FEDERAL COURT OF AUSTRALIA

QAD Inc v Shepparton Partners Collective Operations Pty Ltd [2021] FCA 615

ORDERS

THE COURT ORDERS THAT:

1.    The applicants and respondent confer with a view to providing to the Court within 7 days agreed orders to give effect to the conclusions reached by the Court and any agreed position as to costs.

2.    The cross-claim be dismissed.

3.    Subject to a party to the cross-claim applying within 7 days for a different order as to costs, the cross-claimant pay the cross-respondents’ costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THAWLEY J:

OVERVIEW

1    The applicants (together, QAD) contend that the respondent, Shepparton Partners Collective Operations Pty Ltd (SPC), infringed copyright in QAD’s software. SPC had continued to use QAD’s software after it purchased a business (referred to below as the SPC Business) from the first respondent, SaleCo. SPC used QAD’s software without securing a transfer of the relevant software licence agreement. QAD had required payment of a fee as a condition for its consent to transfer the licence. SPC did not pay the fee.

2    SPC denied it infringed copyright, including on the basis that it had an implied licence from QAD to use the software. SPC also cross-claimed against parties connected with the sale of the SPC Business including on the basis that, contrary to the requirements of the contract of sale, SaleCo failed to use “best endeavours” to secure a transfer of the licence agreement. Amongst other things, it was contended that the “best endeavours” clause required SaleCo to pay any reasonable transfer fee demanded by QAD in order to secure a transfer of the licence to SPC.

3    For the reasons which follow, QAD’s claim has been made out and SPC’s cross-claim has not.

THE FACTS

4    QAD creates and licenses enterprise resource planning (ERP) software (QAD Software). The software has been marketed under different names. QAD Inc is the only applicant which seeks relief.

5    In 1991, SPC Ardmona Operations Ltd (then named SPC Ltd and later named Sale Proprietary Co 2 Limited (SaleCo 2)) acquired a perpetual and, from the licensee’s perspective, non-transferable licence for the QAD Software from QAD.Australia Pty Ltd (QAPL) (the Licence Agreement). The Licence Agreement was assigned by QAPL to QAD Australia Pty Limited (QAD Australia) in around 1998 and was subsequently amended and updated. The Licence Agreement has remained non-transferable so far as the licensee is concerned. At times relevant to the issues in these proceedings, SaleCo 2 was using QAD Enterprise Applications 2008 Standard Edition (QAD 2008 SE) as its ERP software. SaleCo 2 was also paying QAD for maintenance and support services and had so paid up until 31 July 2019.

6    There was ultimately no dispute that QAD Inc is the owner of copyright in the object code and source code of the QAD 2008 SE software.

7    The cross-respondents, which include Coca-Cola Amatil Ltd, and which are referred to collectively in these reasons as CCA, conducted a business involving the processing and selling of agricultural food products under brands including “SPC” and “Goulburn Valley” (SPC Business). The SPC Business produces canned fruit, vegetables and other food products in regional Victoria. It was acquired by CCA in 2005. CCA held all the shares in SPC Ardmona Limited (which changed its name to Sale Co 1 Limited (SaleCo)). SaleCo owned the SPC Business. SaleCo owned all the shares in SaleCo 2 which held the QAD licence.

8    In May 2018, QAD made a recommendation to CCA that it upgrade the QAD Software to the 2017 Enterprise Edition. The recommended upgrade was “signed off” by SaleCo’s Head of IT, Mr Llewellyn, but needed to be approved by Amatil’s Chief Financial Officer (CFO). That approval was not forthcoming because consideration was being given by Amatil to selling the SPC Business.

9    On 4 September 2018, Mr Read (according to his email, QAD’s Executive General Manager for Australia and Japan) emailed Ms Watkins at Amatil, referring to the “aged ERP infrastructure” and stating that QAD had “found significant platform risks plus opportunity to make financial and labour savings” that would improve profit and “build stability for the future”. In cross-examination, Mr Read agreed that he was wanting to sell to Amatil, at an early stage of its consideration of the sale of the SPC Business, the proposal to upgrade SaleCo’s ERP infrastructure and that this might be achieved before the SPC Business went to market and would make the business more attractive.

10    In response, Ms Watkins indicated that the Amatil CFO (Mr Martyn Roberts) was aware of the issues and would follow up if he considered it was warranted. Mr Read emailed Mr Roberts on 12 September 2018, forwarding the emails between him (Mr Read) and Ms Watkins, and stating that he wanted to meet. Amatil was not evidently interested because it did not respond.

11    In March 2019, Mr Rifai – who was the Managing Partner or Executive Chairman of Perpetuity Capital Pty Ltd and became the Managing Director or Executive Chairman of SPC when it was incorporated on 10 May 2019 – became aware that the business and assets comprising the SPC Business were for sale.

12    Mr Rifai considered the SPC Business would be a profitable investment. He commenced the due diligence process, looking at the data room which was progressively opened. Within a couple of weeks he became aware that the SPC Business was running QAD 2008 SE as its ERP software.

13    The QAD Software was critical to the SPC Business continuing to operate. The QAD Software enables manufacturing companies to integrate and manage critical data and support internal business processes, such as sales orders and inventory management, procurement, manufacturing planning and control, service and support project management, distribution and finance. Mr Rifai was aware that the SPC Business could not function without the QAD Software. Mr Rifai accepted in cross-examination that, before signing the business purchase agreement under which SPC purchased the SPC Business its assets on 3 June 2019 (BPA), he had read the Licence Agreement. He knew that the licence could not be assigned or transferred without QAD’s consent and he knew that there was a risk that QAD would not consent.

14    On 29 April 2019, Mr Bloom (according to his email, QAD’s Victorian State Manager) emailed Mr Read stating that he had met with the owners of the SPC Business and that he expected to know the new owner within a few weeks with the deal between the seller and new owner being finalised by the end of June 2019. Mr Bloom stated:

It’s likely that the SPC Operations company that owns the QAD licenses [namely SaleCo 2] will not continue...this means a license transfer at minimum. Our position would be that the new company [ultimately SPC] should go Cloud and do a Lift & Shift. We can’t really discuss it until we know the buyer.

Whilst we wouldn’t leverage Nathan as part of the process I suspect that Stefan [deHaar] might position that a transfer as passive revenue. I would argue different given our investment in [SaleCo 2] and that we would work on positioning Cloud. We will need to work hard to build a relationship with the buyer to ensure an ongoing relationship.

15    On 3 June 2019, SPC and various CCA entities executed the BPA. The completion of the sale was agreed to be 28 June 2019: cl 5.1 BPA. The terms of the BPA are referred to later in these reasons, particularly in the context of the cross-claim. It is sufficient for present purposes to record that, by the BPA, SaleCo sold and SPC (and related entities) acquired the SPC Business for $40 million plus or minus certain adjustments (having a floor and cap of plus or minus $10 million).

16    On 13 June 2019, Mr Bloom (QAD) sent an email to Mr Llewellyn (SaleCo) referring to a discussion the week before and indicating that a transfer would cost approximately $520,000 with annual maintenance of approximately $200,000. The email then stated:

Cloud would be similar to what we have previously quoted, approx $755,000/year. I suspect we can work on the Cloud number to make it more competitive with the transfer on the first year.

Given this, the first year cost is similar in both options but Cloud delivers a lot more value.

We had previously proposed an upgrade but would likely do a lift & shift initially. This would get you to the cloud quickly by moving your current environment as-is. We can then upgrade at a later time. A key focus should be the cost savings and business benefits that we identified during the Q-Scan and preparation of the business case last year.

17    On 14 June 2019, an “IT Transition Meeting” took place between CCA and SPC. Mr Rifai attended that meeting together with consultants engaged by SPC and representatives of CCA. Mr Rifai stated that the QAD Software was discussed in the meeting, but not as the primary topic. At the meeting, he expressed the view that the QAD Software was not fit for purpose. By the time of the meeting, Mr Rifai was concerned about the “functionality” of the QAD 2008 SE software and thought that it was not “fit for purpose” although not “useless”. Mr Rifai wanted to “limp along” with the QAD Software in the SPC Business until he had time to assess what he wanted to do with it and how long that would take.

18    Mr Levy of Kidder Williams, a corporate advisor engaged by CCA, reported to Mr Mitchell of CCA that Mr Rifai had said that “MFG Pro [QAD 2008 SE] is useless and not fit for purpose”.

19    On 21 June 2019, Mr Read from QAD spoke with Mr Jason Bennett who I infer was representing SPC’s interests (he being a Partner of Perpetuity Capital of which Mr Rifai was Managing Partner). I infer that the conversation was about the transfer of the Licence Agreement. Mr Bennett sent a message to Mr Rifai, telling Mr Rifai to speak to Mr Read.

20    On 21 June 2019, QAD (by Mr Stefan deHaar, the Senior Vice-President, Asia-Pacific) emailed a letter addressed to SaleCo 2, Amatil and SPC. The letter drew to the attention of the addressees the fact that the assignment or transfer of the Licence Agreement required QAD’s consent and offering to provide that consent if three conditions were met. The letter included:

As a professional courtesy I am writing to make you aware of a licensing issue arising from the pending purchase of the business and assets of [SaleCo 2] by [SPC]. I understand that [SaleCo 2] has questioned the terms under which [SaleCo 2] may transfer the 1991 Software License Agreement (and software licenses granted under that contract) to another entity in connection with the purchase of [SaleCo 2] by [SPC].

Section 9 of the contract states that any assignment or transfer requires the prior consent of QAD Australia Pty Ltd (“QAD”). QAD has offered to give its consent if the following three conditions are met:

1.     [SPC] shall deliver its irrevocable purchase order for a transfer fee in the amount of AUD 424,392 (excluding GST), together with a maintenance fee in the amount of AUD 177,816 (excluding GST) for the year starting July 1 2019, all as detailed in the attached quote. The maintenance fee includes a credit for one month of maintenance prepaid by [SaleCo 2] for the year ending July 31 2019. These fees shall be paid within 30 days of QAD’s invoice.

2.     [SaleCo 2] and [SPC] shall execute a License Transfer Document (in the form to be provided by QAD) to transfer the licenses from [SaleCo 2] to [SPC]. Further, [SPC] shall execute an Order Document (in the form to be provided by QAD) reflecting the transfer fee. Further, [SPC] shall execute a new License and Maintenance Agreement (in the form to be provided by QAD) to govern the licenses going forward.

3.     These conditions must be fully met on or before the closing date of the purchase of [SaleCo 2] by [SPC] – which we understand will be June 28, 2019. If these conditions are not met by the closing date (and in any event no later than June 30, 2019) then QAD’s offer to permit the license transfer under the above terms shall be automatically withdrawn and void, and in such event [SPC] will be required to purchase new licenses from QAD.

I recommend that [SaleCo 2] and [SPC] confirm this arrangement immediately so that we can prepare the necessary documents for signature in time to help [SaleCo 2] and [SPC] avoid missing the deadline set forth above.

21    On 24 June 2019, Mr Darren Read sent an email to Mr Rifai, attaching QAD’s letter of 21 June 2019. Mr Read’s email stated:

Congratulations on your purchase of SPC [being a reference to the SPC Business owned by SaleCo and being sold to SPC].

The last few months have been understandably challenging for SPC and we are delighted that they now have clarity regarding their future. QAD has been a strategic partner to SPC and CCA for a number of years, we are an incumbent ERP and services provider. Last year, we were engaged to advise on the future of ERP to SPC and CCA...I’d like to share these findings with you....

In the last few months, a number of our clients have been acquired and we have been able to assist them in hitting their transition off obligations and ensuring they make the correct technology decisions that allow future flexibility for the businesses and the private equity firms involved.

We have been trying to get hold you of [sic] via phone, I spoke briefly to Jason recently. Attached is a letter regarding the software licence obligations. For completeness, I have also emailed Alison and Martyn at CCA and Reg at SPC.

I am in Sydney this week and I’d like to take this opportunity to sit down and discuss with you, can you please confirm your availability to meet this week.

22    Mr Rifai understood from the 21 June 2019 letter that QAD was not taking a position about who needed to pay but rather was “simply saying this is the offer and this is what needs to happen”.

23    After Mr Rifai had seen the letter, Mr Rifai spoke to Mr Read. They had a short conversation in which Mr Rifai said to Mr Read to “send me what you want to tell me in writing” and “I will discuss it with [Amatil].” After the conversation with Mr Read, Mr Rifai told Mr Levy that he had spoken to Mr Read and said that he, Mr Rifai, would get back to Mr Read. G+T, acting for CCA, wrote to Herbert Smith Freehills (HSF), acting for the SPC parties, stating:

We understand that Hussein [Mr Rifai] has already had discussions with QAD Australia Pty Limited regarding the attached letter [being the 21 June 2019 letter], and that those discussions are ongoing.

24    G+T asked HSF what SPC proposed to do in relation to QAD. There was no evidence of any response from G+T or SPC.

25    On 25 June 2019, Mr Rifai spoke with Mr Llewellyn, the Head of IT of SaleCo. Mr Llewellyn then sent an email to Mr Rifai stating:

As discussed here are the modules of QAD we use and also the contact details for the GM and Account Manager

26    On 26 June 2019, Mr Read called Mr Rifai to discuss the 21 June 2019 letter. According to Mr Read, whose evidence I accept, Mr Rifai stated that he needed four weeks to digest the information and requested an extension of time to reply to Mr deHaar’s letter. Mr Read stated, and I accept, that he said he was happy to grant an extension, provided that Mr Rifai agree to a face-to-face meeting to discuss a way forward. Mr Read accepted in cross-examination that Mr Rifai stated that he considered the ERP was outdated and needed upgrading. Mr Read also accepted that he said he could help with an upgrade and QAD could credit any transfer fee against the new ERP system.

27    By this point in time, SPC and QAD were in negotiations. Subject to what is referred to below at a meeting on 27 June 2019, there was no evidence that CCA was involved in any negotiations with QAD at this time or that CCA was requested by SPC to have any significant involvement.

28    At 8:39pm on 26 June 2019, Mr Rifai sent to Mr Levy an agenda for a conference call the next morning which included “QAD $660,000 bill” to the “IT” items part of Mr Rifai’s list of outstanding actions or issues.

29    At about 8:30am on 27 June 2019, a conference call between CCA and the SPC “transition team” took place. In cross-examination, Mr Rifai said he could not recall the words spoken in the teleconference. In his affidavit, he had stated that he said that CCA would need to deal with the payment of $600,000. Mr Brandt, a director and (at least from 4 May 2020) company secretary of SPC, gave evidence that Mr Rifai stated, on either the first or second call on 27 June 2019, “something about Coca-Cola needing to assist with resolving the problem, or to take care of the issue, or something of that nature”. I do not accept that Mr Rifai said that it was for CCA “to take care of the issue” given Mr Rifai had wanted to deal, and was dealing, with QAD in relation to the transfer of the Licence Agreement. Whatever was said by Mr Rifai, it is also unlikely that it was to the effect that CCA was responsible for the amount demanded by QAD. If he had said something to that effect, the suggestion is likely to have been recorded in some contemporaneous document, or there would have been some further discussion about the issue. It also sits uneasily with the fact that the only negotiations which were occurring at that time were between SPC and QAD. It is more likely that, to the extent Mr Rifai said something along the lines of what Mr Brandt recollected, it was that CCA might need to provide some assistance in resolving the issue, but that whatever was said fell short of suggesting that the issue was CCA’s responsibility or that CCA was liable to pay the transfer fee.

30    In any event, the words spoken cannot affect the proper construction of the BPA, or SaleCo’s obligations. The words spoken are relevant for other reasons, associated with the copyright part of the case.

31    Later on 27 June 2019, after the first teleconference and before the 7pm teleconference, Mr Read emailed Mr Rifai confirming that, if Mr Rifai agreed to meet him on 4 or 5 July 2019, QAD would extend the QAD letter deadline from 30 June to 31 July 2019. The email stated:

Following our recent discussions, this is to follow up on my June 24 email with the attached letter from Stefan. Yesterday you outlined your view that the current ERP set up is not fit for purpose. As you are aware, QAD understands your concern on the same as referenced in the proposal we sent to SPC in April 2018 that was then endorsed by SPC. I believe you have reviewed this as part of your due diligence.

To move forward, we propose a meeting at your offices next Thursday July 4 or Friday July 5. If you agree to go forward with this July 4/5 meeting then we agree to push back the deadline mentioned in point 3 of Stefan’s letter from June 30 to July 31st.

I ask that you please let me know by the end of this week whether you wish to schedule the July 4/5 meeting.

Good luck tomorrow, its [sic] a historical day for you all and I hope all goes well.

