 2004. In that email Mr Hepburn said that he expected to have the draft clauses back from Abbott Tout the next night and he would then seek final director approval so that he “may execute the HOG on behalf of Hydrocool”. It is apparent from this email that Mr Hepburn understood it was in respect of the execution of the heads of agreement that he needed to obtain final director approval.
435 The same is, also, apparent from the email Mr Hepburn sent to Mr Bourke and Mr Murphy on 5 October 2004, complaining about Dr Teplitzky.
436 The email contained the following statements:
The second development was the issue by David of a formal letter of warning to myself, based on the fact that I circulated the revised Water Master HOA (drafted by Abbott Tout) and their covering letter to all directors, instead of only to himself. At our recent Board meeting, I expressed concern at the time we had taken to respond to the Water Master Offer (three weeks) and Don asked that I obtain a revised draft HOA from Abbott Tout as soon as possible and “run it past the Board as soon as possible since he was under the hammer from his shareholders to have a Board Meeting before the end of next month in order to determine their attitude to Hydrocool”. Shortly after that Don repeated his request for me to have the draft HOA “circulated to all directors and get comments”. This was exactly what was done by the Wednesday following the Friday meeting. The letter of warning was received from David two days later and is completely unjustified. This warning letter is therefore formally rejected. (Original emphasis.)
437 In that email, Mr Hepburn also complained that Dr Teplitzky had been in communication with Mr Richardson about the proposal for the employment commitment in the Water Master heads of agreement, and then went on to say:
This was in spite of Don’s direction at the Board Meeting that “Iain should be given the right to finalise the Agreement with Water Master as soon as possible” subject to acceptance of the revised HOA by all directors. At that time, Steve had confirmed his agreement. (Original emphasis.)
438 In my view, these passages demonstrate that Mr Hepburn knew that he was obliged to refer the Abbott Tout clauses to each of the directors at the earliest opportunity to obtain their approval, before agreeing to the heads of agreement. Mr Hepburn relied, in the email, on the need for urgency to explain his conduct in not sending the Abbott Tout clauses to each of the other directors through Dr Teplitzky, as he had been instructed to do. There would have been no need for this urgency if the board only had to give their approval to the Abbott Tout clauses before the Water Master licence agreement was executed.
439 I find that the board did not authorise Mr Hepburn to conclude the heads of agreement before he had first obtained the approval of the directors of Hydrocool to the Abbott Tout employment commitment clauses.
440 Further, there was an issue at trial as to whether on 4 October 2004, during the telephone conversation between Dr Teplitzky and Mr Richardson, an oral agreement to enter into the Water Master heads of agreement was concluded. In my view, no agreement was concluded during the course of that conversation. This is apparent from the terms of Dr Teplitzky’s email of 4 October 2004 which proceeds on the assumption that the final terms have not yet been concluded. However, I do find Mr Richardson said that he would be prepared to consider an employment commitment from Hydrocool which did not involve all of the employees. I base this finding on the terms of Dr Teplitzky’s email and Mr Richardson’s email in response. The latter email, refers to Mr Richardson as having engaged in further consideration following his telephone conversation with Dr Teplitzky. I infer that the need by Mr Richardson to refer to “further consideration” in that email, was to explain the change of the view he had previously expressed to Dr Teplitzky.
Equitable compensation
441 I now deal with legal principles on causation in relation to a claim for equitable compensation founded on a breach of fiduciary duty.
442 Hydrocool contended that by analogy with the principle in the case of Brickenden v London Loan and Savings Co [1934] 3 DLR 465 (Brickenden), the Court could find that Hydrocool would have entered into the Water Master licence agreement, had Mr Hepburn not breached his fiduciary duty.
443 The principle referred to by Hydrocool is that set out in the following observations of Lord Thankerton at 469:
When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent’s action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.
444 These observations were applied by a Full Court of this Court in Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 394 (Smith). That case, however, was not a case of a company director failing to avoid a conflict between duty and interest.
445 In Smith, the Full Court found that a fiduciary duty was owed by a bank manager to customers of the bank who were engaged in negotiations to purchase a hotel. The bank manager, however, also acted as the adviser to the vendor of the hotel, which was, also, a customer of the bank. The bank manager did not disclose to the potential purchasers that he was also acting as an adviser to the potential vendor. The bank manager, also, failed to advise the potential purchasers to obtain independent advice in relation to the proposed sale.
446 The Full Court determined that in those circumstances, the observations in Brickenden applied to preclude an inquiry into the question of whether the potential purchasers would have, in any event, entered into the purchase agreement, even if the bank manager had made the disclosure.
447 The Brickenden principle was also applied by the Full Court of the South Australian Supreme Court in Gemstone Corporation v Grasso (1994) 62 SASR 239 (Grasso) in circumstances where there was a failure of a company director to avoid a conflict between duty and interest. The case is significant because Hydrocool contended that Mr Hepburn committed the same breach of fiduciary duty.
448 In Grasso, Mr Grasso was a director of a public company which decided to issue partly paid shares in the company. Mr Grasso procured that his allocation of partly paid shares was issued to a private company which he controlled. In doing so, however, he failed to disclose to his fellow directors that his private company was a shell company without assets. The partly paid shares were duly issued to the private company, Star Corporation Pty Ltd (Star), which in due course, failed to meet the call on the unpaid portion of the shares issued to it. Mr Grasso did not disclose the parlous state of Star to his fellow directors prior to the issue of the partly paid shares to it.
449 The Full Court found that Mr Grasso failed to avoid the conflict between his interest and duty. The Full Court rejected Mr Grasso’s contention that there was a break in the chain of causation between breach and loss, because even if he had made the relevant disclosure to his fellow directors, the public company would, in any event, have issued the partly paid shares to Star.
450 At 243, Matheson J observed:
I have reached the conclusion that his Honour’s ultimate decision was wrongly influenced by his consideration of what the directors would have done if Grasso had made full disclosure, and by his conclusion, after that consideration that they would still have allotted the shares to Star, and would not have insisted on any assurance being given by Grasso to stand behind Star. The authorities (some at least may not have been cited before his Honour) make it clear that such considerations are irrelevant.
451 Another case involving questions of causation arising from the breach of a director’s duty in which Brickenden was discussed, is the case of O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262. However, in that case, the Court of Appeal of the New South Wales Supreme Court did not characterise Mr O’Halloran’s breach of duty as a failure to avoid a conflict of interest. Rather the Court of Appeal dealt with the breach of duty as the exercise of power to dispose of the company’s property for an improper purpose.
452 Mr O’Halloran was a director and managing director of a company, RT Thomas & Family Pty Ltd (Thomas). Mr O’Halloran was also chairman of the board of Jeffries Industries Limited (Jeffries). Thomas also held shares in Jeffries. Thomas had, however, entered into an agreement which gave a company, Bowes & Brown, an option to purchase Thomas’s shareholding in Jeffries for the sum of AUD675,000. In breach of his fiduciary duty to Thomas, Mr O’Halloran procured that the Jeffries share register recorded a transfer from Thomas to Bowes & Brown, of its shares in Jeffries. No consideration was paid to Thomas by Bowes & Brown under its option agreement. After the irregular transaction was discovered, Mr O’Halloran failed to supply the documents necessary to permit the Jeffries share register to be rectified to show Thomas as the owner of the shares. Mr O’Halloran’s motive for acting in this way, was his desire to use the transfer of shares as a means of retaining control of Jeffries.
453 Before the Jeffries share register was rectified to show Thomas as the owner of the shares, Jeffries’ share price collapsed. Thomas claimed equitable compensation from Mr O’Halloran for its loss arising from its incapacity to sell the Jeffries shares before the share price collapsed, whilst the shares were registered in Jeffries share register in the name of Bowes & Brown.
454 The trial judge found that Mr O’Halloran’s conduct, in breach of fiduciary duty, caused Thomas to be deprived of effective control over the shares and that Thomas suffered loss by reason of that deprivation.
455 Mr O’Halloran argued that the act of registration of the transfer of the shares to Bowes & Brown did not cause any loss to Thomas. The real loss was caused, said Mr O’Halloran, by other causes, including attempts by Thomas to enforce the terms of the option agreement, and the failure of Thomas to join with Bowes & Brown in reselling the Jeffries shares in June 1994, before the share price collapsed. This argument was rejected by the Court of Appeal which held that a stringent test for causation applied in relation to Mr O’Halloran’s breach of fiduciary duty.
456 Spigelman CJ observed at 274-275:
Causation in equity is not, however, susceptible to the formulation of a single test. It is necessary to identify the purpose of the particular rule to determine the appropriate approach to the issues of causation: see Environment Agency v Empress Car Co (Abertillery) Ltd and Barnes v Hay as noted above.
457 Spigelman CJ went on to say at 276-277:
To adopt the words of the High Court in Maguire and Makaronis (at 473), the Court must identify “…the criteria which supply an adequate or sufficient connection between the equitable compensation claimed and the breach of fiduciary duty”. In the case of a trustee dealing with trust property, the law has proceeded beyond the invocation of the formulaic “common sense” approach to causation, by adopting a stringent test to the selection of those events preceding loss which are to be taken as causing the loss. There is a sufficient connection, irrespective of the identification of a separate and concurrent cause, when the loss would not have occurred if there had been no breach of duty.