32    Mr Rifai decided to defer consideration of what to do about the QAD Software until after completion based on what he understood from this email and Mr Read’s earlier phone call. Mr Rifai added the words “Deferred invoice” to the entry “QAD $660,000 bill” in a revised agenda for the teleconference that evening and sent the revised agenda to Mr Levy.

33    A second conference call took place at about 7pm on 27 June 2019. During that call Mr Rifai told the representatives of CCA that QAD had agreed to defer the invoice for four weeks until Mr Rifai had met with them and that the QAD issue would not delay completion.

34    Mr Rifai responded to Mr Read’s email on 28 June 2019 indicating Mr Read should contact Ms Murray to arrange a meeting and that he, Mr Rifai, would be in Melbourne and was happy to meet there. Mr Rifai said he could remember saying that he had spoken to QAD and that he thought he had found a way forward so that the QAD issue did not hold up completion. The way forward was that QAD would wait for the month if Mr Rifai met with them during the following week. Mr Rifai also gave evidence that Mr Mitchell said something along the lines of “So we can put [a] tick on this item in your completion list” to which Mr Rifai responded: “Yes. Andrew and his ticks. Let’s move on.”

35    Mr Rifai did not say during that teleconference that QAD and the transfer fee was CCA’s problem. He just “told them what happened”.

36    Completion of the BPA occurred on 28 June 2019. The Licence Agreement was not assigned to SPC and SPC continued to use the software. I accept that Mr Rifai considered SPC could lawfully use the QAD 2008 SE software until 31 July 2019 without securing a formal transfer of the Licence Agreement.

37    Although Mr Rifai was on some occasions equivocal in his evidence on the issue, and sought to justify use of the software by reference to certain provisions of the BPA, I am satisfied that he knew, at least before completion on 28 June 2019, that SPC could only obtain rights under the Licence Agreement if QAD agreed to transfer the Licence Agreement to SPC and that QAD could refuse to do so. He knew that QAD had not agreed to transfer the Licence Agreement and that QAD required payment as a condition of its consent to transfer. Mr Rifai initially accepted that CCA could not compel QAD Australia to provide its consent but later stated he thought that CCA could compel QAD to provide its consent through a commercial deal.

38    Mr Rifai’s stated that he considered CCA was responsible for payment to QAD to secure QAD’s consent to a transfer of the Licence Agreement. I am not satisfied that Mr Rifai genuinely thought this was the case at the time of the relevant events. Rather, the probabilities favour that Mr Rifai considered that it was arguable that CCA was responsible under the BPA to secure the transfer of the Licence Agreement (including paying a fee if necessary), but that it was more likely that SPC was responsible for payment of any amount required by QAD for its consent. That conclusion is suggested by the objective facts including the course of negotiations between SPC and QAD and the absence of any serious contemporaneous or sustained demand by SPC for CCA to pay the transfer fee. Mr Rifai was no shrinking violet. He would have demanded CCA pay, at the time of the events and in certain terms, if he genuinely thought they were so obliged.

39    In any event, I am satisfied that Mr Rifai knew that – irrespective of whether SaleCo or SPC was responsible for the transfer fee – SPC could not use the QAD 2008 SE unless it secured either a transfer of the Licence Agreement or QAD’s consent to SPC using the software. As mentioned however, I accept that, as at early July 2019, Mr Rifai thought he had QAD’s consent to SPC using the software until 31 July 2019.

40    Mr Rifai agreed that, immediately before completion, SPC had no assurance that SPC would obtain a licence, but he had to weigh the risk of QAD not consenting to the transfer of the Licence Agreement with the fact that $2.7 million might be lost if SPC failed to complete.

41    Representatives of QAD (Mr Read and Mr Bloom) and SPC (Mr Rifai and Mr Selva Nithan Thiruvankarasu, SPC’s incoming CFO) met on 5 July 2019 in SPC’s boardroom in Melbourne. Mr Read stated that he reiterated that the Licence Agreement was not transferable. In his first affidavit, Mr Read stated that neither Mr Rifai nor Mr Thiruvankarasu stated that they considered CCA was responsible for payment of the transfer fee and neither of them stated that they considered SPC could operate the QAD Software without a licence. In cross-examination, Mr Read accepted that Mr Rifai told him that he did not consider that SPC was liable to pay the transfer fee and that he understood that Mr Rifai was saying that someone else needed to pay. Whilst I accept that Mr Rifai may have said this, I do not accept that Mr Rifai genuinely believed CCA had an obligation to pay the transfer fee. It is likely Mr Rifai considered SPC was responsible for the transfer fee if SPC wanted the Licence Agreement transferred to it.

42    Mr Read accepted that he thought it might not be a simple decision for Mr Rifai to decide what to do in relation to the ERP software given that Mr Rifai had only recently come into the business. Mr Read accepted that he expected that SPC would be considering other service providers, in addition to QAD. Mr Read stated, and I accept, that he said at the meeting that SPC had until the end of July to consider the proposal regarding SPC’s ongoing use of the software.

43    Consistently with my conclusion that SPC had assumed responsibility for negotiations with QAD because Mr Rifai considered SPC was the most likely entity responsible for any transfer fee payable, Mr Rifai did not report to CCA about the 5 July 2019 meeting or any of the subsequent meetings with QAD. Mr Rifai stated in his evidence that CCA was kept abreast of what was going on, but there was no direct evidence which established any pertinent communication in that respect. Mr Rifai never spoke to CCA about QAD or the Licence Agreement after 27 June 2019. There was no evidence of any contemporaneous request for assistance or contribution, less still any demand for payment. I do not accept that CCA was kept informed of what was going on in terms of negotiations between SPC and QAD.

44    Mr Read described his position during July 2019 as follows:

[W]e needed to emphasise to the customer that they were unlicensed, using the software unlicensed, but for that period [until 31 July 2019]. We would – as long as we were having discussions with them, understanding that our software was integral to their business, we felt it was the right thing to do to have dialogue with the customer and not force the issue which, you know, - - -

Yes?--- - - - could have meant them not having to use the software, which would have had serious implications to the business.

And when you say “unlicensed” you mean that they hadn’t signed a transfer?---Correct.

45    On 12 July 2019, Mr Read met with Mr Fotia, who was then employed as SPC’s Sales and Operations Planning Manager, which involved co-ordinating the activities and processes relating to sales forecasting and supply planning. SPC’s IT Manager had left in mid-July 2019 and Mr Fotia informally assumed many of the responsibilities relating to IT operations until about September 2019 at which time Mr Michael Zarb was hired as SPC’s Head of IT. In November 2019, Mr Fotia became SPC’s Head of Strategy Planning & Execution. Mr Fotia gave evidence that he was put in charge, in July 2019, of finding new ERP software. This could be an upgrade of QAD 2008 SE or software from a different supplier.

46    Mr Fotia said he had a conversation with Mr Read on 12 July 2019 in which Mr Read stated that QAD “will hold the lawyers back as long as SPC can show QAD that SPC are making progress on upgrading its ERP software”. Mr Read recalled the conversation generally, stating that he informed Mr Fotia about the one month extension until the end of July, but denied making any comment to the effect asserted by Mr Fotia.

47    On 17 July 2019, Mr Bloom emailed Mr Fotia referring to the extended deadline to the end of July and stated:

I appreciate that arriving at a conclusion by the end of July is unlikely but if we can show progress and map out the process and timing into August then we should be ok.

48    The terms of this email suggest that Mr Read may have said, at the meeting on 12 July 2019, something along the lines stated by Mr Fotia in his affidavit and I accept, on balance, that something to that effect or similar was said. Mr Read’s inability to recall the words spoken, stated as a denial that the words were said, does not reflect adversely on his credit; it merely reflects a different recollection of the meeting.

49    On 31 July 2019, the extended deadline to accept the offer which QAD had made in its 21 June 2019 letter passed without SPC accepting the offer.

50    On 1 August 2019, Mr Fotia delivered a presentation to Mr Rifai titled “Project Insight – ERP Replacement: Overview”. The objectives of the meeting were to “align on timeframe to execute ERP replacement”, to “endorse preferred ERP solution partner” and to agree to key actions for the next four weeks. The presentation noted that all options would take at least 12 months to implement. There were four options referred to, the first two being provided through Fusion 5 Business Solutions: (1) Option A: Microsoft Dynamics 365 “multi-stage”; (2) Option B: Oracle – JD Edwards “single stage”; (3) Option C: QAD “finance first”; (4) Option D: QAD “full replacement”.

51    The presentation noted that the first two options provided a cost-effective solution but that the QAD Software (“MFGPro”) would need to remain operational during transition. One of the costs referred to in relation to the first two options was $660,000 referred to as the “MFGPro Claim”, being a reference to what QAD had stated it required in order to consent to a transfer of the Licence Agreement (representing a transfer fee and payment for a year’s service and maintenance).

52    The options were ranked in the presentation in the following order of preference:

(1)    Microsoft Dynamics 365

(2)    Oracle – JD Edwards

(3)    QAD – “full replacement”

(4)    QAD – “finance first”

53    The presentation recommended proceeding with Option A, namely Fusion 5’s Microsoft Dynamics 365 “multi-stage” solution. A key action item was: “Negotiate a licensing & maintenance term for MFGPro with QAD (& related parties)”.

54    In light of Mr Rifai’s view that QAD 2008 SE was not fit for purpose, it is clear that SPC would not continue with that software. The chances of SPC not moving to a new provider or upgrading QAD were negligible.

55    From August to October 2019, there were various further meetings between QAD and SPC representatives. There were meetings on 22 July 2019, 29 August 2019, 3 September 2019, 11 September 2019, 12 September 2019, 14 October 2019 and 24 October 2019. There were also various phone calls and emails passing between representatives of the two companies during this time. For his part, Mr Read did not feel the need to “force the issue”, on the basis that QAD had written the 21 June 2019 letter and that he had sent the 27 June 2019 email.

56    Mr Zarb attended interviews at SPC for the role of Head of IT in August and September 2019. He gave evidence of a conversation with Mr Rifai in his second interview where they exchanged the following words:

Hussein:     Our current ERP software is very old. We want to consider whether there is something better out there to trigger change and support growth in the business.

[Zarb]:     Sure. I have implemented similar systems from both an IT and team management perspective.

57    On 17 September 2019, after attending his third interview, Mr Fotia made a presentation to Mr Zarb about SPC’s ERP selection options. Mr Zarb stated words to the effect:

I think you should consider Microsoft Dynamics 365. I have a lot of experience with it and can speak to its benefits. It would be helpful if I had time to review the options put forward by Joseph, especially in respect to my experience with Microsoft Dynamics 365.

58    The presentation, probably being the one delivered to Mr Rifai on 1 August 2019, factored in as a cost “MFGPro Claim” of $660,000.

59    On 4 November 2019, Mr Read emailed Mr Fotia and Mr Zarb. The email suggested a meeting that week in Melbourne and stated:

Joseph, as you know, SPC assets were acquired (6 months ago). Since then QAD software is being used unlicensed. It has been brought to our attention that parts of the business are being sold and conversations are taking place about potentially transferring licences again. This type of activity will lead to the QAD legal team getting involved again to protect QAD’s interest and assets, Im [sic] sure you understand.

60    Mr Fotia then forwarded the email to other SPC representatives stating:

FYI – QAD are not relenting on the status of the licenses…

At present, Kate is working with the transition team on solutions that will not require the new KY owners requiring access to MFG during the transition period.

Michael & I will present options for resolving the QAD license issue as part of the ERP recommendation.

61    Mr Rifai said he was not made aware of these emails. Nevertheless, I conclude that Mr Rifai knew at all relevant times that QAD required SPC to pay for the transfer of the Licence Agreement if it wanted to use the QAD 2008 SE software.

62    On 25 November 2019, Mr Read sent an email to Mr Rifai. The email stated (emphasis added):

I hope your recent travels have been productive.

We understand that there are meetings taking place in the next couple of days regarding the ERP selection process.

I feel it an appropriate time to clarify QADs [sic] position. QAD has met with SPC many times in the recent weeks and months as you evaluate your options to take the business forward. It would appear that there are numerous solutions being considered through consultation with Fusion5 and with some input from PrimeQ/Accenture. Both are credible Oracle partners who interestingly have differing views on the way forward with Oracle ERP, I appreciate this has raised concern about the long term roadmap and potential costly re implementations.

It is our strong belief that QAD is the best fit for SPC. We certainly share SPCs [sic] view that we are lowest risk position and best positioned to get things done. We believe the demonstrated technical advancements and the supplied food & beverage references have all been very well received.

Our intention is to reduce the licence fee/transfer to $0 as long as an agreeable solution/agreement is forthcoming. We are aware that our discounted implementation costs are very competitive. We are also keen to offer flexibility regarding our subscription pricing in the forms of free months during the first couple of years. We believe this would help the business with transition and transformation costs.

As requested by yourself in July, QAD has been very patient. You asked us to give you 4 weeks to review your options and we have given 5 months. It’s now in everyone’s interest to move forward. We hope to continue our relationship which has lasted for many years.

My diary is free on Tuesday from 3pm for us to discuss. I will be basing myself in Melbourne today and Tuesday and can return on Thursday if required.

63    On 27 November 2019, Mr Rifai wrote to QAD, by email to Mr Read, stating:

Dear Mr Read,

Arrangements between Shepparton Partners Collective Operations Pty Ltd and QAD Australia Pty Ltd

We refer to our recent discussions with you to transfer your existing licence agreement with Sale Proprietary Co 2 Limited, formerly SPC Limited (ACN 004 077 105) (Seller) [SaleCo 2] from the [SaleCo 2] to Shepparton Partners Collective Operations Pty Limited (SPC OpCo) [SPC], being the recent purchaser of the SPC business.

We have reviewed your Software Licensing Agreement, dated 27 August 1991, and the Customer Support Software Agreement, dated 20 August 1998, (together the Agreements) with [SaleCo 2].

The Agreements do not allow [SaleCo 2] to assign or transfer the benefit of the Agreements to a third party, nor do they allow QAD Australia Pty Ltd (QAD) to require payment to transfer the software license to a third party.

Whilst we are willing to discuss a suitable customer support arrangement with you, [SPC] is not required to pay, nor is it willing to pay, any amounts to effect a transfer of the Agreements from [SaleCo 2] to [SPC]. [SPC] is not contractually obliged with QAD to pay any such amounts (as a contract does not exist between these two entities).

Further, under the business sale agreement between (amongst others) [SaleCo 2] and [SPC], [SPC] is specifically not contractually obliged to pay any amounts to any third party when transferring/assigning a contract. To the extent that a contractual obligation exists for [SaleCo 2] to pay any such amounts to QAD, we suggest that you direct this discussion to [SaleCo 2].

For the reasons set out above, we will not discuss the payment of a fee to QAD to effect an assignment/transfer of the Agreements/relevant licence(s). However, as already mentioned, we are willing to discuss a suitable customer support arrangement with you over the coming weeks.

64    Mr Rifai stated that he wrote the letter without being aware of the content of Mr Read’s email of 4 November.

65    Mr Read responded to Mr Rifai’s letter later that day indicating that “QAD Legal” refuted SPC’s position, forwarding an email from QAD Legal which included the comment that SPC’s “unlicensed use … constitutes infringement of QAD intellectual property rights”.

66    On 3 December 2019, Mr Zarb made a presentation to the SPC board which the board accepted. The presentation recommended Fusion 5’s Microsoft Dynamics 365 solution. It recorded: “600k QAD Claim needs to be accounted for”.

67    On 10 December 2019, QAD’s lawyers, King & Wood Mallesons, sent a letter to SPC referring to Mr Rifai’s letter of 27 November 2019 and SPC’s “unlicensed use” of QAD’s software. The letter stated that “since the purchase [SPC] has been using the software without a licence” and that “[SPC] requires a licence to use the Software”.

68    The letter set out, under the heading “Options for resolution”, the following:

As discussed on our call, there are a number of options available to resolve this issue. These are detailed below. For your information, QAD prices its software and services on a “per user” (sometimes called a “per seat”) arrangement, depending on the number of users. We understand that [SPC] has approximately 220 users, and the figures below are calculated on that basis. If there are more or less than 220 users, then the numbers below will change.

•    Option 1: Purchase of a new licence for the Software to allow [SPC] to continue to use the Software. QAD is prepared to backdate this licence to 1 July 2019 at no additional charge. QAD requires that [SPC] enter into a maintenance contract with QAD for the period from 1 July 2019 to 30 June 2020, and this arrangement can be renewed each year if [SPC] so wishes. For this option, QAD would charge [SPC] the regular list price that is charged to other customers in Australia as if [SPC] was a new customer. Cost: A$1,147,041.50, per the enclosed QAD quote.

•    Option 2: The same arrangement as option 1, except that QAD is prepared to recognise that [SPC] acquired the business from [SaleCo 2], and is therefore willing to make a special deal for licence and maintenance which takes advantage of the fact [SaleCo 2] was a prior customer. Cost: A$680,210.19, per the enclosed QAD quote. This option is open for acceptance until 20 December 2019 only.

•    Option 3: The same arrangement as option 2, but QAD is willing to apply the licence fee and prepaid and unused maintenance fee as a credit against a qualifying cloud arrangement that it entered into between QAD and [SPC] on or before 31 January 2020. A “qualifying cloud arrangement” is one that has a minimum initial term of two years, a 220-user subscription level at QAD list price, and is covered by a standard QAD Cloud Services Agreement. We recommend contacting QAD’s commercial team to discuss this option in greater detail

The pricing above includes GST.

69    On 20 December 2019, SPC’s lawyers, Chedid Storey Legal responded, denying any infringement of copyright. The letter stated that the seller had the right to use the software and was holding that right on trust for SPC, pending the assignment of those rights to SPC. The letter also stated:

As I am also a lawyer, I feel it is necessary to say that your client does not have an express right under the QAD Agreement to demand repayment of the license fee to assign the license to a third party. In our view, it would be implied that your client would have to act reasonably when considering its consent to assign the license. That said, it really is a matter to be ventilated between your client and [SaleCo] because, even if your client is entitled to recharge a license fee, from [SPC’s] perspective, the cost would be borne by [SaleCo]. I am also mindful that the parties would like to resolve the issue amicably and so it is not important to articulate every issue.

70    These proceedings were commenced by the applicants on 28 January 2020.

COPYRIGHT INFRINGEMENT

71    QAD 2008 SE’s source code is made up of text files which create the functionality for the software using a computer programming language. QAD 2008 SE’s object code is an encrypted version of its source code. There was no dispute that QAD 2008 SE is a “computer program”, namely “a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result”, within the meaning of s 10(1) of the Copyright Act 1968 (Cth). A computer program is a form of “literary work”: s 10(1) of the Copyright Act.

72    Section 31(1)(a)(i) of the Copyright Act provides that copyright in relation to a work (including a computer program) is the exclusive right to do certain acts in relation to that work, including the right to reproduce it in a material form. It provides:

31 Nature of copyright in original works

(1)    For the purposes of this Act, unless the contrary intention appears, copyright, in relation to a work, is the exclusive right:

(a)    in the case of a literary, dramatic or musical work, to do all or any of the following acts:

(i)    to reproduce the work in a material form;

73    Section 10 provides that a “material form” includes “any form (whether visible or not) of storage of the work … (whether or not the work … can be reproduced)”. The definition of “material form” in the Copyright Act was amended with effect from 1 January 2005 to make it clear that material form includes all forms of storage of the work, even if the work cannot be further reproduced from them – compare: the previous form of the provision considered in Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 224 CLR 193 at [62]-[79]; and see the Explanatory Memorandum to the US Free Trade Agreement Implementation Bill 2004 (Cth) at [668].

74    Section 14(1)(a) provides that “a reference to the doing of an act in relation to a work … shall be read as including a reference to the doing of that act in relation to a substantial part of the work”. SPC disavowed any contention that any reproductions it is found to have made would not constitute reproduction of a substantial part of QAD 2008 SE.

75    By reason of s 36(1), copyright in a work is infringed by a person who is not the owner of the copyright who does any act “comprised in the copyright” (including reproducing it in a material form) without the licence of the owner. Section 36(1) provides:

Subject to this Act, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorizes the doing in Australia of, any act comprised in the copyright.

76    It follows from the foregoing, and SPC accepted, that any reproductions made by SPC of any part of QAD 2008 SE will constitute copyright infringement unless SPC had a licence. The next issue therefore is whether there were reproductions. The remaining issue, if there were reproductions, is whether SPC had a licence. SPC ultimately contended it had an implied licence; it ultimately abandoned its earlier reliance on an express licence.

Reproductions

77    The applicant relied on four types of reproductions. At least by its closing submissions, SPC accepted that each type of reproduction had occurred since 28 June 2019. It is nevertheless necessary to reach conclusions about the reproductions in order to determine what relief would be appropriate if, contrary to SPC’s submission, the reproductions were unlicensed.

78    I am satisfied that the following reproductions occurred.

79    The first type of reproductions occurred in the course of running QAD 2008 SE on SPC’s servers (day-to-day use reproductions). The day-to-day use reproductions were described in the unchallenged evidence of Mr Morris. The following aspects of that evidence were emphasised by QAD in its submissions:

(1)    users connect to QAD 2008 SE through a user name and password;

(2)    use of QAD 2008 SE involves the reproduction of object code for the QAD Software from the application server into the server’s computer memory, namely RAM;

(3)    when QAD 2008 SE is executed by a user, memory is requested for QAD 2008 SE object code and data and allocated to the server’s operating system;

(4)    to enable the computer’s Central Processing Unit (CPU) to execute object code, QAD 2008 SE object code and data must be copied from the application server into the RAM of the server;

(5)    the QAD 2008 SE object code copied into RAM during the period of the computer’s operation will be stored there until the computer is shut down or the computer exits the software.

80    The second type of reproductions were made in the course of modifying or customising QAD 2008 SE, including on test and development servers (test and development reproductions). This involved reproducing code from the live application server to the test and development server when customising it, and further reproductions when moving code between the development and test environments.

81    The third type of reproduction was made by creating a “historical copy” of QAD 2008 SE (historical copy reproductions). This occurred in late November or early December 2020 and involved SPC migrating QAD 2008 SE from an IBM server to a server owned by AS 400, which required a backup and restore of QAD 2008 SE. SPC accepted that the historical copy reproduction constituted a reproduction in material form of the whole of QAD 2008 SE.

82    The fourth type of reproductions were made by backing up QAD 2008 SE on SPC’s servers (back-up reproductions). SPC accepted that it backed up the files the subject of the test and development reproductions and that in doing so it reproduced at least a substantial part of QAD 2008 SE. SPC denied backing up the whole of QAD 2008 SE, stating that the only backing up that had occurred was “incremental” (and thus did not involve QAD 2008 SE code). QAD submitted that Mr Zarb accepted in cross-examination that, from 14 October 2019 to 28 September 2020, SPC on various occasions backed up the whole of the code of QAD 2008 SE. I do not accept that Mr Zarb made this concession. Mr Zarb’s evidence was to the effect that the back-up procedures were those inherited from CCA and that they were performed in the IBM environment. His evidence did not go so far as to accept that it was the whole of the code which was backed up. The evidence did not establish for example that the back-up did not involve simply backing up relevant changes since the last back-up. Nevertheless, as mentioned, SPC did not contend that any reproduction was not a reproduction of a substantial part.

83    Mr Zarb did accept that, after 28 September 2020, SPC engaged in “Copy to FPS2 task” back-ups. FPS2 is a local file server. These back-ups appeared to Mr Zarb to be a backup of various of QAD 2008 SE’s files. These occurred in 2020 on a daily basis from 8 October 2020 to 4 November 2020 and on 19 November 2020 and 5 December 2020.

84    Mr Zarb also accepted that, after 28 September 2020, SPC engaged in “QAD backup task” back-ups, which involved copying databases from the local file server to another server. These occurred on 5 October 2020, 12 October 2020, 19 October 2020, 26 October 2020 and 9 November 2020.

85    I will say more about the extent of use after addressing whether, and for what period, SPC had a licence to use the QAD Software.

Did QAD have an express licence?

86    In its pleadings and opening submissions, SPC contended that it had a licence, or was entitled to the benefit of a licence, by reason of various provisions of the BPA (to which QAD was not a party). Underlying this contention was the proposition that SaleCo 2 held the Licence Agreement on trust for SPC. SPC’s case in this respect was, properly, abandoned in closing submissions.

Did QAD grant SPC an implied licence?

SPC’s case

87    SPC’s case was that it had an implied licence to reproduce QAD 2008 SE from 29 June 2019 until at least 10 December 2019.

88    SPC’s argument in this respect began with the correct observation that the word “licence” in s 36(1) of the Copyright Act means “consent” or “permission” and that such a licence may be “given orally or be implied by conduct”: Interstate Parcel Express Co Pty Ltd v Time-Life International (Nederlands) BV (1977) 138 CLR 534 at 539. A “licence” may be granted by “a positive permission or consent being implied from the circumstances of a particular case”: Computermate Products (Aust) Pty Ltd v Ozi-Soft Pty Ltd (1988) 20 FCR 46 at 51 (Sheppard, Spender and Gummow JJ). Although Interstate Parcel and Computermate concerned s 37 of the Copyright Act, s 37 employs the same relevant language as s 36, namely “without the licence of the owner of the copyright” and the phrase should be understood in the same way in both provisions.

89    SPC observed that, in Computermate at 49, the Full Court noted that a licence may be a gratuitous or bare licence and stated:

A bare licence may be revoked at will, or at least, on giving the licensee reasonable notice: Laddie Prescott & Vitoria, The Modern Law of Copyright (1980), para 10.66. However, where the bare licence has been acted upon by the licensee to the detriment of the licensee, in an appropriate case there may be an estoppel against the licensor preventing the revocation of the licence, either at all or otherwise than upon notice: Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.

90    SPC then noted that a gratuitous or bare licence is not necessarily revocable at will. SPC submitted that whether a bare licence is revocable at will depends on the circumstances in, and the purposes for which, the licence was granted, referring to Chhabra v McPherson (as trustee for the McPherson Practice Trust) (2018) 138 IPR 1 at [137] (per Yates J) and Chhabra v McPherson (as trustee for the McPherson Practice Trust) (2019) 147 IPR 399 at [92] (Full Court).

91    SPC emphasised the following facts:

(1)    In May 2018, QAD had recommended the upgrade of the QAD Software to the 2017 Enterprise Edition. The project was put on hold because consideration was being given to selling the SPC Business. Mr Read followed up the issue in September 2018. CCA was not evidently interested in light of its proposal to sell the SPC Business.

(2)    In April 2019, in expectation of learning of the purchaser of the SPC Business, Mr Bloom suggested to Mr Read that instead of the “passive revenue” of a transfer fee, QAD should propose an upgrade to the cloud platform. Mr Bloom was pursuing this strategy in June 2019.

(3)    On 24 June 2019, Mr Read emailed Mr Rifai a letter dated 21 June 2019 from QAD’s Senior Vice-President, Mr deHaar, which offered QAD’s consent to a transfer of the Licence Agreement if three conditions were met, including payment of a transfer fee.

(4)    On 26 June 2019, Mr Rifai told Mr Read during their telephone conversation that he considered the QAD Software was outdated and in need of upgrading. Mr Read said he could help with an upgrade and QAD could credit any transfer fee against the new ERP system. Mr Rifai said he needed four weeks to consider his different options.

(5)    On 27 June 2019, Mr Read emailed Mr Rifai with respect to Mr Rifai’s request for four weeks to consider his options – either Mr Rifai could meet Mr Read the following week, and the deadline in Mr deHaar’s letter would be extended to 31 July; or the deadline in Mr deHaar’s letter would expire. Mr Rifai accepted. The applicant emphasised that there was no mention in that email of the transfer fee, and no indication that Mr Rifai was agreeing that SPC would be liable to pay the transfer fee.

(6)    At the meeting on 5 July 2019, Mr Rifai told Mr Read that he did not consider that SPC was liable to pay the transfer fee. Whilst I accept Mr Rifai stated this, Mr Rifai knew that SPC would have to pay QAD in order to secure a transfer of the Licence Agreement. He also thought that QAD would notionally put that transfer (and maintenance) fee towards an upgrade if SPC chose to follow that path. Mr Rifai told Mr Read that SPC needed time to consider its options in relation to the ERP system. Mr Read expected that it would not be a simple decision for Mr Rifai. Mr Read expected that SPC would be considering other service providers, in addition to QAD.

(7)    Mr Read knew that SPC would be using the QAD Software during July 2019. Mr Read knew that QAD stood to earn substantial revenue in the future if SPC took the QAD upgrade. Mr Read was comfortable to extend the deadline to the end of July as long as commercial discussions were ongoing and progress was being made.

(8)    On 17 July 2019, Mr Bloom emailed Mr Fotia stating: “I appreciate that arriving at a conclusion by the end of July is unlikely but if we can show progress and map out the process and timing into August then we should be ok”.

(9)    There were continuing meetings, phone calls and emails between QAD and SPC with respect to an upgrade from 22 July 2019 to 24 October 2019.

(10)    Mr Read understood that requiring SPC to stop using the QAD Software would have been a serious inconvenience to SPC. He did not tell SPC to stop using the QAD Software.

(11)    On 4 November 2019, Mr Read sent an email to Mr Zarb and Mr Fotia referring to SPC’s use of the QAD Software being “unlicensed”. Mr Read confirmed in cross-examination that his use of the term “unlicensed” was referring to the fact that a transfer of the Licence Agreement had not been executed by SPC. Mr Read stated in the email that selling off parts of the SPC Business and transferring licenses would “lead to the QAD legal team getting involved again to protect QAD’s interests and assets”. Mr Read did not make any similar complaint in relation to the “unlicensed” use.

(12)    On 3 December 2019, Mr Zarb recommended to the board of SPC that the company go with Microsoft Dynamics 365 for the ERP upgrade.

(13)    On 10 December 2019, QAD’s solicitors wrote to SPC. The letter presented three options by which SPC could acquire a licence from QAD.

92    SPC submitted that, in the circumstances, regardless of whether or not, as a formal matter, the deadline in paragraph three of Mr deHaar’s letter was extended beyond 31 July 2019, QAD consented to and permitted SPC’s use of the QAD Software during July 2019, and continued to consent to and permit that use up until at least 10 December 2019. SPC submitted that the consent was given orally by Mr Read until 31 July 2019, and it was extended beyond that date by conduct; the use of the QAD Software was, therefore, with the licence of the owner of copyright and did not constitute copyright infringement. SPC submitted that QAD had given the extension to the deadline in Mr deHaar’s letter so that it could try to win SPC’s business for the upgraded ERP system. This was a commercial decision by QAD to try to win new business.

93    As to QAD’s argument that, if consent or permission was given, the use of the software was consented to provided that SPC ultimately obtained an upgrade from QAD or paid a transfer (and maintenance) fee for a transfer of the Licence Agreement, SPC submitted that “a retroactive withdrawal of consent ought not be entertained”.

94    Further, SPC submitted that it was not apparent that Mr Rifai had ever agreed to the condition attaching to QAD’s “conditional” implied licence – namely, either to upgrade with QAD or pay the transfer fee. As to the former, SPC was considering all of its options and Mr Read expected that SPC would be considering other service providers – so an upgrade with QAD was not a certainty. As to the latter, there was no evidence that Mr Rifai agreed to this on 26 June 2019 or at any other time, and both his and Mr Read’s evidence was to the effect that, on 5 July 2019, Mr Rifai stated to Mr Read that Mr Rifai did not consider SPC was required to pay the transfer fee.

95    SPC submitted that, even if the licence were to be treated as a bare or gratuitous licence, it could not be withdrawn without giving SPC reasonable notice of the proposed withdrawal. What would constitute reasonable notice would depend upon how quickly SPC could implement a new ERP system and transition off the old system. The evidence indicated that it generally takes approximately 12 months to change ERP systems. SPC moved as quickly as possible and transitioned to Microsoft Dynamics 365 in about 10 months. As noted below, QAD took the position that the requirement of giving reasonable notice was not pleaded.

QAD’s case

96    QAD submitted that the question is “whether in the circumstances of a particular case the court may properly infer from the evidence the existence of consent to what otherwise would be an infringement of copyright”: Devefi Pty Ltd v Mateffy Perl Nagy Pty Ltd (1993) 113 ALR 225 at 234 (Northrop, Gummow and Hill JJ). A licence will only be implied when there is a necessity to do so: Acohs Pty Ltd v Ucorp Pty Ltd (2012) 201 FCR 173 at [145] (Jacobson, Nicholas and Yates JJ).

97    QAD relied on Powerflex Services Pty Ltd v Data Access Corporation (No 2) (1997) 75 FCR 108 for the proposition that “mere silence” is not sufficient to create an implied licence.

98    QAD also relied on Devefi at 242 (particularly regarding the copyright owner’s “site inspections”) to submit that “reasonable and temporary” collaboration between parties does not involve the grant of a gratuitous licence.