458 Spigelman CJ went on to observe that the issue was whether an “adequate or sufficient connection” would be established by applying the test appropriate in the case of a breach by the trustee of a traditional trust, or by some other less stringent test.
459 Spigelman CJ observed at 277:
Policy favours a stringent test in the circumstances of this case. It is the vulnerability of a company which places its property in the power of directors, that makes it appropriate to adopt the approach to causation applicable to the trustee of a traditional trust in deciding issues of causation for the contravention by a company director of his or her duty not to exercise the power to dispose of property for an improper purpose.
460 Spigelman CJ referred to the Brickenden decision and said that it had been applied, or referred to without disapproval, on a number of occasions in Australia, including in Smith and Grasso, but he noted that it had also been subjected to criticism. However, in light of the characterisation of the duty breached, Spigelman CJ said that it was unnecessary to resolve the question in this case.
461 On applying the test of whether the loss would have occurred if there had been no breach of fiduciary duty by Mr O’Halloran, Spigelman CJ found that the act of registration of the shares in the name of Bowes & Brown, meant that Thomas lost the capacity to deal with its property by way of a sale to a third party. It was, said Spigelman CJ, of no avail to Mr O’Halloran to say that there was another cause of Thomas’s failure to make such a sale, namely, Thomas’s attempts to enforce the contract with Bowes & Brown. Spigelman CJ went on to say at 279:
The affirmation of the contract with Bowes & Brown may, in a common law action, have been characterised as a novus actus interveniens. But this concept has no role to play in the case of a breach of fiduciary obligation involving disposition of property which disposition is fraudulent in equity. That is the present case.
462 Priestley JA also made observations about Brickenden. Priestley JA said that Brickenden had been treated as binding authority and applied by the Full Court of the Federal Court in Smith. Further, Priestley JA referred to observations of the High Court in Maguire v Makaronis (1997) 188 CLR 449 to the effect that it was not self-evident that the response to the criticisms of the application of the reasoning in Brickenden was that there should be a general denial of the applicability of that reasoning to delinquent fiduciaries, particularly, solicitors and other professional advisers. Priestley JA went on to comment in relation to those observations, as follows:
This seems to be a relatively clear signal that if it becomes necessary for the High Court to consider the criticism of London Loan & Savings Co Ltd v Brickenden in a definitive way, the rule will be upheld although the range of situations to which the rule applies may be more carefully defined.
463 In Youyang v Minter Ellison Morris Fletcher (2003) 212 CLR 484 (Youyang), the High Court distinguished the case before them (involving a claim that a solicitor had dispersed funds in breach of trust) from the Brickenden case. The High Court said that the case made by Mr Youyang was not a case of a breach by the trustee of the proscriptive fiduciary obligation not to obtain an unauthorised benefit from the relationship and not to be in a position of conflict. However, the observations of the High Court in Youyang at [38]-[42], provide no comfort for an argument that the more stringent test of causation, applied in Smith, Grasso and O’Halloran, had no application where the duty breached by the failure, is the failure to avoid a conflict of interest and duty.
464 It follows that I find that the more stringent equitable test of causation is to be applied in the circumstances of this case. The policy considerations for the application of the more stringent test referred to by Spigelman CJ in O’Halloran, apply also to the circumstances of this case. A company is as vulnerable to a director with power to dispose of its property, as it is to a self-interested director.
465 On the application of the principle, it does not avail Mr Hepburn to contend, as he does, that Water Master would not, in any event, have entered into the Water Master heads of agreement, on the basis that Water Master would not have agreed to the upfront payment of a licence fee. Nor does it avail him to contend that Hydrocool would have closed the Fremantle operations in any event.
466 The question is whether the loss would have happened if there had been no breach of fiduciary duty by Mr Hepburn. In my view, it was only the introduction of the employment commitment clause which brought to an end the negotiations between the parties. As I have found above, this clause was introduced by the conduct of Mr Hepburn. It follows that I find that the loss, namely, the loss of the benefit to Hydrocool of entering into the Water Master heads of agreement and the subsequent licence agreement, would not have happened if there had not been a breach of fiduciary duty by Mr Hepburn.
467 Further, I find that the collective simultaneous resignation of all the employees, would not have happened if Mr Hepburn had not, in breach of his duty, during the preceding six months or so encouraged and fostered a collectivist mentality among the engineers antagonistic to Dr Teplitzky and the board. Further, Mr Hepburn was the instrument by which the simultaneous resignation of Mr Clarke and the engineers was effected. Consistently with the collectivist mentality he had engendered, Mr Hepburn collected the resignation letters from the engineers and Mr Clarke, before he met Dr Teplitzky. It was Mr Hepburn, not each of the engineers themselves, who delivered the letters of resignation to Dr Teplitzky on 19 October 2004.
468 It follows, therefore, that I find that the breach of fiduciary duty by Mr Hepburn caused Hydrocool to lose the benefit of entering into the Water Master licence agreement.
469 I also find that the breach of the fiduciary duty by Mr Hepburn also caused the en masse resignation of the engineers.
470 The next question is the means by which the quantum of compensation due to Hydrocool, is to be assessed.
471 In Youyang, the High Court at [50], approved the following observations of Lord Browne-Wilkinson in the case of Target Holdings Ltd v Redferns (a firm) [1996] 1 AC 421 (Target Holdings) at 437:
The fact that there is an accrued cause of action as soon as the breach is committed does not in my judgment mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred. The quantum is fixed at the date of judgment at which date, according to the circumstances then pertaining, the compensation is assessed at the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach. I can see no justification for “stopping the clock” immediately in some cases but not in others: to do so may, as in this case, lead to compensating the trust estate or the beneficiary for a loss which, on the facts known at trial, it has never suffered.
472 Finkelstein J in the case of AMP Services Limited v Manning [2006] FCA 256 (Manning), also referred to the Target Holdings case. At [66], Finkelstein J observed:
To accept Arrive’s argument is to accept the notion that a fiduciary breach effectively “stops the clock” at the time of breach for the purpose of determining what actual loss was suffered by a party and what the party’s ultimate “position” would have been. This line of reasoning was rejected by the House of Lords in Target Holdings Ltd v Redferns (a firm) [1996] 1 AC 421. There, Lord Browne-Wilkinson said (at 439):
Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.
473 Finkelstein J went on to observe at [69]:
Though the actual quantification of the claim will take place at a later point, it is necessary to say one final word about the method of calculating that loss. When dealing with equitable compensation a court is often faced with the challenge of placing a monetary value on an elusive loss such as a “loss of opportunity”, a loss that defines precise measurement: O’Halloran v RT Thomas & Family Pty Ltd (1998) 45 NSWLR 262, 273, adopting Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129, 163. To this end the court is permitted to use somewhat subjective “tools” in arriving at a valuation; tools such as common sense and general notions of justice and fairness.
Compensation under s 1317H of the Corporations Act
474 Hydrocool also sought compensation orders under s 1317H of the Corporations Act in respect of the contraventions by Mr Hepburn and Mr Clarke of s 182 and s 183 of the Corporations Act.
475 The question of the principles of causation to be applied in respect of compensation orders made under s 1317H of the Corporations Act, was considered in the case of Adler. In that case, the New South Wales Court of Appeal observed (Giles JA with Mason P and Beazley JA agreeing) at [709]:
…the words “resulted from” in s 1317H are words by which, in their natural meaning, only the damage which as a matter of fact was caused by the contravention can be the subject of an order for compensation. Like the word “by” in s 82 of the Trade Practices Act 1974 (Cth) (see Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; 158 ALR 333 at [38]-[42]), they should be given their ordinary meaning of requiring a causal connection between the damage and the contravening conduct, free from the strictures of analogy with equitable claims against fiduciaries.
476 In my view, therefore, it is appropriate to apply the test prescribed by the High Court in March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506, namely, determining causation as a question of fact by reference to common sense and experience.
477 In my view, for the reasons given below, I find that Water Master would have entered into the licence agreement on terms which provided for the payment of an upfront licence fee, even if there had been no employment commitment term.
478 However, for the reasons given below, I find that Hydrocool had already decided to close the Fremantle operations before the en masse resignation of Mr Clarke and the engineers, and, therefore, the causal link between Mr Hepburn’s and Mr Clarke’s contraventions of the Corporations Act and the losses claimed by Hydrocool, said to have arisen from the en masse resignation of the engineers, was not established.
exoneration
479 Each of Mr Hepburn and Mr Clarke claimed relief under s 1318 of the Corporations Act. This provision reads as follows:
(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.
480 Section 1318 applies to relieve directors and officers against liability deriving from their office under the general law and also for contraventions of the Corporations Act: Deputy Commissioner of Taxation v Dick (2007) 242 ALR 152 at [15]-[20] per Spigelman CJ.
481 In Australian Securities and Investments Commission v Macdonald (No 12) (2009) 259 ALR 116 at [22], Gzell J stated that in his opinion, a person acts honestly for the purposes of s 1318:
…if that person’s conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. That conclusion may be drawn from evidence of the person’s subjective intent. But a lack of such subjective intent will not lead the court to conclude that a person has acted honestly if a reasonable person in that position would regard the conduct as exhibiting moral turpitude.