99    QAD’s primary argument was that the Court should reject the existence of an implied licence for one or more of the following reasons:

(1)    The evidence indicated that QAD only granted licences to engage in conduct that would otherwise infringe copyright by way of a formal process involving signed agreements, and no such agreements were executed. In those circumstances, QAD submitted, it would be a strange outcome for QAD inadvertently to have granted permission to SPC to infringe its copyright despite the fact that it was trying to secure a payment from SPC for that very outcome.

(2)    As is clear from Mr Read’s email of 27 June 2019, it was only the offer of 21 June 2019 that QAD extended to 31 July 2019. The extension of the deadline to take up an offer is not the same as the provision of permission.

(3)    There is no evidence that a QAD representative ever said to an SPC representative that SPC did not need a licence for its present use, or that it could continue to use QAD 2008 SE without a licence.

(4)    SPC did not contemporaneously assert the existence of any arrangement consistent with an implied licence and referred in this respect to SPC’s letter of 27 November 2019 and SPC’s lawyers’ letter of 20 December 2019. QAD referred to Mr Rifai’s assertion in giving evidence that he thought SPC was licensed to use QAD 2008 SE because he was “working under the BPA under licence from Coca Cola”. This suggested a different position.

(5)    After Mr Read’s email of 4 November 2019 where Mr Read said “since [completion] QAD software is being used unlicensed”, Mr Fotia acknowledged in his internal reporting of the email that “QAD are not relenting on the status of licences”.

(6)    It was common ground that SPC would need to continue using QAD 2008 SE until it had implemented a new ERP system. The fact that SPC was using QAD 2008 SE unlicensed was a key piece of commercial leverage for QAD – one would not expect that to have been surrendered gratuitously or inadvertently.

(7)    Relatedly, SPC did not change its position once QAD’s lawyers became involved. Rather, SPC continued to do what it had already been doing, that is, using QAD 2008 SE. There is a logical disconnect between the idea that it had “permission” to use QAD 2008 SE before a certain date, and then carried on using QAD 2008 SE after that date despite any alleged “permission” having been revoked. Subsequent events “may often cast light on what has gone before”: Commissioner of Probate Duties (Vic) v Stocks (1976) 135 CLR 247 at 262 (Gibbs J).

100    QAD submitted that it was not necessary for the business efficacy of any arrangement for SPC to have had any permission. According to QAD, there is no difficulty with the position that SPC was using QAD 2008 SE without QAD’s permission and QAD staying its hand in terms of not suing for that infringement until such time as the outcome of the commercial negotiations was known. To the extent SPC asserts that such an arrangement places it at risk, SPC had placed itself in that position. Viewed in that light, QAD’s accommodation should not be extended beyond a temporary abstention from commencing legal proceedings.

101    QAD’s alternative argument was that, insofar as any permission was given to SPC to engage in conduct after completion on 28 June 2019 that otherwise infringed the copyright in QAD 2008 SE, this was conditional on the payment of money either for the execution of a transfer of the Licence Agreement or for an upgrade to QAD’s cloud software. As SPC did not do either of these things, its conduct was not within the scope of any licence. A conditional permission is all that is necessary to give effect to any implicit arrangement between QAD and SPC.

102    In this context, QAD submitted that an implied licence is not at large; it “must have some terms and conditions”: Trumpet Software Pty Ltd v Ozemail Pty Ltd (1996) 34 IPR 481 at 499. QAD relied on Tamawood Ltd v Habitare Developments Pty Ltd (No 3) (2013) 101 IPR 225 as authority for the proposition that an implied licence may be conditioned on a future event occurring, in the sense that if the event does not occur the party cannot rely on any licence.

103    In addition to the matters relied upon in relation to its primary argument, QAD relied in particular on the following in respect of its alternative argument:

(1)    Various SPC representatives had factored in or otherwise thought it prudent to factor in the SPC Business paying $660,000 to QAD if SPC did not select the QAD cloud-based option.

(2)    There was no evidence that QAD ever intended to give SPC unconditional permission to use QAD 2008 SE without a fee.

104    QAD submitted that Mr Rifai understood “perfectly well” that QAD was not content for SPC to continue using QAD 2008 SE after completion except on the condition that some payment moved to them, either by way of transfer fee or by payment for the upgrade of a new system. I accept that Mr Rifai’s evidence was to that effect.

105    Similarly, Mr Fotia knew that QAD was expecting to receive a payment, whether by way of a transfer fee or payment for the upgrade and that any permission QAD was giving to SPC to use QAD 2008 SE after completion was conditional on receiving that payment. I accept that Mr Fotia’s evidence was to that effect.

106    QAD submitted that no SPC witness gave evidence that SPC relied on QAD’s conduct as involving some form of permission for it to use QAD 2008 SE gratuitously.

107    QAD submitted that SPC’s case on implied licence rests on the slender foundation that, from 31 July 2019 (when the extension to accept QAD’s offer of 21 June 2019 expired) to late November 2019, while the parties were negotiating, nobody from QAD informed SPC that SPC should stop using QAD Software.

108    QAD submitted its conduct did not involve a form of permission. Rather, it was consistent with QAD not (yet) “going legal”. QAD was hoping to reach an agreement without resorting to the present litigation, and had been “very patient” in doing so. Even a multi-year delay in commencing proceedings does not constitute the granting of a licence: Powerflex at [131]. QAD submitted that SPC now – opportunistically – seeks to throw the reasonableness of QAD’s approach back in its face by contending that QAD inadvertently licensed SPC during the period in which it did not threaten legal proceedings. The Court would be slow to find that QAD’s commercially sensible approach somehow involved the grant of a licence.

109    QAD submitted that, if there was an implied licence commencing in late June 2019, then it came to an end on the following dates:

    31 July 2019: when the extended deadline set out in SPC’s letter of 21 June 2019 passed;

    4 November 2019: when Mr Read wrote an email to SPC representatives stating that SPC’s software use was unlicensed;

    27 November 2019: when SPC indicated its unwillingness to pay any fee for the transfer of the Licence Agreement and QAD responded indicating that SPC’s unlicensed use constituted copyright infringement;

    3 December 2019: when SPC chose Microsoft Dynamic 365 as its new ERP software;

    10 December 2019: when QAD’s lawyers wrote a letter of demand to SPC;

    28 January 2020: when these proceedings were commenced.

Consideration

110    Assessed objectively, QAD gave SPC permission to use the QAD Software until Mr Rifai wrote his letter on 27 November 2019, when SPC indicated its unwillingness to pay any fee for the transfer of the Licence Agreement. If QAD’s permission did not end then, it ended when QAD responded on 10 December 2019 indicating that SPC’s unlicensed use constituted copyright infringement.

111    Up until 31 July 2019, QAD’s permission stemmed principally from Mr Read’s email of 27 June 2019 which extended the offer contained in Mr DeHaar’s letter of 21 June 2019 to transfer the licence on the three conditions mentioned in the letter. If, on 31 July 2019, SPC had rejected the offer, QAD could not sensibly have complained that its copyright had been infringed in circumstances where it knew SPC was using the software and allowed QAD further time to consider its offer.

112    Up until 27 November 2019, QAD’s permission stemmed from Mr Read’s email of 27 June 2019 and the course of conduct between the parties.

113    Assessed objectively, the permission was that SPC could use QAD 2008 SE pending SPC’s decision whether to pay the amount of $602,208 (exclusive of GST) (representing a transfer fee of $424,392 and a maintenance fee of $177,816) or selecting QAD as the provider of an upgraded QAD software solution, provided it was genuinely considering at least one of those options. Once QAD had decided both that it would not pay for a transfer of the Licence Agreement and that it would not select QAD for an upgraded solution, the implied licence came to an end.

114    According to Mr Rifai, SPC never intended to pay a transfer fee. I think this to be exaggeration if it was intended to mean that SPC would never consider paying anything for a transfer of the Licence Agreement, but I accept that SPC reached that position by 27 November 2019. When Mr Rifai wrote his letter on 27 November 2019, stating that SPC would not pay a transfer fee, he placed SPC in the position where the implied licence ended, because SPC was not prepared to use the QAD Software on the basis on which it been permitted to use it. Although formal board approval to upgrade to Microsoft Dynamics 365 did not occur until 3 December 2019, there was, to Mr Rifai’s knowledge, no realistic prospect that SPC would upgrade with QAD as at 27 November 2019 and I do not consider Mr Rifai or SPC were genuinely considering a QAD upgrade at that time.

115    As noted earlier, QAD relied on Powerflex in submitting that “mere silence” is insufficient to create an implied licence. In Powerflex, the Full Court held that Powerflex infringed Data Access’s copyright in a table used in its “Dataflex” computer program. Powerflex had reverse engineered a computer program which used the same commands, file structure and function keys as the Dataflex program. Powerflex claimed that the respondent had granted an implied licence for it to use Dataflex. The relevant circumstances from which Powerflex submitted a licence should be implied included: that infringement proceedings were commenced four years after Powerflex was first published; there had been irregular discussions between Powerflex and Data Access during these four years, including discussions of possible cooperation between the parties; and the absence of any suggestion by Data Access of litigation during this period. The Full Court held at 131 that these circumstances were insufficient to conclude that there had been a grant of an implied licence (emphasis added):

At the most the evidence indicates that Data Access remained silent until ultimately proceedings were commenced. That silence was no doubt explicable, having regard to the difficulty of concluding whether what was done by Powerflex constituted a breach of the copyright of Dataflex. Whatever may be necessary to constitute an authorisation or licence, mere silence will not suffice: see Australasian Performing Right Association Ltd v Jain (1990) 26 FCR 53.

116    Unlike Powerflex, QAD was aware that, without its consent, there was a likely infringement of copyright, because its software was being used by SPC without a transfer of the licence. QAD chose not to require SPC expressly to stop using the software or to commence proceedings. It did so in order to continue negotiations with SPC. Whilst “mere silence” is not of itself sufficient to create an implied licence, a party’s silence must be considered in the context of all of the circumstances. In the context of ongoing negotiations regarding SPC’s licence to use the QAD Software, QAD made a commercial decision not to ask SPC to stop using the software, in circumstances where it knew that SPC was using the QAD Software without the Licence Agreement having been transferred.

117    As also noted earlier, QAD relied on Tamawood in submitting that an implied licence can be conditioned on a future event such that, if the future event does not occur, the implied licence cannot be relied on. Tamawood concerned a claimed infringement of copyright, in respect of building plans for low-cost project housing. The applicant, Tamawood, produced the building plans for one of the respondent companies, Habitare, on the understanding that Tamawood would be the builder of the houses. Habitare used Tamawood’s plans to obtain council development approval for the project, but subsequently hired a different architectural firm to design new plans which were “generally in accordance with” Tamawood’s plans, and used a different construction company to build the buildings.

118    Justice Collier found that there was an implied licence granted by Tamawood for Habitare to use the plans, but the implied licence was “limited in scope” such that Habitare was only entitled to use the plans in circumstances where Habitare had the intention of using Tamawood as the builder of the project housing: at [114], [139]. Tamawood had “made it plain to the agents of Habitare” that Habitare’s use of the plans was “contingent on the appointment of Tamawood as the builder”; there was “no evidence to support a finding that Habitare understood the position to be otherwise”: at [139].

119    The implied licence in Tamawood was not so much “conditioned on a future event occurring”, as QAD submitted, but rather conditioned on Habitare’s intention at the time it used the plans. Justice Collier found that Habitare was within the scope of the implied licence in using Tamawood’s plans to obtain council development approval, as Habitare intended to engage the applicant as the builder at that point in time: at [147]; however once Habitare resolved that it would not engage Tamawood to build the project housing, Habitare was no longer entitled to use the Tamawood plans: at [149].

120    The implied licence here was conditioned on SPC either upgrading or paying the transfer fee. Once SPC decided it would do neither, the implied licence came to an end.

121    SPC argued that it was entitled to reasonable notice. This defence was not pleaded and QAD submitted that it would have adduced evidence on the topic of what was reasonable if the defence had been pleaded and that it would have sought discovery on the issue. I accept what QAD says in this regard given the history of the proceedings. SPC argued that the defence did not need to be pleaded because reasonable notice was an “incident of the implied licence”. In my view, the issue is one which should have been specifically pleaded if it was to be relied upon as an issue at trial, particularly when SPC’s Further Amended Defence confined the alleged implied licence period to the end of negotiations and was silent about any continued ability to use the QAD Software lawfully.

122    In any event, however, the reasonable notice argument does not assist SPC:

(1)    First, whether or not a term is to be implied that a licensee is entitled to reasonable notice on termination, and the terms on which a licence for continued use for a reasonable period should be given, depends on the particular implied licence. The circumstance may indicate that the implied licence was a bare licence, revocable at will (without reasonable notice) – see: Computermate at 49. The question whether a licence is terminable at will depends on the circumstances at the time of the licence – see, for example: Crawford Fitting Co v Sydney Valve and Fittings Pty Ltd (1988) 14 NSWLR 438 at 444 (McHugh JA). Here, the permission was terminable at will because it was permission to use the software only while negotiations were continuing.

(2)    Secondly, if the implied licence was one terminable only with reasonable notice, SPC would only have been entitled to minimal notice (of a few days) absent payment for continued use of the QAD Software. What is reasonable notice depends on the circumstances as they exist at the date of the notice: Crawford at 444; Australian Blue Metal Ltd v Hughes [1963] AC 74 at 99. In the circumstances of this case, QAD was not entitled to continue to use the QAD Software for any more than a few days without payment of an amount equal to the transfer and maintenance fee totalling $602,208 (exclusive of GST). At the time permission was granted, and at all times during the implied licence, the parties were aware that SPC had taken the benefit of use of the software and considered it would have to use the software extensively for approximately a year if it transitioned to new software. SPC knew that QAD’s position was that a minimum payment of approximately $600,000 (exclusive of GST) was required as the quid pro quo for SPC’s use of the software.

123    It follows that SPC infringed QAD Inc’s copyright in the QAD Software from 27 November 2019.

124    Something more should be said about the extent of use. SPC ran QAD 2008 SE for a wide variety of functions including: managing accounts payable and receivable, recording and balancing general ledger entries, managing and reporting on inventory, recording and reporting on SPC’s products, managing production processes, running SPC’s payroll system, accepting data from electronic data interchanges (so as to allow receipt of electronic messages such as orders, receipts and shipping notifications), preparing and issuing invoices to customers, collecting real-time data in warehouses and inventory and for grower management.

125    Whilst as at 28 or 29 June 2019 there were around 214 frequent users and 6 infrequent users, on 26 March 2020 there were 225 users.

126    SPC commenced using Microsoft Dynamic 365 as its live ERP system on 28 September 2020 and used QAD 2008 SE as its live ERP system until then. As noted earlier, SPC continued to use QAD 2008 SE after 28 September 2020 and continued to run it throughout the course of the proceedings, and even during the hearing, for what Mr Zarb described as “non-production purposes”. These purposes included extracting historical information for quality control or financial reasons.

127    As noted below, I infer that, as at the time judgment was reserved, SPC proposed to run the software after the hearing to extract data. I conclude that it has in fact done that.

NON-PECUNIARY RELIEF

128    QAD seeks:

(1)    a declaration of infringement;

(2)    an injunction; and

(3)    orders for verified deletion.

129    All of this relief should be granted.

130    Declaratory relief serves to vindicate QAD’s claim and record the Court’s disapproval of the infringing conduct and can be granted in an appropriate case notwithstanding that infringing conduct has ceased: REA Group Ltd v Real Estate 1 Ltd (No 2) [2013] FCA 968 at [6] (Bromberg J). In the present case, infringing conduct continued after the commencement of proceedings, and even during the course of the hearing, making it a stronger contender for declaratory relief than REA Group.

131    As to injunctive relief, the evidence established that SPC was continuing to use and make reproductions in respect of QAD 2008 SE and is likely to need to do so for the next 7 years, absent printing out all of the relevant data. During closing submissions, SPC gave an undertaking in the following form:

I Hussein Hani Rifai, on behalf of the Respondent, undertake to the Court that, by no later than 3 May 2021, the Respondent (including by its servants, agents or otherwise) will:

(a)    permanently refrain from using or reproducing QAD Enterprise Applications 2008 Standard Edition (QAD Software); and

(b)     delete and/or destroy all copies of the QAD Software in its possession or control.