482 In my view, this is not an appropriate case for the Court to exercise the discretion in favour of excusing Mr Hepburn and Mr Clarke from the consequences of their respective breaches of duty. Mr Hepburn engaged in the conduct in a surreptitious and deceitful manner, knowing that the implementation of his plan for the imposition of the employment commitment would adversely affect the financial condition of Hydrocool. Mr Clarke knowingly participated in Mr Hepburn’s surreptitious and deceitful conduct.
483 Further, both Mr Hepburn and Mr Clarke denied that they had engaged in conduct in breach of duty.
484 It cannot be said in those circumstances, that Mr Hepburn and Mr Clarke acted “honestly” within the meaning of s 1318 of the Corporations Act.
compensation
485 Hydrocool claimed three different categories of compensation.
486 First, Hydrocool claimed that by reason of Mr Hepburn’s and Mr Clarke’s breaches of duty in relation to the employment commitment, Hydrocool lost the opportunity to enter into and make profits from, the Water Master licence agreement; and also lost the opportunity to commercialise the Hydrocool CPU cooler technology.
487 Hydrocool claimed compensation in the sum of AUD2,438,294, alternatively, AUD2,313,000, in respect of the loss of opportunity to earn profits from the Water Master project. Hydrocool also claimed AUD970,500, alternatively, AUD443,426.18, in respect of the loss of opportunity to earn profits from the commercialisation of the Hydrocool CPU cooler technology.
488 Secondly, Hydrocool claimed that it suffered damage by reason of Mr Hepburn’s and Mr Clarke’s breaches of duty which caused the en masse resignation of the engineers. Under this head of claim, Hydrocool claimed that it lost opportunities to earn profits from a royalty agreement entered into with Hydrokinetics – the company under the control of Mr Skillecorn.
489 It was said that Hydrokinetics lost the opportunity to enter into agreements to supply heat exchangers to two companies from the United States, namely, Thetford and Marlow.
490 In respect of the loss of opportunity to earn royalties in relation to Thetford, Hydrocool claimed, in its closing submissions, the sum of AUD300,000, and in relation to Marlow, the sum of AUD16,500. Alternatively, said Hydrocool, the Court should award a nominal sum of AUD75,000 for those lost opportunities.
491 In addition, Hydrocool claimed that the Court should award a sum in respect of the costs and expenses incurred by each of Mr Skillecorn and Mr Murphy in seeking to re-establish Hydrocool’s technology. In respect of this head of claim, Hydrocool claims the sum of approximately AUD256,884.27.
492 The third of Hydrocool’s compensation claims, is a claim that Mr Hepburn account for the sum of AUD33,280 and interest. This claim arose from the fact that, on the day on which he was dismissed, Mr Hepburn procured Mr Clarke to authorise a payment to him in the sum of AUD33,280, on the basis that he was entitled to a bonus payment. Hydrocool claimed Mr Hepburn was not entitled to be paid a bonus, and claimed the repayment of the sum of AUD33,280 from Mr Hepburn with interest.
Loss of opportunity from Hydrocool’s failure to enter the Water Master licence agreement
493 I now deal with the first category of compensation claimed, namely, those said to arise from the loss of opportunity to enter into the Water Master licence agreement and the Windsor licence agreement.
494 I have found that whether one applied the equitable or common law test for causation, Hydrocool would have entered into a licence agreement which provided for the payment of the licence fee.
495 I reject Mr Hepburn’s and Mr Clarke’s contention that Water Master in the absence of the employment commitment from Hydrocool, would only have entered into a licence agreement, if there was no requirement for the payment of the fee upfront. This contention was based on a statement to that effect, by Mr Richardson in his witness statement of 29 March 2010. Mr Richardson founds that view on a statement made to him earlier, by either Mr Chung or Mr Tse opposing the payment of upfront fees. I accept that during the negotiations, the representatives of Water Master initially had objections to Hydrocool’s requirement for the payment of an upfront fee. This is evident from an email of 1 July 2004 sent by Mr Richardson to Dr Teplitzky, protesting about Hydrocool’s requirement for the payment of an upfront fee. However, I find that by August 2004, Water Master was prepared to enter the proposed licence agreement with Hydrocool on the basis that it would be required to pay an upfront fee. I infer this from the fact that the shareholders of Water Master approved the entry into the heads of agreement in August 2004. At that time, there was a provision in the heads of agreement for the payment of an upfront fee and no term providing for an employment commitment from Hydrocool.
496 The next step is for the Court to make an assessment of the loss suffered by Hydrocool by reason of the loss of that opportunity. As mentioned, the principles referred to by Finkelstein J in Manning, are to be applied in making that assessment. In Manning, Finkelstein J cited, with approval, the following observations of McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163:
In summary, compensation is an equitable monetary remedy which is available when the equitable remedies of restitution and account are not appropriate. By analogy with restitution, it attempts to restore to the plaintiff what has been lost as a result of the breach, ie the plaintiff’s lost opportunity. The plaintiff’s actual loss as a consequence of the breach is to be assessed with the full benefit of hindsight. Foreseeability is not a concern in assessing compensation, but it is essential that the losses made good are only those which on a common sense view of causation, were caused by the breach.
497 The following observations of the High Court in Malec v JC Hutton (1990) 169 CLR 638 at 643, are also relevant:
If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high – 99.9 per cent – or very low – 0.1 per cent. But unless the chance is so low as to be regarded as speculative – say less than 1 per cent – or so high as to be practically certain – say over 99 per cent – the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded. See Mallett v McMonagle [1970] AC 166 at 174; Davies v Taylor [1974] AC 207 at 212, 219; McIntosh v Williams [1979] 2 NSWLR 543 at 550-1. The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place.
498 The Water Master heads of agreement provided for the payment of a licence fee of USD750,000, which at that time equated to AUD1,005,000.
499 The net value of the loss of opportunity to earn the Water Master licence fee, contended Hydrocool, was the amount of licence fee less the estimated costs in completing its obligations under the heads of agreement, plus additional benefits that would have been available to Hydrocool from carrying out the work, namely, a tax rebate for research and development costs. Hydrocool claimed that it would have received the amount of AUD1,005,000, less staffing and other costs of AUD585,500, plus an allowance for a tax rebate of 30% of 125% of research and development costs, being the sum of AUD219,562.50, resulting in a net loss of profit of approximately AUD639,000.
500 In assessing the net figure, Hydrocool adopted the estimated costs of AUD585,500 which was the figure used by Mr Clarke as the total cost for the completion of the prototype, in the cash flow statement referred to at the 24 September 2004 board meeting.
501 Hydrocool also claimed that it lost the opportunity to earn royalties under the Water Master licence agreement. The heads of agreement provided for the payment of an ongoing royalty fee calculated at 3% (or 2.5% for units manufactured in excess of 10,000 per month) of the ex-factory cost of each water from air device that was manufactured. Hydrocool claimed that the ex-factory cost of the domestic device would be USD300, or AUD399, and that damages should be awarded on the basis of the loss of one year’s royalty that would have been earned based on the manufacture of 130,778 water from air units, alternatively, 120,000 water from air units.
502 In relation to its contention that it lost the opportunity to commercialise the Hydrocool CPU cooler technology, Hydrocool claimed that it lost the opportunity to earn AUD237,500 as profit from the payment of the licence fee payable under the proposed Windsor licence agreement. This sum is comprised of the fee of AUD500,000, less costs of approximately AUD300,000, a tax rebate of AUD37,500 based on AUD100,000 of research and development costs.
503 Hydrocool also contended that it would have earned AUD133,000 from a second licence agreement which would have been entered into with a potential licensee in the United States.
504 Hydrocool also claimed a loss of the opportunity to earn royalties from Windsor under the proposed Windsor licence agreement.
505 Hydrocool claimed the sum of AUD600,000 as the annual royalty payment, on the basis that Mr Hepburn had made the assessment at the 24 September 2004 board meeting, that the royalties would grow to AUD50,000 per month. Alternatively, Hydrocool claimed the sum of AUD72,926.18 founded on potential sales over a four year period into a worldwide market comprising only new computers. The potential market penetration by Hydrocool was calculated by applying the available market filters referred to by Mr McGrath. On this basis, Hydrocool predicted sales of Hydrocool CPU cooler units of 8,171 units over a four year period from 2005 to 2008.
506 In my view, it is necessary to make an assessment of the value of the loss of opportunity for each of the component amounts claimed by Hydrocool.
The loss of opportunity to earn a profit from the proposed licence fees
507 Hydrocool contended that it would have made a profit from the receipt of the licence fees contemplated under each of the proposed Water Master licence agreement and the proposed Windsor licence agreement. It also said it would have received a second licence fee of AUD133,000 in respect of the CPU cooler unit.
508 For the purpose of calculating the loss of opportunity to earn the profit claimed, Hydrocool considered each of the contemplated Water Master and Windsor licence fees separately – deducting from each fee an amount representing the expenses that Hydrocool would have had to incur in carrying out the work to develop the Water Master prototype and the CPU cooler units respectively.
509 Hydrocool claimed the loss of opportunity to earn profits from the licence fees amounted to a sum totalling AUD876,500, comprising AUD639,000 in respect of the loss of the Water Master license fee and AUD237,500 in respect of the loss of the Windsor licence fee.