132    This undertaking was given because Mr Rifai accepted in cross-examination that SPC would give an undertaking. I infer from the form of the undertaking that SPC proposed to make a hardcopy of the records it needs (or a copy of the relevant data in a form such that use of the copied data would not infringe copyright) by 3 May 2021. That is, SPC’s undertaking implicitly acknowledged it would continue to infringe by using the software to extract data in order to stop infringing by 3 May 2021. SPC stated that the Court should not accept the undertaking and submitted further that it should not preclude the granting of injunctive relief, referring to Director of Consumer Affairs v Srinivasan [2014] VSC 271 at [67]-[70] and Australian Competition and Consumer Commission v Pacific National Pty Ltd (2020) 277 FCR 49 at [434]-[438]. I accept that an injunction should be granted. Consistently with what was said in Srinivasan at [70], “general deterrence and deterrence of a repetition of non-compliant behaviour by [SPC] is better served by a Court order being an injunction than acceptance of an undertaking”.

133    Orders for verified deletion are available as ancillary relief in aid of an injunction. Given the fact that infringing conduct continued after commencement of the proceedings and during the course of the hearing and in light of the undertaking which implicitly acknowledged that infringing conduct would continue until 3 May 2021, such relief should be granted.

COMPENSATORY DAMAGES

134    QAD Inc sought compensatory damages under s 115(2) of the Copyright Act in the sum of $984,059.12 (including GST). On the “licence fee approach” this was calculated in the following way. For on-premises versions of the QAD Software, QAD had the same list price and charged the same license fee regardless of the version of the QAD Software used. QAD’s pricing was based on the non-transferable nature of its licences of QAD Software. Based on a frequent user count of 214 and an infrequent user count of 6 as at 28 or 29 June 2019 (representing SPC’s users) the prices (including GST) for QAD 2008 SE was $984,059.12 for a licence purchase (yearly maintenance/support was $226,809.78 (inclusive of GST)).

135    QAD submitted that, faced with the choice of not using QAD 2008 SE or paying the list price, the Court ought to infer that SPC would have paid the list price. The SPC Business could not operate without QAD 2008 SE. Outside of a transfer permitted by QAD, the only method by which SPC could obtain a licence was by a new purchase at list price. QAD submitted that it does not lie in the mouth of SPC – the infringer – to haggle down the price.

136    SPC submitted that copyright damages is the depreciation caused by the infringement to the value of the copyright as a chose in action. I do not accept that this is an appropriate measure of damages on the facts of this case, which include that QAD Inc was in the business of selling licences for its software (and charging transfer fees) and the parties in fact discussed what was required to secure a transfer of the Licence Agreement – cf: Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales (1975) 6 ALR 445 at 447. Further, QAD was not in the business of licensing its software for limited periods; its unchallenged evidence was that it sold perpetual licences.

137    I also reject SPC’s submission that the damages should reflect the period of time over which copyright was infringed. Absent these proceedings, SPC would have continued to use the software and infringe copyright for a period of at least seven years.

138    Likewise, I reject SPC’s submission that a discount should be made to reflect the age of the software. QAD 2008 SE was being used in the SPC Business before transfer. The software continues to be used around the world. The software was sufficiently good for the SPC Business to make over $284 million in the financial year ending 28 June 2020, revenue which Mr Rifai admitted could not have been generated without using QAD 2008 SE.

139    The purpose of damages for infringement of intellectual property rights is “to compensate for loss or injury” suffered as a result of the infringement. In Bailey v Namol Pty Ltd (1994) 53 FCR 102 at 110-111, the Court stated:

General Tire & Rubber Co v Firestone Tyre & Rubber Co Ltd [1976] RPC 197, involved patent infringement. But the general remarks of Lord Wilberforce (at 212) are, putting to one side s 115(4), applicable to cases of copyright infringement. His Lordship said:

“As in the case of any other tort (leaving aside cases where exemplary damages can be given) the object of damages is to compensate for loss or injury. The general rule at any rate in relation to ‘economic’ torts is that the measure of damages is to be, so far as possible, that sum of money which will put the injured party in the same position as he would have been in if he had not sustained the wrong.

…

In the case of infringement of a patent, an alternative remedy at the option of the plaintiff exists by way of an account of profits made by the infringer... There are two essential principles in valuing that claim [in damages]: first, that the plaintiffs have the burden of proving their loss: second, that the defendants being wrongdoers, damages should be liberally assessed but that the object is to compensate the plaintiffs and not punish the defendants...

These elemental principles have been applied in numerous cases of infringements of patents. Naturally their application varies from case to case. Reported authorities, many of which were cited in argument, may be useful as illustration of judicial reasoning, but are capable of misleading if decisions on a particular set of facts and observations in judgments leading up to such decisions are later relied upon as establishing a rule of law.”

See also: Generic Health Pty Ltd v Bayer Pharma Aktiengesellschaft (2018) 267 FCR 428.

140    In my view, the appropriate amount for damages is $602,208 (excluding GST), or $662,428.80 (including GST), being the amount SPC would have paid to secure a transfer of the licence, together with a year’s maintenance fee. This is the amount QAD required to be paid as a condition of transfer of the Licence Agreement. It is the amount QAD would have continued to accept for some many months after the transfer of the business to SPC. A higher, but not dissimilar, price was offered on 10 December 2019. If that amount had been offered by SPC in response to the letter of 10 December 2019, it is an amount which, more likely than not, would have been accepted. I have considered whether QAD would have agreed to transfer the licence for the amount of only $424,392 (excluding GST) and not required payment of a maintenance fee if SPC had negotiated along those lines. I do not think it would have. As at 10 December 2019, SPC had taken the benefit of maintenance services from completion on 28 June 2019 onwards. It had not paid for those services. In any event, SPC did not negotiate, deciding instead to use the QAD Software without a licence.

141    On balance, I consider QAD Inc’s loss as a result of infringement is appropriately reflected in the amount of $662,428.80 (including GST) being the amount SPC would have paid to secure QAD’s consent to a transfer of the Licence Agreement. My provisional view, subject to hearing from the parties if necessary on the question of whether GST is payable, is that the amount of $662,428.80 (including GST) should be payable by SPC within 28 days of the respondent receiving a tax invoice from QAD.

ADDITIONAL DAMAGES

142    Section 115(4)(b) of the Copyright Act provides:

115     Actions for infringement

(4)    Where, in an action under this section:

…

(b)    the court is satisfied that it is proper to do so, having regard to:

(i)    the flagrancy of the infringement; and

(ia)    the need to deter similar infringements of copyright; and

(ib)    the conduct of the defendant after the act constituting the infringement or, if relevant, after the defendant was informed that the defendant had allegedly infringed the plaintiff’s copyright; and

(ii)    whether the infringement involved the conversion of a work or other subject‑matter from hardcopy or analog form into a digital or other electronic machine‑readable form; and

(iii)    any benefit shown to have accrued to the defendant by reason of the infringement; and

(iv)    all other relevant matters;

the court may, in assessing damages for the infringement, award such additional damages as it considers appropriate in the circumstances.

143    QAD Inc sought additional damages in a sum that, when added together with compensatory damages of $984,059.12, would make SPC’s total damages $1,476,088.68. That is, QAD Inc sought a 50% “uplift” on the award of compensatory damages, being additional damages of $492,029.56, when calculated by reference to the quantum of damages it sought.

144    However, if the Court awarded compensatory damages less than $984,059.12, then QAD Inc sought a greater amount of additional damages – in an amount representing the shortfall from $1,476,088.68.

145    The principles relevant to an award of additional damages include:

(1)    The award is made under s 115(4)(b) of the Copyright Act and it is the terms of that provision which are of paramount importance. The Court must have regard to the matters in subparagraphs (i) to (iv) of s 115(4)(b) in being satisfied that it is proper to award additional damages. Those matters, to which the Court must have regard, are not in the nature of pre-conditions which must be satisfied in order to make the award: Futuretronics.com.au Pty Limited v Graphix Labels Pty Ltd (No 2) (2008) 76 IPR 763 at [17].

(2)    Subparagraph (iv) of s 115(4)(b) requires the Court to take into account all relevant matters. The discretion is, accordingly, broad and its exercise will be closely tied to the particular facts of the case. No doubt other cases might provide some guidance in various ways, but the focus must be on the particular facts before the Court.

(3)    The Court has a broad general discretion to award additional damages not fettered in any arithmetical or mechanical way: LED Builders Pty Ltd v Eagle Homes Pty Ltd (1999) 44 IPR 24 at 50, [91].

(4)    Additional damages need not be proportionate to any award of compensatory damages: Futuretronics at [17]. Damages may be awarded even if the copyright owner is only entitled to nominal compensatory damages: Dynamic Supplies Pty Ltd v Tonnex International Pty Ltd (No 3) (2014) 312 ALR 705 at [52].

(5)    It is, nevertheless, permissible to calculate additional damages as an “uplift” in a fixed percentage on top of the licence fee that the infringer would have paid – see, for example: Halal Certification Authority Pty Limited v Scadilone Pty Ltd (2014) 107 IPR 23 at [111]-[113].

(6)    Additional damages may be assessed having regard to principles derived from awards of aggravated and exemplary damages at common law: Autodesk Inc v Yee (1996) 68 FCR 391 at 394. However, additional damages are not “exceptional” – rather, an element of penalty is an accepted factor: Tonnex at [43]. When an award of additional damages includes a punitive component, the individual circumstances of the infringer must be taken into account in the award: Tonnex at [53].

(7)    The blatancy of the infringing conduct may be taken into account – see: Amalgamated Mining Services Pty Ltd v Warman International Ltd (1992) 111 ALR 269 at 286-7, in which Wilcox J said that “[i]f copyright protection is to mean anything, the courts must take a severe view in cases [that are] blatant”.

SPC’s submissions

146    SPC submitted that the following matters were relevant to the Court’s considerations as to any award of additional damages (unless otherwise stated I accept the facts, although they must be read with the other findings which I have made):

(a)    SPC was open with QAD about its use of the QAD Software after completion, which was necessary in the business that SPC had acquired. SPC obtained, before completion, QAD’s permission to use the QAD Software. Mr Rifai told Mr Read at an early stage in July that he did not consider SPC to be liable to pay the transfer fee. Whilst I accept Mr Rifai said this, I conclude that Mr Rifai considered that SPC would have to pay a transfer fee to secure a transfer of the Licence Agreement.

(b)    During the period from July to December 2019, SPC’s use of the QAD Software was permitted by QAD. Even if QAD’s consent or permission was “conditional” for the purpose of the implied licence, it was nevertheless permitted at the time it occurred. That permission was given while SPC considered its options with respect to the upgrade of its ERP system. SPC gave detailed consideration in good faith to upgrading its ERP system with QAD. This involved numerous meetings and presentations and various other communications between SPC and QAD to allow QAD to pitch its upgrade offering. During this period QAD had the commercial opportunity to acquire lucrative business from a new customer.

(c)    When SPC selected Microsoft Dynamics 365 for the new system, it moved expeditiously to transition from the old QAD Software to the new system. However, given the nature of the software and its role in the SPC Business, the transition necessarily took some time.

(d)    The use of the QAD Software that has occurred since the transition to Microsoft Dynamics 365 has been for necessary historical and archive purposes, with approximately five people having access.

(e)    Whether or not SPC’s arguments on the cross-claim succeed, SPC operated upon a genuine belief that SaleCo, rather than it, was obliged to pay the transfer fee pursuant to the BPA. I do not accept that SPC operated on a genuine belief that SaleCo was obliged to pay the transfer fee, although I accept SPC considered that it had an argument that SaleCo was responsible. SPC did not think the argument was that strong given that neither Mr Rifai nor SPC apparently pursued, contemporaneously with the events described earlier, SaleCo or CCA to pay or contribute and that Mr Rifai assumed responsibility for negotiating with QAD.

(f)    SPC abandoned its reliance on the statutory defences when it became apparent in oral opening submissions how QAD put its case with respect to the “infringing copy” issue (which had not been particularised and differed from the way the case was put in QAD’s written submissions). In SPC’s submission, those defences were maintainable until the asserted change in QAD’s case. I do not accept that the position is quite so straight forward. I consider that the abandoning of these defences was also motivated by a forensic decision to minimise the level of damages which might be awarded by abandoning defences with limited prospects of success – see [158]-[162] below.

(g)    SPC gave an undertaking to the Court with respect to ceasing to use the QAD Software and deleting copies. I accept that an undertaking was given in closing submissions. It was an undertaking which implied continuing infringement. It was only given as a consequence of answers given by Mr Rifai in cross-examination. It should have been given far earlier and there should not have been infringing conduct.

Relevant factors

Flagrancy: s 115(4)(b)(i)

147    The meaning of “the flagrancy of the infringement” has been described as:

    “scandalous conduct, deceit and such like; it includes deliberate and calculated copyright infringement”;

    “calculated disregard of the plaintiff’s rights, or cynical pursuit of benefit”;

    conduct which could be described as glaring, scandalous or blatant;

    extending to conduct exhibiting a consciousness of wrongdoing, whether or not it exhibits a consciousness of copyright infringement.

See: Futuretronics at [19]; Tonnex at [47].

148    An infringement might be flagrant even if the infringer did not know the conduct amounted to infringement. Nevertheless, the lack of knowledge would, all other things being equal, also be relevant to the question whether to make an award of additional damages and the level of such an award. Carelessness of a sufficiently serious kind is capable of grounding an award of additional damages: Nottinghamshire Healthcare National Health Service Trust v News Group Newspapers Ltd [2002] RPC 49 at [52].

149    Mr Rifai suggested in cross-examination that he considered SPC had a right to use the software by reason of the terms of the BPA. I do not accept Mr Rifai’s evidence in this respect. I do not accept that, at the relevant times, Mr Rifai considered the BPA gave SPC a right to use the software. It is difficult to see how any reasonable and commercial businessperson could have reached that understanding and I was unconvinced that Mr Rifai seriously held that understanding. Mr Rifai accepted that he knew that SPC had no assurance SPC would obtain a licence to use QAD 2008 SE at any time after completion. I accept that Mr Rifai may have held the view that there was an available argument that CCA should pay for the transfer or, as a commercial matter, that he would try to make them pay for it, but as between SPC and QAD, Mr Rifai knew that the licence had not been transferred, knew that QAD required payment for transfer and knew that QAD had not been paid. Mr Rifai took a commercial decision to use the software without paying for the transfer. Mr Rifai agreed that, as at 27 June 2019, SPC took on the risk of not securing a transfer of the licence because he did not want to lose $2.7 million which might be forfeited if completion did not occur.

150    I do not accept Mr Rifai’s evidence that SPC did not have the cash flow to pay the amount required by QAD. SPC was able to pay many millions for the acquisition of the SPC Business. It is fanciful that it could not pay an amount of approximately $660,000. SPC went on to conduct the SPC Business profitably once it was acquired on 28 June 2019. In the financial year from 29 June 2019 to 28 June 2020, SPC had gross revenue of about $284 million and after tax profits of $28.65 million. This does not suggest a serious cash flow issue preventing payment of the amount required to secure a transfer of the licence.

151    Even after commencement of proceedings and during the hearing, SPC continued to infringe. Mr Rifai admitted that SPC used QAD 2008 SE without a licence because SPC considered it to be in SPC’s commercial benefit and accepted doing so as recently as February 2021. SPC evidently made no attempt to prevent its employees from using the software because documents produced on 15 April 2021 showed that SPC had continued to use the QAD Software since February 2021, including on multiple occasions during trial. Mr Rifai was prepared to use the software because it kept the business running. Mr Rifai accepted in cross-examination that, whilst SPC would use the software, SPC never intended to pay QAD any amount at any point for the ongoing use of it. The fact that, commercially, Mr Rifai had little choice other than to use the software does not make the infringement less flagrant; rather it explains the reasons why the infringement was so flagrant.

Deterrence: s 115(4)(b)(ia)

152    The concept of deterrence includes both specific and general deterrence: Urban Ventures Pty Ltd v Solitaire Homes Pty Ltd (2010) 90 IPR 289 at [58]. Both have a role to play on the present facts. Mr Rifai displayed a disregard for QAD’s rights and demands. His attitude, and his failure to direct employees of SPC otherwise, had the result that SPC continued to use the software even after the proceedings commenced, during the proceedings and, presumably on his instruction, after the hearing (the undertaking evidencing the intention to use the software until 3 May 2021, which I infer has occurred).

153    Lack of remorse is relevant to an assessment of whether a person or entity is likely to infringe in the future. SPC has shown no remorse. SPC vigorously defended these proceedings, including on statutory grounds, unlikely as candidates for success, abandoned at trial. The applicant submitted that it is reasonable to think that, even after a finding of flagrant copyright infringement, Mr Rifai would maintain the view that SPC’s conduct was appropriate. There is much to be said in favour of that submission. Nevertheless, accepting that SPC’s conduct to date has been influenced by Mr Rifai, it is SPC which has infringed and to which the issue of specific deterrence must be directed. A substantial additional damages award is necessary to deter SPC from engaging in like conduct in the future.

154    In considering specific deterrence, an infringer’s financial standing and resources may be a relevant matter to be considered: Tonnex at [116]; Nesor Nominees Pty Ltd v Big Boys BBQ Pty Ltd (2019) 146 IPR 1 at [47]. An amount which may deter a small company may not be sufficient to deter a large and well-resourced one. Indeed, it may also be relevant on the issue of general deterrence – see, albeit in a different statutory context: Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2) (2005) 215 ALR 281 at [9] (overturned on appeal, but not in a manner relevant to this point). That is because, for example, potential contraveners might be expected to take notice of the level of awards of additional damages made against comparably sized companies.

155    In Halal Certification at [111], Perram J observed (in relation to additional damages under the Trade Marks Act 1995 (Cth), but the point applies equally under the Copyright Act):

If the damages were to be fixed at the level of the applicant’s wholesale licence fee this would strip Quality Kebabs of the benefit it has received of using the trade mark without having to pay for it but it would not, in my opinion, be a sufficient deterrent. It would mean that an infringer could acquire, in effect, a compulsory licence to use a trade mark subject only to paying for it. It would create a “use now” and “pay later” state of affairs.

156    Perram J calculated additional damages as an uplift of 50% of the licence fee to take account of deterrence: Halal Certification at [111]-[112].

Conduct after infringement or being informed of alleged infringement: s 115(4)(b)(ib)

157    In relation to s 115(4)(b)(ib), QAD relied on the following matters:.

(1)    First, by the 21 June 2019 offer, SPC was informed in terms before it commenced its infringing conduct that it required a licence to engage in that conduct. SPC proceeded anyway. SPC continued with its infringing conduct after receiving letters of demand, after the proceedings commenced and had not desisted by the time of hearing. It gave an undertaking which reflected an intention to continue to infringe.

(2)    Secondly, notwithstanding QAD’s assertion of its rights, SPC has forced QAD to endure the stress (and indeed cost) of enforcing those rights through to finality in contested litigation: Coles v Dormer (No 2) (2016) 330 ALR 151 at [23].

(3)    Thirdly, SPC’s conduct of the proceeding leaves much to be desired. The Court should take into account SPC’s conduct in the circumstances of this case.

158    The infringer’s conduct of the proceedings has been described as being capable of being a “significant factor” falling for consideration under s 115(4)(b)(ib): Facton Ltd v Rifai Fashions Pty Ltd (2012) 199 FCR 569 at [109]; see also: Truong Giang Corporation v Quach (2015) 114 IPR 498 at [138]. Whether it is significant depends on the particular circumstances of the case. For example, in Henley Arch Pty Ltd v Lucky Homes Pty Ltd (2016) 120 IPR 317 at [249] it was said:

A respondent’s conduct after the commencement of litigation may be taken into account if it involves false denials of infringing conduct or only belatedly acknowledges wrongful conduct.

159    In Facton at [44], Lander and Gordon JJ said:

We think the respondents’ conduct after the proceeding was brought, and during the proceeding, ought to be taken into account, much like it would for an award of aggravated damages in a defamation case. It was only at the last minute that the respondents acknowledged their wrongful conduct, and they denied the infringement until that last minute.

160    It is no answer to this kind of conduct to say that it should only be taken into account on costs. This is because the purposes of additional damages and costs awards are distinct; additional damages have a punitive role to play, whereas a costs award does not; awards of costs have a compensatory purpose: Facton at [108].

161    QAD relied on the following matters regarding SPC’s conduct of the proceeding:

(1)    In its Further Amended Defence, SPC refused to admit that copyright subsisted in QAD 2008 SE or that QAD Inc was the owner of that copyright. It was submitted that this should not seriously have been in issue. SPC sought to challenge both subsistence and ownership. It sought discovery relating to those matters, which was refused. As a result of SPC’s non-admission, QAD needed to adduce evidence as to copyright ownership and subsistence. It was only after QAD prepared detailed opening submissions as to ownership and subsistence that SPC accepted that QAD Inc was the owner of the copyright in QAD 2008 SE.

(2)    In its Further Amended Defence, SPC denied making any reproductions of QAD 2008 SE at all. QAD was required to adduce detailed evidence from Mr Morris regarding the reproductions that SPC was likely to have made. In awarding additional damages, the Court may take into account the fact that a defendant’s conduct required the claimant to prepare extensive evidence which was ultimately unnecessary: Nominet UK v Diverse Internet Pty Ltd (No 2) (2005) 68 IPR 131 at [53]-[54].

(3)    SPC amended its Defence on 31 August 2020 to run a variety of technical statutory defences which were ultimately abandoned during the trial. It was necessary for QAD to adduce evidence as to all forms of reproduction made by SPC, to address the possibility that the Court might uphold any of the defences for one kind of reproduction. These defences were the subject of extensive written opening submissions.

162    I have taken into account the way in which the proceedings have been conducted. I have placed less reliance on this factor than the others. That is for two principal reasons. First, in some ways, SPC’s conduct of the proceedings was appropriate. Certain issues were abandoned early and, whilst others were abandoned late (and some very late), they were still appropriately abandoned. Secondly, I have to an extent taken into account the way in which the proceedings were conducted in the weight I have given to flagrancy and in considering deterrence.

Benefits shown to have accrued: s 115(4)(b)(iii)

163    There was no dispute that the SPC Business could not have operated without use of the QAD Software. There was no dispute that SPC’s gross revenue of $284 million for the financial year ending 28 June 2020 could not have been generated without using QAD 2008 SE.

164    QAD relied on two further benefits:

(1)    by retaining archival information on QAD 2008 SE after the transition to Dynamics 365, SPC avoided the need for that information to be stored on Dynamics 365 which enabled SPC to transition to Dynamics 365 “as quickly as possible” and sooner than would otherwise have been the case. The non-migration of data enabled SPC “to maintain an operational business”. The “benefit” in s 115(4)(b)(iii) is not limited to pecuniary advantage (eg: Yee at 394);

(2)    SPC avoided the expense of paying for an ERP system until it transitioned to Dynamics 365 as its “live system”. The “benefit” in s 115(4)(b)(iii) may also be “the avoidance of an expense”.

165    SPC obtained a benefit in the form of using the software to operate its business and earn substantial profits, without the need to pay for an ERP system. I have taken this into account. I do not regard the matter in (1) above as particularly significant and have not given it significant weight, albeit accepting that it reflects some benefit.

Other relevant matters: s 115(4)(b)(iv).

166    QAD submitted that there were two additional matters to take into account under s 115(4)(b)(iv):

(1)    First, QAD submitted that the quantum of any additional damages may be affected by the Court’s determination of compensatory damages. QAD submitted that, if the Court awards compensatory damages less than the $984,059.12, then the shortfall (together with a portion of SPC’s “benefit” or “profit”) ought to be awarded by way of additional damages.

(2)    Secondly, QAD referred to the observation of Wilcox J in Autodesk Australia Pty Ltd v Cheung (1990) 94 ALR 472 at 479 about “the difficulty computer program owners face in trying to protect their copyrights” including because “[e]ven in the course of litigation, difficulties arise concerning proof of infringement”.

Consideration

167    I accept that a substantial award is appropriate by way of additional damages. The two most significant considerations are the flagrancy of the infringement and considerations of specific and general deterrence. I have taken into account the other matters referred to, but as less significant factors. I accept that there is a connection between the award of compensatory damages and additional damages which should be taken into account.

168    SPC could have secured a transfer of the licence for an amount of $662,428.80 (including GST). I have awarded that amount as compensatory damages. As explained earlier, whilst this figure included ongoing maintenance, that was required by QAD as a condition of transfer, as indicated in QAD’s letter of 21 June 2019. A not dissimilar offer was repeated on 10 December 2019 by QAD’s solicitor.

169    Having regard to the matters referred to above, particularly:

(1)    the flagrancy of the infringements, the continuing nature of them notwithstanding the commencement of proceedings and the fact that the infringements continued throughout the conduct of the proceedings, during the hearing and after the hearing; and

(2)    the need for deterrence,

I consider the appropriate award of additional damages to be $500,000.

CROSS-CLAIM

Nature of the cross-claim

170    By its cross-claim, SPC alleged two types of breach:

(1)    The first was that SaleCo failed to use its “best endeavours” to:

(i)    transfer the Licence Agreement to SPC on completion or as soon as practicable after completion on 28 June 2019, said to be in breach of cl 10.1(a) of the BPA; and

(ii)    obtain QAD’s consent to the novation or assignment of the Licence Agreement to SPC, or procure the entry by QAD into a new licence agreement with SPC, on completion or as soon as practicable after completion, said to be in breach of cl 10.2;

(2)    The second was an allegation that SaleCo and SaleCo 2 (the latter of which was not a party to the BPA) failed to comply with their obligations under cl 10.3 to:

(i)    do what they lawfully could to permit SPC to have the benefit of, and exercise, SaleCo 2’s rights under the Licence Agreement from completion, said to be in breach of cl 10.3(a)(vi)); and

(ii)    give all reasonable assistance to SPC to enable it to enforce SaleCo 2’s rights under the Licence Agreement, said to be in breach of cl 10.3(a)(vii)).

171    Further, SPC alleged that SaleCo promised to indemnify SPC against any loss which SPC would suffer or incur: (i) as a result of a failure to comply with obligations under clause 10.3: cl 10.5(a); and/or (ii) in relation to any breach or failure to comply with the terms of the Licence Agreement pursuant to clause 10.3(a)(vi): cl 10.5(b).

172    Finally, SPC alleged that Amatil also promised to indemnify SPC against any loss and damage SPC suffered as a result of SaleCo’s breach of the BPA: cl 17.2 and 17.3.

Principles of construction of contracts

173    The applicable principles were not in dispute. Construing a written contract involves an objective determination of the intention of the parties as expressed in the words in which their agreement is recorded. As Meagher JA and Ball J recently stated in HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296 at [18] and [19]:

18    Construing a written contract involves determining the intention of the parties as expressed in the words in which their agreement is recorded. As Lord Wright said in Inland Revenue Commissioners v Raphael [1935] AC 96 at 142: “It must be remembered at the outset that the court, while it seeks to give effect to the intention of the parties, must give effect to that intention as expressed, that is, it must ascertain the meaning of the words actually used”.

19    That task is to be approached objectively. The meaning of the words used must be ascertained by reference to what a reasonable person would have understood the language of the contract to convey: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]. That is because the objective theory of contract requires that the legal rights and obligations of the parties turn “upon what their words and conduct would reasonably be understood to convey”: Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55 at [34], citing Lord Diplock in Gissing v Gissing [1971] AC 886 at 906 and Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 502.

174    The language of the written contract is construed according to its natural and ordinary meaning, having regard to those surrounding circumstances which may legitimately be taken into account, the circumstances which the contract addresses, and the objects which it may properly be seen were intended to be achieved: Wonkana at [22]-[28]. The Court should have regard to the commercial purpose behind the transaction which “presupposes knowledge of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”: Wonkana at [23].

175    In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35], French CJ, Hayne, Crennan and Kiefel JJ stated (footnotes omitted):

... The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

The BPA

176    The “Background” to the BPA included:

A    [SaleCo], together with its wholly-owned subsidiaries, are the current owners of the Business, the Business Assets and Freehold Properties.

B    The Buyers [being a reference to SPC and other related entities] agree to buy, and [SaleCo] agrees to sell, the Business, the Business Assets and the Freehold Properties on the terms and conditions set out in this agreement and the Property Agreements (to the extent relevant).

…

177    Clause 2.1 of the BPA provided as follows:

2.1    Sale of Business

(a)    [SaleCo] agrees to sell, or procure the sale of, the Business, the Business Assets and the Properties to the Buyers and the Buyers agree to purchase, or procure the purchase of, the Business, the Business Assets and the Properties:

(i)    for the Purchase Price;

(ii)    on the Completion Date;

(iii)    free from any Security Interests (other than a Permitted Security Interest); and

(iv)    on the terms and conditions of this agreement and, in relation to the Properties, the Property Agreements.

178    “Business” was defined in the BPA as “the business of SPC carried on using the Business Assets and Properties.”

179    “Business Assets” were defined in the BPA as:

…the assets used in, forming part of or produced by, the Business as at the date of this agreement, whether tangible or intangible and whether owned or leased or used including the:

…

(k)    Contracts, including rights to use the Licensed IP;

…

(p)    any other assets necessary to conduct the Business as at Completion…

180    “Contracts” were defined in the BPA as:

…the agreements relating to the Business or the Business Assets to which a SPC Group Member is a party and which have not been fully performed as at the Completion Date, including the Asset Leases and Material Contracts, but excluding:

(a)    the Property Leases;

(b)    the Shared Contracts; and

(c)    any agreement to the extent it relates to Excluded Assets or which are not otherwise assumed by the Buyers under this agreement.

181     “Licensed IP” was defined as follows:

Licensed IP means Intellectual Property Rights owned by a Third Party and licensed to a SPC Group Member for use exclusively in the Business in relation to the Products.

182    Clause 2.5 of the BPA provided:

2.5    Business Assets and Property Acquisitions

(a)    Subject to clause 2.5(b), the parties agree that the sale of the Business under this agreement will occur by transfers, assignments, novations or offers of employment (as the context requires) to the relevant Buyer Group Member as follows:

183    Clause 4.7 of the BPA relevantly provided:

4.7    Meeting with customers and suppliers

In addition to the relevant requirements under clause 10, between the date of this agreement and the earlier of the Completion Date and termination of this agreement:

…

(b)    [SaleCo] must, and must procure the SPC Group Members to, use their respective best endeavours to:

…

(iii)    have each Key Counterparty novate their relevant Material Contract to the Buyers with effect on and from Completion (provided that this obligation shall not oblige [SaleCo] or any SPC Group Member to pay monies to third parties, commence legal proceedings or guarantee any obligations under the novated Material Contract);

184    Clause 4.10 of the BPA provided:

4.10    Authorisations

(a)    Subject to clause 4.10(b) and compliance with the requirements set out in clause 4.4 (Conditions of access), between the date of this agreement and the earlier of the Completion Date and termination of this agreement, [SaleCo] must provide HoldCo with all reasonable assistance required in order to enable HoldCo to obtain new Authorisations, or to renew or transfer existing Authorisations, required to carry on the Business, with such assistance to include providing HoldCo with:

(i)    reasonable access to the Business and the Properties;

(ii)    reasonable access to the Employees; and

(iii)    access to information reasonably requested by HoldCo.

(b)    Nothing in clause 4.10(a) shall oblige [SaleCo] or any Seller Group Member to pay monies to third parties, commence legal proceedings or guarantee any obligations under an Authorisation.

185    Clause 5.2 of the BPA provided:

5.2    Seller’s obligations at Completion

At Completion, [SaleCo] must:

(a)    ensure the Buyers have:

(i)    operating control of the Business and the Business Assets;

(ii)    exclusive possession of the Business Assets (other than the Property Licences and as set out in any Property Lease or Third Party Lease), free of any Security Interests (other than a Permitted Security Interest); and

(b)    comply with the obligations set out in clauses 5.3 to 5.8 (inclusive).

186    Clause 5.6 of the BPA relevantly provided:

5.6    Provision of Tangible Assets, Business Records and other documents in relation to the Business Assets

…

(b)    Subject to clause 10 (Contracts, Asset Leases and Property Leases), at Completion [SaleCo] must ensure the Buyers have all documents necessary to:

(i)    establish [SaleCo’s] title to each Business Asset;

(ii)    effect the transfer of each Business Asset to the relevant Buyer;

(iii)    comply with clause 5.7 (Security Interests); and

(iv)    otherwise give effect to this agreement.

187    Clause 5.12 of the BPA provided:

5.12    Effect of Completion – title and risk

From Completion:

(a)    all title to the Business, including the Business Assets, passes to the Buyers; and

(b)    all risks associated with the Business and the Business Assets pass to the Buyers.

188    Clause 10.1 of the BPA provided:

10.1    Novation, assignment or new contract

(a)    Subject to clause (b), [SaleCo] and [SPC] must use their best endeavours to transfer the Contracts other than the Material Contracts which are dealt with under clause 4.7 (Meeting with customers and suppliers), and Property Leases and Third Party Leases to [SPC] in accordance with this clause 10.1 to clause 10.3 (Obligations regarding Contracts pending transfer) on Completion or, if not transferred on Completion, as soon as practicable after Completion.

(b)    For the purposes of clause 10.1(a), [SPC] shall not be required to pay or guarantee any amount in respect of the transfer of any Contract, Property Lease or Third Party Lease other than the payment of such amounts that are expressly required by the relevant Contract, Property Lease or Third Party Lease to effect the transfer, novation or assignment, except to the extent that payment relates to any amounts that are unpaid and owing to the relevant counterparty of the Contract, Property Lease or Third Party Lease.

(c)    Subject to any applicable law, regulation or order or rule of any Government Agency, [SaleCo] must use reasonable endeavours to organise a meeting (or if a meeting is not practicable, a telephone conference) between [SPC] and the counterparty of each Material Shared Contract as are nominated and notified by [SPC] to [SaleCo] as soon as practicable after the date of this agreement, to seek to have the counterparty agree to contract with [SPC] in respect of the substance of the Material Shared Contract that relates exclusively to the Business. For the avoidance of doubt, nothing in this agreement will require any Seller Group Member to pay any monies or guarantee any obligation in respect of any replacement contract for the substance of a Shared Contract.

(d)    The transfers under clause 10.1(a) may be by assignment, by notation or by entry into a new contract. [SaleCo] will determine whether a Contract is to be assigned or novated, or a new contract is to be entered into with [SPC] and in doing so must act reasonably including taking into account any comments or views from [SPC]. If the preferred method is not possible, [SaleCo] must use its best endeavours to effect the transfer by another method.

189    Clause 10.2 of the BPA provided:

10.2    Third party consent

For Contracts, other than Material Contracts which are dealt with under clause 4.7, Property Leases or Third Party Leases which contain an express provision to the effect that the Contract or Property Lease cannot be assigned without the Counterparty’s consent or such contract is to be novated, [SaleCo] must use its best endeavours to obtain the consent of the Counterparty to the novation or assignment of those Contracts or Property Leases to [SPC], or procure the entry by the Counterparty into a new contract with [SPC], on Completion or if not transferred on Completion, as soon as practicable after Completion.

190    Clause 10.3 of the BPA included:

10.3    Obligations regarding Contracts pending transfer

Subject to clause 10.7 (Failure to transfer Contracts), if a Contract has not been transferred to one of the Buyers by Completion:

(a)    the relevant SPC Group Member must from Completion:

(i)    hold all of its right, title and interest in that Contract on trust for the benefit of the Buyers;

…

(iii)    not take any action which would constitute a breach of that Contract;

(iv)    not terminate or surrender that Contract, without the Buyers’ prior written consent such consent not to be unreasonably withheld…

(vi)    to the extent it lawfully can, permit the Buyers to have the benefit of and exercise the relevant SPC Group Member’s rights under the Contract from Completion;

(vii)    give all reasonable assistance to the Buyers to enable the Buyers to enforce the rights of the relevant Seller Group Member under the Contract and at all times act with regard to the Contract in accordance with the Buyers’ reasonable instructions from time to time…

191    Clause 10.5 of the BPA provided:

10.5    Indemnity from Seller

[SaleCo] indemnifies the Buyers against any Loss which the Buyers suffer or incur:

(a)    as a result of any failure of [SaleCo] to comply with its obligations under clause 10.3 (Obligations regarding Contracts pending transfer); or

(b)    in relation to any breach or failure to comply with the terms of the Contracts by [SaleCo] after Completion pursuant to clause 10.3(a)(vi).

192    Clause 10.7 of the BPA provided:

10.7    Failure to transfer Contracts

If a Contract, Property Lease or Third Party Lease is not transferred to the Buyers in accordance with this agreement within:

(a)    12 months after the Completion Date, the obligations under clauses 10.1 (Novation, assignment or new contract) cease to apply in respect of that Contract, Property Lease or Third Party Lease and [SaleCo] is not liable to the Buyers for any Loss suffered or incurred by the Buyers as a result of a Contract or Property Lease not being transferred to the Buyers unless [SaleCo] fails to use its best endeavours in accordance with clause 10.1 (Novation, assignment or new contract); and

(b)    18 months after the Completion Date, the obligations under clauses 10.3 (Obligations regarding Contracts pending transfer) and 10.6 (Right of use or occupation pending transfer) cease to apply in respect of that Contract, Property Lease or Third Party Lease and [SaleCo] is not liable to the Buyers for any Loss suffered or incurred by the Buyers as a result of a Contract or Property Lease not being transferred to the Buyers.

193    Clauses 17.1 to 17.4 of the BPA provided:

17.1    Consideration

[Amatil] acknowledges that the Buyers are acting in reliance on [Amatil] incurring obligations and giving rights under this Seller Guarantee.

17.2    Seller Guarantee

(a)    [Amatil] unconditionally and irrevocably guarantees to the Buyers the due and punctual performance by [SaleCo] of all its obligations under the Transaction Documents, including each obligation to pay money (the Seller Guarantee Obligations).

(b)    If [SaleCo] fails to perform the Seller Guaranteed Obligations in full and on time, [Amatil] agrees to comply with the Seller Guaranteed Obligations on demand from the Buyers.

17.3    Indemnity

(a)    [Amatil]:

(i)    unconditionally and irrevocably indemnifies the Buyers against any Loss or Claim which may be incurred or sustained by the Buyers in connection with any default or delay by [SaleCo] in the due and punctual performance of any of the Seller Guaranteed Obligations, including any Loss or Claim incurred or sustained by the Buyers in connection with the enforcement of this Seller Guarantee; and

(ii)    agrees to pay amounts due under this clause 24.3 on demand from the Buyers.

(b)    The Buyers need not incur expense or make payment before enforcing this right of indemnity.

17.4     Extent of guarantee and indemnity

(a)    [Amatil] will be responsible to the Buyers in respect of the Seller Guaranteed Obligations in the same manner as if the Seller Guarantor was the Seller under the Transaction Documents…

First alleged breach: cll 10.1(a) and 10.2

194    The Licence Agreement contained a clause that it could not be assigned without QAD’s consent. Clause 9 provided:

9. ASSIGNMENT. This Agreement is personal to [SaleCo 2] and neither this Agreement nor any of [SaleCo 2]’ s rights or duties hereunder shall be assigned, sold or otherwise transfered [sic] by [SaleCo 2] without the prior written consent of [QAPL]. [SaleCo 2] consents to the assignment by [QAPL] to qad.inc or qad.inc’s designee of all or any part of [QAPL’s] rights or duties under this Agreement in any time.

195    SPC submitted that the obligation on the part of SaleCo to use “best endeavours” was such that it required the payment by SaleCo of substantial transfer fees to secure a transfer of the Licence Agreement to SPC. This argument was based on the terms of cl 10.1(a) and (b), which are repeated here for convenience:

10.1    Novation, assignment or new contract

(a)    Subject to clause (b), [SaleCo] and [SPC] must use their best endeavours to transfer the Contracts other than the Material Contracts which are dealt with under clause 4.7 (Meeting with customers and suppliers), and Property Leases and Third Party Leases to [SPC] in accordance with this clause 10.1 to clause 10.3 (Obligations regarding Contracts pending transfer) on Completion or, if not transferred on Completion, as soon as practicable after Completion.

(b)    For the purposes of clause 10.1(a), [SPC] shall not be required to pay or guarantee any amount in respect of the transfer of any Contract, Property Lease or Third Party Lease other than the payment of such amounts that are expressly required by the relevant Contract, Property Lease or Third Party Lease to effect the transfer, novation or assignment, except to the extent that payment relates to any amounts that are unpaid and owing to the relevant counterparty of the Contract, Property Lease or Third Party Lease.

196    SPC’s argument was as follows:

(a)    The obligation under cl 10.1(a) applied from the time of executing the BPA on 3 June 2019 and continued to run beyond completion on 28 June 2019, for a period of 12 months: cl 10.7(a).

(b)    The obligations under clause 10.1(a) were “[s]ubject to clause (b)”.

(c)    Clause 10.1(b) provided that, for the purpose of cl 10.1(a), SPC was not required to pay or guarantee any amount in respect of any Contract other than the payment of such amounts that are “expressly required by the relevant Contract … to effect the transfer”.

(d)    The BPA makes it clear that SPC’s “best endeavours” under cl 10.1(a) did not extend to payment of any amount in respect of the transfer of a Contract unless the Contract expressly required the payment of an amount to effect a transfer. That was an express limitation or “carve out” in respect of what SPC’s “best endeavours” would entail. That limitation or carve out did not apply in respect of Contracts which expressly required payment of a transfer fee; in those types of contract SPC’s “best endeavours” would include payment of a transfer fee.

(e)    The BPA included no such limitation for SaleCo. There was no equivalent of cl 10.1(b) which operated in SaleCo’s favour in the same way that cl 10.1(b) operated in SPC’s favour.

(f)    The parties must have intended that one or other of SPC or SaleCo would pay for the transfer of Contracts where that was required.

(g)    Given that the parties plainly considered that use of “best endeavours” to transfer “Contracts” included the payment of transfer fees (or else the carve out in favour of SPC would be redundant), and given that SPC was expressly exempted from paying the transfer fee (pursuant to the exercise of its “best endeavours”) except in respect of “Contracts” which expressly set out a transfer fee, it follows that for “Contracts” in respect of which SPC’s exemption applied, SaleCo’s use of its “best endeavours” required SaleCo to pay a reasonable transfer fee.

(h)    This is what a reasonable person would understand cl 10.1(a) to require, based upon the natural and ordinary meaning of the words used in cl 10.1 (in particular, the words used in paragraphs (a) and (b)).

197    CCA submitted that it was cl 10.2 which applied and that cl 10.1 had no application. I reject that submission. Clause 10.2 does not apply independently of, or before, cl 10.1. It is cl 10.1(a), applied in accordance with cl 10.2, which governs the issue which faced the parties. Clauses 10.1 and 10.2 work together. This conclusion flows in particular from cl 10.7 which indicates that the obligation under cl 10.1 ceases to apply 12 months after the completion date. If cl 10.2 were intended to be a wholly free-standing obligation, then cl 10.7 would be expected to have included a 12 month limitation for the independent obligation under cl 10.2. The obligation in cl 10.2 does have a 12 month limitation, but that is because the obligation in cl 10.2 forms a part of the obligation in cl 10.1(1)(a) (which must be applied “in accordance with” cl 10.2) and cl 10.1 ceases to apply 12 months after completion.

198    Accepting that SPC’s construction of cl 10 is arguable, it is not the correct construction. The correct construction of cll 10.1 and 10.2, so far as is relevant to the disposition of this case, is as follows:

(1)    Clause 10.1(a) is “subject to” cl 10.1(b).

(2)    As to cl 10.1(b):

•    if a contract expressly required payment of an amount in respect of the transfer of a contract, then SPC was required to pay the relevant amount (subject to the exception stated at the end of cl 10.1(b));

•    if a contract did not expressly state that an amount was payable in respect of the transfer of a contract, then – if such an amount was subsequently demanded by the transferor – SPC was not required to pay such an amount by reason of its “best endeavours” obligation. However, SPC could choose to do so, if it wanted the contract transferred;

•    read in the context of the whole agreement, cl 10.1(1)(b) does not carry an implication that – in relation to contracts which did not expressly require the payment of a transfer fee – SaleCo had to pay a fee which might subsequently be demanded by an external party for the transfer by reason of SaleCo’s agreement to use “best endeavours”. Clause 10.1(1)(b) places an obligation on SPC to pay a transfer fee in the circumstances identified in cl 10.1(1)(b), if expressly provided for in the contract (express transfer fees), but the BPA is silent on transfer fees which are not expressly provided for in the contract (non-express transfer fees), but which might later be demanded by the transferor as a condition of its consent (as occurred in the present case with respect to the Licence Agreement). Clause 10.1(1)(b) qualifies SPC’s “best endeavours” obligation by providing that SPC was not required to pay non-express transfer fees, but does not supply by implication any duty on the part of SaleCo to pay such transfer fees under its “best endeavours” obligation.

(3)    Clause 10.1(a) required both SPC and SaleCo to “use their best endeavours to transfer the Contracts [the Licence Agreement] … in accordance with this clause 10.1 to clause 10.3 … on Completion or … as soon as practicable after completion”. The obligation on both SPC and SaleCo to use “best endeavours” under cl 10.1(1)(a) had to be exercised in accordance with cl 10.2, where that clause applied.

(4)    Clause 10.2 required that “[SaleCo] must use its best endeavours to obtain the consent of [QAD] to the … assignment of [the Licence Agreement] to [SPC], or procure the entry by [QAD] into a new contract with [SPC], on Completion or if not transferred on Completion, as soon as practicable after Completion”. Clause 10.2 applied to the particular facts: the Licence Agreement was a “Contract” and it was one which “contain[ed] an express provision to the effect that the Contract … [could] not be assigned without [QAD’s] consent”.

(5)    Clause 10.2, read in the context of the BPA as a whole (including cl 10.1, in particular cl 10.1(1)(b)) also does not carry an implication that the parties intended that SaleCo would have to pay a substantial transfer fee under a “best endeavours” obligation in order to secure a transfer of a contract for SPC’s benefit.

199    In any event, whether the obligation to use “best endeavours” arose under cll 10.1 or 10.2, the failure by CCA to pay the amounts demanded by QAD, or otherwise to secure satisfaction of the conditions demanded by QAD as conditions for transfer of the Licence Agreement, did not give rise to a breach of the BPA for two principal reasons:

(1)    First, whether the obligation arose under cll 10.1 or 10.2, it was not of a scope which required SaleCo to pay substantial sums by way of transfer fees.

(2)    Secondly, in circumstances where Mr Rifai had assumed responsibility for negotiations with QAD, SaleCo acted reasonably and in compliance with its “best endeavours” obligation in allowing Mr Rifai to pursue the negotiations and not itself pursuing parallel negotiations.

200    In Woodside at [41] to [43], French CJ, Hayne, Crennan and Kiefel JJ made three general observations as to the obligation to use reasonable endeavours (footnotes omitted):

[41]    Three general observations can be made about obligations to use reasonable endeavours to achieve a contractual object. First, an obligation expressed thus is not an absolute or unconditional obligation. Secondly, the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect an obligor’s business. This was explained by Mason J in Hospital Products Ltd v United States Surgical Corporation, which concerned a sole distributor’s obligation to use “best efforts” to promote the sale of a manufacturer’s products. His Honour said:

“The qualification [of reasonableness] itself is aimed at situations in which there would be a conflict between the obligation to use best efforts and the independent business interests of the distributor and has the object of resolving those conflicts by the standard of reasonableness … It therefore involves a recognition that the interests of [the manufacturer] could not be paramount in every case and that in some cases the interests of the distributor would prevail.”

[42]    As Sellers J observed of a corporate obligor in Terrell v Mabie Todd & Co Ltd, an obligation to use reasonable endeavours would not oblige the achievement of a contractual object “to the certain ruin of the Company or to the utter disregard of the interests of the shareholders”. An obligor’s freedom to act in its own business interests, in matters to which the agreement relates, is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object.

[43]    Thirdly, some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an [obligor].

201    As is made clear by the passage at [41], an obligation to use best or reasonable endeavours is not an absolute obligation. It is conditioned on what is reasonable in the circumstances. In making that point at [41], the majority cited (in a footnote to the third sentence) Mason J in Transfield Proprietary Ltd v Arlo International Ltd (1980) 144 CLR 83 at 101, where his Honour stated:

A “best endeavours” clause thus prescribes a standard of endeavour which is measured by what is reasonable in the circumstances, having regard to the nature, capacity, qualifications and responsibilities of the [promisor] viewed in the light of the particular contract.

202    In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 64, Gibbs CJ stated that a “best endeavours” clause “does not require the person who undertakes the obligation to go beyond the bounds of reason; he is required to do all he reasonably can in the circumstances to achieve the contractual object, but not more”.

203    Assessing the BPA objectively, if these commercial parties had intended that SaleCo be liable for payment of substantial fees to an external party to secure the transfer of a “Contract” (not being a “Material Contract”) for the benefit of the purchaser (SPC), then the contract would have expressly so provided, rather than leaving the work to be done, by implication, from a clause imposing “best endeavours”. The use of “best endeavours” does not require the achieving at any cost of the result to which the “best endeavours” are directed. SaleCo was selling a business, not buying a business for SPC. It is improbable that SaleCo assumed the risk of a non-express or ex-contractual fee (let alone the possibility of multiple fees of an equivalent nature – there were more than a hundred contracts that were to be assigned) to obtain rights for SPC.

204    As CCA submitted, SPC’s characterisation of the “best endeavours” obligation as one imposing a requirement that SaleCo pay a reasonable fee demanded by an external party as the price for a transfer is an improbable obligation viewed through the prism of a dealing between commercial parties, at least absent express language. The BPA expressly addressed which assets were agreed to be transferred. Other assets were the subject of one of several “best endeavours” obligations. These included the Licence Agreement. The obligation in cll 10.1(a) and 10.2 to use “best endeavours” was coupled with promises in the event one or more of the contracts in that class were not transferred: cl 10.3. Objectively, the parties contemplated that some of the many contracts the subject of cl 10 could not be or may not be assigned. In consideration for those promises, SPC promised to pay a purchase price of $40 million subject to certain adjustments, not related to the contracts assigned.

205    There are other aspects of the BPA which tend against SPC’s construction. Clause 4.7 is directed to “Material Contracts” with a “Key Counterparty”. It provides that SaleCo was not required to pay moneys to the counterparties. SPC’s construction has the improbable consequence that SaleCo was not required to make any payment to a “Key Counterparty” but was required to pay a fee demanded by a counterparty treated as something less than “Key”.

206    The BPA contemplated that not all contracts would be assigned. The BPA provided a regime in cl 10.3 for conferring on SPC, to an extent, the benefit of the rights which, for one reason or another, were not assigned. Clause 10.7 provided that this regime was temporally limited to periods of 12 and 18 months post-completion and that SaleCo was not under any obligation arising from a non-transferred contract after these periods. This suggests that it was not contemplated that SaleCo would be required to pay substantial fees to secure a transfer.

207    There are aspects of the BPA which might be said to support SPC’s construction. For example, cll 4.7(b)(iii), 4.10 and 10.1(c), which contained an obligation to use “best endeavours” or provide “reasonable assistance” expressly carve out a requirement to pay money. There is no equivalent express limitation to SaleCo’s “best endeavours” in cll 10.1(a) or 10.2. Nevertheless, I consider that the construction I have identified earlier is the one which is to be preferred. A reasonable businessperson (Woodside at [35]) would not have understood that SaleCo had promised to pay substantial transfer fees demanded by a third party as the price for consenting to a transfer to secure the benefit of the agreement for SPC.

208    SPC’s case was that SaleCo’s “best endeavours” under each of cll 10.1(a) and 10.2 included SaleCo:

(1)    paying any reasonable transfer fee sought by QAD in respect of its consent to a transfer of the Licence Agreement;

(2)    where the amount of the transfer fee sought by QAD was not reasonable, negotiating in good faith with QAD to seek to reach an agreement with respect to a reasonable transfer fee;

(3)    where the negotiation was unsuccessful and QAD continued to require payment of a transfer fee that was not reasonable, paying to SPC (or QAD) the amount of a reasonable transfer fee so that SPC could use it as a contribution towards payment of the transfer fee.

209    I have concluded that SaleCo was not under an obligation to pay a reasonable transfer fee to QAD under either cl 10.1(1)(a) or cl 10.2. To the extent SPC’s case is based on a failure on the part of CCA to negotiate, the case must also be rejected. After Mr Rifai received QAD’s letter of 21 June 2019, he – to CCA’s knowledge – undertook negotiations with QAD focussed on the needs of the SPC Business and the direction in which he wished to take it. Mr Rifai obtained a four week extension and, thereafter, SPC continued its dealings and negotiations with QAD without seeking to involve CCA. Mr Rifai was not prepared to pay any money for the Licence Agreement and QAD was not prepared to waive the transfer fee (except to the extent it would be absorbed if SPC decided to upgrade instead of taking a transfer).

210    CCA’s obligation to use “best endeavours” did not extend to requiring CCA to negotiate in circumstances where it knew that SPC wanted to and was pursuing negotiations with QAD and SPC had not requested any assistance from CCA.

211    Further, even if CCA should have negotiated in the absence of any request and in potential conflict with SPC’s negotiations, there was no evidence that any such negotiation would have improved the position.

Second alleged breaches: cl 10.3

212    SPC’s argument in relation to cl 10.3 was, in essence, as follows:

(1)    Clause 10.3 was the mechanism by which the parties provided that SPC could have the benefit of the Licence Agreement and to exercise SaleCo 2’s rights under that licence while the parties used their best endeavours to transfer the Licence Agreement. The obligation to use best endeavours to transfer “Contracts” lasted for 12 months: cl 10.7(a). The obligations under cl 10.3 lasted for 18 months: cl 10.7(b).

(2)    Clause 10.3 contained obligations on SaleCo (cl 10.3(a)) and on SPC (cl 10.3(b)) which together provided the interim arrangements by which SPC could have the benefit of “Contracts” and to exercise rights under those contracts, so that SPC could operate the SPC Business notwithstanding the failure to transfer all “Contracts” by completion.

(3)    The provisions of cl 10.3(a) that SPC alleges SaleCo breached were:

(a)    cl 10.3(a)(vi), which required SaleCo 2, to the extent it lawfully could, to permit SPC to have the benefit of an exercise of its rights under the Licence Agreement from completion;

(b)    cl 10.3(a)(vii), which required SaleCo 2 to give all reasonable assistance to SPC to enable SPC to enforce SaleCo 2’s rights under the Licence Agreement and at all times act with regard to the Licence Agreement in accordance with SPC’s reasonable instructions from time to time.

Alleged breach of cl 10.3(a)(vi)

213    As to the construction of cl 10.3(1)(vi), SPC submitted:

(1)    The words “to the extent” are not used synonymously with the word “if”. Clause 10.3(a)(vi) requires SaleCo 2 to do everything it lawfully can to permit SPC to have the benefit of and exercise SaleCo 2’s rights under the Licence Agreement.

(2)    The words “relevant SPC Group Member’s rights under the Contract” referred to those things that SaleCo 2 is permitted to do under the contract and:

•    cl 10.3(a)(vi) required SaleCo and SaleCo 2 to permit SPC to do the things that SaleCo 2 is permitted to do under the contract, that is, to enable SPC to do whatever it is that the contract allows so that it may commence operating the business during the interim period;

•    SaleCo 2’s rights under the Licence Agreement included the right to use the QAD Software;

•    accordingly, cl 10.3(a)(vi) required SaleCo and SaleCo 2 to do everything they lawfully could to permit SPC to use the QAD Software. That included doing everything they lawfully could to secure SPC’s right to use the QAD Software for the 18 month period following completion.

214    As to breach of cl 10.3(a)(vi), SPC submitted:

(1)    SaleCo and SaleCo 2 did certain things to permit SPC to use the QAD Software. For example, they:

(a)    provided SPC with the computer system on which the QAD Software was installed;

(b)    participated with SPC to transfer the employment of the employees who used the QAD Software in the conduct of the SPC Business;

(c)    conducted an IT meeting on 14 June 2019 during which Mr Rifai was introduced to the QAD Software and explained to him the work to be done to separate the SPC Business use of the software from that of other parts of CCA’s business;

(d)    after completion, continued to work on transition issues with SPC, including migration of data relevant to SPC’s use of the QAD Software.

(2)    That was not all that SaleCo and SaleCo 2 could lawfully do to permit SPC to use the QAD Software. SaleCo or SaleCo 2 could have negotiated to secure an interim arrangement with QAD which would have permitted SPC to use the QAD Software for the 18 month period after completion. SaleCo and SaleCo 2 failed to do that.

(3)    Because QAD would not have entered into an interim arrangement (QAD only granted perpetual licences), SaleCo or SaleCo 2 could have permitted SPC to use the QAD Software for the 18 month period by arranging for a transfer of the Licence Agreement – that is, by paying the transfer fee required by QAD. That would not have involved SaleCo doing anything unlawful.

(4)    The extent of what SaleCo and SaleCo 2 could lawfully do to permit SPC lawfully to use the QAD Software ought to be considered in the context of other obligations undertaken by SaleCo under cl 10.3(a). By cl 10.3(a)(i), SaleCo promised that SaleCo 2 would hold all of its right, title and interest in the Licence Agreement on trust for the benefit of SPC. The parties cannot be taken to have considered it unlawful for SaleCo 2 to make good on that promise. Even if the trust contemplated by cl 10.3(a)(i) was ineffective as against QAD, cl 10.3(a)(i) required SaleCo 2 to hold its interests under the Licence Agreement for the benefit of SPC. Whether or not it did so, SaleCo 2 was required to permit SPC to have the benefit of those rights which it had promised to hold on trust during the interim period. Clause 10.3(a)(vi) provided the contractual mechanism for that to occur. The parties could not have intended for that result to be unlawful.

(5)    Accordingly, if SPC is found to have infringed copyright in the QAD Software, it will be a result of SaleCo’s breach of cl 10.3(a)(vi) of the BPA.

Alleged breach of cl 10.3(a)(vii)

215    As to the construction of cl 10.3(a)(vii), SPC submitted:

(1)    Clause 10.3(a)(vii) required SaleCo and SaleCo 2 to give all reasonable assistance to SPC to enable SPC to enforce SaleCo 2’s rights under the Licence Agreement and at all times act with regard to the Licence Agreement in accordance with SPC’s reasonable instructions from time to time.

(2)    Clause 10.3(a)(vii) must be considered in the context of the suite of the obligations placed on SaleCo and SaleCo 2 by cl 10.3(a). The whole of cl 10.3(a) is directed towards enabling SPC to enforce the rights of the “Seller Group Members” under contracts, and cl 10.3(a)(vii) requires the “Seller Group Members” to give all reasonable assistance to the “Buyers” (SPC) in respect of those matters.

(3)    The standard required with respect to “reasonable assistance” is equivalent to “reasonable endeavours” or “best endeavours”. It obliged SaleCo to do all it reasonably could to assist SPC to enforce SaleCo 2’s rights under the Licence Agreement (that is, the right to use the QAD Software).

216    As to breach of cl 10.3(a)(vii), SPC submitted that the position was similar to that under cl 10.3(a)(vi): SaleCo and SaleCo 2’s failure to do all they lawfully could to permit SPC to have the benefit of and exercise SaleCo 2’s rights under the Licence Agreement amounted to a failure to give all reasonable assistance to enable SPC to enforce SaleCo 2’s rights under the Licence Agreement. SPC relied on the same matters set out above with respect to breach of cl 10.3(a)(vi).

Consideration of second alleged breaches: cl 10.3

217    Clause 10.3 BPA applies where a “Contract”, which includes the Licence Agreement, has not been transferred by Completion. There was no suggestion that SaleCo 2 or QAD terminated the Licence Agreement at any time – cf: cl 10.3(a)(iv).

218    If SaleCo 2 had assigned the benefit of the Licence Agreement to SPC this would have constituted a breach of the Licence Agreement and would not have been “lawful” within the meaning of cl 10.3(a)(vi). SaleCo 2 could not have permitted SPC “lawfully” to have the benefit of the Licence Agreement by that mechanism.

219    Further, cl 10.3(a)(iii) expressly required SaleCo 2 “not [to] take any action which would constitute a breach of” the Licence Agreement. The Licence Agreement provided that the QAD Software “may be used only for the benefit of” SaleCo 2. If SaleCo 2 did assign the benefit of the Licence Agreement to SPC or otherwise give it the benefit of that licence: (a) SaleCo 2 would have breached cl 10.3(a)(iii) of the BPA by breaching the Licence Agreement; and (b) QAD would have terminated the Licence Agreement by reason of SaleCo 2’s breach of the licence. In this context, it is relevant to note that there was no pleaded breach of cl 10.3(a)(i).

220    As to the argument that cl 10.3(a)(vi) required SaleCo 2 to pay a transfer fee to QAD so that SPC had the perpetual licence transferred to it, no reasonable commercial businessperson would have understood cl 10.3(a)(vi) of the BPA as imposing such an obligation. An obligation to “permit” person C to have the benefit of B’s contract with A, to the extent B lawfully can, would not be understood by any reasonable commercial businessperson as imposing an obligation on B to pay C a substantial sum to secure a transfer of the contract.

221    The obligation under cl 10.3(a)(vii) to give all reasonable assistance to enable SPC to enforce SaleCo 2’s rights has no obvious relevance to the facts. To the extent it is said to be capable of applying by reason of the matters relied on in relation to cl 10.3(a)(vi), it fails for the same reasons.

Alternative case: cl 10.3(a)(vi)

222    SPC put an alternative case with respect to cl 10.3(a)(vi), in some ways inconsistent with its primary case in relation to that clause, namely:

(1)    SaleCo and SaleCo 2, through the sale of the SPC Business in which use of the QAD Software was necessary and ongoing, permitted SPC to have the benefit of and exercise SaleCo 2’s rights under the Licence Agreement. SaleCo provided SPC with the computer system on which the QAD Software was installed, participated with SPC to transfer the employment of the employees who used the QAD Software in the conduct of the SPC Business at the same premises, and assisted SPC with the transition and separation of the use of the QAD Software in the SPC Business away from other entities in CCA’s business.

(2)    Under cl 10.5(b), SaleCo indemnified SPC for any loss which it suffered or incurred “in relation to any breach or failure to comply with the terms of the [Licence Agreement] by [SaleCo] after Completion pursuant to clause 10.3(a)(vi)”.

(3)    In contrast with cl 10.5(a), cl 10.5(b) does not require a breach of the BPA. Rather, it concerns loss which SPC suffers in relation to a breach or failure to comply with the terms of a Contract by SaleCo pursuant to cl 10.3(a)(vi) (that is, by reason of SaleCo doing the things required of it under cl 10.3(a)(vi)).

(4)    Clauses 10.3(a)(vi) and 10.5(b) need to be construed in the context of the transaction underlying the BPA – namely, that SPC was acquiring the SPC Business as a going concern, that it would be conducting the business immediately after completion, and that it was expected that some Contracts would not be transferred to SPC by completion.

(5)    By putting SPC in the shoes of an “SPC Group Member” before transfer of the relevant Contract, and permitting SPC to have the benefit of and exercise the rights under the Contract, SPC was put in some jeopardy with respect to the contractual counterparty.

(6)    By agreeing to indemnify SPC in respect of any loss pursuant to cl 10.3(a)(vi), SaleCo (the party with familiarity with the Contracts and the counterparties) assumed the risk that the arrangements might breach the terms of a contract, causing loss to SPC.

(7)    The words “in relation to” are wide words which do no more, at least without reference to context, than signify the need for there to be some relationship or connection between two subject matters. In the context of the BPA, and of cl 10.3 in particular, and the distinction between a “breach” and a “failure to comply with the terms” of a Contract, the loss incurred by SPC need not stem from an action for breach of the Contract brought against SaleCo or SaleCo 2. Other types of loss arising from a breach of (or failure to comply with) a Contract pursuant to cl 10.3(a)(vi) would also be losses that are “in relation to” that breach or failure.

223    This argument must be rejected. The meaning of cl 10.3(a)(vi) is clear. If SaleCo lawfully permitted SPC to have the benefit of the Licence Agreement or to exercise SaleCo 2’s rights under that agreement, then cl 10.5(b) might apply. SaleCo did not permit SPC to have the benefit of the Licence Agreement, for one reason because it could not lawfully do so. That is, the proposition at (5) above is not made out (and it is not necessary to address the remaining propositions): SaleCo did not permit SPC to have the benefit of or exercise the rights under the Licence Agreement. Clause 10.5 has no application.

224    Even if SaleCo 2 had lawfully permitted SPC to have the benefit of the Licence Agreement, cl 10.5 would only apply if SaleCo 2 breached or failed to comply with the Licence Agreement. It did not. There was nothing for SaleCo to indemnify.

Guarantee and Indemnity

225    SPC’s case against Amatil was as follows:

(1)    By cl 17.2, Amatil “unconditionally and irrevocably” guaranteed to SPC the due and punctual performance by SaleCo of all its obligations under the Transaction Documents (which included the BPA).

(2)    By cl 17.3, Amatil “unconditionally and irrevocably” indemnified SPC against any loss or claim which SPC might incur in connection with any default or delay by SaleCo in the performance of its obligations under the Transaction Documents (including the BPA).

(3)    Clause 17.4 provided that Amatil would be responsible to SPC in respect of those obligations in the same manner as if Amatil was the “Seller” (SaleCo) under the Transaction Documents (including the BPA).

(4)    SPC was indemnified under the BPA in respect of a breach of cl 10.3 (see cl 10.5(a)) and in respect of the alternative argument under cl 10.3(a)(vi) (see cl 10.5(b)).

(5)    If SaleCo 2 breached its obligations under cl 10.3 of the BPA, Amatil is liable to indemnify SPC in respect of the loss and damage it suffered by reason of those breaches.

226    Given the conclusion that SaleCo did not breach cl 10.3, Amatil has nothing to indemnify.

CONCLUSION

227    QAD’s claim against SPC is made out. SPC’s cross-claim is not. QAD and SPC should confer with a view to agreeing orders to give effect to these reasons. The cross-claim should be dismissed with costs.

Associate:

Dated:    8 June 2021