510 Mr Hepburn and Mr Clarke contended that in October 2004, there were a number of unsolved problems with the HS5 convector module. These problems would have precluded, or at least substantially delayed, the commercialisation of the HS5 convectors and, therefore, the development of the CPU cooler units and, also, potentially the water from air prototype, depending on whether the HS5 convector or the single fluid circuit technology was used.
511 Further, contended Mr Hepburn and Mr Clarke, contrary to the approach adopted by Hydrocool in isolating the budgeted cost of each of the projects, it was necessary to have regard to the total expenses of Hydrocool over the anticipated duration of the two projects, which was until December 2005. Mr Hepburn and Mr Clarke contended that, on that basis, it was likely that Hydrocool’s expenses would have exceeded its income.
512 The consequence of these factors, therefore, said Mr Hepburn and Mr Clarke, was that there was a very high risk that not all of the monies comprising the two licence fees would have been paid, and, if some, or all, of the licence fees were paid, no profit would, in any event, have been retained in relation to those licence fees, because of the high level of expenditure.
513 I have found that Water Master would have entered into the Water Master licence agreement on terms that provided that it pay Hydrocool a licence fee of AUD1,005,000 payable in three instalments on the achievement of the milestones referred to in the Water Master heads of agreement.
514 However, the position is different in relation to the proposed Windsor licence agreement which provided for the manufacture of the HS5 convectors and the manufacture and distribution of the CPU cooler units throughout Asia. Windsor did not pursue entry into the Windsor heads of agreement with the same degree of diligence and enthusiasm as did Water Master. At the Hydrocool board meeting on 24 September 2004, Mr Hepburn advised the directors that Windsor wanted to wait and see how matters turned out in relation to the Water Master licence agreement and the development of the Water Master prototype, before progressing the Windsor licence agreement. However, as is evident from the cash flow statement which Mr Hepburn presented to the board at that meeting, Mr Hepburn anticipated that Windsor would enter into and pay the licence fee, anticipated to be AUD500,000, in May 2005. At the board meeting, Dr Teplitzky warned that in the absence of the Windsor licence agreement, there would be no manufacturer and this could have adverse consequences on the prospect of earning royalties under the Water Master licence agreement.
515 I deal first with the question of the contention that in October 2004, there were unsolved problems with the HS5 heat exchanger/convector technology.
516 Mr Weymouth deposed that there were technical difficulties with the HS5 convector prototypes. Mr Weymouth said that, at the time that he resigned from Hydrocool, the technology was not ready for commercialisation because there were “serious technical problems” which had not been solved.
517 The major technical problem, said Mr Weymouth, related to the method of attaching the micro-channels through which the coolant passed to the base and top plate that enclosed it. The problem related to the method by which the micro-channels were attached. The difficulties arose from the soldering which was used as the method of attaching the micro-channels. Excessive heating process could destroy the thin metal of the device. Excessive use of solder could “wick up” the thin channels and block the flow and increase thermal resistance.
518 Mr Weymouth said that there were also corrosion problems, as well as a problem with the sealing of the housing. Mr Weymouth said that as the engineer in charge, he could not be certain that these technical problems could have been solved within any reasonable time frame or cost frame or at all.
519 Mr Weymouth said that the corrosion problem appeared to have been solved but re-emerged at a later time.
520 In cross-examination, Mr Cobden, senior counsel for Hydrocool, took Mr Weymouth to the MARCO/Hydrocool collaboration final report in relation to the development of the thermoelectric fridge freezer. Mr Weymouth accepted that the report had referred to corrosion tests carried out at Curtin University of Technology by Mr Brian Sellar, that Mr Sellar had concluded that the corrosion rate in respect of the HC3 convector module was low and that on the basis of the tests the use of Freezium would not cause a corrosion problem. Further, a solder joinder reliability test had been successfully carried out.
521 In re-examination, however, Mr Weymouth drew a distinction between the HS5 convector which used water and the HC3 convector which used Freezium.
522 Dr Bellstedt, an expert witness called by Hydrocool, gave evidence about the time that Hydrocool might take to complete the further development work in relation to the Hydro-Stream HS5 waterblock for use as a CPU cooler and the proposed water from air device.
523 Dr Bellstedt referred to the fact that in June 2004, the reviewer of the Hydro-Stream HS5 waterblock on the website, Overclockers.com, had said that the Hydro-Stream was an excellent choice for CPU cooling with the proviso that a larger water pump would be needed for the best performance. The reference to the larger water pump was because Overclockers.com had also referred to a high pressure drop when using the Hydro-Stream HS5 waterblock. Dr Bellstedt said that development work by Hydrocool to provide a fully functional CPU cooling kit could, in his opinion, have resulted in Hydrocool making an improved device to a worldwide market within six months from the date of the review in Overclockers.com.
524 However, during cross-examination, it emerged that when Dr Bellstedt prepared his report, it had not been brought to his attention that in October 2004, the HS5 convector had unresolved problems. Dr Bellstedt said that, at the time of preparing his report, he was aware that Hydrocool was still perfecting the technique of bonding the copper pins to the base plate of the HS5. However, he was unaware that the HS5 had unresolved problems with galvanic corrosion and also unresolved problem in reliably producing a flat base plate for the HS5.
525 Dr Bellstedt agreed with the proposition that the HS5 could not be manufactured and sold until all these problems were resolved. Dr Bellstedt said that he could not state with certainty how long it might take to resolve these problems. He said that it “may be a brief time or it may be a very long time, because you have to find a materials solution that works”. He also agreed with the proposition that it was possible that there may not have been any solutions to some of the problems.
526 During the 24 September 2004 board meeting, Dr Teplitzky also raised the question of the “brazing” of the fins into the base plate. Mr Hepburn agreed that there was still work to do in “a mass production sense” but low temperature soldering seemed to be the option for Hydrocool. Mr Hepburn went on to say that there were no “major concerns about the mass produceability of the device”. However, Dr Teplitzky said that he had been involved in this issue and that he had engaged a person in California to inquire into the problem. Dr Teplizky said that his understanding, subject to being corrected, was that “the current procedure is not really ready for commercial manufacture of that HS5 convector.”
527 Hydrocool submitted that these contentions of Mr Hepburn and Mr Clarke should be discounted because during the negotiations with Water Master, neither Mr Clarke nor Mr Hepburn raised these problems as an impediment to the prospects of success of the Water Master project. Nor, said Hydrocool, had Mr Hepburn, at the board meeting on 24 September 2004, seen these problems as insurmountable obstacles.
528 In my view, it is apparent that at the 24 September 2004 board meeting, both Mr Hepburn and Dr Teplitzky were aware that there were problems to be overcome before the HS5 convector could be commercialised, but each expressed a different opinion as to the potential effect of the problems on the commercialisation prospects of the HS5. Mr Hepburn was more optimistic in this respect than Dr Teplitzky. In my view, the opinions expressed in September 2004, by Mr Hepburn and Dr Teplitzky, as to the potential for these problems to impede the commercialisation of the HS5 convector, are not of great assistance in assessing that question with the benefit of hindsight.
529 More helpful in this respect, is the evidence of Dr Bellstedt and the evidence of Mr Skillecorn. Dr Bellstedt accepted in cross-examination that these problems were sufficiently important to have constituted a threat to the commercialisation of the HS5 convector and that all the problems would have to have been solved for the HS5 to have been manufactured and sold. He accepted that it was possible that the problems could never be solved. Further, the effect of Mr Skillecorn’s evidence is that he did consult with experts on the problems with the HS5 convector, but that he had not taken the commercialisation of the HS5 convector any further because it was too expensive.
530 Hydrocool also contended that the Court should discount the impact of the technical problems facing the commercialisation of the HS5 convector, referred to by Mr Hepburn and Mr Clarke, because TEA had been able to produce a water from air prototype device within 12 months. I accept that TEA did not use Hydrocool technology in the production of the TEA prototype, but I do place some weight on this submission. This is because by October 2004, the draft head of agreement with Water Master contemplated that Hydrocool may use either the HS5 convector or the single fluid circuit technology in the development of the water from air prototype.
531 I find that in October 2004, there were unsolved problems with the HS5 convector which had the potential to adversely affect the prospect of Hydrocool being able to commercialise the HS5 convector. I find, therefore, that this is a consideration which is to be taken into account in assessing the prospect of Hydrocool earning a profit from the receipt of licence fees under the Water Master licence agreement, the Windsor licence agreement and the proposed second licence fee. I accept that the problems may have impacted differently on the CPU cooler project and the Water Master project, depending upon the technology used in the water from air device.
532 Another matter which had the propensity to affect the extent of the profit, if any, which Hydrocool would have made from the licence fees, is the expenses which Hydrocool would have incurred before the completion of the Water Master project and the CPU cooler project.
533 At the board meeting on 24 September 2004, Mr Hepburn presented a cash flow statement which predicted the income and expenditure for Hydrocool until December 2005. This cash flow statement predicted that the expenditure incurred by Hydrocool during the period from October 2004 to December 2005, would be, including overheads, AUD2,489,057. It is to be noted that this cash flow statement did not take into account making any payments in relation to the Symetrix project.
534 The cash flow statement also predicted that Hydrocool would receive the Windsor licence fee of AUD500,000 in June 2005, royalty payments from Windsor totalling AUD745,000 between June 2005 and December 2005, and a second licence fee of AUD140,000 in respect of a CPU cooler licence, in June 2005.
535 In my view, the prospect of Hydrocool receiving the Windsor licence fee, the second licence fee and the royalty payments under the Windsor licence agreement between June 2005 and December 2005, must be very substantially discounted because of the unsolved problems attending the commercialisation of the HS5 convector. This is because Windsor had advised it would wait to observe the progress that was made under the Water Master licence agreement before deciding whether to progress the licence agreement. In addition, the prospect of a company entering into a licence agreement for the United States, in respect of the CPU cooler unit, as foreshadowed by Mr Hepburn, whilst there were unsolved problems in relation to the HS5 convector, must also be very substantially discounted.
536 In this regard, it is relevant to observe that in his strategy paper to the board meeting of 24 September 2004, Dr Teplitzky predicted that Hydrocool would run out of cash in August 2005.
537 Hydrocool also contended that the Court should take into account the contingency that Hydrocool would have been able to raise further capital had it entered into the Water Master licence agreement. Dr Teplitzky and Mr Murphy both gave evidence that they would have been able to raise further capital.
538 Mr Hepburn and Mr Clarke submitted that this evidence of Dr Teplitzky and Mr Murphy should be considered in light of Dr Teplitzky’s report to the board dated 20 September 2004, in which he had advised that he had been unsuccessful in raising further capital for Hydrocool. Dr Teplitzky’s report stated that the real value for investors was in the Symetrix research. However, at the trial, there was no evidence that the Symetrix research had led to the elusive breakthrough.
539 In my view, Dr Teplitzky’s and Mr Murphy’s evidence cannot be wholly discounted. The entry into the Water Master licence agreement may have altered the prospect of further equity investment being made in Hydrocool.
540 Accordingly, I take into account the possibility that Hydrocool may have raised further capital before December 2005, but assess that prospect as low.
541 It follows, that the prospect of Hydrocool, first receiving all of the contemplated licence fees, and then, retaining any profit from those fees, is very low. This is because of the high risk of not actually receiving all the fees, the very high prospect that Hydrocool would be required to use such of the monies as it did in fact receive, in discharging its operating expenditure, and the low prospect of it being able to raise further capital.
542 In my view, an award of the sum of AUD20,000 in respect of this head of claim, reflects the balance of the contingencies, in respect of Hydrocool’s prospects of being paid all three tranches of the Water Master licence fee, the Windsor licence fee and the second licence fee and retaining any profit from those fees.
The loss of royalties under the Water Master licence agreement
543 Hydrocool claimed that compensation should be awarded for loss of its opportunity to earn royalties under the Water Master licence agreement in the sum of either AUD1,799,294, or alternatively AUD1,674,000. Hydrocool contended that this sum should be awarded on the basis that it was a near certainty that the royalties under the Water Master licence agreement would have been paid to Hydrocool.
544 The amount of AUD1,799,294 represents the royalties which would have been payable under the Water Master licence agreement in one year on the assumption that 130,778 water from air domestic units would have been manufactured in that year and that the ex-factory price of the domestic unit would have been AUD399 (using an United States dollar exchange rate then current of 1.33). The assumption that there would be 130,778 water from air domestic units manufactured in one year, was based on sales projection figures for the domestic water maker contained in a document produced by Water Master Enterprise (BVI) Group Limited (WMEL), a company with which Mr Richardson was associated in 2007. Hydrocool tendered this document and another related business plan in support of its claim that it had lost the opportunity to earn royalties under the Water Master licence agreement.
545 One of the WMEL business plans disclosed that it had acquired the intellectual property rights in a water from air device developed by TEA, and completed contractual arrangements with the ex-staff of TEA via their new company, Thermoelectric Consulting Pty Ltd, to assist in the commercialisation of the domestic water from air device. It also revealed that WMEL had entered into a licence agreement with TEA to pay a royalty on the ex-factory cost of the domestic water from air device.
546 The business plan disclosed that Windsor had closed the factory in China at which the Water Master water from air devices were to have been manufactured, due to Windsor’s financial problems. However, the business plan went on to say, that it intended to relocate to another factory, at Dong Guan, at which the water from air devices could be manufactured. The business plan sought investment for the purpose of raising money to meet WMEL’s objectives. One of these objectives was to relocate to the new factory. Another of these objectives was to manufacture and sell the commercial and domestic water making devices.
547 Further, Mr Richardson also said in his witness statement of 9 September 2009, that Water Master had not been able to raise the funds to commercialise the domestic water from air device.
548 The amount claimed of AUD1,674,000 is based on the loss of royalties founded on the manufacture in one year of 10,000 water from air units per month, at an ex-factory cost of AUD399 per unit.
549 The licence granted by Hydrocool under the proposed Water Master licence agreement was to manufacture and commercially exploit the HS5 and/or the single fluid circuit technologies, for the single application of domestic water from air devices. The prospect of Hydrocool earning royalties under the Water Master licence agreement, was, therefore, to an extent, subject to the contingencies relating to the unsolved problems with the HS5 convector, to which I have already referred. Because of the prospect of the single fluid circuit technology being used in the water maker, I place less weight on this contingency, in relation to the Water Master agreement, than in respect of the CPU cooler units.
550 In addition to the other contingencies to which I have already referred, there are further contingencies which are to be taken into account in assessing the prospect of Hydrocool receiving the royalties contemplated under the Water Master licence agreement.
551 The first contingency is that, even if a domestic water from air prototype had been successfully developed by Hydrocool and been capable of commercial production, the product would not have been a market success. Plainly, in the absence of a domestic water from air device being a success in the market, the prospect of receiving substantial royalties under the Water Master licence agreement is substantially diminished. In this regard, there was no evidence that Water Master’s compressor driven office water maker was a market success. In fact, to the contrary, the evidence of Mr Skillecorn was to the opposite effect.
552 The next contingency is the risk of Water Master being unable to manufacture or procure the manufacture of the water from air devices, in respect of which the licence had been granted. As mentioned, in 2004, the parties had proceeded on the assumption that there would be a manufacturer for the CPU cooler units and the domestic water from air devices. However, it was apparent that by the time of the trial, Windsor had closed down the factory in China where the units were to have been manufactured, for financial reasons. The WMEL business plan stated that WMEL, with which Mr Richardson was associated, had located an alternative factory. However, WMEL was looking for further monies to progress the venture.
553 Also, there was no evidence that TEA had earned any royalties in respect of the licensing of its technology for use in relation to the domestic water maker prototype which it had produced.
554 Although it may be that Windsor’s actions in closing down the factory in China, and the absence of TEA earning royalties, are to be explained by the existence of this litigation, as hinted by Hydrocool, this was not a matter which was explored in the evidence. I, accordingly, proceed on the basis that Water Master’s inability to manufacture, or to procure a manufacturer for the water from air device, is a contingency to be taken into account in assessing the prospect of Hydrocool earning the royalties contemplated under the proposed Water Master licence agreement.
555 Taking all the contingencies into account, I find that there was about a 15% prospect of Hydrocool earning royalties under the contemplated Water Master licence agreement.
556 In assessing the compensation to be awarded in respect of this lost opportunity, I prefer to use the larger of the sums claimed by Hydrocool as the base upon which to assess the quantum of compensation payable. This is because Hydrocool has clamed its loss by reference only to one year’s potential lost royalty, whereas had the project been successful, the royalties would have continued for longer than one year. Further, Mr Hepburn and Mr Clarke did not adduce their own expert evidence directed to establishing a projected loss, against which a discount should be applied for contingencies.
557 I observe that Mr Hepburn and Mr Clarke contended that Hydrocool had not established an ex-factory cost for the water from air device. The figure of AUD399 was based on projected figures for manufacturing costs used in the WMEL business plan. Mr Richardson said in evidence that the manufacturing costs referred to in the business plan were hypothetical and bore no relation to fact. In my view, this is not a sufficient basis to find that Hydrocool’s figure is not supported by the evidence. Notwithstanding that the manufacturing costs may have been hypothetical, WMEL a company with which Mr Richardson was associated, was content to publish those figures in a business plan to be used for the purposes of seeking investors, in respect of the commercialisation of a domestic water maker.
558 Accordingly, I award compensation in the sum of AUD270,000 in respect of the loss of opportunity to earn royalties under the contemplated Water Master licence agreement.
559 I observe that in the closing submissions of Hydrocool, Hydrocool also referred to the market projection in respect of office water from air machines. However, the office water from air machine on which Water Master based its sales projections, was a compressor based machine. Further, such evidence as there was about the office based water from air machine, was that it had not been a success in the market. In my view, the submission was unhelpful.
The loss of opportunity to earn royalties from the Windsor agreement
560 As I have already mentioned, Hydrocool claimed the sum of AUD600,000 or alternatively, AUD72,926.18 as compensation for the loss of the opportunity to earn royalties under the proposed Windsor licence agreement. Although the proposed Windsor licence agreement provided for a royalty of 5%, Mr Hepburn advised the board at the 24 September 2004 meeting, that a royalty of 3% of ex-factory cost was more appropriate. Hydrocool has used this rate in the calculation of its loss.
561 It was contemplated that Windsor would have had an exclusive licence to manufacture and distribute Hydrocool’s CPU cooler units for South-East Asia and Australasia and a non-exclusive licence for the rest of the world.
562 There were a number of obstacles in respect of Hydrocool’s claim under this head of claim compensation.
563 First, the sum of AUD72,928.18 which Hydrocool claims, is founded on an addressable market which is derived by the application of two filters, namely 20% and 0.3%, referred to by Mr McGrath in his evidence. However, in his cross-examination Mr McGrath said that the application of those filters showed only those persons with computers with specifications (“highly spec’d machines”) who would benefit from a CPU cooler. The market for persons who are likely to actually buy CPU coolers requires the application of a third filter, namely, a smaller group than in the total addressable market. The application of this third filter would reduce further the potential sales of Hydrocool CPU cooler units relied upon by Hydrocool in assessing its loss of opportunity to earn royalties in respect of its CPU cooler units.
564 Further, in assessing potential royalties based on a formula of 3% of the ex-factory cost of a CPU cooler unit, Hydrocool relied upon the evidence of Mr McGrath for the ex-factory cost of a CPU cooler unit. Mr McGrath used AUD297.50 as the ex-factory cost. During cross-examination, however, Mr McGrath accepted that the cost to build each unit was AUD264. Mr McGrath conceded during cross-examination that on a sale price of AUD297.50 the manufacturer’s overheads would not be covered, with the consequence that there would be no net profit on sales. Mr McGrath went on to concede that as a matter of commercial reality no such sales would ever occur.
565 However, notwithstanding the concessions made by Mr McGrath in cross-examination, it must be possible to derive an ex-factory cost of a CPU cooler unit which will generate a profit for the manufacturer. I will, in the absence of Mr Hepburn and Mr Clarke having in final submissions relied upon evidence of an alternative figure for the ex-factory cost of a CPU cooler unit, assume that the cost of manufacture, namely AUD260 referred to by Mr McGrath, was higher than was in truth the case, and proceed on the assumption that the figure of AUD297.50 as the ex-factory cost of a CPU cooler unit was within the range of reasonable estimates.
566 In addition to the substantial contingency risks to which I have already referred, namely, the unsolved problems associated with the HS5 convector and the substantial risk that Windsor would be unable to manufacture the HS5 convectors and CPU cooler units, by reason of having been forced for financial reasons, to close down the factory in China, there was also a further risk that Hydrocool was too late in entering the market for the supply of CPU cooler units.
567 This risk was recognised by Mr Stone at the board meeting on 24 September 2004, when he raised with Mr Hepburn the fact that there were pages of hits on Google which indicated that there were several manufacturers of CPU coolers already in the market. Mr Stone queried whether Hydrocool may have missed the boat. At the same meeting, Dr Teplitzky asked whether computer manufacturers themselves would be integrating water cooling into their manufacturing and, if so, who was going to buy an ancillary unit. Mr Hepburn said that, even if the manufacturers were integrating water cooling into their computers, if Hydrocool was the best performer, that was something the computer manufacturer had to look at.
568 However, there was no evidence that Hydrokinetics had achieved any success in commercialising a CPU cooler using the HS5 technology. Indeed, Mr Skillecorn said that he had abandoned attempts to commercialise the HS5 convector.
569 Nevertheless, the fact that a prototype Hydrocool Hydro-Stream CPU cooler unit had received a favourable review in Overclockers.com in June 2004, is a factor to which weight should be accorded. Further, as Dr Bellstedt deposed, the period during which Hydrocool was able to take advantage of the favourable review was limited.
570 In my view, seeking to quantify the prospect of Hydrocool subsequently earning royalties by reference to the application of a percentage to either of the sums claimed by Hydrocool would not fairly represent the loss of opportunity. The figure of AUD600,000 is based purely on optimistic speculation by Mr Hepburn at the board meeting on 24 September 2004, whereas the figure of AUD72,926.18 is affected by obvious anomalies in the evidence of Mr McGrath.
571 In my view, taking into account the contingencies referred to above, I award compensation of AUD30,000 in respect of Hydrocool’s loss of the opportunity to earn royalties under the Windsor agreement.
losses arising from the en masse resignation of the engineers
572 There are two elements to Hydrocool’s claim for losses arising from the en masse resignation of the engineers.
573 The first element relates to the time costs and expenses claimed by Mr Skillecorn and Mr Murphy in re-establishing the Hydrocool technology. The second element of the claim comprises a claim by Hydrocool for the loss of opportunity to earn royalties under the Hydrokinetics license agreement.
574 I have found that the conduct by Mr Hepburn in breach of his fiduciary duty, and the conduct of Mr Hepburn and Mr Clarke in contravention of s 182(1) of the Corporations Act, caused the en masse resignation of the engineers.
575 The next question is whether the en masse resignation of the engineers caused the losses claimed by Hydrocool.
576 Mr Hepburn and Mr Clarke contended that the causal chain between the losses claimed by Hydrocool, and any breach of duty by them, had been broken because Hydrocool had, before Mr Hepburn was dismissed, and, therefore, before the en masse resignation of the engineers, already decided to close the Fremantle premises, terminate the contracts of employment of Mr Clarke and the engineers, and move the operations to Sydney. Accordingly, said Mr Hepburn and Mr Clarke, Hydrocool was in no different a position after the en masse resignation of the engineers and Mr Clarke, than it would otherwise have been.
577 In my view, on the operation of the more stringent test in equity, it is not open to Mr Hepburn to raise this contention in response to the finding that his breach of fiduciary duty caused the en masse resignation of the engineers.
578 However, in my view, a contention to that effect is available to Mr Hepburn and Mr Clarke in relation to Hydrocool’s contention that losses were caused by their respective contraventions of s 182(1) of the Corporations Act. I now consider this contention.
579 I find that prior to the dismissal of Mr Hepburn on 19 October 2004, Dr Teplitzky had already decided to close the Fremantle operations. It is apparent from his communication with Grant Thornton, on 18 October 2001, that he intended to close the Fremantle operations, whether any one or more of the engineers agreed to relocate to Sydney or not. As previously mentioned, I reject Dr Teplitzky’s evidence at para 35 of his affidavit, that he intended to keep the Fremantle operations going under a new managing director if the engineers did not want to relocate to Sydney, as being contrary to the contemporaneous documentation.
580 It follows that in relation to Hydrocool’s claim for compensation against Mr Hepburn and Mr Clarke under s 1317H of the Corporations Act, Hydrocool has failed to establish the necessary causal link between Mr Hepburn’s and Mr Clarke’s contraventions of s 182(1) and the damage that Hydrocool claims that it has suffered.
581 I now deal with the claim against Mr Hepburn arising from his breach of his fiduciary duty.
582 In Youyang, the High Court at [44], said that there was “no equitable by-pass to the need to establish causation”. It is necessary, therefore, to apply the principles referred to at [469]-[473] above.
Mr Skillecorn and Mr Murphy’s time and expenses
583 The claim in relation to the time spent and expenses incurred by Mr Skillecorn in re-establishing the Hydrocool technology, comprises the following components:
(a) time cost for Mr Skillecorn of AUD167,115;
(b) telephone costs of AUD1,400;
(c) motor vehicle expenses of AUD1,400;
(d) stationery costs of AUD500;
(e) other consultants costs of AUD3,500.
584 The claim for AUD82,929.27 in relation to Mr Murphy, represents a charge in respect of the time which he said that he spent on Hydrocool matters in the course of seeking to re-establish the Hydrocool operations.
585 Mr Skillecorn deposed that since July 2005, he kept Mr Murphy advised of the costs and expenses incurred, and Mr Murphy advised Mr Skillecorn that if Hydrocool had funds in the future, the costs and expenses would be reimbursed.
586 In his affidavit of 28 November 2008, Mr Murphy said he was the sole director of Hydrocool and he made all decisions relating to the payment of money by Hydrocool to third parties. He said that it was his intention as soon as there were funds available to Hydrocool from trading activities, including the receipt of royalties from Hydrokinetics, to authorise the payment to both Mr Skillecorn and himself of an amount of money to reimburse each of them for the costs they had incurred in re-establishing Hydrocool’s technology. He said that neither he, nor Mr Skillecorn, had rendered invoices in respect of the charges Hydrocool claimed.
587 Mr Murphy annexed to the affidavit a print out of the spreadsheet setting out the activities in which he engaged in trying to re-establish Hydrocool’s technology. Those activities include dealing with Mr Skillecorn.
588 In my view, Hydrocool has not proved that it has suffered a loss in respect of these charges. The evidence does not reveal that either Mr Skillecorn or Mr Murphy has a presently enforceable right in respect of these monies against Hydrocool, which Hydrocool would be liable to meet. At best, the evidence of Mr Murphy discloses a statement of future intent to make payments, should circumstances change.
589 It is significant that neither he nor Mr Skillecorn had issued invoices relating to the costs they incurred.
590 Accordingly, I dismiss this claim.
591 Further, and in any event, I am not satisfied that all of the time spent by Mr Skillecorn is causally connected to Mr Hepburn’s breach.
592 First, after his appointment, Mr Skillecorn, who is not an engineer, contrary to the advice of Mr Murphy and Dr Teplitzky, declined for some time, to engage engineering assistance to help him in his task of re-establishing the Hydrocool technology.
593 During cross-examination, Mr Skillecorn was taken to an email from Mr Murphy dated 5 October 2005. The email contained the following statement:
From day one it was understood that you would need to employ a competent engineer and I have lost count of the number of times David has brought this up. As this has not occurred to date the slow progress sorting out the technology is therefore not unexpected.
594 Secondly, Mr Clarke during his evidence, showed that a full set of records and reports were left on Hydrocool’s server.
595 Mr Skillecorn said in cross-examination, however, that Grant Thornton delayed providing him the portable hard drive and ghost copies of the Hydrocool computers until 1 November 2005 – about one year after Grant Thornton took control of the Fremantle premises.
596 Mr Skillecorn also admitted that he was unable to access the CAD drawings stored on the hard drive because he did not know how to do so. It took nine months after the delivery of the disk by Grant Thornton before he sought advice from an information technology expert.
597 Further, Dr Bellstedt gave evidence that he would advise the company against hiring a person with no qualifications or experience in engineering, thermodynamics or in thermoelectrics to develop a new heat pump.
598 Accordingly, if contrary to my view, Hydrocool was liable to meet Mr Skillecorn’s costs, it would have been my view that Hydrocool has not proved that all the costs and expenses incurred by Mr Skillecorn were related to Mr Hepburn’s breach of duty.
599 I would have been prepared to award only AUD25,000 in respect of this claim.
600 In relation to the claim in respect of Mr Murphy’s time, had I been of the view, that Hydrocool had suffered a loss in respect of this claim, I would only have awarded Hydrocool AUD25,000 in respect of those costs. This is because Hydrocool chose to enter into a licence agreement with Hydrokinetics knowing full well that Mr Skillecorn was not an engineer, and the predictable consequences occurred. This meant that Mr Murphy’s involvement was greater than it would otherwise have been, had Hydrocool acted reasonably, and appointed a person with the necessary professional expertise to re-establish Hydrocool’s technology.
Thetford
601 Hydrocool claimed the sum of AUD300,000 in respect of the lost opportunity to earn royalties under the Hydrokinetics licence agreement from a licence that Hydrokinetics would have entered into with a company, Thetford.
602 In May 2006, Mr Paul Chandler who agreed to assist Mr Skillecorn in licensing Hydrocool technology, met a friend who worked for Thetford, which was a large supplier of refrigeration equipment for recreational vehicles, boats and trucks in the United States and around the world. They discussed Hydrocool technology. Hydrokinetics entered into a non-disclosure agreement with Thetford on 12 May 2006. During negotiations, an executive of Thetford said that Thetford produced about 40,000 refrigerators a year and it was interested in Hydrocool’s technology.
603 Negotiations proceeded to the point where an executive from Thetford asked Hydrokinetics to send a complete thermoelectrical refrigeration system to its plant in Ohio so that it could be tested. Thetford said that they would need to see the complete refrigeration system before proceeding further. Mr Skillecorn was unable to comply with Thetford’s request because the one sample he had, comprised the Hydrocool 126 litre refrigerator freezer prototype built as part of the MARCO project. However, the fridge freezer did not work because the system had largely corroded. Also, Mr Skillecorn had no further heat exchangers. Mr Skillecorn also said that it would have cost several thousand dollars to replicate the refrigerator freezer. Hydrokinetics did not have sufficient funds at the time to obtain the required heat exchangers and replicate the refrigerator freezer. Negotiations with Thetford, therefore, ceased.
604 Mr Skillecorn said that Hydrokinetics would have sold heat exchangers to Thetford and entered into a licence agreement with Thetford in respect of which it would have charged a licence fee of 4%. Mr Skillecorn went on to say that an ex-factory cost of the Thetford refrigerator could be assumed to be AUD300 to AUD400.
605 Hydrocool contended that pursuant to its licence agreement with Hydrocool, Hydrokinetics would be required to pay Hydrocool a royalty/licence fee of 5% of the ex-factory cost of the fridge freezer. On that basis, a licence fee payable in respect of 40,000 refrigerators for one year would be AUD600,000. Hydrocool contended that a deduction of 50% was acceptable, reducing the claim to AUD300,000.
606 In my view, this claim is entirely speculative and demonstrates no causal link to the en masse resignation of the engineers. There is no prospect that Thetford would have entered into an agreement with Hydrokinetics. This is because Hydrokinetics was in such a parlous financial position that it was not able even to supply a sample of the complete refrigeration system. The fact that it could not supply that system was not related to the en masse resignation of the engineers, but to the fact that the fridge freezer had corroded and Hydrokinetics was not in a financial position to repair or replicate the system. The fact that Hydrokinetics was in a parlous financial position was also unrelated to the en masse resignation of the engineers.
Marlow
607 Hydrocool claimed the sum of AUD16,500 by way of a lost opportunity to earn royalties under the Hydrokinetics licence agreement in relation to an opportunity which Hydrokinetics had to enter into a contract with a company, Marlow, in 2006.
608 In June 2006, Mr Skillecorn had a conversation with Mr Dwight Johnson, an executive of Marlow. During that conversation Mr Johnson asked Mr Skillecorn to give Marlow a quote to supply up to 60,000 heat exchangers.
609 Mr Skillecorn deposed that Hydrokinetics did not have the funding to build the heat exchangers and so sought a quote from Matsushita in Japan. Matsushita quoted USD60 to supply a complete heat exchanger unit. Mr Chandler then on behalf of Hydrokinetics quoted the price of USD60 per heat exchanger. Marlow rejected the quote on the grounds that it was too expensive.
610 Mr Skillecorn deposed that if Hydrokinetics had been in a position to build the heat exchangers it would have quoted Marlow AUD22.50 per heat exchanger to supply 60,000 heat exchangers.
611 Hydrocool contended that on that basis it would have been entitled under the Hydrokinetics licence agreement to a royalty payment of AUD33,000. However, Hydrocool contended that a 50% reduction was applicable for contingencies.
612 This claim, too, is speculative and does not demonstrate a causal link with the en masse resignation of the engineers. There was no prospect of Hydrocool earning any royalty by reason of Hydrokinetics entering into a transaction for the supply of 60,000 heat exchangers to Marlow. The evidence shows that Hydrokinetics was not in a financial position to build the heat exchangers. As mentioned above, Hydrokinetics’ parlous financial position, was unrelated to the en masse resignation of the engineers.
The claim for the repayment by Mr Hepburn of the monies he claimed as a bonus
613 The next question is whether Mr Hepburn is required to pay Hydrocool the sum of AUD33,280 and interest.
614 On 19 October 2004, Mr Hepburn procured Mr Clarke to pay the sum of AUD33,280 to a bank account under his control. Mr Hepburn says in his defence, that he was entitled to be paid that sum as his annual bonus for the 2003/2004 financial year.
615 Mr Hepburn’s terms of employment are recorded in a letter of engagement dated 20 July 2000. The letter contains the following term relating to the payment of a bonus:
Annual Bonus. The Board of Directors reserves the right to pay a bonus upon the achievement of approved objectives. Any such bonus shall be up to 20% of base salary.
616 At the meeting of the board of Hydrocool on 23 June 2004, the payment of a bonus to Mr Hepburn was discussed by the board members. However, no minutes of the meeting were prepared.
617 On 14 July 2004, Mr Hepburn sent an email to Dr Teplitzky in which Mr Hepburn stated that his intention was “to seek payment” of the bonus before December 2004. A copy of that email was sent to Mr Bourke.
618 Dr Teplitzky responded to Mr Hepburn’s email noting that Mr Hepburn stated that “he will wait for further funds to come into [Hydrocool] before seeking payment. We anticipate licence fees to be paid this year”.
619 On 26 July 2004, Dr Teplitzky sent an email to Mr Bourke in which Dr Teplitzky stated “that the accounts for 03/04 should contain a provision for the full bonus payment to Iain for the year 03/04 none of which has been paid”.
620 On 27 July 2004, Mr Bourke sent a facsimile to “Dorothy” which stated that a decision had been made to make a provision for the payment of the bonus to Mr Hepburn in the accounts. The facsimile also contained an undated and unsourced handwritten note, stating that a binding commitment had been received from Water Master on 8 September and the bonus was now payable. I place no weight on this note. Its author is unknown. Further, its contents are inconsistent with the views expressed by the members of the board, including the views of Mr Hepburn set out in his email of 27 September 2004, that the bonus would be paid once the Water Master heads of agreement was signed.
621 On 27 September 2004, Mr Hepburn, in response to a request to provide his notes of the Board meeting of 23 June 2004, sent an email to Dr Teplitzky. The email relevantly stated:
Don asked that I provide a list of the action points from our Board Meeting of 23 June 2004. These are listed below and have been taken from my notes of the meeting.
...
6. Bonus for IH for 2003/2004 to be accrued in the 2003/2004 accounts and paid once HOG with Water Master signed.
622 On the same day, Dr Teplitzky responded to Mr Hepburn in relation to the bonus as follows:
I do not recall this as a condition, but more to do with funds available. I may be wrong.
623 Mr Hepburn then respond to Dr Teplitzky as follows:
My notes recorded what I have advised.
624 In his witness statement, however, Mr Hepburn said that he may not have referred at the June 2004 directors meeting to the signing of the Water Master heads of agreement being the basis on which the bonus would be paid to him. I prefer the evidence comprised by Mr Hepburn’s email of 27 September 2004.
625 Mr Murphy gave the following oral evidence as to Hydrocool’s practice, in respect of the accrual of a bonus payment in the accounts:
The procedures with Hydrocool was that every year the accrual would be recognised and when the criteria had been met to make the payment, the payment would be made so that the accrual would be cleared out. It would be paid in subsequent year, basically, if everything that needed to be done had been done to receive that bonus.
626 There was no dispute between the parties that Mr Hepburn had met the annual bonus objectives which Dr Teplitzky had set Mr Hepburn for the financial year 2003/2004.
627 In cross-examination, Mr Hepburn said that he believed that he was entitled to the bonus payment because “the Water Master heads of agreement in my view should have been signed” by the date he was dismissed.
628 In his closing submissions, Mr Hepburn submitted that he was entitled to receive the payment of the bonus because he had met the objectives which Dr Teplitzky had set for him for the 2003/2004 year. Accordingly, his right to be paid the bonus sum had accrued several months before he sent his email of 27 September 2004 to Dr Teplitzky. There was, said Mr Hepburn, no need for any further decision to be made by the board, whether by board resolution or otherwise.
629 For the following reasons, I find that at the date of his dismissal, Mr Hepburn was not entitled to be paid the sum of AUD33,280 which was paid by Mr Clarke.
630 First, on a proper construction of the term of his contract relating to the annual bonus, whether Mr Hepburn received a payment by way of a bonus was a matter which lay within the discretion of the board. There was, contrary to Mr Hepburn’s contention, no accrued right to the payment of a bonus by reason only of having achieved the objectives set by Dr Teplitzky for the financial year in question. The achievement of the objectives was a condition of the receipt of the bonus payment, but did not in itself, vest in Mr Hepburn a right to receive the bonus. The payment of a bonus even when the qualifying condition had been fulfilled, was a matter for the exercise of the board’s discretion. After all, the contract provided for the payment of an amount “up to 20% of base salary”.
631 In my view, by 19 October 2004, the board had not decided that Mr Hepburn should have an immediate right to be paid a bonus for the 2003/2004 financial year.
632 In my view, the evidence when taken as a whole, shows that there was no final decision by the board made in June 2004, to approve the payment of a bonus to Mr Hepburn. Rather, the evidence shows that the decision made was to make a provision in the accounts for the payment of the bonus, but the final approval of the bonus was to be a matter for the board to consider at a future time, once the financial circumstances of the company had changed. The evidence also shows that, in June 2004, the directors anticipated that the most likely source of revenue to the company in the near future was the payment of a licence fee under the Water Master agreement, which all concerned anticipated would be signed before the end of 2004.
633 However, even if the evidence was to be construed as the board having decided finally to pay Mr Hepburn the annual bonus, subject only to the fulfilment of a further condition, namely, on Dr Teplitzky’s version, the receipt of funds, or on Mr Hepburn’s version, the signing of the Water Master heads of agreement, Mr Hepburn would still not have been entitled to the bonus payment of AUD33,280 on 19 October 2004. This is because, by that date, Hydrocool had neither signed the Water Master heads of agreement, nor was it in receipt of further funds.
634 I do not accept Mr Hepburn’s argument that he was entitled to the payment of the bonus because it was by reason of Hydrocool’s actions, that the Water Master heads of agreement was not signed by the date of his dismissal. As I have found above, it was by reason of Mr Hepburn’s own conduct, namely, his breaches of duty that the Water Master heads of agreement was not signed.
635 I find that by the date of his dismissal on 19 October 2004, Mr Hepburn had no accrued right to receive the payment of AUD33,280, by way of a bonus for the 2003/2004 financial year.
636 Hydrocool contended that in procuring Mr Clarke to pay the bonus payments to his nominated bank account, Mr Hepburn acted in breach of his fiduciary duty. Counsel for Mr Hepburn and Mr Clarke did not put in issue whether, in relation to an entitlement to his own remuneration, Mr Hepburn owed Hydrocool a fiduciary duty. In my view, however, in relation to the question of the payment of his own remuneration, Mr Hepburn did not owe Hydrocool a fiduciary duty. He was entitled to act in his own interest in relation to securing payment of his own remuneration from Hydrocool. However, in my view, in procuring Mr Clarke on 19 October 2004, to make the bonus payment, Mr Hepburn improperly used his position as a director for his own advantage. This is because he sought to justify his actions on the basis that the condition for the payment of the bonus, namely, the entry into the Water Master licence agreement, had, by reason of Hydrocool’s actions not been fulfilled. I have found, however, that the loss of the Water Master licence agreement arose by reason of Mr Hepburn’s conduct which was in breach of fiduciary duty and improper. In those circumstances, and with knowledge of the true reason why the heads of agreement had not been signed, Mr Hepburn acted improperly, by procuring Mr Clarke to make the payment.
637 It follows that Mr Hepburn is liable to pay Hydrocool the sum of AUD33,280 and interest.
should hydrocool pay TEA’s costs on an indemnity basis?
638 On 24 March 2010, following discussion between counsel, counsel for the second respondent, TEA, moved for orders that the claim against the second respondent, TEA, be dismissed with costs. Senior counsel for Hydrocool agreed with the orders. I, accordingly, made an order in Court that the application against TEA be dismissed and that Hydrocool pay TEA’s costs.
639 However, on 28 May 2010, TEA filed a notice of motion and an affidavit of Mr Hepburn sworn 27 May 2010 in support of an application that its costs be payable on an indemnity basis.
640 In the originating application filed by Hydrocool on 12 September 2006, it was alleged that TEA made use of Hydrocool’s confidential information in building the TEA prototype. However, following a meeting of the experts on 1 February 2010, the experts issued a joint report in which they agreed that the TEA technology did not incorporate any of Hydrocool’s technology.
641 Following the production of the joint report, Hydrocool amended its statement of claim to withdraw the allegations that TEA had used Hydrocool’s confidential information, in relation to the production of the TEA prototype. During the trial, the rest of Hydrocool’s claim against TEA was dismissed by consent.
642 On the last day of closing submissions, I heard submissions on the question of whether Hydrocool should pay TEA’s costs on an indemnity basis.
643 In support of its claim for indemnity costs, TEA contended that, even prior to the commencement of the proceeding, TEA had maintained that the technology it used in the TEA prototype did not make use of any of Hydrocool’s technology.
644 Mr Hepburn’s affidavit annexes correspondence between TEA and Hydrocool, which goes back to February 2005, which asserts that TEA had not made use of the Hydrocool technology.
645 Further, there is a letter from TEA’s solicitors dated 30 May 2008, to Hydrocool’s solicitors, which states:
As previously advised, the single prototype is available for inspection in Perth, by arrangement with this office.
We expect that any independent assessment of the technology arranged by your client will require a detailed inspection of the prototype. We look forward to receiving your advices as to when this is to occur.
646 Hydrocool did not inspect the prototype.
647 On 26 June 2008, Corser & Corser again wrote to Hydrocool’s solicitors stating:
Inspection of Prototype
Our clients interpret your client’s failure to take any action to inspect the prototype held by our clients as strong evidence that your client accepts that its action is without merit. Our clients reserve their rights in respect of this inference.
648 Despite the regular invitations issued by TEA to Hydrocool to inspect the prototype, Hydrocool declined to do so.
649 Hydrocool’s refusal to accept TEA’s invitation to inspect the prototype typified Hydrocool’s more general attitude opposing a cooperative approach by the respective experts to the assessment of whether TEA had made use of Hydrocool’s technology in the development of its prototype. Hydrocool opposed TEA’s application to the Court that there be a meeting of experts for the purpose of producing, if possible, a joint report on this issue. On 12 December 2009, the Court made orders over the opposition of Hydrocool that such a meeting of experts take place before 31 January 2010. As mentioned, as a consequence of the meeting of experts, a joint minute was signed by the experts to the effect that they were satisfied that Hydrocool’s technology had not been used by TEA.
650 The refusal of Hydrocool to join with TEA in a cooperative approach by their respective experts, to the question of whether Hydrocool’s technology had been used by TEA until 12 December 2009, when Hydrocool was ordered by Court order to do so, was unreasonable and contrary to the modern approach to the conduct of litigation.
651 One of the recognised bases on which a Court may award indemnity costs is where a party by its unreasonable conduct unduly prolongs the litigation. Hydrocool was on notice from 26 June 2008, that an application for indemnity costs may be made arising from the refusal to inspect the prototype.
652 It is no answer to TEA’s claim, as Hydrocool contended, that TEA engaged the same lawyers as did Mr Hepburn and Mr Clarke, and had, therefore, not incurred costs independently of Mr Hepburn and Mr Clarke. The extent of any overlap in costs between TEA and Mr Hepburn and Mr Clarke is a matter to be determined at taxation.
653 A court will exercise caution in making supplemental orders, and in ordering indemnity costs. However, in my view, the circumstances of this case, warrant the making of such orders.
654 I will, accordingly, order that all costs incurred by TEA from 26 June 2008, be paid by Hydrocool on an indemnity basis.
I certify that the preceding six hundred and fifty-four (654) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. |
Associate:
