Charter Pacific Corporation Ltd v Belrida Enterprises Pty Ltd & Ors [2002] QSC 254

i SUPREME COURT OF QUEENSLAND CITATION: Charter Pacific Corporation Ltd v Belrida Enterprises Pty Ltd & Ors [2002] QSC 254 PARTIES: CHARTER PACIFIC CORPORATION LIMITED (plaintiff) v BELRIDA ENTERPRISES PTY LTD (first defendant) THOMAS QUINN (second defendant) MICHAEL JOHN COVENTRY and LYNETTE HELEN COVENTRY as trustees of the MIKE AND LYN COVENTRY FAMILY TRUST (third defendants) BARRY TABE as trustee of the TABE FAMILY TRUST (fourth defendant) ANDREW COVENTRY (fifth defendant) MICHAEL JOHN COVENTRY and LYNETTE HELEN COVENTRY as trustees of the MIKE AND LYN COVENTRY FAMILY TRUST (first cross-claimants) BARRY TABE and ANDREW COVENTRY as trustees of the TABE FAMILY TRUST (second cross-claimants) v CHARTER PACIFIC CORPORATION LIMITED (first defendant by counterclaim) KEVIN JOHN DART (second defendant by cross-claim) BRYAN GERRARD DART (third defendant by cross-claim) FILE NO/S: SC No 784 of 1994 DIVISION: Trial Division PROCEEDING: Claim, counterclaim and cross-claim ORIGINATING COURT: Supreme Court DELIVERED ON: 30 August 2002 DELIVERED AT: Brisbane HEARING DATE: 24 January 2000 – 3 March 2000; 28, 29, 31 August 2000; 1 September 2000 – 6 October 2000; 11 October 2000 – 13 November 2000; 15 November 2000 – 23 November -- 1 of 267 -- (ii) 2000; 28 November 2000 – 8 December 2000; 29 January 2001 – 16 February 2001; 26 February 2001 – 6 April 2001; 17 April 2001 – 24 April 2001; 26 April 2001 – 2 May 2001; 28 May 2001 – 1 June 2001. JUDGE: Fryberg J ORDER: 1. Judgment for the plaintiff against the third, fourth and fifth defendants for $604,634.30 plus interest to date, calculated from 1 June 1994 at the rate which is one per cent higher than the benchmark rate of the National Australia Bank from time to time. 2. Judgment for the first cross-claimants against the plaintiff for $397,600 plus interest to date, calculated on $360,000 from 1 June 1994 and on $37,600 from 29 July 1994, at the rate which is one per cent higher than the benchmark rate of the National Australia Bank from time to time. 3. Judgment for the second cross-claimants against the plaintiff for $397,600 plus interest to date, calculated on $360,000 from 1 June 1994 and on $37,600 from 29 July 1994, at the rate which is one per cent higher than the benchmark rate of the National Australia Bank from time to time. 4. Action relisted for further argument as to the form of order and costs. CATCHWORDS: EQUITY – Fraudulent and innocent misrepresentation – Materiality, inducement and reliance upon misrepresentation – Where misrepresentation objectively likely to induce party to contract – How reliance proved CORPORATIONS – Corporate finance – Shares – Valuation – Whether agreement induced by misrepresentations could assist in determining value – Most appropriate method of valuation DAMAGES – General principles – Whether costs recoverable as damages BANKRUPTCY – Administration of property – Proof of debts – What debts provable – Damages and contingent liabilities – Damages under s 1005 Corporations Law – Whether damages “by reason of a contract” – s 82(2) Bankruptcy Act 1966 (Cth) EQUITY – Equitable remedies – Injunctions – Interlocutory injunctions – Undertaking as to damages – Where injunction refused at trial – Whether interlocutory injunction reasonable attempt to mitigate apprehended loss – Whether undertaking -- 2 of 267 -- (iii) should be enforced Bankruptcy Act 1966 (Cth), s 82(1), s 82(2) Corporations Law (Cth), s 1005, s 1325 Trade Practices Act 1974 (Cth), s 52 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249, followed Aliferis v Kyriacou (2000) 1 VR 447, followed Commissioner of Succession Duties (SA) v Executor Trustee and Agency Company of South Australia Ltd (1947) 74 CLR 358, considered Gould v Vaggelas (1985) 157 CLR 215, considered Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547, considered I & L Securities Pty Ltd v HTW Valuers Pty Ltd [2000] QCA 383, followed Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, followed McMahon v Pomeray (1991) ATPR 41-185, not followed Potts v Miller (1940) 64 CLR 282, followed QIW Retailers Ltd v Felview Pty Ltd [1989] 2 Qd R 245, followed Spencer v The Commonwealth (1907) 5 CLR 418, considered The Duke Group Ltd v Pilmer (2001) 75 ALJR 1067, followed Watson v Foxman (1995) 49 NSWLR 315, followed COUNSEL: B D O’Donnell QC, with D R J Wenck, for the plaintiff and for B G and K J Dart D W Spain (solicitor) for the defendants from 24 January – 3 March 2000; D A Savage SC for the defendants from 28 – 31 August 2000; thereafter M and A Coventry in person, no appearance for the other defendants SOLICITORS: McCullough Robertson for the plaintiff Spains Solicitors for the defendants until 31 August 2000 -- 3 of 267 -- (iv) TABLE OF CONTENTS 1. INTRODUCTION .............................................................................. viii Definitions................................................................................................................. 1 The action.................................................................................................................. 1 The parties and their companies ............................................................................... 2 The plaintiff and the Darts ............................................................................ 2 The Coventrys and Evtech............................................................................. 2 Belrida and Thomas Quinn ........................................................................... 3 Parties on the record..................................................................................... 3 2. THE ORIGINS OF EVTECH................................................................ 3 Zedprime and Intechnologic ..................................................................................... 3 3. THE STATE OF THE ART IN 1992 .................................................... 8 Computers ................................................................................................................. 8 Operating systems..................................................................................................... 9 Modems................................................................................................................... 10 Communications software ...................................................................................... 11 Telephone systems .................................................................................................. 13 Modem to telephone interface ................................................................................ 14 4. EVTECH DURING 1992 .................................................................... 15 Corporate arrangements .......................................................................................... 15 The product ............................................................................................................. 16 Funding and staff .................................................................................................... 16 The joint venture ..................................................................................................... 17 Development work: the modem.............................................................................. 18 Development work: Electrocomm .......................................................................... 21 Financial position.................................................................................................... 22 5. NOVEMBER 1992 TO APRIL 1993 .................................................. 23 The state of the plaintiff.......................................................................................... 23 Negotiations ............................................................................................................ 24 The Bundaway Agreement ..................................................................................... 27 The importance of NEC .......................................................................................... 28 Peter Gillmore......................................................................................................... 30 Product development January to March 1993 ........................................................ 31 Control of Evtech.................................................................................................... 34 Evtech’s documents..................................................................................... 34 Funding ....................................................................................................... 36 The making of the First Deed ................................................................................. 37 The licence agreement ............................................................................................ 38 The licence agreement: credibility.......................................................................... 41 6. THE REPRESENTATIONS................................................................ 49 Statement of claim para 6(o)................................................................................... 50 Statement of claim para 6(p)................................................................................... 50 -- 4 of 267 -- (v) Statement of claim para 6(q)................................................................................... 50 Statement of claim para 6(r) ................................................................................... 50 Statement of claim para 6(n)................................................................................... 51 Statement of claim para 6(s) ................................................................................... 52 Statement of claim para 6(m).................................................................................. 52 Statement of claim para 6(k)................................................................................... 52 Statement of claim para 6(j) ................................................................................... 53 Statement of claim para 6(t) ................................................................................... 56 Statement of claim para 6(a)................................................................................... 61 Statement of claim para 6(aa)................................................................................. 61 Statement of claim para 6(b)................................................................................... 61 Statement of claim para 6(c)................................................................................... 61 Statement of claim para 6(e)................................................................................... 61 Statement of claim para 6(y)................................................................................... 62 Statement of claim para 6(x)................................................................................... 62 7. FROM DEED TO DEED..................................................................... 63 The employment of Peter Gillmore ........................................................................ 63 Shares in Charter Pacific......................................................................................... 69 Completion of the First Deed.................................................................................. 70 Evtech cheques........................................................................................................ 72 Electrocomm ........................................................................................................... 74 The IMS modem ..................................................................................................... 75 Relationships among the Evtech directors.............................................................. 77 Evtech’s cash flow .................................................................................................. 79 The Second Deed .................................................................................................... 88 8. WERE THE REPRESENTATIONS MISLEADING OR DECEPTIVE? ...................................................................................... 98 Statement of claim para 6(o)................................................................................... 98 Statement of claim para 6(p)................................................................................. 100 Statement of claim para 6(p) ................................................................................ 105 Statement of claim para 6(r) ................................................................................. 105 The importance of ASCII data transmissions ........................................... 106 Loss of valid data ...................................................................................... 107 Statement of claim para 6(q) ................................................................................ 109 Statement of claim para 6(s) ................................................................................. 110 Statement of claim para 6(m)................................................................................ 112 Statement of claim para 6(b)................................................................................. 117 Statement of claim para 6(c)................................................................................. 117 Users.......................................................................................................... 118 Designers................................................................................................... 123 Forensic testing ......................................................................................... 124 Mr Boucher and Mr Welstead, August 1999................................. 125 Mr Welstead, November 1999 ....................................................... 129 Mr Boucher and Mr Welstead, 8 December 1999 ........................ 130 Joint testing, 14 December 1999................................................... 131 Mr Welstead, August 2000 ............................................................ 133 Mr Welstead, 17 September 2000 ................................................. 136 Mr Welstead, 18-19 September 2000 ............................................ 138 -- 5 of 267 -- (vi) Mr Welstead, 9-10 October 2000 .................................................. 138 Ms Shepherd, 17 September 1998 ................................................. 138 Dr Graham, 7 September 1999 ..................................................... 139 Ms Shepherd, 22-24 January 2000 ............................................... 140 Dr Graham, 10 March 2000 ......................................................... 140 The defendants’ submissions regarding reliability ................................... 141 Summary: representations regarding reliability ........................................ 143 Statement of claim para 6(k) ......................................................... 144 Statement of claim para 6(a)......................................................... 144 Statement of claim para 6(aa)....................................................... 144 Statement of claim para 6(b)......................................................... 144 The field testing representation................................................................. 145 Mr O’Connor and Mr Morgan...................................................... 146 Mr Morgan .................................................................................... 146 Telecom Australia ......................................................................... 146 Fisher & Paykel ............................................................................ 147 The commercialisation representation ...................................................... 148 Statement of claim para 6(e) ......................................................... 152 Was MNP10 operating in the IMS modem? ............................................. 152 Was Electrocomm able to turn MNP10 on and off? ................................. 156 Did the IMS modems contain MNP10 from 26 May to 7 June 1993? ..... 157 Statement of claim para 6(x) ......................................................... 158 Statement of claim para 6(y) ......................................................... 159 Silicomm and Electrocomm...................................................................... 160 The agreement of October 1990................................................................ 160 Valuable consideration ................................................................. 161 Interpretation and application of cl 4.1 ........................................ 163 9. CAUSATION AND RELIANCE ...................................................... 166 General.................................................................................................................. 166 Reliance: making the First Deed........................................................................... 170 Reliance: completion of the First Deed ................................................................ 178 10. THE CONTRACTUAL REPRESENTATIONS AND NONDISCLOSURE .......................................................................... 181 The contractual representations ............................................................................ 181 Nondisclosure ....................................................................................................... 184 11. THE SECOND DEED ............................................................................................ 184 The making of the further representation.............................................................. 185 Was the further representation misleading or deceptive? ..................................... 188 The Fujitsu order....................................................................................... 188 Distributor and representatives ................................................................ 191 Reliance................................................................................................................. 191 The Second Deed as mitigation ............................................................................ 193 Miscellaneous ....................................................................................................... 195 12. AUGUST 1993 TO MARCH 1994 ................................................... 195 Performance of obligations under the deeds......................................................... 195 -- 6 of 267 -- (vii) The Chinese project .............................................................................................. 196 The IMS modem ................................................................................................... 197 Bankruptcy for the Coventrys............................................................................... 204 13. FINDINGS ON CREDIT................................................................... 204 Bryan Dart............................................................................................................. 204 Kevin Dart............................................................................................................. 205 Steven Cole ........................................................................................................... 207 Andrew Coventry.................................................................................................. 207 Michael Coventry.................................................................................................. 208 Tom Quinn ............................................................................................................ 209 Peter Gillmore....................................................................................................... 209 Russell Morgan ..................................................................................................... 209 Steven O’Connor .................................................................................................. 210 14. THE PLAINTIFF’S REMEDIES ...................................................... 210 The losses.............................................................................................................. 210 Non-monetary remedies........................................................................................ 212 Rescission.................................................................................................. 212 Avoidance and variation under s 1325 ..................................................... 213 Monetary remedies claimed .................................................................................. 215 Indemnity and breach of warranty............................................................ 215 Damages under s 1005 of the Corporations Law ..................................... 216 Advances by the plaintiff ...................................................................................... 216 Payments to third parties .......................................................................... 217 Payments to Evtech ................................................................................... 218 The $400,000 loan ................................................................................................ 219 General principles..................................................................................... 219 The price the plaintiff paid........................................................................ 220 The value of what the plaintiff acquired: the loan .................................... 220 The value of what the plaintiff acquired: the A-class shares in Evtech .... 221 A diversion: the patent applications ......................................................... 223 The A-class shares (continued) ................................................................. 224 Consequential loss ................................................................................................ 226 The defendants’ arguments ................................................................................... 228 Conclusion regarding advances ............................................................................ 230 Costs of the interlocutory injunction..................................................................... 230 Damages for liability on the undertakings ............................................................ 230 Interest................................................................................................................... 230 15. OTHER DEFENCES ......................................................................... 231 The bankruptcy of the defendants......................................................................... 231 Andrew Coventry....................................................................................... 231 Michael Coventry ...................................................................................... 232 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd ................................ 233 16. THE COUNTERCLAIMS AND CROSS-CLAIMS......................... 235 The 1992 representations ...................................................................................... 235 The making of the representations ............................................................ 236 -- 7 of 267 -- (viii) Inducement ................................................................................................ 238 Causation and damage.............................................................................. 239 The 1993 representations ...................................................................................... 239 The claim pursuant to the plaintiff’s undertaking as to damages ......................... 239 The injunctions and the undertakings ....................................................... 240 Harm suffered by the cross-claimants....................................................... 242 Discretionary factors: supervening event ................................................. 242 Discretionary factors: attempted mitigation............................................. 244 Other discretionary factors ....................................................................... 245 Amount of damages ................................................................................... 246 The balance payable under Second Deed ............................................................. 247 Interest................................................................................................................... 247 ANNEXURE A ............................................................................................................ 248 ANNEXURE B1 .......................................................................................................... 249 ANNEXURE B2 .......................................................................................................... 250 ANNEXURE B3 .......................................................................................................... 251 ANNEXURE B4 .......................................................................................................... 252 ANNEXURE C ............................................................................................................ 253 ANNEXURE D ............................................................................................................ 254 ANNEXURE E ............................................................................................................. 255 ANNEXURE F ............................................................................................................. 256 ANNEXURE G ............................................................................................................ 257 -- 8 of 267 -- 1 1. INTRODUCTION Definitions “Belrida” Belrida Enterprises Pty Ltd “Evtech” Evtech Pty Ltd “Fisher & Paykel” Fisher & Paykel Australia Pty Ltd “IMS” Integrated Memory Systems Pty Ltd “Intechnologic” Intechnologic Pty Ltd “TES” Telecom Equipment Supplies Ltd “TGE” The Great Escape Computer Company “the Coventrys” Andrew and Michael Coventry “the cross-claimants” Michael and Lynette Coventry and Barry Tabe and Andrew Coventy “the Darts” Kevin and Bryan Dart “the defendants” the third, fourth and fifth defendants “the fifth defendant” Andrew Coventry “the fourth defendant” Barry Tabe “the plaintiff” Charter Pacific Corporation Ltd “the promoters” Andrew and Michael Coventry and Thomas Quinn “the third defendants” Michael and Lynette Coventry “the trustees” the trustee defendants and Belrida “the trustee defendants” the third and fourth defendants “Zedprime” Zedprime Pty Ltd The action [1] This is an action for misrepresentation. It has been compromised as between the plaintiff and the first and second defendants, but continues between the other parties. The plaintiff alleges that the defendants misled it into acquiring shares from the trustee defendants and lending money to Evtech, thereby causing the plaintiff loss. The cross-claimants allege that the plaintiff and two of its directors, the Darts, misled them into parting with the shares, thereby causing them loss, and that they deprived them of the consideration for the shares, that consideration being options in the plaintiff and cash. The responses to these allegations were complex. A formal mediation, ordered despite the failure of an earlier informal mediation, did not produce a resolution of the dispute. Before the trial began the case was subjected to intensive management. In their final form the pleadings spread over 87 pages. On the 31st day of the trial the defendants withdrew their instructions from the solicitors who had represented them up to that point and thereafter the only defendants who appeared were the Coventrys. The trial lasted 157 sitting days spread over a period of about 18 months. There was an interlocutory appeal to the Court of Appeal. Thirty witnesses were called at trial, the transcript occupied over 11,000 pages, and 342 exhibits were tendered, including one which was a CD ROM on which a large number of documents were imaged. Substantial court resources (including IT resources) have been deployed to deal with the case and since judgment was reserved, it has consumed an inordinate amount of my time and that of court staff. I cannot know what all of this has cost the parties and the taxpayers, but the amount must be horrendous. -- 9 of 267 -- 2 The parties and their companies The plaintiff and the Darts [2] The plaintiff’s early history is obscure. It seems that it was incorporated some time prior to 1979 as a private company, under the name Dart Developments Pty Ltd. Apparently, it was a vehicle by which brothers Kevin and Bryan Dart carried out property developments in south-east Queensland. In 1988, “just after the crash”, it became a public company. It had a paid-up capital of only $200,000 (or perhaps $300,000) and achieved second board listing, then available on the stock exchange. The Darts were the major shareholders and also included were a number of Hong Kong and Gold Coast investors. Its articles of association provided for one “management share”, the holder of which was entitled to 30 percent of the voting rights at general meetings. That share was held by Charter Investments Pty Ltd, a company equally owned by the Darts. After the second board was abolished the company was listed on the amalgamated board notwithstanding the continued existence of the management share. Under the stock exchange conditions of listing, all shares were required to carry equal voting rights by 31 December 1996 at the latest. Initially the Darts in fact controlled more than 30 percent of the shares, but subsequent capital issues diluted their holding (by November 1992 they controlled about 11 percent of the shares, fewer than the largest single shareholder). [3] Executive authority in the plaintiff was exercised by the Darts as joint managing directors. The only other director was Bryan Sprod, who was also company secretary and lived in Sydney. The directors did not hold regular meetings but spoke regularly over the phone. Mr Sprod visited from time to time, particularly for annual general meetings. His name occasionally appeared on correspondence, but there is no evidence that he exercised any influence whatsoever on the decision- making processes of the company. The only employees were Steven Cole (the financial controller and bookkeeper) and a receptionist. [4] Kevin was the older of the Darts. He had no background in technology or computers. His knowledge of mobile phones was that of a user. He could not use a computer. His background was in real estate and property development. Bryan left school after grade 12 and had no training in science or technology. He too used a mobile phone and was computer-illiterate. His experience from 1978 onward was in property development with his brother. The Coventrys and Evtech [5] Michael Coventry was born in Adelaide in 1951, the son of a radio engineer. After completing grade 12 he joined the army, where he served for six years. He was employed as a field surveyor. His interest in computing began in 1975, whilst working as a surveyor for a seismic exploration company. He learned programming in Basic. In 1984 he undertook a course in computing studies and did a lot of extra- curricular study of satellite and radio communication. Unable to make ends meet, he drove taxis to supplement his income. He took up a position with the Defence Science and Technology Organisation in 1985, where his duties mainly involved computer network administration. Here he gained knowledge and experience in relation to the remote downloading and uploading of computer files and of protocols used for this purpose. After that he worked in several positions in relation to personal computers. His wife, Lynette, was a party to the action only in her capacity as trustee of their family trust. -- 10 of 267 -- 3 [6] Andrew Coventry was born in Adelaide in 1952. At the beginning of the 1970’s he received two and a half years’ training as an electronics technician. Thereafter he gained considerable practical experience in refrigeration mechanics. From that he moved to providing marketing advisory and consultancy services, particularly in relation to innovative technology. He suffers from dyslexia and had difficulty with densely printed documents and financial accounts. Barry Tabe is his son. Mr Tabe played no active part in the litigation, being sued only as trustee of Andrew Coventry’s family trust. Belrida and Thomas Quinn [7] In 1992, Thomas Quinn was a real estate agent carrying on business at Springwood. Belrida was the trustee of his family trust. Initially he and Belrida were defendants. They compromised with the plaintiff in 1994, the year the writ was issued. His only role in the trial was as a witness. Parties on the record [8] On 8 September 2000 Michael Coventry was substituted for Kathleen Duckford in, and Andrew Coventry was added to, the counterclaim. These changes reflected changes to the trustees of the respective family trusts. 2. THE ORIGINS OF EVTECH Zedprime and Intechnologic [9] In 1989 the Coventrys lived in Adelaide. Toward the end of that year, Andrew Coventry had an idea by which he thought he could make money. He discussed it with his brother. Michael Coventry later described it in these terms: “He had thought of a way that could get Australian software to the marketplace for the ‘back-yard’ programmers we had discussed. He told me that his idea involved a central organization to which programmers submitted their work, which then assessed the programs submitted and placed them into a network of marketers, who would actively promote and sell the programs to end users through franchise type organizations. Royalties would be paid to the software developer on the sale of their programs at a determined rate.” They decided to call this method of marketing “Multiplex Marketing” and to operate it through a company. The idea was that software developers would license the company to sell their software. The company would pay a royalty to the developer from its sales revenue. Presumably the Coventrys would benefit, not only as employees of the company, but also (hopefully) as its shareholders. In September 1990, in association with a man named Peter Anderson, they acquired a shelf company (Zedprime) for the purpose of the business. [10] Salaries and dividends were not the only way by which the Coventrys intended to make money from the project. On 29 October 1990, there was a meeting of the -- 11 of 267 -- 4 directors of Zedprime. The minutes record the following discussions and resolutions: “1) After the tabling of and subsequent discussion about the documents called Multiplex Marketing, Silicon Cash and Pirate Proof, introduced by Messrs Andrew and Michael Coventry, it was resolved that Zedprime Pty Ltd, and/or its successors, licence from A P & M J Coventry, the rights to use, on-sell and sublicense the Multiplex Marketing system together with Silicon Cash and Pirate Proof – and that Messrs A P & M J Coventry be paid a license fee from Zedprime for the use of the licenses in the aforementioned way. 2) It was further resolved that the license fee for Multiplex Marketing should be no less than $150,000.00 (One Hundred and Fifty Thousand Dollars), but as concern was shown by the directors, as to the limited cash available to the company at this time both A P and M J Coventry accepted that the full payment for the license should be deferred until 1992, however a suitable time payment method would need to be agreed to and put into place before any of the aforementioned rights were transferred. … 4) These resolutions being acceptable to Messrs A P & M J Coventry, (the owners of the intellectual property in Multiplex Marketing, Silicon Cash and Pirate Proof) it was further resolved that such a suitable agreement be drawn up signed and sealed within seven days of the meeting.” The documents tabled at that meeting are not in evidence. [11] Two days later, the Coventrys, as directors of Zedprime as well as in their own right, executed an agreement purporting to constitute a licensing agreement between them and Zedprime. So far as is material, that agreement provided: “ 1.1 In this Agreement unless the context otherwise requires the following words shall have the meaning appearing thereafter; 1.1.1 ‘Confidential Product’ means prototypes, written and published information, technical information and know-how (Whether in written documentary or other recorded or tangible form) in relation to the Multiplex Marketing System developed by the Licensor. 2. Term Subject to any rights of termination, the Term of this agreement shall be two years. -- 12 of 267 -- 5 3. Licensor to provide Licence and Rights of Use 3.1 The Licensor agrees to grant to the licensee a non- exclusive non-transferable licence to use and to develop and promote the Multiplex Marketing System subject to the terms and conditions hereinafter defined. 3.2 In consideration of the licence granted under the preceding clause (3.1) the Licensee will pay to the Licensor the Licence Fee which sum and payment methods is hereinafter defined. 4. Modification 4.1 Any replacement, update or modification of any part of the Multiplex Marketing System by the Licensee shall become part of that system and the rights of the Licensee to use such replacement, update or modifications shall be governed by the terms of this licence and reference to the Multiplex Marketing System herein shall include all such replacements, updates and modifications which are made from time to time. 4.2 Any replacement, update or modification of any part of the Multiplex Marketing System by the Licensee must be shown to and approved by the Licensor. … 7. Termination of Licence 7.1 In the event of termination by either party, the Licensor shall not pay any refund or rebate of the licence fee. 7.2 The Licensee may terminate this licence agreement at any time by giving of notice in writing to the licensor and complying with the provisions terms and clauses herein. 7.3 The Licensor shall be entitled to terminate this Licence forthwith at any time after breach of any term of this Licence by the Licensee. 8. Payment of Licence Fee Sum 8.1 The Licensee agrees to pay to the Licensor the sum amount of $150,000 (One Hundred and Fifty Thousand Dollars) to secure the aforementioned -- 13 of 267 -- 6 licences and rights payment of such sum to be made by method hereinafter described. 8.2 Initial Deposit Payment of $2,000 to be paid by the 31st day of May 1991 in the form of two cheques each of half of the deposit amount to be made out in favour of each of the aforementioned Andrew Paul Coventry and Michael John Coventry being joint licensors. Further Payment of $48,000 to be paid by the 31st day of October 1991 in the form of two cheques each of half of the further payment amount made out in favour of each of the aforementioned Andrew Paul Coventry and Michael John Coventry being joint licensors. Final Payment of $100,000 to be paid by the 31st day of May 1992 in the form of two cheques each of half of the final payment amount made out in favour of each of the aforementioned Andrew Paul Coventry and Michael John Coventry being joint licensors. 9. Property not to pass No property in the rights to confidential product licences and provisions hereinbefore mentioned shall be deemed to have passed between the two parties herein until the receipt of the hereinbefore mentioned deposit by the Licensor.” I shall refer to that agreement later.1 [12] It is not clear precisely when the business was commenced, but it was certainly operating by April 1991. It operated under the name Australian Software Publishers or ASP. Michael Coventry was employed full-time as technical director. Andrew Coventry, who by then lived on the Gold Coast, was appointed as main distributor for Queensland. In April it employed Steven O’Connor. Initially, he worked in marketing. However at that time, as he put it, “There were a number of concepts floating around that required communications software and my job very quickly fell into developing communications software full time”. The Coventrys had envisaged that sales representatives would be provided with software which would enable the company to receive almost immediate payment whenever a sale was made. This software was to be called Silicon Cash. To operate, the concept required the company’s computer to be connected to the computer of the State Bank of South Australia. This meant that Silicon Cash required a communications module. Mr O’Connor was put to work developing this module, which became known as Silicomm. On 14 June 1991 Michael Coventry filed application no PK6665 in his own name for provisional protection under the Patents Act 1990 in respect of “Electronic Funds Transfer Method and Means”. At the same time he was investigating the possibility of constructing a proprietary modem. On 10 May 1 Para [551]. -- 14 of 267 -- 7 Russell Morgan wrote to him, advising that he had located a chipset which he believed could be used for this purpose. [13] At about the same time new investment brought new money into the company, new directors joined the board and new managers appeared. In fact, five new directors were appointed on 1 July 1991. One of them, Jeffrey George, was appointed managing director and the Coventrys ceased to hold a controlling interest in the company. On 17 July the company was renamed Intechnologic Pty Ltd (“Intechnologic”). A “Company Profile” dated August 1991 described the company as publishing and marketing software products. It recorded that to assist distribution of company products to remote locations, its distributors used “Mobile Manager”. This consisted of a laptop computer in a briefcase with a cellular phone and appropriate interfaces, which together were alleged “to overcome the data communications difficulties inherent in normal cellular telephone communications”. It achieved this by the use of the “communications section built in to Silicon Cash software”. [14] By the beginning of September Intechnologic was able to run its inaugural “kick- off” conference, an in-house affair which (the company newsletter claimed) saw the introduction of Silicon Cash and also of Mobile Manager. The newsletter claimed that Silicon Cash, though originally developed to support software sales transactions for the company, also had, in its own right, major corporate applications. It gave a description of the program features which was so vague as to merit the appellation “waffle”. There is some doubt whether the program was ever in fact written (Mr O’Connor said that, to his knowledge, no one wrote it), but probably some parts of it at least did exist. Certainly, code for the communications section, Silicomm, was written by Mr O’Connor during 1991. The Mobile Manager also was sold as a product in its own right. A contemporaneous brochure asserted, “Our specifically- produced communications program (Silicomm*) installed in this device, enables the Mobile Manager* to overcome the data communications difficulties inherent in normal cellular telephone communications”.2 In October negotiations occurred with TGE, a computer sales company operating in Australia and New Zealand, culminating in an offer to that company of terms for the licensing of Silicomm. [15] Despite the optimism of the newsletter and continuing negotiations with TGE, Intechnologic did not prosper. In mid-December Michael Coventry ceased to be a director,3 but through his business, Coventry Computing Services, he became a consultant to the company. Around this time some “bad blood” developed between the Coventrys. In financial difficulty, Michael Coventry entered into a further agreement on 13 December with Intechnologic, purportedly in substitution for that made a year earlier. It is unnecessary here to refer in detail to this agreement and the circumstances under which it was made, since the plaintiff places no reliance upon it. Andrew Coventry did not get on with Jeffrey George and ceased to be a director about a month and a half later. By that time an application to wind up Intechnologic had been filed in the Supreme Court of South Australia. [16] In all probability the Coventrys had seen the writing on the wall. At the beginning of 1992 Andrew Coventry was introduced to Thomas Quinn. Andrew Coventry proposed to Mr Quinn that the latter finance the development of a cellular modem driven by software which he and his brother had been developing. The software 2 The asterisks were in the brochure. 3 On this point, I prefer exhibit 273 to the uncertain evidence of Michael Coventry. -- 15 of 267 -- 8 was to be called “Electrocomm” and the modem was to be that being developed by Russell Morgan. Mr Quinn was interested in providing finance up to $100,000. The Coventrys and Mr Quinn would be the promoters of and shareholders in a company to be acquired as a vehicle for the purpose. [17] Despite the winding up application Intechnologic continued to carry on business. In February some staff were retrenched and others were required to work shorter hours. Mr O’Connor was not among those retrenched. Negotiations with TGE continued during March, both in Australia and in New Zealand. At the same time Michael Coventry contacted TGE. I am satisfied that he told Mr Macmorran, an officer of the New Zealand branch of that company, of the new business proposed with Andrew Coventry and Mr Quinn, and that he also claimed to be the owner of Silicon Cash and, by implication at least, Silicomm. By letter dated 6 April 1992 Mr George disputed this claim; he also informed TGE that Mr O’Connor had been appointed technical manager. Two days later Michael Coventry wrote to Mr O’Connor offering him a position in the new venture as manager, software development and implementation. Mr O’Connor accepted the offer and started work in his new position on 13 April 1992. The following day, Millican and Co, Gold Coast solicitors acting on behalf of the Coventrys, wrote to Intechnologic terminating the licence granted on 31 October 1990. On 27 May the Supreme Court of South Australia appointed a liquidator to the company. [18] Before recounting what happened next it is desirable to describe the state of the art in computer communications (so far as is relevant) as at 1992. 3. THE STATE OF THE ART IN 1992 Computers [19] The decade of the 1980s saw the computer become a mass-market consumer product. At the beginning of that decade most computers in business use were either “mainframes” or “mini-computers” - large machines which could occupy a room. Small or “personal” computers were available from a variety of manufacturers, but their use was confined mainly to hobbyists or electronics enthusiasts. One of the leading brands was Apple, manufactured by a company founded by a group of young enthusiasts. A major change occurred in the early part of the decade when the IBM Corporation manufactured and sold the IBM personal computer. This machine was reliable, affordable, available and backed by the reputation and strength of its manufacturer. IBM made it available by way of outright sale rather than leasing (its policy for larger machines). It realised that to generate sales there needed to be a ready supply of software to carry out the multitude of tasks which could be performed on a computer. It therefore made two important decisions which were to have an effect on how the industry developed. First, it did not tie its personal computer to any particular operating system. Second, it made details of how the system worked relatively freely available. As a result there was a proliferation of software capable of running on the machine and, before long, a host of machines from other manufacturers (“clones”) copying the IBM design. By the end of the decade the terms “personal computer” and “PC” had come to refer to an IBM machine or one of its clones, and the PC was the dominant -- 16 of 267 -- 9 type of machine in the small computer market. Its main competition came from the Apple computer in its various incarnations. [20] By the 1990s a number of manufacturers (both PC and Apple) were selling so- called “laptop” computers. These were portable, battery-powered computers, small enough to be carried in a case slung over the shoulder. By comparison with “desktop” computers, this was their only advantage. There were numerous disadvantages: they were relatively heavy, particularly if a spare battery was carried; they had less processor power than a comparably priced desktop machine; disk drive storage space was less; memory was sometimes limited; and battery life was short. These were disadvantages with which those who really needed the machines learnt to cope and which did not trouble those who acquired the machines for only status purposes. Operating systems [21] An operating system is software which controls the basic functions which a computer must perform (such as reading and writing to memory and to disk and controlling the video monitor) while it is running the various application programs loaded into it. When IBM released its first PC it did not follow its usual practice of writing its own operating system. It contracted the task to a relatively small company called Microsoft Inc. Microsoft was permitted by the terms of its contract to make the operating system available (with trivial changes) to other PC manufacturers. The operating system which Microsoft wrote was called DOS (Disk Operating System - a misleading abbreviation). While it was not the only PC operating system, by the late 1980s it had established a dominant position in the PC market. It was installed onto and run from a disk drive, preferably the hard disk drive of the computer. It was not “hard wired” into the computer; a user could replace it with another operating system. Similarly, if a software manufacturer writing an application program wished to bypass the operating system and write code which directly controlled some of the various computer components, it could do so; the information needed was publicly available. [22] Generally, application programs were written so the user was required to interact directly with DOS as little as possible. That was done because the operating system was difficult to learn and counter-intuitive in its operations. It was character based, which meant that the user gave it commands by typing letters or other characters on the keyboard and watching the responses on the video monitor. It was sensitive to the slightest typing error and the range of commands which a user could issue was limited. Application programs generally were controlled through structured menus accessed by the numeral or cursor keys on the keyboard. This was an improvement on DOS, but was still far from satisfactory. [23] DOS did not work on the Apple computer. That computer came with its own operating system, supplied and tightly controlled by the manufacturer. No other operating system could be run on the computer and application programs were compelled to access the computer’s facilities through the operating system. Software for the computer had to comply with detailed specifications. This tight control gave Apple much more flexibility in what it could do with the operating system. It enabled Apple, at a relatively early date, to move from a character based user interface to a graphics based one, the so-called GUI accessed with a mouse instead of (or as well as) the keyboard. The ease-of-use of this interface compared with that of DOS, together with the superior graphics performance of the Apple -- 17 of 267 -- 10 computer, led many people to prefer it to the PC. However the Apple computer was, throughout the 1980s, significantly more expensive than an equivalent PC. While it attracted great loyalty and fervour from its devotees, it failed to displace the PC from its position of market dominance. [24] Criticism of the interface provided in DOS led Microsoft to develop a program called Windows. In the period with which this case is concerned, Windows was not strictly an operating system. It was an interface which loaded on top of DOS and operated through DOS. The first two versions of the program, released during the 1980s, were unsuccessful. However in May 1990 Microsoft released version 3.0 of Windows. While this did contain some “bugs”, it was reasonably reliable and gained a degree of popularity. Some of its problems were corrected in version 3.1, released in about 1991. These developments made it clear by 1992 that DOS had a limited future as an operating system for the PC. [25] Although Windows was not an operating system, it had some features which made it resemble an operating system. To take full advantage of the benefits of the program, existing application software generally had to be substantially rewritten. Programs written to run under DOS could usually be run on a PC with Windows installed, in the so-called “DOS window”, but this was not true of programs which had been written to bypass certain features of DOS or which did not strictly comply with its rules. Using the DOS window was, however, an unsatisfactory option, since it deprived the user of the GUI and the other advantages of Windows. Modems [26] A modem is a device which connects a computer to a telephone or radio system. Computers are an instance of digital electronics and their output signals are in digital form. In 1992 most telephone and radio systems received and transmitted analogue signals. A modem (modulator/demodulator) converted the computer output to analogue form and the input from the communications system to digital form. Modems came in two types: internal and external. The former was built onto a card which could be plugged into the motherboard of the computer inside its case. In theory this was the form preferred for a laptop computer, but in practice the size of the card often made this option impracticable. An external modem came in its own case and usually required its own power. In addition to the power cable it required a cable to connect it to the computer and another to connect it to the telephone system. It was usually equipped with an array of lights (LEDs) and a small audio speaker to indicate what it was doing, and an on-off switch. [27] A number of different brands of modem were available on the market. In 1992, however, most manufacturers sourced the sets of silicon chips, which constituted the most important parts of the modem, from one of very few manufacturers in the world. One of the most important manufacturers was an American company called Rockwell Corporation. The early 1990s was a period of rapid advances in the chipsets used in modems, and Rockwell regularly released new sets. [28] All computer chips require a program to control their operations. In a PC most programs were stored on a disk drive (usually the hard disk drive) and were copied into volatile memory (“RAM”) as required. From there they commanded and were accessed by the central processor of the computer. That was not the approach taken with respect to the operating system of the modem. Invariably the program which controlled the basic functions of the modem was burnt onto a chip which formed -- 18 of 267 -- 11 part of the modem. For this reason it was given the name “firmware”. The earlier forms of such chips (“ROMs”) were unable to be modified once burnt; but by 1992, re-programmable chips were in general use. The work of programming the ROM with the firmware was done by the modem manufacturer, but the program was supplied by the chipset manufacturer. Modem manufacturers were allowed, or even encouraged, to modify some parts of the firmware to suit their own requirements; but other parts were made inaccessible to them. Perhaps because of the rapidity of advances in technology, the firmware supplied by chipset manufacturers often contained faults. From time to time the manufacturers would release upgraded versions to rectify known problems and incorporate improvements. Among the improvements were improved communications protocols.4 [29] In earlier times the chipsets and the firmware had been designed solely with a view to sending and receiving computer data. By the 1990s systems were available which also enabled modems to be used to send and receive faxes. This was a popular facility and a modem which lacked it would by 1992 have been uncompetitive. [30] As modems became more complex the number of commands recognised by their operating systems increased. By late 1992 there were at least 63 publicly documented commands, one of which 5 had 36 variants to reflect the 36 registers it could address. Some of the commands were simple “on-off” commands, but many of them permitted a selection to be made from a range of options. They were, in short, quite complex. In theory each modem manufacturer or chipset manufacturer could have established its own set of commands; but the inconvenience to users of such diversity would have been intolerable. For this reason the industry adopted a standard set of commands which were devised by the manufacturer of the Hayes modem. These commands are now colloquially known as “AT” commands, because, under the standard, the string of characters containing a command begins with the letters “AT”. [31] The firmware contained the operating system for the modem, but did not provide a mechanism for the user to send AT commands to the modem or data through the modem. In theory most modem operations could have been controlled by the user typing in a series of AT commands. However, except for the simplest tasks, such a process would be difficult, extremely tedious, time-consuming and clumsy. A well- designed communications program provided a simple interface (or as simple as possible) to generate the commands and send them to the modem without the user having to learn them. Communications software [32] The basic function of a communications program was to enable the user to control the modem, although by 1992, most communications software had a number of enhancements. This control enabled the user not only to give such elementary commands as “dial” or “hang up”, but also, if desired, to adjust the large number of settings to which the AT commands gave access. At that time establishing communications between computers was, in technical terms, a particularly complex operation. There were many things which could (and often did) go wrong and many adjustments which could be made to the modem to try to prevent their doing so or to 4 See paras [37] ff. 5 ATSx=n, the S register setting command; x is the register number and n the value entered. -- 19 of 267 -- 12 enhance the connection. A communications program simplified the task of correcting and adjusting. It was, however, still necessary for the user to learn something about the arcane art of computer communications. Not everything was standardised. Different computers (or rather, their operators) chose to communicate at different speeds, using different sized packets of information and with a number of other variables. Users had to understand and be able to adjust such settings using the communications software. [33] As might be expected there were differences between modems manufactured by different manufacturers, and between different models of modems manufactured by the one manufacturer. By 1992 practically all modems recognised AT commands but not all modems worked optimally at the same settings. This was not as severe a problem for communications programs as might be thought at first glance, because a default value for each setting was fixed by the firmware, and modem manufacturers usually set values to optimise their particular modems. However some settings depended on the environment in which the user operated or upon the user’s preference, so the default settings might need to be adjusted. Since the user could not directly access or change the firmware, it was necessary that such adjustments be made each time the modem was used. For this reason most communications programs allowed the user to construct or modify a string of commands, which the program would automatically send to the modem at the beginning of each communications session. Such a string was known as an initialisation string. [34] The advent of combined data/fax modems led the manufacturers of communications software to enhance programs originally designed only for data communications by adding the capacity to send faxes. Some released programs primarily designed as fax software, although usually these included data transmission capabilities. By 1992 it was clear that a communications program without fax capabilities had little prospect of long-term commercial success. Adding fax capabilities to a data communication program required more than just adding new AT commands and additional menus to interface them. Fax programs had to be able to access documents created on the computer by other programs, particularly word processors. By their nature they not only had to deal with graphics files, they also had to convert text files into graphics files. They had to be designed to trick the PC into believing that there was an extra printer attached to it (the “fax printer”), so that faxes could be sent directly from within other programs, without the user having to open the fax program. Writing the software to perform these tasks posed new challenges for programmers. [35] In 1992 the Internet as it exists today was practically unknown outside universities and defence establishments. How then did computer users communicate with each other? Direct one-to-one connection was possible, but the procedure was fairly complex and the time taken to establish and operate such connections was commercially unattractive. More popular were bulletin boards. Essentially these were constituted by a computer running specialist software connected to the PSTN system through a bank of modems and multiple telephone lines. Remote users could download data from and upload data to such computers. Such data might take the form of online messages or commands sent as they were typed, or pre-saved computer files. Many bulletin boards existed. Some were operated by amateur computer enthusiasts; some were operated by manufacturers (typically, manufacturers of computer accessories) to support their products; some (for -- 20 of 267 -- 13 example CompuServe) operated on a commercial basis, providing subscribers with information, the opportunity to exchange messages and files, and various other benefits; and there were other types of boards. Large companies were often interested in the idea of in-house bulletin boards to enable communications with remote employees. Telephone systems [36] In 1992 telephony was available in Australia over wired networks and radio networks. By far the most important of these were Telecom Australia’s Public Switched Telephony Network (PSTN) and its Cellular Network. Neither was ideal for the purposes of data communication.6 To different degrees each was susceptible to interference from various sources. Such interference during a data transfer could and frequently would distort the electromagnetic signals by which the transfer was effected, replacing parts of the data with randomly generated and meaningless data. In many cases where computer files were being transferred, the slightest interference was liable to corrupt the whole file and render it useless. The quality of the connection also limited the speed at which the data could be transmitted between computers, an important consideration if the call were a timed call. The interference was much worse on cellular connections than on PSTN connections; the former were subject to additional, problematic characteristics such as fading and signal fluctuation caused by phase distortion and multipathing7 . These characteristics manifested themselves as loss of carrier (signal) in certain areas (“dropout”) and possible distortion when a call was switched between base stations. No reliable system for overcoming the inherent difficulties of the medium had been devised. [37] A number of attempts had been made to devise procedures to deal with these difficulties and to enable modems to understand each other. A number of schemes for detecting the presence of “rubbish” signals and for correcting the errors induced by them were devised. In the United States this work was done by private companies hoping to benefit from the royalties which would be payable if their schemes (“protocols”) were adopted throughout the world. One such company was Microcom Inc, which developed a series of proprietary protocols identified by numbers preceded by the letters “MNP” (Microcom Network Protocol). Elsewhere, the work was done under the auspices of the International Telecommunications Union (“CCITT”), whose publicly available protocols were designated with numbers preceded by the letter “V”. [38] Four types of protocol are relevant for present purposes.8 The first dealt with modulation and was designed to increase modem compatibility. For this, most modems available in Australia in 1992 contained both the Bell standards (103A and 212A) usable only in America and the CCITT standards (V.22bis, V.32 and V.32bis) used in the rest of the world. The second was designed to increase reliability. There were three Microcom protocols of this type, one of which (MNP4) provided error control. The CCITT error control protocol was called Link Access Protocol for Modems, written LAPM and pronounced “lap em”. The third type dealt with data compression and was designed to improve performance, 6 It was also possible to lease dedicated data lines from Telecom. These provided a higher quality connection, but were expensive. 7 See para [348]. 8 They are helpfully described in exhibit 45. -- 21 of 267 -- 14 particularly speed. Here the competing protocols were MNP5 and MNP7 on the one hand and V.42bis on the other. Finally, by late 1992, Microcom had developed three protocols, MNP6, MNP9 and MNP10, providing what were called “extended services”. One of these, MNP10, was designed to improve reliability over adverse connections. It was described by Rockwell as “the de facto standard for combating particularly harsh line conditions such as cellular”, featuring enhancements which “optimise performance in environments with poor or varying line conditions such as cellular connections, international links and rural telephone service”. [39] In all cases, a protocol would work only if it were contained in the firmware of both the transmitting and the receiving modems. Modem to telephone interface [40] By 1992 the problems involved in interfacing a modem to the PSTN had largely been solved. Standard connectors (plugs and sockets) were available and the properties of the network signals (for such things as going off-line, hanging up, interpreting audio cues, etc) were widely known. Modems were built to implement these properties in an appropriate way. However it was not possible simply to take a modem designed for this network and plug it into a cellular phone. To begin with, not all cellular phones had sockets. Those with sockets were designed to connect to a hands-free-operation device, not to a modem. Instead of the two wires used on the standard PSTN line, the sockets connected to multiple lines. Because cellular phones had many functions which did not exist on PSTN phones, there were many additional signals to be interpreted. Pin layouts varied among phone manufacturers and the use and voltage of each pin was not standard. Most importantly, with one exception (Ericsson), most major phone manufacturers refused to disclose the functions of the various pins and how the phone worked in relation to them. Consequently anyone who wished to build an interface device between the modem and the phone would have to carry out extensive research (“reverse engineering”) to determine the allocation, nature and strength of signals to and from the phone in order to control it. Then the builder had to purchase or construct a plug to fit the particular phone being interfaced. This plug was required at the end of the cable joining the phone to the modem. Finally, it was necessary to construct a circuit board carrying the hardware and firmware, built with the knowledge obtained from the reverse engineering, to enable the phone and the modem to communicate. At that time a different board was required for each telephone, so the practical way to construct the interface was to build the board into the cable rather than into the modem itself. [41] Attempts to develop interfaces were proceeding around the world. In Australia, Intercell, a company run by a man named Jim Shamos, had built an interface into a cable designed to run between the modem and the phone. It was a rather clumsy affair, with a substantial bulge along the cable. It was supposed to connect to an NEC phone. The reverse engineering had been done by a man named Carsten Anderson. It was this product which had been proposed for use in the Mobile Manager intended to be sold by Intechnologic. -- 22 of 267 -- 15 4. EVTECH DURING 1992 Corporate arrangements [42] To enable their business to commence, the promoters had to deal with a number of matters. First, a business vehicle had to be created and its structure appropriately organised. Second, the arrangements for Mr Quinn’s loan had to be documented. Third, the business had to acquire the rights to Silicomm and uncertainties surrounding the Coventrys’ ownership of the intellectual property in it had to be taken into account. Fourth, a joint venture agreement had to be entered into with respect to the modem to be used in the product. Fifth, documentation for sales contracts and employment contracts had to be developed. Sixth, arrangements between the shareholders regarding the introduction of new capital and rights of pre-emption needed to be documented. It was decided to have these matters attended to at the Gold Coast, where Andrew Coventry and Mr Quinn resided. Consequently Michael Coventry was not directly involved. Andrew Coventry was incapable of attending to the task personally (he was dyslexic, his linguistic skills were limited, he was incapable of attention to detail in documents and he was busy with other affairs), and he appointed a business associate, Peter Chapman, to deal with the matter on his behalf. He allowed the manager of his business9 , Michael Poulsen, to work for the new venture. [43] In the meantime Michael Coventry was following up his contacts with TGE. He and Mr Poulsen flew to New Zealand and on 13 April Mr Poulsen discussed marketing arrangements with Mr Macmorran of TGE. They were all hoping to obtain a substantial order from Telecom New Zealand’s marketing arm. The next day Mr Macmorran faxed Michael Coventry asking for a profile of the company with which TGE would be dealing, including its name, capital structure, personnel and financial backing and backers. On 15 April Mr Chapman and Mr Quinn retained Feez Ruthning & Co as solicitors and six days later KPMG Peat Marwick as accountants. By then Mr Macmorran was pressing for a company profile. On the accountants’ advice, the promoters decided to adopt a corporate vehicle and the solicitors provided a shelf company which was renamed Evtech Pty Ltd. Initially the two issued shares were held by Belrida and Mr Tabe. The promoters all became the directors and Mr Quinn the secretary. A corporate profile was assembled.10 The solicitors were instructed to prepare a loan agreement, revised memorandum and articles of association, an assignment of rights in the software and a shareholders’ agreement dealing with (among other things) directors’ unanimity and rights of pre- emption among shareholders. These and other documents were prepared and approved by the promoters by July 1992, but were not then executed. [44] The share structure of the company was integral to these corporate arrangements. Shares were to be divided into three classes. Eighty percent of the shares, the A-class shares, were held equally by the trustees. These shares carried all of the voting rights as well as some extraordinary powers in relation to the sale of other 9 His business was called Australian Surface Protection, abbreviated to ASP. Whether this was more than a coincidence was not investigated during the trial. 10 Michael Coventry wrote the product descriptions. It was probably assembled by Andrew Coventry. It consists of the document G3 (exhibit 2, pp 173-243). -- 23 of 267 -- 16 classes of shares. The remaining shares were distributed to half a dozen or so people who had assisted in the venture. The essential difference between the B and C-class shares were that the holders of the latter were required to reinvest their after-tax dividends up to a certain level. A total of 3000 shares was to be issued: 10 times the minimum number mathematically necessary to allot in the agreed proportions. This was done because it “would more readily facilitate partial disposals of shares than the small shareholdings created by the issue of only 300 shares”. I am satisfied that from the start the promoters envisaged selling some of their shares. However after their experience with Intechnologic, the Coventrys did not wish to lose control of the company. The product [45] What exactly was Evtech aiming to produce? It seems to be common ground that from the outset Evtech intended to produce what its promoters called the “office-in- a-briefcase”. In the beginning this was simply a concept. In 1992 it was a popular concept and a number of people in the computer industry were pushing it. One manifestation was Intechnologic’s Mobile Manager, but there were others. It was thought that a large untapped market existed for such a product and that great wealth awaited whoever was first to develop a reliable system. Such a system would combine in one briefcase the computer, the phone, a modem, a power supply unit and battery, and all necessary cords and interfaces to connect these items. It would include the software necessary for these items to operate reliably together. Such a combination, it was thought, would be attractive to (for example) business and professional people who had to travel frequently, and to mobile sales personnel. The concept was easily enough stated but implementing it was altogether different. [46] Apart from the communications software, the Evtech-office-in-a-briefcase was intended to be constituted by third party products. No particular computer was specified. Apparently it was envisaged that purchasers would buy laptop computers from the product’s distributors or use their existing laptops. No reseller arrangements were entered into. All major mobile phones were intended to be supported but again, no reseller arrangements were entered into. Little thought seems to have been given to this aspect of the business. Instead the promoters focused their attention on the communications software, the modem, the interface to the mobile phone and a power supply unit. [47] When Mr O’Connor ceased his employment with Intechnologic, he retained a copy of the source code for Silicomm. The Coventrys claimed to own this and all intellectual property rights associated with it. They renamed it Electrocomm. I find that in April 1992, Electrocomm was simply Silicomm in its state of development at that time. Evtech and its promoters had no capacity to manufacture modems. It was always intended that the modem being developed by Mr Morgan would be the modem for the office-in-a-briefcase. They named it Cell-U-Comm. They envisaged that Mr Morgan would design the interface, which in the first instance was to be for the Ericsson hotline mobile phone. Funding and staff [48] Evtech opened an account with Westpac Banking Corporation on 20 May with a deposit of $4,000. That sum, like all of the money received by the company during 1992, was provided by Belrida. Mr Quinn had conditionally agreed to provide a loan of $100,000 interest free for 25 years. He claimed that the loan was secured by -- 24 of 267 -- 17 a fixed and floating charge, but no such charge was ever registered. Westpac provided Evtech with an overdraft facility of $40,000 which was subsequently secured on property provided by Mr Quinn. The Belrida advance was not paid in one lump sum. Instead, Mr Quinn advanced the funds as required. The largest instalment was some $46,500 on 17 June. Other substantial advances were $13,000 on 6 July, over $16,000 on 23 July and $9,000 on 28 August. In addition almost $10,000 was advanced by way of direct payment to creditors. It is unnecessary to analyse all of the expenditure in detail. The largest single item was $40,000, comprising payments of $20,000 to each of the Coventrys. These payments were for the assignment of intellectual property rights in the technology. [49] It seems that during 1992 Evtech had four employees. Mr Poulsen was given the title of general manager although he said his work really consisted of project management. Andrew Coventry made Mr Poulsen’s services available to Evtech without charge. Mr O’Connor had been recruited as a programmer by Michael Coventry in mid-April. He was paid wages of $1,500 per fortnight from the commencement of his employment. Carsten Anderson was paid $1,272 per fortnight as wages or fees from August onward. Michael Coventry was paid wages of $1,900 per fortnight until about the end of July 1992. By that time money was tight. Mr Quinn felt that the directors should work without recompense and explained to Michael Coventry that Evtech simply could not afford to pay him. I reject Michael Coventry’s evidence that he continued to be employed until late October or after. The joint venture [50] Mr Morgan carried on business through his own company Glenorn Holdings Pty Ltd, using the business name Imprimis CAE, but effectively he was under the direction of IMS, a company whose principals were Mr Burgess and Mr Fitzpatrick. IMS owned the rights to the modem, a fact the full implications of which were not immediately appreciated by the promoters. Initially they seem to have thought that provided the modems were acquired from IMS, the rights would vest in Evtech. The company profile referred to above11 describes IMS as a consultant. Sometime in the second half of the year, Evtech and IMS began discussions toward a joint venture. These discussions may have been brought about by Evtech’s perceived need for modems to be manufactured in numbers at a time when it could not pay for them. In late October a system of weekly meetings between Mr Poulsen, Mr Morgan and directors of IMS seems to have been established. Mr Fitzpatrick instructed IMS’s solicitors, Steindls, to prepare a draft joint venture agreement. This they did; but precisely when, it is unclear. 12 [51] In that month, at what might have been the first of the weekly meetings, IMS was notified that Evtech had applied for a patent (misleadingly) entitled “Computer/Telephone Interface Apparatus”13 . The minutes of the meeting record that Mr Poulsen was to prepare a brief for the joint venture partners about this. Perhaps because of the title, the application appears to have aroused a degree of 11 Para [43] and note 10. 12 Despite an attempt by the plaintiff to suggest through cross-examination of Mr Quinn that the joint venture agreement exhibit 158 could be traced to 2 May 1992, I am satisfied that it arose at a later time. It is likely that Feez Ruthning & Co prepared not a draft for an agreement of some sort between Evtech and IMS, but that it was the progenitor of the joint venture agreement subsequently prepared by Steindls (exhibit 158). 13 Para [68]. -- 25 of 267 -- 18 alarm at IMS. On 2 November, Mr Poulsen was emphasising in a memo to the directors of Evtech the principle that Evtech and IMS were “equal and open partners”. However it seems that he did not prepare the brief just referred to. As late as 1 February 1993 Steindls on behalf of IMS were asking for a copy of the application and asserting that it had been made without the authority of IMS. [52] On or just before 2 November 1992 the putative joint venturers agreed to establish a joint venture company. Each was to have three directors. There is no evidence that any action was taken to implement this agreement. I infer that other events supervened. Development work: the modem [53] Mr Morgan had a laboratory in premises which formed part of an industrial park associated with Bond University at the Gold Coast. During 1991 he had worked on the development of a data/fax modem based on the Rockwell RC9624AC chipset and its associated firmware, to allow the modem to interface directly to a mobile phone. I infer that this was the work he was doing for Intechnologic. There was nothing noteworthy about a modem based on this chipset without more. Mr Morgan assembled the modem on a single large uncased circuit board, which he called a “longboard”. The modem was experimental and was intended, according to Mr Morgan, “to explore the concept”. Only one was built. Mr Morgan said, and I accept, that it was the device which became exhibit 335. [54] From February until April or May 1992, Mr Morgan developed and constructed a prototype of the modem. The prototype comprised two circuit boards in a “sandwich” configuration. Only one prototype was constructed. Mr Morgan described it as the “breadboard” version of the modem. Again, it was not in a case. Mr Morgan still had it in July 2000. [55] Version 2.10 of the firmware was released by Rockwell in February 1992. It embodied the relevant Microcom networking protocols up to and including MNP10, as well as the CCITT equivalents described above. In the same month, Mr Morgan entered into a non-disclosure agreement with Rockwell and received the bulk of the source code from which the firmware was derived. Thereafter he was able to modify the code to suit Australian conditions and the modem which he was developing. This was a continuing process as the modem evolved and as Rockwell issued upgraded versions of the code. After modifying the source code, Mr Morgan would compile it (i.e., turn it into machine code) and download it into a programmable memory chip (EPROM) in the modem. [56] In April 1992 Mr Poulsen went to New Zealand with Michael Coventry.14 On behalf of the defendants it was put to him, and he accepted, that he took with him “what was termed the longboard, a developmental board with holes and so on that could be populated with trial components ... just as a demonstration of an evolving idea.” I am satisfied that this was an error and that he did not demonstrate the modem on that trip. Later that year, probably before August, he took it to Sydney where he attempted to demonstrate it to a number of officers employed by the communications company NEC. It was a source of some embarrassment to him that this exercise had to be carried out with an Ericsson mobile phone, because the longboard would not work with an NEC phone. Mr Frank of NEC also said that the 14 Para [43]. -- 26 of 267 -- 19 demonstrations he saw were with an Ericsson phone. Michael Coventry alleged otherwise but I am satisfied that he was wrong. A belated attempt by the defendants to reinforce Michael Coventry’s evidence with evidence from Mr Morgan was unconvincing. [57] On 28 April 1992 TGE signed an order for 50 “cellular offices”, with six for immediate delivery. At first sight that seems odd, for at that time the modem did not exist – far less did Evtech have a capacity to sell the “office-in-a-briefcase”. The order followed the marketing trip made by Mr Poulsen and Michael Coventry a fortnight earlier. In what purports to be minutes of a meeting between Mr Poulsen and Mr Macmorran of TGE, a tentative timetable is recorded providing (among other things) for an order by 21 April, delivery of the initial six units by 30 April and production delivery in June. I am satisfied that the Evtech representatives could not have believed that such a timetable could be adhered to. [58] This order was crucially important to the Coventrys. By 15 April Mr Quinn had advanced $6,000 for the venture and indicated his willingness to advance up to $100,000. However he would not advance more than a further $20,000 unless New Zealand Telecom or an appropriate intermediary placed an order within two months. I am satisfied that the Coventrys’ desire to receive the order led them, through Mr Poulsen, to encourage TGE to believe that early delivery was possible. The order of 28 April was the result. [59] In about July or August Mr Morgan began manufacturing what he termed the IMS mark I version 1 modem. He did this by hand, making approximately ten modems. They operated at the rate of 2400 bps for data and 9600 bps for fax. Like the prototype, they operated only in asynchronous mode utilising an 82C250 UART chip. This meant that they could not be used with the then popular NEC P3 mobile phone, which operated in synchronous mode, but could be used with the Ericsson Hotline phone. To Mr Morgan this was not a problem. What mattered to him was achieving a reliable office-in-a-briefcase, to be marketed as a packaged business solution, not enabling multiple interfaces for specific hardware devices for sale as individual modems. In any event, unlike Ericsson, NEC would not release information regarding the polarity of their phone pins in the various modes of operation. This meant that to develop an interface to the P3 it was necessary to reverse engineer the workings of the phone and deduce the operation of the various pins. Since NEC would not even sell connector plugs for their phones, it was also necessary to design and manufacture that item. Mr Morgan described the situation as “an impasse”. [60] The development of the IMS mark I version 1 modem did not proceed smoothly. Michael Coventry particularly wanted it with at least a prototype interface section for the Ericsson phone to demonstrate to groups in Melbourne and New Zealand in August. On 14 April he contacted Ericsson Australia to organise technical specifications for Mr Morgan. By June it became apparent that Mr Morgan had not completed his part of the firmware design, contrary to Mr Coventry’s belief. To assist in this work Mr O’Connor was taken off software development in Adelaide and flown to Queensland for a week. Carsten Anderson was also flown to Queensland for that week and in late July was appointed to develop the actual interface. Michael Coventry himself came to Queensland for the week. A Mr Will Vissa was engaged for two weeks’ work in Queensland. All of this was funded by Evtech, though it had not originally been provided for in Evtech’s budget. It seems that the problems and delays were due in part to problems in -- 27 of 267 -- 20 communication between Mr Morgan at the Gold Coast and Michael Coventry and Mr O’Connor in Adelaide. In part they were due also to Mr Morgan’s natural tendency not to be pro-active in communicating with others, to his lack of resources and to the fact that he was working on other projects at the same time. Other factors causing additional cost and delay were difficulties in sourcing suitable modem components and defects in the firmware code supplied by Rockwell. In mid- September, Michael Coventry wrote: “Originally we were led to believe that Russ could capably design the hardware logic for the complete fax modem and Cell Phone interface. This may still be the case, but in my opinion, Russ has not shown too much commercial sense in this area and appears to lack a sense of timing and organisation. A view supported by Peter Rovesini himself as late as last Monday!!” 15 [61] What happened to the ten IMS mark I version 1 modems is unclear. At least one was sent to Adelaide and was used by Mr Poulsen and Michael Coventry on their trip to Melbourne and New Zealand. This modem was reliable only on a “send” basis, although in New Zealand they were able to demonstrate both sending to and receiving from a bulletin board over the cellular network. Its firmware was defective in that it did not drop CTS (clear to send) at the appropriate time. That was a problem which Rockwell had rectified with a new release of firmware. However by mid-September Michael Coventry and Mr O’Connor were still waiting for a working modem. The problem may have been in the interface: Mr Morgan said that the Ericsson interface was perfected (only) by September or October. In the meantime, during the August trip to New Zealand, Mr Poulsen identified two items which he thought needed to be addressed in design and production in order “to fill current and imminent orders”. First, the modem did not have an on/off switch. Second, unlike almost all external modems at that time, it had no indicator lights on the front panel to show the progress of a call. Mr Morgan justified these omissions in his evidence16 , but I am satisfied that they were design faults, albeit ones which were easily rectified and were not of major importance to the office-in- a-briefcase. [62] It is not clear on the evidence how Evtech became involved with NEC. Probably it resulted from an approach to the marketing staff of that company by Andrew Coventry. One outcome of the initial approach was Mr Poulsen’s visit to NEC headquarters at French’s Forest. Another was a meeting in Adelaide between representatives of NEC and Mr Poulsen and Michael Coventry. That meeting took place in early August and preceded the trip to Melbourne and New Zealand referred to above. NEC was interested in selling the system, perhaps rebadged, as a standard, shrink-wrapped, packaged solution, not as something which needed to be customised for each customer. The interest from NEC led to Evtech’s making the development of a modem and interface to work with the NEC P3 phone a priority: Andrew Coventry described it as a “sudden panic”. Broadly speaking, the development required the construction of a modem which could operate in synchronous mode and the development of an interface for use between the modem and the P3. It is not clear precisely when Mr Morgan began work on such a modem, but the design seems to have been complete by the end of October 1992. In place of the 82C250 UART communications chip previously used, the new model 15 Peter Rovesini was a director of IMS. 16 He made the point that the modem was not designed for stand-alone operation, but for use in a briefcase where lights could not be seen: see para [59]. -- 28 of 267 -- 21 used a Zilog 85C30 USART chip. At that stage however, it did not contain the firmware needed to drive the new chip. Mr Morgan designated this modem the IMS mark I version 2 modem. It operated at 2400 bps (9600 bps for fax) and its firmware was based on version 2.1 as supplied by Rockwell. The cable for connecting to the computer was hardwired to the modem. Again, Mr Morgan manufactured about ten of these modems. [63] Although Mr Anderson was appointed originally to develop the Ericsson interface, one of his duties was to specify the code necessary for the connection of the NEC telephone. From some time in or about August 1992 development of the NEC interface became his primary duty. Mr Anderson worked in Melbourne and the only effective way he could be supervised was for Mr Poulsen to fly to Melbourne. For whatever reason, he did not complete his work until mid-April 1993. Mr Morgan described this work as continuing “sporadically”. He said that by late October 1992 the modem was able to send but not receive reliably using the P3. Despite this NEC was given a modem (and the Electrocomm software) for evaluation. Mr Poulsen was told on 2 November that the receive problem was “probably fixed but not tested”. Development work: Electrocomm [64] When Mr O’Connor began work for the new venture in April 1992 he worked on the source code of the Silicomm software. At that stage the program was designed purely for data communications and had no fax capabilities. Even so it had some unusual features in its design. [65] First, it embodied the so-called “Bulldog effect”. This was a marketing term, not a programming term. Mr O’Connor said that it referred to a section of the program embodying a filter designed to remove “rubbish” characters generated by interference in the flow of incoming data of a certain type; and to certain timing settings (controlled by AT commands) set in registers in the modem called the S registers.17 This code was original and unique. It will be necessary to describe the filter in more detail later; for now it is sufficient to observe that the code embodying it was completely written while Mr O’Connor was employed by Intechnologic. There was nothing unique about the timing settings; they were available in most if not all firmware. [66] Second, the program included code designed to give it the capacity to control a bulletin board. This capacity was completely unnecessary for most domestic users and suggests that the program was designed for use in a commercial or semi- commercial environment. Few other communication programs were designed with this capacity, at least among those sold “off-the shelf”. It was a capacity of marginal benefit in the context of the office-in-a-briefcase. [67] Third, the program included code designed to give it “remote control” capabilities. There were several stand-alone programs available which allowed a remote computer to take control of a computer connected to it, provided both computers had the program installed. Few other communication programs (if any) were designed with this capacity. Again this was of marginal benefit in the context of the office-in-a-briefcase. 17 See para [30]. -- 29 of 267 -- 22 [68] In June Evtech paid each of the Coventrys $20,000 as consideration for the assignment to it of their rights in (among other things) Electrocomm. 18 On 15 June, the day after Michael Coventry’s provisional protection under patent application PK6665 expired, Evtech filed application PL2932 with the same title and content. A few weeks later Evtech lodged a new patent application entitled somewhat misleadingly “Computer/Telephone Interface Apparatus”. The attached provisional specification described the logic on which the code establishing the filter for the Bulldog effect was based. A certificate of filing was issued by the patent office with the number PL3381. [69] A report by Michael Coventry in mid-May indicates that Mr O’Connor was then working on developing the fax capabilities of Electrocomm version 1. It also suggests that even at that early stage Michael Coventry envisaged selling the software in shrink-wrapped packaging. By mid-July version 1 was still incomplete. One cause of delay was difficulty in communicating with Mr Morgan. Electrocomm still did not support fax when Mr Poulsen and Michael Coventry took it to New Zealand in early August. In a demonstration to Telecom New Zealand, it was used to send data to, and receive data from a bulletin board, but the commercial program Winfax was used to send a fax.19 During that visit they called on nine substantial telecommunications or electronics equipment companies. One of the two messages which Mr Poulsen reported to be “coming through loud and clear” was a desire for a Windows version of the product. [70] By mid-September Michael Coventry claimed that he and Mr O’Connor had completed the software testing on a third party modem but could not do the testing on an IMS modem because the one which they had was defective. Even so a number of problems remained in regard to the software. Mr Poulsen reported five significant “bugs” to Mr O’Connor on 5 October. On the following day Mr O’Connor replied with a list of (at least) 92 things he was working on, not all of which were minor and some of which persisted for many months afterwards. A number of these related to the fax capacity of the program. That capacity remained relatively primitive. In Mr O’Connor’s vision of Electrocomm, it was regarded as of secondary importance: “It can be immediately noted at this point that I do not see Electrocomm/Cellucom as simply a ‘mobile fax machine’. To think of it as such would be to miss the whole point of the market. It would be like trying to convince Australia Post that they should buy $100,000 prime movers from us to replace all of their motor scooters. There are such things as portable fax machines that will always cost less than our solution, and will provide a better environment than a computer/faxmodem combination for the user who is only interested in faxes.” Financial position [71] The draft loan agreement prepared by Feez Ruthning envisaged that Mr Quinn be satisfied that firm orders had been placed for the supply of a certain number of systems before he became liable to advance more than $26,000. It seems that this agreement was never executed, although the shareholders’ agreement to which it was a schedule was subsequently executed. Nonetheless, Mr Quinn did in fact lend 18 Para [48]. 19 At this stage, the modem could not receive faxes - see para [61]. -- 30 of 267 -- 23 the $100,000 which he had promised. Almost $90,000 was deposited into Evtech’s bank account and the balance was paid directly to suppliers. The last deposit into the bank account occurred on 28 August. Up to that time the account had been managed so as to keep the overdraft below $10,000: whenever it approached this figure, Mr Quinn would make a further deposit. The amount of the loan reached approximately $100,000 with the deposit of $9,000 on 28 August. That deposit placed the account slightly in credit. No further deposits were made to the account between then and December. In that time the bank balance went from the small credit to an overdraft of more than $42,250. [72] In a message to his brother in April 1992 Michael Coventry had written, “We do however require funding to produce a saleable software unit in any number - perhaps this can be discussed with Tom, Peter and yourself. The orders are there if we are ready to deliver the product!” Eight months and $140,000 later; Evtech was still not ready to deliver the product. It had exceeded its overdraft limit and Mr Quinn was reluctant to advance further funds. Meanwhile the state of the art was improving rapidly and the window of opportunity for Evtech was getting smaller each day. The need for further funding was acute; without it Evtech was insolvent. [73] In Evtech’s circumstances, there was no possibility of its borrowing further funds without security. The Coventrys could not provide security and Mr Quinn was unwilling to do so. As the overdraft increased they turned their attention to finding further equity funding. Michael Coventry at least was reluctant to take this option, but in early October Mr Quinn’s accountants provided him with some calculations demonstrating how this could be done without significantly eroding their controlling interest in the company. Discussions were held with prospective investors, including some representatives of Telecom Indonesia. Nothing seems to have come of these discussions. At the end of October they advertised for investors. One of the advertisements was seen by David Vickermann, a finance broker. 5. NOVEMBER 1992 TO APRIL 1993 The state of the plaintiff [74] From 1989 until the time of the events with which this litigation is concerned, the plaintiff was involved in only two projects. The first was a property development on the Gold Coast (which may have involved two different projects). This was its last property development. The second was an arrangement with CSIRO to commercialise technology called “pixelgram”, an arrangement which stimulated the plaintiff to consider the possibility of similar arrangements in respect of a number of other products. The technology was the property of CSIRO and comprised an anti- counterfeiting device for currency and credit cards. On this basis the Darts asserted that the plaintiff’s business in 1992 was investment in technology projects, despite the fact that no one associated with it had any experience in that area. Its Annual Report for 1992 described its principal activity during that financial year as “investment in businesses, properties and companies that have yet to realise their full potential” and its involvement with the pixelgram technology as being “to pursue business opportunities for the commercial exploitation of the technology”. -- 31 of 267 -- 24 [75] Fiscal 1991 - 1992 was not a good year for the plaintiff. It suffered an operating loss in excess of $1.2 million, most of which it accumulated. Less than half of this was due to abnormal items. It finished the year with net assets of about $277,000, down from some $913,000 the previous year. Its share price in 1991 and 1992 was volatile, reaching a low of only six cents in each year. This compares with lows of 48 cents in 1989 and 55 cents in 1990. It was sustained during 1992 by issuing 1.14 million ordinary shares for $570,000. However its major shareholder, a Japanese company called Nifco Inc, surrendered options which it held in the plaintiff and was relieved of its obligation to maintain a 50 percent equity in the company. During the year the plaintiff became embroiled in legal proceedings against CSIRO and the Reserve Bank of Australia over the pixelgram technology and wrote off all costs and receivables in respect of its investment in the commercialisation of that technology. It recognised that if it were unsuccessful in those proceedings, all shareholders’ funds might be lost. Plainly it needed a substantial capital injection. [76] It received further capital of $100,000 in September 1992 when 200,000 shares were issued pursuant to the exercise of options. In addition, on 24 November 1992, it lodged a prospectus with the Australian Securities Commission for the issue of a further 6 million shares. The prospectus sought to raise $3 million. It offered one free option for every five shares allotted under it. Without more, the Darts’ interest would have fallen to about 5.6 percent if it were fully subscribed. Two weeks before the prospectus was lodged the directors approved the issue of over 6.8 million options. Slightly fewer than 6.1 million of these were issued, directly or indirectly, to the Darts. The price paid for these options (if any) does not appear from the evidence. At that time the issued capital of the plaintiff comprised slightly over 3 million fully paid ordinary shares and the one management share. [77] In December 1992 the existence of the prospectus turned out to be a crucial factor in the pixelgram litigation. The defendants, CSIRO and the Reserve Bank, applied for security for costs. Faced with the likelihood of such an order being made, the plaintiff relied upon the prospectus to demonstrate its capacity to pay costs if ordered. On 4 December the Federal Court ordered it to provide a total of $300,000 as security, but with a qualification: “Such order not to be effective until 10 February 1993 or until early closure of the subscriptions offer and subject to the applicants prior to that date having leave to set aside the order upon fresh material being adduced.” This made the future of the litigation dependent upon the success of the issue. As it turned out the issue enjoyed considerable success. When it closed on 10 February 1993 a total of $2.4 million had been subscribed. Negotiations [78] Mr Vickerman introduced Bryan Dart and Andrew Coventry in late October 1992. A further meeting was arranged and took place on 3 November, this time between Bryan and Kevin Dart and Andrew Coventry. The following day Bryan Dart faxed Andrew Coventry an encouraging letter on Charter Pacific stationery seeking further information. This was followed on 5 November by a flurry of activity in the Evtech camp. The shareholders’ agreement was executed; the loan agreement with Mr Quinn which it scheduled was executed; the deed of assignment by the Coventrys which it scheduled was executed; a special resolution to amend the -- 32 of 267 -- 25 articles of association as envisaged by it was passed by the two members of Evtech;20 and a number of transfers and allotments of shares were approved. By the end of the day the family trusts of the three promoters of Evtech each held 840 A-class shares, all of that class that were issued. On the following day Bryan Dart executed a non-disclosure agreement on behalf of the plaintiff, and, I infer, negotiations began in earnest. [79] During his visit to New Zealand in August 1992 Mr Poulsen had demonstrated the modem to Peter Gillmore, business development manager for Telecom Equipment Supplies Ltd, an equipment retailer and subsidiary of Telecom New Zealand. On 2 October 1992 Mr Bob Chambers, who had until that time been (New Zealand) national sales manager for TGE21 , reminded Mr Poulsen that Mr Gillmore was to visit Queensland in the coming weeks. He told Mr Poulsen of his intention to contact Mr Gillmore to see if he could fit a visit (to Evtech) into his agenda. The outcome was a visit in the week ending Saturday 14 November 1992. During that visit, Mr Gillmore met not only Mr Quinn and the Coventrys but also the Darts. As Mr Quinn described it, he presented himself to the Darts “as someone with an intimate knowledge of the New Zealand telecommunications market, as someone who held an influential position in New Zealand Telecom, and someone who was a very experienced marketer in that field.” He spent about two hours telling them about the future of the market in “extremely optimistic” terms. The Darts were very impressed by his knowledge and experience. Bryan Dart described him at the meeting as “very well spoken and, as I say, knew his technology very well”, and said that his effect on him was “extremely positive”. Kevin Dart’s evidence-in- chief was: “Do you recall what he said about the Evtech product, if anything?-- Yes, he was very confident that the Evtech product was commercially viable and ready for the market. HIS HONOUR: Did that opinion affect you?-- Yes, it did. In what way?-- The fact that his background is - or was at that stage, sorry - the new business manager for New Zealand Telecom, in my opinion he was deemed an expert. What influence did it have on your subsequent conduct?-- It made a big difference, actually, having someone, as I saw, as independent giving a view on how good the product was. It certainly gave us a lot of comfort.” Before he went back to New Zealand, Mr Gillmore agreed to prepare a report on the market for products such as Evtech’s. [80] After his return, Mr Gillmore sent Andrew Coventry a fax which read (as far as is relevant): “Thanks very much for the opportunity to meet the Evtech team including Mike, Caren, Vv 22 and Tom, the Dart brothers and Peter from ISM [sic]. It would seem that Evtech has a bright future with 20 A historical search of Evtech in the records of the Australian Securities and Investment Commission contains no record of the filing of that resolution. However no point having been raised about this by the parties, I proceed on the assumption that the articles were duly amended. 21 And whom Mr Poulsen and Michael Coventry had met during their visit in April: see para [96]. 22 Mrs Caren Coventry (Andrew’s wife) and Mrs Quinn. -- 33 of 267 -- 26 products that are world beaters and well qualified partners and investors. Let me now confirm the statement that I made to you and Tom last week to the effect that TES are keen to pursue negotiations that would lead to us having exclusive representation for Evtech in New Zealand. To that end, and as a first step, we look forward to receiving the Cell- U-Comm, Electrocomm and your single source Mobile Power Units for evaluation as soon as possible. As I mentioned to you, the sooner we get these the sooner my QA guys can evaluate and approve them. After this approval is obtained it will be included with my MO Business Case which, when signed off here, will result in our first order coming to you. At the moment the ball is in your court. As promised I will send you later next week, a synopsis of my New Zealand MO Business case and a copy of the Telecom Supplier Trading Agreement for you to peruse. I am also working on that report as we discussed and should have that with you, also by the end of next week. Andrew, thanks once again for all the time that you, Mike and Tom were able to spend with me last week. I did appreciate the opportunity to meet with you all and I am excited about the prospects for Evtech and its products.” Andrew Coventry forwarded that to Bryan Dart on 18 November with the comment, “I think it is extremely positive.” [81] Meanwhile negotiations between the Darts and the promoters were continuing.23 The Evtech interests wanted to sell only 10 percent of the company and wanted a large amount of money for it. However they were negotiating from a position of financial weakness. The Darts wanted 50 percent and proposed that the price be paid partly in cash and partly in shares in a public company. Because the plaintiff was about to lodge a prospectus for the issue of further shares, the Darts explained that it could not become involved in the transaction at that time. 24 There was some discussion about floating a company for the purpose, but at some stage during November it was decided instead to use a proprietary company owned by the Darts, Bundaway Pty Ltd, as a temporary vehicle. [82] On 18 November Mr Quinn gave Bryan Dart a set of projected profit figures purportedly “based on NZ Telecom Equipment Supplies market research”. The figures purported to relate not only to the New Zealand market but also to the Australian and United States markets. They showed an expected gross profit from the three markets combined of $129 million in the first year. They were on their face incredible, and Bryan Dart did not believe them. Indeed, in a conversation with his brother Kevin, he wondered what sort of people they were dealing with. But, as 23 That statement does not imply a finding one way or the other as to whether Mr Cole was involved in negotiations at this time. 24 The prospectus was lodged with the Australian Securities Commission on 24 November. -- 34 of 267 -- 27 he said in evidence, “Once again we just kept going back to this New Zealand Telecom approval and purchase.” [83] Bryan Dart’s scepticism about the figures provided by Mr Quinn did not inhibit his using them in negotiations. On the following day he sent Mr Quinn a fax containing a calculation of the share price of a hypothetical public company making the earnings postulated. The calculation showed that the Evtech shareholdings on these assumptions would be worth approximately $36 million and the shareholders would receive fully franked dividends of $3.36 million per annum. [84] The information sought by Bryan Dart in his letter of 4 November 25 had not been provided when on 3 December the Darts resolved in principle that Bundaway should proceed with the deal. That resolution was subject to verification of the information sought on 4 November, namely: • Evtech Pty Ltd company structure • business plan • future cash flow projections • product details and capabilities • details of joint venture with IMS Pty Ltd26 . [85] Six days later Bryan Dart sent Mr Quinn a “list of details required for execution of documentation (Heads of Agreement)”. Of the five topics referred to in the resolution of 3 December, only two (cash flow and joint venture) were included in the list. Quite possibly this was because in the interim the Darts had received, or had read, the G2 and G3 booklets referred to below27 . However some additional information was now demanded, including financial statements since incorporation and summaries of the current financial position. It is unlikely that this was the first time the topic was raised with Mr Quinn. By this date he had already instructed Evtech’s accountants, KPMG Peat Marwick Hungerfords, to prepare such documents. [86] Precisely when the accountants received their instructions is unclear, but it was probably in very early December 1992. Two employees of the accountancy practice interviewed Mr Quinn to receive information required for the preparation of the statements. Present at the interview was Evtech’s bookkeeper, Andrew Coventry’s wife Caren. The accountants were instructed to prepare the accounts to 30 November 1992 “for internal management purposes of the company and its officers”. This they did, using, in addition to the information provided at the interview, the books and records of Evtech. The draft accounts were faxed to the promoters on 11 December and the accountants signed the final version (which had some small differences from the draft) the same day. The accounts were unaudited and there was no attempt to have them comply with Australian Accounting Standards. I infer that in due course, a copy was given to the Darts. The Bundaway Agreement [87] Although Bryan Dart had wanted the financial details before the execution of Heads of Agreement, the Darts caused Bundaway to execute the agreement on 25 Para [78]. 26 Note that this suggests the joint venture proposal was still afoot. 27 Para [176]. -- 35 of 267 -- 28 10 December, prior to the receipt of those details. The parties to it were Evtech, Bundaway and the trustees. The major features of the Heads of Agreement were: • the trustees agreed to transfer to Bundaway half of their A-class shares in Evtech • Bundaway agreed to transfer or cause to be transferred to the trustees 1.2 million shares in a public company, the shares having a value of not less than $600,000 • Evtech gave a number of warranties regarding its intellectual property and one regarding testing by NEC, New Zealand Telecom and Telecom Australia • Bundaway agreed to lend Evtech $400,000 on specified terms • the agreement was subject to a number of conditions precedent • the agreement was assignable by Bundaway • Mr Quinn and Andrew Coventry were to be employed by Evtech • the directors of Evtech were to provide complete and full disclosure of Evtech’s financial position within seven days and to warrant the accuracy of the disclosure. [88] One of the Evtech warranties referred to above was in these terms: “E. That NEC and New Zealand Telecom and Telecom Australia, with the assistance of Evtech, are carrying out exhaustive tests with respect to the technology the subject of the Patent to determine whether or not it satisfies the representations made by Evtech and each of them and Telecom Australia are considering whether or not to endorse it unconditionally (the endorsement of any one of them hereafter being called ‘the Endorsement’).” In the event that this endorsement was not received on or before a specified date, Bundaway had an absolute right to terminate the agreement. [89] The conditions precedent included the trustees’ agreement that the shares issued to them be held in escrow for 12 months and their agreement that various amendments be made to Evtech’s articles of association and the Evtech shareholders’ agreement. The importance of NEC [90] I have already referred to the interest which NEC showed in the modem in 1992. This interest was not the only factor which made the development of an interface with the NEC phone important. The cellular phone favoured by TES was also the NEC. In his fax to Mr Poulsen of 2 October Mr Chambers drew attention to that fact, probably not for the first time. I am satisfied that in November 1992, development of an NEC interface remained the major priority of Evtech’s promoters. [91] At first sight it is odd that NEC would be interested in selling the Evtech System, yet would refuse to provide the information the absence of which was thought to be the greatest impediment to the System’s perfection. The explanation for this oddity lies in NEC’s organisational structure. NEC was a Japanese company with wide-ranging interests in electronics and communications. In Australia it had three divisions. The division concerned with cellular phones was a different division from that concerned with computers. The divisions operated separately. Each reported to a corresponding division in Japan. The cellular phone division was -- 36 of 267 -- 29 interested in producing peripheral devices for the telephone itself and regarded others as competitors to whom information should not be released. In practice the Australian computer division, which wanted to market a rebadged mobile office, was in no position to induce the release of the necessary information. [92] It was the latter division which was provided with an evaluation version of the Evtech System in the first half of November 1992. The version of the modem which it evaluated was the mark I version 2 modem, although initially it might have been provided with an earlier version. It proceeded to test the System over the next couple of months. It found both the Electrocomm software and the Cell-U-Comm modem were unreliable. The modem would “hang” and the software would not respond to certain commands. Problems persisted even with third party software. From time to time Evtech provided NEC with updates to the software and possibly the modem was replaced with an updated version; but the problems persisted. [93] In January or early February 1993 an employee of NEC, Mr J L Frank, visited Queensland to view the research and production facilities. This occurred toward the end of the evaluation process and at the time Mr Frank’s opinion was that the System had defects and did not offer anything which other systems did not offer. He was taken to Mr Morgan’s laboratory. He described what he saw: “My evaluation of the R & D process, it was not that of a professional organisation. There was very little antistatic procedures, there was very little control on the hardware in the environment. By that, I mean I guess the way things were, it was a bit haphazard. There was one person there doing some development work.” Mr Morgan explained that they were still having problems with the interface to the NEC phone. The demonstration “wasn’t terribly successful”. That was probably due to the fact that Mr Morgan’s laboratory had poor cellular phone reception. When they took the equipment to a balcony, they were able to send a fax successfully. [94] Not much turned upon this incident, but Mr Morgan’s approach to it in his evidence is of some interest. Andrew Coventry claimed in his evidence that when he arrived at the demonstration, those participating were already on the balcony. He claimed that he was told that Mr Morgan was unable to connect and that he was using WinFax (I interpolate that this was Mr Morgan’s software of choice for testing facsimile transmissions). He said that at his suggestion, Mr Morgan switched to Electrocomm “and achieved connection immediately, clearly showing the superiority of our software product”. Mr Frank did not confirm that version. He related the connection to going upstairs to the balcony, not to a change in software. The only mention of software by Andrew Coventry which he recalled “was not during the evaluation but maybe later during a talk we had”. Mr Morgan said that there was no testing done in his laboratory; the testing was done from the balcony. He said, “From memory, I think we tried with Winfax first and it didn’t work, but with Electrocomm it did.” I am satisfied that Mr Morgan had no idea what software was being used when the connection was made and that his evidence was an attempt to assist the defendants. [95] Shortly after Mr Frank returned to Sydney, NEC decided that “until we could be given a more substantial product, it was felt that we were just becoming part of the R & D process, that we were evaluating a product as it was being developed, and that wasn’t our intention of evaluating the product”. That intention was to see if it -- 37 of 267 -- 30 was suitable to bring to market, not to be involved in the development process. In his view, “It was a long way short, which was why we should not continue to be involved in the evaluation process substantially after that.” He testified, “Given the facilities and the resources that I had been exposed to over that testing period from the first demonstration to the site visit up in Queensland, I would say there was still at least several months of development work required before it could be brought to market.” He thought that the unit which NEC tested was “definitely not ready for commercialisation”. Thereafter, “The relationship just started to fizzle away in terms of the ongoing evaluation of their product.” Peter Gillmore [96] When Mr Poulsen and Michael Coventry went to New Zealand in April 1992, one person whom they met was Mr Bob Chambers, New Zealand sales manager of TGE. Mr Chambers was greatly attracted to the Evtech product. By the beginning of June he evolved a plan, apparently secret, to leave TGE and establish his own company to market the product, particularly to New Zealand Telecom which had indicated its keen interest in the mobile office concept. To this end he wrote a draft business plan for such a company, which he called Cellular Technologies Ltd. He sent a copy of that draft dated 2 June to Mr Poulsen under cover of a letter dated 9 July 1992. He wrote, “It is my intention to continue with TGE until such time as I am satisfied that the Cell-U-Comm product has a market in New Zealand and meets the technical criterion. This will be when Telecom approve and adopt the product.” However New Zealand Telecom did not approve or adopt the product. It wanted a system which would operate with an NEC cellular phone. At no time during 1992 (at least) could Evtech provide this. Nonetheless Mr Chambers left TGE on 2 October, though he remained keen to get Evtech’s business. [97] I have already referred to Mr Gillmore’s visit to the Gold Coast during November.28 It seems that from that time onwards, Evtech ceased dealing with Mr Chambers and dealt directly with Mr Gillmore. This made commercial sense. New Zealand Telecom’s commercial arm, TES, was always envisaged as the ultimate retailer of the Evtech product; Mr Gillmore was enthusiastic about the product; and it was TES which would decide whether the product was commercially acceptable. He had agreed to prepare a report on the market for the Evtech System, which he eventually did. He sent it to Andrew Coventry, Bryan Dart and Mr Quinn by courier on 14 December. At the same time, he was pressing Andrew Coventry to send the System to New Zealand Telecom for evaluation. About 20 December Evtech sent Mr Quinn and Mr Morgan to New Zealand. Mr Quinn went at Bryan Dart’s request. They probably took two mark I version 2 modems with them, although these might have been sent over shortly before their trip. They demonstrated these to Mr Gillmore and left one with him for evaluation. His enthusiasm is evident in the letter he sent to Mr Quinn two days later: “My initial research indicates that there is a potential market in New Zealand for your product of approximately 4,500 units within the first twelve months. This is presuming that both Windows and Apple software releases are available. I understand that these are under development. As a indication of Telecom’s interest in marketing Evtech’s Mobile Office portfolio in New Zealand it is our intention to purchase an 28 Para [79]. -- 38 of 267 -- 31 initial 100 units of the Evtech Computer/Telephone Interface [Cell- U-Comm]. Our order will be subject to agreed confirmed prices, acceptance by Evtech of the Telecom Conditions of Trading, Type Approval [Permit To Connect] and Electrical Supply approvals being obtained by TES and Beta trials of the product by our technical group being successful.” Mr Quinn sent a copy of this letter to Kevin Dart the following day. [98] Two other points should be noted about that letter. First, Mr Gillmore’s research presumed that both Windows and Apple software releases of the Electrocomm software would be available. Second, Mr Gillmore envisaged that TES would obtain, not issue the necessary Permit to Connect and that this would be something separate from the beta trials of the product to be conducted by the TES technical group. This is an important distinction. Product development January to March 1993 [99] Mr Gillmore’s optimism was misplaced. Mr Morgan’s demonstrations had revealed a number of difficulties associated with both the hardware and the software. He referred to these in a fax to Mr O’Connor in early January 1993. Mr O’Connor was not asked during his evidence whether he remedied the problems. Indeed, it is not altogether clear precisely what Mr O’Connor was doing in the first quarter of 1993. A fax from Michael to Andrew Coventry on 8 January 199329 envisaged his position “as purely interfacing between the programmers we find as regards implementation of the modules he has written”. That was a reference to work in progress in Adelaide aimed at redesigning the program for Windows and for the Apple computer. Such talk was fanciful in Evtech’s financial position at that time, but Michael Coventry might have been assuming that finance would be forthcoming from Mr Quinn. [100] On 19 January Mr O’Connor sent two facsimile messages from Adelaide to Evtech personnel in Queensland. One, marked for attention of Andrew Coventry, listed marketing benefits to be gained from the Electrocomm software and was apparently written in response to a request from him. The other was entitled “Product Announcement: Electrocomm Version 3.0”.30 It was written in response to an article in the monthly Australian Personal Computer, which reviewed a number of fax modems and software packages. That article seems at last to have convinced Mr O’Connor of the importance of the fax side of the product. He wrote: “I am now in a position to announce ambitious plans to bring Electrocomm’s fax facilities to the forefront of the market in this area. We currently have the most innovative modem solution for mobile offices, and I believe the very best communications software for the date side of communications. The views expressed by APC magazine will tend to form a benchmark for the market over the next 29 Wrongly dated 8 January 1992 30 It appears in exhibit 2 at pp 292-297, but the pages are out of sequence. Page 293 is actually the last page of the fax. -- 39 of 267 -- 32 12 months, so I think that it is well worth the effort for the extra development. There are some minor extensions to the data side and general operation of the Electrocomm program, however the major advances in the next version are all concerning the fax interface.” There followed a lengthy list of fax features to be included in the next version of the software. By implication, those features were absent from the current version. I infer that many, if not all of them were derived from the article and were the features which would, in Mr O’Connor’s opinion, “tend to form a benchmark for the market” in 1993. Plainly, there was a lot of work still to be done to incorporate these features into Electrocomm. [101] There are some other features of Mr O’Connor’s vision for version 3.0 which are interesting. He envisaged that with that version, “all of the major bugs are now gone”. That seems to accept the existence of some major bugs in earlier versions. This is confirmed by his summary (under the heading “Bug Fixes”) of the main improvements to the data side of communications: “● All of the serious problems that caused Electrocomm to lock up and crash the whole system were related to a single bug that was programming the PIC chips incorrectly. This has now been resolved, and Electrocomm has not been able to crash under heavy testing” There was also reference to fixing “bugs involving redialling faxes”. [102] Mr O’Connor’s references to Windows support are also of interest. First, Mr O’Connor made the point that version 3.0 would not be a complete Windows version. It would simply be “Windows safe”, that is, able to run as a DOS program in Windows without crashing the System. Mr O’Connor observed, “This is not ideal, but it provides a quick Windows solution for those that are demanding it.” Again, the implication is that the existing version was not “Windows safe”, notwithstanding Mr O’Connor’s later assertion, “We do have a good stable product in Electrocomm V 2.0”. [103] Andrew Coventry sent copies of Mr O’Connor’s faxes to Mr Gillmore, Mr Quinn and the Darts. Mr Gillmore responded on 31 January. He was cautiously effusive: “If Steve is able to produce robust comms software with the features that he describes then Evtech will be offering comms software that will, I believe, become the industry standard.” He again displayed his predilection for Windows: “It is great to see that Steve is incorporating ‘Windows Support’ in Version Three. As I have mentioned previously most IBM compatible Notebooks being sold today are with the Windows operating system software so Version Four will provide even greater opportunity than Version Three. We are looking forward to getting the reformatted version of ElectroComm to evaluate. From all accounts it should prove robust and be a good product to introduce the Evtech software portfolio into the market. Every time I hear about both your software and modem/interface developments I become more excited about the Evtech portfolio. NZ -- 40 of 267 -- 33 PTC approval for the CellUComm looks likely after we receive the ‘final’ version and with the new ElectroComm which you are sending us we should be soon ready to roll!!” [104] It is apparent from this letter that as at 31 January, Mr Gillmore was still waiting to receive a “reformatted version” of Electrocomm to evaluate, as well as a “final version” of the modem. Possibly he received them. Certainly, by 16 February evaluation was under way. The evaluation work was done for TES by Telecom Repair Services Ltd whose engineer, Kevin Underdown, had premises in the same building as Mr Gillmore. He reported a number of difficulties to Mr Morgan on 17 February. Mr Morgan told Mr Quinn and Andrew Coventry that he could “see no alternative than for Steve, Kevin and myself to all physically be at the one location at the same time and get these problems nailed ...”. His offer was not immediately taken up. On 22 February, Mr Gillmore faxed Andrew Coventry and Mr Quinn: “We received this afternoon the updated ElectroComm discs from Steve, and, after installation and preliminary testing, we are pleased to report that we are now able to receive faxes. The even better news is that we will now complete tests that will enable a PTC application to be made. We see no major obstacles to an Application being approved. As you know every Application needs to have a full report to be submitted and Kevin is working on this today. This should take about ten working days to complete and then the Application is submitted to Access Standards. Access take about ten working days to peruse the Application and then approve it. Note: We are in regular contact with Access Standards and thus do not submit to them any Application which we know will be rejected. They often make suggestions to assist with an early approval. I am now confident that the CellUComm/ElectroComm product will have, within four weeks, approval to connect to both the New Zealand PSTN and Cellular Network.” A copy of that fax was given to Bryan Dart. [105] Mr Gillmore’s optimism was again unfounded. Mr Underdown continued to encounter problems. On 6 March Mr Morgan flew to New Zealand where he spent five days fixing four separate problems which the testing laboratory had discovered. That in turn exposed further problems in the firmware. After his return to Queensland, Mr Morgan rewrote the firmware, loaded it into another modem and sent that to Mr Underdown on 25 March. Yet another defect became apparent in that modem, although this time, a minor defect. Mr Underdown did not wait for this defect to be remedied. On 31 March he signed a report on the modem in the form necessary to support an application for a Permit to Connect. As Mr Gillmore observed in a fax to Mr Quinn on 7 April 1993, “It seems strange that Russ does not test for these problems before he sends the unit to NZ”. [106] Several features of that report should be noted. First, it covered only the modem, not the Electrocomm software. Second, although the overall assessment was that -- 41 of 267 -- 34 the modem did not comply with the specification for a Permit to Connect, most of the non-compliances were curable by attaching warning notices to the modem or inserting them in the manual. The exceptions were the failure of the modem to “reverse dial” and the need for a further test of the power supply to ensure compliance with appropriate power safety requirements. The former problem (unique to the New Zealand PSTN) was dealt with in the Electrocomm software; apparently it was not an obstacle to the issue of a permit. The latter could be covered by a condition. Control of Evtech [107] The defendants argued that from the time of the Bundaway Agreement, the Darts were de facto directors of Evtech. They attended all meetings of directors; they meddled in the affairs of Evtech; they controlled Evtech’s books and records; and (after early January 1993) they controlled all of Evtech’s expenditure. This argument vastly overstates the position. In fact Evtech did very little during this period. It had no funds and was sustained only by money from Bundaway. Andrew Coventry himself admitted, “There wasn’t a great deal to be done with Evtech. We couldn’t do a great deal at that stage other than wait.” Bryan Dart seems to have involved himself in learning about Evtech’s business to some extent, but his efforts seem manly to have been directed to the things necessary to satisfy the conditions laid down by the Darts for the deal to proceed. The defendants argued that during this period, he and Mr Cole became familiar with Evtech’s affairs. (This was one foundation for submissions relating to non-reliance.) The argument was supported by evidence relating to only two topics: control of Evtech’s documents and control of its expenditure. Evtech’s documents [108] Andrew Coventry gave evidence that shortly before the Bundaway Agreement, he and his wife Caren delivered two or three boxes of documents belonging to Evtech to the plaintiff’s office. One box was said to contain financial documents, the others Evtech’s remaining documents. The financial records were taken into Mr Cole’s office and Caren Coventry discussed them with him. Mrs Coventry substantially corroborated this version, although she was uncertain whether the delivery occurred before or after Christmas 1992. She said that the financial records consisted of a payments journal, petty cash book, creditors’ ledger, receipts journal and payroll. With the possible exception of the creditors’ documents, these were bound books. Mr Cole’s evidence was that with one exception he did not receive such documents until after he pressed for them following completion of the First Deed. The exception was a ring binder containing invoices and a list of creditors, which was handed to him after the signing of the Bundaway Agreement in December 1992 and which he used to contact creditors. [109] The objective evidence does not support the Coventrys’ version of events. I have already referred to the accounts prepared by KPMG Peat Marwick Hungerfords in early December.31 That firm must have been in possession of Evtech’s financial records in order to prepare of those accounts. Mrs Coventry implied she had not known of the preparation of these accounts and said that Mr Quinn would have arranged it if it happened. She said that she did not deliver the books to the accountants and she did not think she had parted with possession of them for the 31 Paras [85]-[86]. -- 42 of 267 -- 35 purposes of such delivery. She denied speaking to the accountants about the preparation of the accounts and said that if anyone did, it would have been Mr Quinn. Her evidence was inconsistent with an invoice in the accountants’ file charging Evtech for: “Interview with Mrs Caren Coventry, Mr Michael Fitzpatrick and Ms Irena Cassimatis to receive information required for the preparation of financial statements.” Even when confronted with this invoice, she claimed never to have heard of Ms Cassimatis and to have no recollection of the interview. [110] In cross-examination, Mrs Coventry said that the last time she saw the books was when she gave them to Mr Cole. However in answer to the next question, she said that after 15 December: “They would have been up at Fern. I still paid Steve’s wages each week when we were still up at Fern, so I must have had the books for some period - at least I had the payroll.” “Fern” was a reference to her husband’s new business, where she began work on 15 December and where she continued to work during 1993. “Steve” was Mr O’Connor. The proximity of those two answers suggests that Mrs Coventry saw no inconsistency between them. That in turn suggests that she had in mind a delivery of documents which occurred after she ceased to be responsible for paying Mr O’Connor’s wages. That was after completion of the First Deed. If that were what happened, her evidence would be quite inconsistent with that of Andrew Coventry, who insisted that the delivery of documents occurred prior to the Bundaway Agreement. [111] That answer was given about half an hour before the luncheon adjournment. Shortly after lunch counsel returned to the subject in his questioning: “You said in your evidence before lunch that after you moved to the Fern chemical business premises, you could only recall writing out cheques to O’Connor and you said you thought you must have had access to the chequebook and you must have written up payroll - your payroll records in respect of paying wages to O’Connor. Do you recall that?-- Yes. Now, if Evtech was also paying other expenses, as shown by these cheques we see in the bank statements, it’s likely, isn’t it, that you would also have been writing up other records in respect of the payment of other cheques?-- I simply don’t recall.” From that point onward Mrs Coventry’s responses became evasive, obfuscatory and unremembering and she sought to resile from her earlier answer. I shall not set out the transcript at length. She did not explain how she kept the payroll and group tax accounts if she did not have the relevant books. I formed the distinct impression that she was aware of the inconsistency between her pre-lunch evidence and that of her husband and was trying to minimise it. [112] I should also note that on 19 March 1993 she faxed a list of certain outstanding Evtech accounts to Mr Cole on Fern Group stationery. This suggests she was in possession of Evtech financial records. Unfortunately, it was not apparent that she was the author of that fax until after she had finished her evidence. The weight which can be given to this fax is diminished by reason of its not having been put to her; but it is still a factor to be considered. -- 43 of 267 -- 36 [113] Mr Quinn’s evidence was that he thought the financial records of Evtech were at the premises of the Fern Group during the period December 1992 to May 1993, although this may be a conclusion which he worked out rather than an observation which he made. [114] The strongest evidence in support of the Coventrys’ version is to be found in the cross-examination of Bryan Dart: “Throughout 1993 up to the period of this extra $70,000 advance, that is, the end of July, I suggest that administration of the Evtech finances and possession of the Evtech books of account and chequebooks and so on was totally under the control of Charter Pacific and Steve Cole?—Yes. Steve Cole handled all the accounts for everybody, yes. HIS HONOUR: Have you put it to him when that situation first commenced? MR SPAIN: I suggest that this situation commenced back in December 1992 at the time of the Bundaway Agreement?—Yes, that’s correct. Steve Cole paid the accounts. Evtech had a lot of pushing creditors, and I remember Andrew Coventry’s wife coming in and dropping all the books in and sort of saying, ‘Well, you can look after these people for us,’ or words to that effect.” At first glance those answers appear to constitute a substantial admission of a version which conflicts with that of Mr Cole. I have carefully considered whether I should act upon it. The conclusion to which I have come is that I should not. The second question directed the attention of the witness specifically to the time of the Bundaway Agreement, but the answer focused on payment of accounts in relation to that time rather than receipt of the books. I have reached the conclusion that the witness was confused about the time when the books were dropped in, on the basis of an examination of the wording of the answer and a comparison of it with the evidence to which I have already referred. [115] I reject the evidence of Andrew and Caren Coventry on this point. I am satisfied that apart from the creditors’ binder referred to above, the plaintiff did not receive Evtech’s records until after completion of the First Deed. Funding [116] Clause 6 of the Bundaway Agreement provided for Bundaway to make an immediate advance to Evtech of $10,000. That amount was deposited into Evtech’s account at Westpac Bank on 11 December 1992. By 8 January 1993 it was all spent. In anticipation of this somebody on behalf of Evtech, probably Mr Quinn, approached Bryan Dart in early January for a further loan to satisfy pressing obligations. He agreed that Bundaway would lend Evtech a further $20,000 and Mr Quinn accepted his conditions on 13 January. One of the conditions was that Evtech would forward relevant invoices to him to be satisfied by direct payment from Bundaway. A little over half of this money was spent on purchasing a computer and mobile telephone and a couple of small outstanding accounts. In addition, monies were advanced by Bundaway to enable Evtech to pay wages. These funds were Evtech’s only receipts in the period up to the signing of the First Deed. They were plainly insufficient to cover Evtech’s outstanding liabilities. -- 44 of 267 -- 37 As at 28 February 1993 trade creditors alone were owed in excess of $126,000; this included over $38,000 owing to the Australian Taxation Office. Almost all of these creditors dated from 1992. [117] Mr Cole gave evidence that in late 1992, when he was given the ring binder, he was asked to help by talking to creditors and keeping them at bay. This he agreed to do. His efforts were successful: few if any of the 1992 creditors had been paid by the time of completion of the First Deed. I accept his evidence. The making of the First Deed [118] On 24 March 1993 the plaintiff, Evtech and Evtech’s A-class shareholders entered into a deed. The deed had originally been drafted by a solicitor, Mr Bruce Campbell, who was an in-house consultant to the plaintiff; it was settled by the plaintiff’s solicitors, McCullough Robertson. It was intended by the parties to supersede the Bundaway Agreement and it was so treated by them. It was the defining event of their relationship. [119] No clear explanation was given as to why it took three months for the parties to execute the agreement. Most of the delay can be explained by the Charter Pacific prospectus: it would have been extremely inconvenient for the plaintiff to have become involved before the offer contained in the prospectus closed. That happened on 10 February. The draft went to McCullough Robertson on 12 March. Given the complexity of the arrangements which had to be made, that delay was perhaps understandable. [120] The deed was subject to eight conditions precedent. Only two of these were problematic. Those conditions were: “(c) The execution by the Company, Integrated Memory Systems Pty Ltd, Glenorn Holdings Pty Ltd and Morgan of the Licence Agreement. (d) The Company receiving written notification (to the satisfaction of the Purchaser at its absolute discretion) from any one of New Zealand Telecom, NEC or Telecom Australia that it endorses the Cell-U-Com Systems.” [121] The reference to Telecom Australia in condition (d) is curious. That organisation had not been given a modem to evaluate. On the evidence there was no likelihood that it would “endorse” the System. As the year wore on NEC became an unlikely prospect. The interface was still not complete and NEC was dissatisfied with its evaluation. Realistically, if there was going to be an endorsement, it had to come from New Zealand Telecom. Its attitude was crucial to the plaintiff. [122] I referred above to Mr Gillmore’s fax of 22 February.32 Within 24 hours of that fax, and probably as a result of it, arrangements were in place for Mr Gillmore to visit Queensland. The primary purpose of the visit was a meeting with the Darts. The visit took place on 2-5 March. Mr Gillmore prepared and sent to Evtech in advance an elaborate agenda for the meeting. Effectively, the agenda proposed discussing in detail the development of a business plan for Evtech and it seems that that is what occurred. The plaintiff paid Mr Gillmore’s fare for this visit. 32 Para [104]. -- 45 of 267 -- 38 [123] On 19 March Mr Cunningham of McCullough Robertson strongly advised the plaintiff in writing to include a “due diligence” clause in the agreement and to carry out a due diligence procedure as soon as possible. Three days later, Bryan Dart and Mr Campbell told him there was no need for this because: “● Steve Cole has been looking after the accounts and is keeping creditors at bay; • They are relying on New Zealand Telecom for technology advice; • They are pretty au fait with most aspects of the company.” 33 The licence agreement [124] Condition (c) of the deed referred to “the Licence Agreement”. That term was defined, opaquely, to mean an agreement between the named parties “whereby [Evtech] has been granted a licence to use certain technology”. That technology was not defined. To understand the condition it is necessary to go back a little in time. [125] I have already described how Evtech proposed to enter into a joint venture arrangement with IMS and Mr Morgan.34 In late 1992 this remained only a proposal. However the Darts insisted on the need for a formal agreement. They were rigidly opposed to becoming involved in a venture where they had less than 50 percent control and, therefore, preferred to buy out IMS rather than enter into a joint venture. There is some evidence that despite the agreement to form a joint venture company, Andrew Coventry was not averse to the idea of reducing IMS to a mere supplier: that would have been the effect of the draft agreement a copy of which was part of the bound document G2. During December 1992 and into January 1993, there was a cooling of relations between Evtech and IMS. The solicitors for IMS, Steindls, produced a draft joint venture agreement, but it is not clear when. It was certainly in existence by late January, when Mr Quinn collected a copy from Steindls.35 [126] IMS had become concerned about the patent for which it understood Evtech had applied in mid-1992. Mr Poulsen’s agreement in November to brief IMS on this subject was not honoured and he was transferred out of Evtech before the end of 1992. IMS again sought information about the patent application by a letter to Mr Quinn from Steindls on 1 February 1993, a day or two after Mr Quinn had collected the copy agreement. Delivery of the letter was delayed and in the meantime Mr Quinn and Bryan Dart consulted Mr Cunningham of McCullough Robertson regarding the joint venture agreement which Mr Quinn had collected. It is evident from the latter’s letter of advice of 2 February that all three held the belief that the patent application applied in part to the modem. That belief was apparently inspired by Andrew Coventry through several documents which he wrote, and may have been reinforced by the title on the specification for application PL3381 (“Computer/Telephone Interface Apparatus”). The true position seems to have been 33 See paras [598] ff. 34 Para [50]. 35 The Darts had provided a draft joint venture agreement to McCullough Robertson in early January, but that appears to have been drafted by Mr Quinn’s solicitors, Goodfellow and Scott. Mr Cunningham provided a critique of it which made it sound unattractive, and nothing further came of it. It is in evidence as part of exhibit 8, viz scan 47.awd. Exhibit 158 is a copy of the Steindls draft, misidentified by Mr Cunningham. -- 46 of 267 -- 39 explained in a conversation between Bryan Dart, Andrew Coventry and Mr Cunningham on 10 February. [127] Andrew Coventry denied that this conversation occurred. I have no hesitation in preferring the evidence of Mr Cunningham. Mr Cunningham was a careful witness who had made a note at the time. He had no motive to fabricate his note, nor was it suggested that he had done so. Indeed, his evidence was not challenged in cross- examination by either defendant. He was undoubtedly honest. Although some of his oral answers were occasionally confused in relation to the identification of documents, the inaccuracies were due to unfamiliarity with the file after a long period of time and to the fact that he was not given part of the file until very late in his evidence. I refer elsewhere to the credibility of Andrew Coventry.36 [128] Andrew Coventry said that one of the directors of IMS, Mr Burgess, was “very upset with me because I hadn’t brought Charter Pacific into the joint venture, rather I brought it into Evtech.” The plaintiff did not challenge this answer; rather, it relied upon it. Accepting its correctness, it shows another source of conflict between IMS and Evtech at this time. In this environment Bryan Dart asked Mr Quinn in early February to approach the directors of IMS with a view to buying them out of the proposed joint venture. Unlike Andrew Coventry, Mr Quinn was on reasonable terms with those directors. Mr Quinn negotiated with Mr Fitzpatrick, one of the directors, but was unable to reach satisfactory terms. IMS demanded too much. On 15 February, Bryan Dart told Mr Cunningham that it looked as though they would have to proceed with the joint venture arrangement. [129] What happened next must be inferred. It is probable that either Mr Quinn or Andrew Coventry spoke to one of the IMS directors about the need for a financial contribution and was told, in effect, to get the plaintiff to fund both parties to the joint venture. On 16 February Andrew Coventry told Bryan Dart of IMS’s unwillingness to provide financial support for the project. The following letter from Bundaway (by Bryan Dart) to Evtech (Andrew Coventry) was the result: “Following my discussion with you today, and in light of the difficulties you are experiencing with I.M.S. regarding Cell-U-Com and possible future problems with the ownership of the patent of Cell-U-Com we advise, that until you resolve these matters we are not prepared to continue further support to Evtech either financially or otherwise. Andrew, I might just remind you that when you approached us to invest in Evtech you represented that I.M.S. and yourselves were forming a Joint Venture to commercialise the Cell-U-Com product. Our original deal was to buy a 50% share in Evtech Pty Ltd which had a 50/50 Joint Venture with I.M.S. to commercialise the Cell-U- Com technology. We believed that we would only be required, at worst, to provide a maximum of 25% of the costs of the Joint Venture for a 25% share of the profits, which is the basis on which we provided our financial support to you. However the deal has now changed considerably from this agreement and unfortunately we do not have sufficient confidence in the product, especially after the fiasco that Russ Morgan provided for the NEC meeting, to proceed further. 36 Para [702]. -- 47 of 267 -- 40 It appears from your comments that I.M.S. will not be providing any further financial support for this project and that you have real problems ahead. I make the point that we do not particularly want to become a part of any legal proceedings between Evtech and I.M.S. If I.M.S. has the confidence in the product, my advice to you, for what it is worth, is to let them buy you out under the same terms and conditions as they propose. This will solve all your current financial problems and enable you to repay us our investment. Please also arrange for the immediate return to us of the NEC mobile phone, Note Star laptop computer and the IBM printer.” Andrew Coventry denied receiving that letter. [130] It will be noted that that letter did not irrevocably sever the relationship between the plaintiff and Evtech. I am satisfied that to some extent, Bryan Dart was being disingenuous. He had never believed that the plaintiff would only be required to fund 25 percent of the joint venture - he knew the state of Evtech’s finances perfectly well. I am satisfied that he wrote the letter in order to put pressure upon the Evtech directors and perhaps, through them, upon IMS. However I do not think he was simply bluffing. He was genuinely concerned about the implications of the letter from Steindls relating to the Evtech patent; and he needed to break down the IMS bargaining position. He was also quite aware of the failure of the demonstration of the product to Mr Frank of NEC and of the alleged deficiencies of Mr Morgan’s conduct at that time and had serious doubts about whether the product was any good. [131] After 16 February Mr Quinn conducted negotiations with the directors of IMS on the basis that Evtech would be given a licence to sell the modem and associated equipment for consideration which would include a lump sum payment. By 18 February he had reached agreement with them. The agreement provided for Evtech to pay IMS $150,000 within seven days of Telecom New Zealand’s approving the product; a further $100,000 within seven days of receipt of payment for an order of 100 units from Telecom New Zealand; and for royalties on units after the first 100. The plaintiff then produced a schedule of actions required to implement its purchase of shares. It contained a wildly optimistic timetable. It demonstrates the plaintiff’s commitment by that time to this licence and its intention to approach the Evtech shareholders to accept options in lieu of shares. McCullough Robertson were instructed to draft a licence agreement on 22 and 24 February. The process had not been completed when the First Deed was executed on 24 March, hence the condition precedent referred to earlier.37 It was however ready for execution on 13 April and on that day, Mr Quinn signed it on behalf of Evtech. [132] It was the plaintiff’s case that he did so on the authority of a resolution of directors of Evtech passed on that day. Mr Quinn signed what the plaintiff claimed were the minutes of the meeting of directors at which the resolution was passed. The plaintiff’s case was that Andrew Coventry had received the letter of 16 February. Following its receipt he became concerned that the deal with the plaintiff would fall 37 Para [120]. -- 48 of 267 -- 41 through. He therefore wrote a document38 setting out how to approach IMS with a view to satisfying the plaintiff and retaining the cooperation of IMS. Thereafter Mr Quinn negotiated with IMS starting on that basis and succeeded in obtaining agreement in a form which ultimately became the licence agreement executed on 13 April. The Coventrys were perfectly well aware of this and participated in the meeting at which it was resolved to enter into the agreement. [133] The defendants’ case was that they knew nothing of the agreement; that no such meeting was held, nor resolution passed; that Mr Quinn’s execution of the agreement (if it occurred) was not only unauthorised but was also a breach of the shareholders’ agreement; and that they did not become aware of the liability under the agreement until much later. They submitted that the plaintiff demanded a licence agreement rather than a joint venture agreement (presumably for control), but did not tell them because it knew Andrew Coventry would have opposed the expenditure which was unbudgeted. They argued that Andrew Coventry was not aware of Mr Quinn’s negotiations and that the document which he admittedly wrote39 had been written in late 1992, after the Bundaway Agreement was signed, because the Darts told Andrew Coventry that they wanted a formal agreement with IMS. It was intended as a “reasonable proposal” to put to IMS. Somewhat inconsistently, they also submitted that they always knew there would be a free licence in the context of the joint venture agreement; and that a licence was unnecessary because the IMS modem was not irreplaceable. [134] The parties devoted a great deal of time and trouble to this issue. Its relevance to the plaintiff was to establish that the amount charged by McCullough Robertson for preparing the agreement was properly claimable as part of its damages. Its relevance to the Coventrys was that it showed that the Darts “dominated and directed Evtech right from the time of the Bundaway Deed, and that they spent money and blew budgets as they pleased.” This, they submitted, negated causation of damage. As the trial evolved, the issue gained a central importance in the assessment of credibility. If the Coventrys’ contention were right, Mr Quinn had acted in breach of his director’s duties and Mr Cole and probably the Darts committed fraud and subsequently perjury. If the plaintiff’s contention were right, the Coventrys (or at least Andrew Coventry) were probably perjuring themselves. The licence agreement: credibility [135] I referred above to the letter from Steindls to Mr Quinn of 1 February 1993.40 Andrew Coventry denied any knowledge of that letter. He also denied knowledge of any concern on the part of IMS about the Evtech patent application, though he conceded the question had been raised by Mr Burgess at some time prior to the Darts’ involvement. Consistently with this evidence, he denied participation in the telephone conversation of 10 February 1993, a note of which was recorded by Mr Cunningham.41 As I have already said, I reject his evidence on this point.42 [136] Andrew Coventry also denied knowledge of Mr Quinn’s negotiations with IMS and, indeed, of any difficulty with IMS. His evidence (in his prepared statement) was: 38 A copy of which became exhibit 219. 39 Exhibit 219 40 Para [126]. 41 Exhibit 201. 42 Para [127]. -- 49 of 267 -- 42 “Everything seemed to be going well. The Darts were happy and Bundaway payed [sic] the wages to Steve and I think a few pressing bills. We were all waiting for Telecom NZ to give us approval for the device to be connected to their telephone system: then we could place an order with IMS to supply Bob Chambers and Telecom NZ with the modems and power supplies, this would give us the feed back so marketing could begin in earnest.” Such ignorance was, however, inconsistent with his having participated in the telephone conversation of 10 February. Mr Cunningham’s evidence of the conversation adopted his file note: “Bryan then said that Quinn was negotiating with the IMS representatives to buy them out of the proposed joint venture. It was agreed that they would try and determine a price for that, and once that issue had been settled Tom would then tell the IMS representatives that given the circumstances there was never any intention nor could there be any assumption made that IMS would have any part of the patent application. They will get back in touch with me in due course, but in the meantime I can expect a copy of Andrew Coventry’s statement.” I am satisfied that Andrew Coventry was fully aware of the difficulties with IMS and of Mr Quinn’s negotiations with the directors of that company. [137] Mr Quinn insisted that he kept Andrew Coventry fully informed of what he was doing at all times. The Coventrys denied this, hinting that Mr Quinn may have had his own motives for keeping them in the dark. It is true that Mr Quinn’s evidence was at times given with an unconvincing level of generality. However his attitude was sympathetic to the Coventrys. I am satisfied that his evidence on this point was sincere and not an attempt to save face. It is likely that Mr Quinn did not show Andrew Coventry draft documents, but that is because, as Andrew admitted himself, he had (and still has) difficulty in reading and understanding complex documents. I am satisfied that Mr Quinn kept Andrew Coventry informed, at least in general terms, of the substance of his negotiations with IMS. [138] Andrew Coventry’s concept of the joint venture was founded on the notion of equal participation by the two joint venturers. He realised that the expenses of the project would have to be borne equally by them. Initially, this was also the view of IMS, reflected in the draft joint venture agreement prepared on IMS’s instructions by Steindls.43 However IMS did not maintain that attitude after its directors heard about the plaintiff. I am satisfied that by 16 February, Andrew Coventry knew that IMS was refusing to provide further financial support for the project. I draw that conclusion from Bryan Dart’s letter of 16 February. Andrew Coventry could not remember telling this to Bryan Dart and claimed that it was not his belief at the time. Bryan Dart was not directly asked about the point. Mr Quinn could not recall the issues raised in the third paragraph of the letter, but believed that it would have been his thinking at the time that the relationship with IMS was at risk. He thought that IMS was not willing to sign the joint venture agreement. Whether IMS was simply trying to get its hands on some of the plaintiff’s money is beside the point. 43 There was no evidence as to whether IMS ever had the capacity to do this. -- 50 of 267 -- 43 [139] Exhibit 219 is a copy of a document originally written by Andrew Coventry: so much is common ground between the parties. It was raised and tendered by the defence. What became of the original does not appear from the evidence. The exhibit was discovered by the plaintiff, but how it came to be among the plaintiff’s documents was not explained. Andrew Coventry said that he did not write the date which appears before the question mark at the head of the document and it seems probable that this and the other hand written annotations were added during the litigation process. The first line of page 3 has apparently been omitted due to a copying error. [140] The plaintiff submitted that the document was created after Andrew Coventry received Bryan Dart’s letter in February 1993. It argued that Andrew Coventry’s purpose was to re-establish the relationship with IMS and thereby to prevent the collapse of the deal with the plaintiff. [141] The defendants’ position in relation to the document varied at different stages of the trial. On the seventh day, their case was put to Bryan Dart this way: “I suggest that Andrew Coventry also delivered to you at the end of 1992 certain suggestions and notes regarding the nature of the relationship with IMS. That’s scan 126. Do you recall receiving that document?-- I can’t recall seeing that document, no. Do you agree it’s possible that that document could have been brought to you during late November or December 1992?-- It is possible, but I do not recall it coming to our office. MR SPAIN: I put it to you this was a list of suggestions that Andrew Coventry gave to you to update you on his proposals for formulation of the IMS/Evtech relationship, that he gave those to you in November 1992 pursuant to your request?-- I can’t recall that. So you don’t recognise the document at all, so it should just be marked for identification at this time. But if you have a look at page 2, you see there there’s $150,000 to be paid up front, but subject to a New Zealand order, and $100,000 within 30 days of delivery of units from IMS to fill an order of 100 units. There’s no mention at that point of any licence fee.” The context of those passages shows that the point which the cross examiner sought to establish was that the Darts were “driving the desire” for a formal licence agreement rather than a joint venture agreement. [142] On the 79th day of the trial, Kevin Dart was cross-examined on the document. He had no recollection of it. In this context he was asked: “Do you remember that Mr Coventry explained to you - do you remember if Mr Coventry explained to you – I’ll rephrase it. I put it to you that Mr Coventry explained to you that the parts had to be paid for, a percentage of them, paid for in 5,000 order lots?-- No, I don’t recall that. I put it to you that the figure of $150,000 and then the figures 150,000 and $100,000 were mentioned to assist IMS to be able to fund an order for parts for 5,000 units?-- I don’t recall that.” -- 51 of 267 -- 44 By this stage, the defendants were not legally represented. I would therefore not readily draw inferences from omissions in this cross-examination. What is more interesting is that these allegations were not put to Bryan Dart. [143] A substantial part of Andrew Coventry’s evidence in chief was given in the form of a prepared statement tendered on the 97th day of the trial.44 Paragraph 92 dealt with the point presently under consideration: “I was asked by Bryan and Kevin to work out a plan to secure the ownership of the technology for the purpose of the 10% for 1 million buy in of Evtech for the Hong Kong investors. I think it was Kevin who said we would have to own the modem technology as well, so I put together a plan to get the ownership, for $250,000 which allowed IMS to get a royalty broken into two levels, reducing once we achieved a certain sales level. They were still locked into future development to maintain that royalty, at the same time it allowed them to buy the first 5000 units electronic components and associated parts, because in those days a minimum run to secure electronic parts at manufacturing prices, was a 6 months order of no less than 5000 units.” He enlarged on that paragraph in his evidence in chief: “This, as I said in my statement, was something that Bryan and Kevin asked me to put together, some way of securing the ownership of the technology that belonged to IMS. They explained that their investors were happy to put the money in that we wanted or we’d suggested before, and possibly a little bit more, which was 10 per cent of the company, but we wouldn’t be able to do that unless we secured the technology from IMS. I was asked to put my thinking cap on and put together what I thought was the best way to approach the situation. That is what this letter was, my thoughts on how to approach IMS, but still maintain them in the circle, because when you have an inventor and he invents something and he’s got at it and it’s technology that has to be continually updated to keep up with the marketplace, you don’t want to pay someone for something and then just get them to walk off. You need to be able to allow them to make something continually and still be locked in to providing updated technology and their expertise in other areas that may pop in. So that was basically what I tried to do with this situation. But I also at the same time was - in the second page on the second main paragraph it says, ‘I, therefore, propose the following amounts’, and ‘150,000 upfront subject to the New Zealand order’ – ‘subject to the New Zealand order’. So, in other words, no-one was paid until that happened. … So I put together the way that I would go about securing the rights to this product, allowing IMS money upfront, which was easily paid for if they were going to give us the sort of money that they were going to come in, which allowed IMS to not have to go into danger of - for ordering parts and so forth to produce them because that’s as big a worry as any, placing an order on a company for products for anything that they don’t have the funds to finance it. But it’s all still 44 Exhibit 214. -- 52 of 267 -- 45 tied to the New Zealand orders and the deliveries. So, that’s the basic concept of how I saw of doing it and still keeping them involved with it. Yep. Anyway, that was the way that I saw of doing it.” [144] I shall not set out the extensive cross-examination of Andrew Coventry on this point. His answers were discursive, evasive and contradictory. They exposed a number of major difficulties in his evidence. [145] First, there was no explanation of why he would have written the last paragraph of exhibit 219 in November or December 1992. On the other hand, that paragraph does have a context in February 1993. [146] Second, there was no satisfactory explanation of why the passage “as we all realise a joint venture may not be the best scenario for all and to prevent the possibility of problems a sale of the intellectual property to Evtech is probably more sensible” would have been written in November or December 1992 when, as he said in his evidence in chief, “We were going to form a joint venture. We were going to put our technology in. They were going to put their technology in. We’d own half. They’d own half. Which meant that the patents would have to cover those things in there. That was a discussion that we’d had.” [147] Third, the words “plus it may cause our investors to pull out which I believe will kill the project before we got started” are explained by Bryan Dart’s letter of 16 February, whereas there is nothing in the evidence to suggest a basis for them in November or December 1992. [148] Fourth, Bryan Dart was cross-examined to the effect that the Darts were demanding a formalisation of the Evtech-IMS relationship as that of licensor-licensee, not on the basis that Evtech was to own technology to facilitate the introduction of Hong Kong investors as Andrew Coventry’s statement claimed. Andrew Coventry was unable to explain this. [149] Fifth, both drafts of the joint venture agreement which were put into evidence contemplated that the joint venturers would contribute their respective intellectual property at cost only and would share the expenses of the venture equally. This is inconsistent with the scale of payments proposed in exhibit 219, which suggests that the exhibit was created after IMS refused to contribute to the joint venture. It is also inconsistent with Andrew Coventry’s evidence of the need to provide cash royalties to IMS to enable manufacturing to proceed. [150] Finally, Bryan Dart’s letter of 4 November 1992 and the minutes of a meeting of directors of Bundaway on 3 December 1992 show that the Darts were anxious to obtain details of the joint venture with IMS; there is no suggestion that they wished to change the nature of the relationship in those documents. [151] In my judgment the evidence strongly favours the view that Andrew Coventry wrote exhibit 219 in February 1993. He wrote it for use in negotiations with IMS, with a view to assisting Mr Quinn to persuade IMS to sell its interest in the modem to Evtech. He was fully aware of those negotiations and of the difficulties that arose when IMS demanded a ridiculous price and refused to contribute to the joint venture. These difficulties included the risk the plaintiff would withdraw from the deal, an outcome that would have been catastrophic for Evtech. Probably he wrote -- 53 of 267 -- 46 it after he received Bryan Dart’s letter of 16 February. His evidence to the contrary of these findings was not the result of mistake; it was fabricated. [152] The licence agreement itself was made between IMS, Glenorn Holdings Pty Ltd (Mr Morgan’s company) and Evtech. It was drafted by McCullough Robertson. It was dated 13 April 1993 by Mr Cunningham. By it, IMS granted Evtech a sole, exclusive and transferable licence to exploit the modem during its commercial life. As consideration Evtech agreed to pay IMS $150,000 within 14 days after receipt of a New Zealand Telecom Permit to Connect to the New Zealand PSTN; a further $100,000 within 14 days after delivery of at least 100 units provided the order was received within 30 days of the Permit to Connect; and subsequent royalties which it is unnecessary to detail. Mr Morgan’s future cooperation was assured and IMS was obliged to supply the first 1000 units of the product upon request. Evtech was not obliged to procure them from IMS. The whole agreement was conditional on receipt of the Permit to Connect within 4 months and upon the plaintiff completing the First Deed. It was executed as an agreement by Mr Morgan, Mr Burgess on behalf of IMS, and Mr Quinn on behalf of Evtech. Mr Quinn was the last to execute it; he did so at about 12.45pm on 13 April. [153] I have summarised the defendants’ case regarding its execution above45 , but it is helpful to observe how that case was put to Bryan Dart, the first relevant witness for the plaintiff: “I suggest that you were quite aware that Andrew Coventry and Michael Coventry didn’t know of these activities being arranged - negotiations with IMS and instructions to McCullough Robertson to prepare a licence agreement?-- I totally disagree with that. You knew that Andrew and Michael Coventry were quite unaware of these arrangements?-- I totally disagree with that. And you were persuading or obtaining the cooperation of Tom Quinn, if at all, in these arrangements with the knowledge that Michael and Andrew Coventry were in the dark about it?-- I totally disagree with that. And you were doing that because you believed Charter would be more secure having an exclusive licence than trusting in a joint venture situation?-- Disagree with that. And that you embarked on this frolic of your own, arranging a licence, knowing you were encouraging Tom Quinn to breach the shareholders’ agreement requiring exclusivity or unanimity of directors’ agreement?-- I totally disagree with that. And that you never raised this issue with Andrew Coventry or Michael Coventry?-- I totally disagree that it wasn’t raised with Andrew Coventry. I can’t recall what discussions I had, if any, with Michael Coventry. But certainly with Andrew Coventry, it was. 45 Para [133]. -- 54 of 267 -- 47 And that you did not raise it with Andrew Coventry precisely because you knew he wanted a trusting joint venture arrangement, not a formal exclusive licence situation?-- I totally disagree with that. And that, having arranged this licence agreement secretly, in conscious breach of the shareholders’ agreement, you then caused the sum of $150,000 to be paid for this licence knowing that the other directors of Evtech, or at least the Coventries, were quite unaware that you were getting Tom Quinn to sign a cheque in that sum?-- I totally disagree with that. And that you knew that, in expending that large sum of money, $150,000, you were totally blowing the budget as regards $400,000 that Andrew Coventry presented to you in the blue book?-- I disagree with that. But, nevertheless, you went ahead and did it ruthlessly because you thought it was in the best interests of Charter to have that exclusive licence?-- I disagree with that. We didn’t – Andrew Coventry was aware, along with Tom Quinn, continually on that.” [154] There are some obvious difficulties with this version. First, the First Deed itself contained a condition precedent for the making of a licence agreement. Second, as I have found, Andrew Coventry knew of IMS’s refusal to provide funds for a joint venture agreement and of Mr Quinn’s negotiations with IMS. Third, there is a remarkable similarity, although not an identity, between the payments proposed by Andrew Coventry to buy out IMS and the payments provided for in the licence agreement. [155] The version of events upon which the plaintiff relied was given by Mr Cole. He witnessed Mr Quinn’s signature at the plaintiff’s office. He said that the licence agreement was a very important document for the plaintiff and that he was anxious to have the i’s dotted and the t’s crossed. He said that copies of the licence agreement had been faxed to the Coventrys and that during a telephone hook up, they approved its execution by Mr Quinn. He prepared a minute to reflect that agreement and faxed it to the Coventrys. The minute records their acknowledgment of possession of a copy of the agreement as well as their authorisation of Mr Quinn to execute it. Subsequently, Mr Quinn signed the minute as chairman. [156] Mr Quinn, who was called by the Coventrys, supported that version in cross- examination. He said he kept the Coventrys well informed of his negotiations, which were authorised by everyone involved. However he had little memory of the actual events of 13 April. He insisted that what occurred was reflected in the minute which he signed on that day. [157] The Coventrys submitted that the “whole IMS License thing was arranged secretly by the Darts during their process of hijacking Evtech”, and “that these minutes were a CPC construct, signed by TWQ as their stooge, not a genuine Evtech decision”. They pointed to the oddity of a meeting of Evtech directors at the Charter Pacific office, with Mr Cole preparing the minutes. They submitted that it was improbable the directors of Evtech would have undertaken such a liability when there was no provision for it in the Evtech budget. They contended that Mr Cole was not only -- 55 of 267 -- 48 giving false evidence about the events of the day, but also that at the behest of the Darts, he had at the time participated in a sham the purpose of which was to render Evtech financially unstable, so that the Darts could ultimately take complete control of it. Mr Quinn was characterised as a dupe who unknowingly signed the false minute when it was subsequently included in a bundle of documents given to him for signature. The foundation for this theory seems to have been the presence of indented impressions of Mr Quinn’s signature on the original minute, impressions which in their submission were unexplained, but which suggest he was signing a multiplicity of documents at the time he signed the minute. [158] Andrew Coventry gave evidence of his movements on 13 April which, if accepted, was inconsistent with his having participated in the minuted meeting. His explanation of how he thought Evtech was going to comply with the condition precedent in the First Deed was confused. At times he seemed to concede that he was aware of the need for a licence agreement: “There is no argument that we agreed and acknowledged that there had to be a licence agreement for the deal to go ahead. I was always in the belief that it followed very closely ours, but needed tightening up and I do remember Tom ringing us and saying, ‘Look, the licence agreement’s all done. It is tidied up now, everything is kosher. Everyone is happy.’ We said, ‘Yes. Let’s get it signed and get this thing on the road.’” I am satisfied that he was indifferent to the legal nature of the agreement and that this indifference and his acknowledged difficulty in reading documents caused him to ignore the material faxed to him. [159] Michael Coventry also denied knowledge of the alleged telephone meeting. He said that he did not receive a copy of the unsigned agreement by fax and did not participate in a telephone meeting of directors. The plaintiff led evidence from Telstra’s records, however, which was consistent with Mr Cole’s evidence and for which Michael Coventry had no satisfactory explanation. [160] I do not believe the Coventrys’ version. I found the evidence of each of them on this point evasive and confused. I think it was deliberately so. I reject the conspiracy theory which they advanced in relation to Mr Cole. I did not assess him as a person committing perjury. His evidence was supported by that of Mr Quinn and despite Mr Quinn’s numerous uncertainties, he did not appear to me likely to have been a “stooge”. The Coventrys have failed to explain the obvious difficulties referred to above46 with one possible exception. I find that Andrew Coventry fabricated his evidence about lack of knowledge of the licence agreement, non- receipt of a copy of the agreement and non-participation in the directors’ meeting which resolved to authorise Mr Quinn to sign it. [161] The possible exception is this. I make no finding as to whether Andrew Coventry realised that the deal negotiated by Mr Quinn and embodied in the licence agreement made the initial payment contingent upon receipt of a Telecom New Zealand Permit to Connect rather than receipt of an order for 100 units. Unless one of those involved had specifically drawn his attention to this difference from what he had proposed in exhibit 219, he may not have realised its presence. Certainly, it was this feature of the licence agreement which seemed to anger him most. 46 Para [154]. -- 56 of 267 -- 49 [162] It is interesting to observe that the net effect of the licence agreement was to give IMS $150,000 of the $400,000 advanced to Evtech by the plaintiff. 6. THE REPRESENTATIONS [163] Numerous meetings occurred between Andrew Coventry and Mr Quinn, on the one hand and Bryan and Kevin Dart, with or without Mr Cole on the other, from November 1992 up to 24 March 1993, when the plaintiff entered into the First Deed with Evtech, Mr Quinn and the Coventrys. The plaintiff claims that in those meetings and in a number of documents given to it or to the Darts on its behalf, a large number of misrepresentations were made either by Andrew Coventry or by Mr Quinn in Andrew Coventry’s presence. The third and fourth defendants admit that Andrew Coventry acted as their agent and with their authority. [164] Not surprisingly, when the matter came on for trial, the parties’ recollections of the meetings were clouded. There was a long delay between the issue of the writ and the trial. During this time, a considerable number of the plaintiff’s documents and computerised records disappeared or were destroyed.47 None of the participants made contemporaneous notes of their conversations. Intense animosity existed between the Coventrys and the Darts. This animosity extended on the Coventrys’ part to Mr Cole. Whether he reciprocated is difficult to say, for usually he concealed his emotions well; but he would have been less than human had he not felt some resentment toward the Coventrys. For these and other reasons given below, 48 I have various reservations about the accounts given from the witness box by the participants in these conversations. [165] Notwithstanding the multitude of misrepresentations alleged, the plaintiff did not particularise the making of the representations individually. It gave “wrapped up” particulars in respect of all representations, without distinguishing between express or implied representations or oral or written representations. It thereby forfeited the opportunity to give its allegations the cloak of verisimilitude in its initial pleading. The particulars which it gave were as follows: “The representations were made in, or are to be inferred from: (i) statements by the second and fifth defendants, on behalf of the first, third and fourth defendants, to Kevin and Bryan Dart and Steven Cole at numerous meetings held between about October 1992 and March 1993; (ii) written documents entitled ‘Evtech – Company information – 7th October 1992’, ‘Evtech – Cell-U-Comm Mobile Modem – Product Overview’, ‘Evtech – Electrocomm Product Overview’ and other documents about Evtech’s products which were handed to Steven Cole, Kevin Dart and 47 I found the plaintiff’s attempted explanations of its failure to preserve obviously essential records highly unsatisfactory. It meant that a significant amount of evidence on its behalf, particularly that of Mr Cole, was unable to be verified. This has operated to the plaintiff's advantage. 48 Paras [698] ff. -- 57 of 267 -- 50 Bryan Dart between about October and December 1992; (iii) a letter from the male third defendant to the plaintiff dated 4 February 1993; (iv) a letter from the second defendant to the plaintiff dated 24 May 1993; (v) a heads of agreement document made between Bundaway Pty Ltd. and the first, third and fourth defendants made on or about 10 December 1992; (vi) the Deed49 .” The oral evidence of the plaintiff’s witnesses regarding the conversations often displayed a similar lack of persuasive particularity.50 [166] These considerations make it important that I examine the evidence closely, by reference to the precise terms of the representations pleaded. The similarity which exists among a number of the representations relied on means that the evidence must be examined to ensure that it supports a particular allegation with precision. The onus lies on the plaintiff to prove that a representation was made. It cannot rely upon unpleaded representations raised by witnesses in oral evidence. On the other hand, it is unnecessary for me to dissect the various conversations in all the detail with which they were recounted. Partly this is because there is no dispute as to the making of a number of the representations. Partly it is because a number of the representations were made in writing. Partly it is because a number of the contentions advanced about the conversations were no more than petty squabbles, the resolution of which would not assist the disposition of this case. Partly it is because in final submissions, the plaintiff did not rely upon all of the misrepresentations pleaded. I shall direct my attention to the outstanding issues, doing so under headings constituted by the various alleged misrepresentations, more or less in the order in which Mr O’Donnell QC dealt with them. 6(o) The software possessed a capability, referred to as the “Bulldog effect”, which filtered noise from signals and thereby assisted in making the Electrocomm software a very substantial advance in communications software; 6(p) the Electrocomm software was unique in that it had been designed to withstand the “drop outs” and “noisy lines” commonly associated with cellular and other radio communications systems; 6(q) the System contained patented data correction features; 6(r) the Electrocomm software contained an inbuilt data “dictionary” module, which constantly checked and compared all information passing through the mobile phone/computer link. The module retained all valid data while “throwing out the garbage” [167] The defendants admitted making these representations. 49 Dated 24 March 1993. 50 Compare Watson v Foxman (2000) 49 NSWLR 315 at pp 318-319, quoted in para [797]. -- 58 of 267 -- 51 6(n) the System possessed a capability, referred to as the “Bulldog effect”, which prevented a disconnection or “dropout” from the PSTN or cellular network at times when the signal strength was poor or interrupted [168] The defendants denied making this representation. [169] Bryan Dart referred on several occasions to Andrew Coventry’s statements about the Bulldog effect. His evidence shows that he was very confused about precisely what Andrew Coventry said the Bulldog effect did. There is, however, a common theme to his evidence of the various occasions. His understanding was that the Bulldog effect enabled the System to counter noise in an incoming signal by waiting until the noise ceased and then continuing the transmission. On one occasion Bryan Dart claimed that the representation related the Bulldog effect to calls from the cellular network to the PSTN.51 On that occasion he described the problem being overcome as “interference”, but his later evidence makes it plain that he was referring to noise, not to interference in the technical sense used by Mr Boucher. Shortly afterwards, he thought the representation was that the capacity of the System to hold the connection through noise and then continue to pass on the information it was sending was due not only to the software, but also to the modem itself.52 A little later still, he thought that the discussion was that error correction protocols were part of the Bulldog effect. In particular he thought the combination of the software and MNP10 was said by Andrew Coventry to have created the Bulldog effect and the clearing of rubbish in the connection.53 A few minutes later he said: “I was told by Andrew Coventry and Russ Morgan that the modem did in fact contain MNP10, and that was explained to me in the early meetings, which gets back to my understanding of the MNP10 and the software combined creating this Bulldog effect that sort of kept the connections with the cellular network. When there was rubbish on the cellular network, it would sort of hold the connection until that clear so it could continue to transmit information.”54 Reading Bryan Dart’s various versions in context and bearing in mind that he said that he “didn’t fully understand” the discussion at the first couple of meetings, it is clear that Bryan Dart did not relate the Bulldog effect to times when the signal strength was poor or interrupted, but rather to times when there was noise on the connection. The two were not the same. Bryan Dart did not specifically give evidence of the making of the representation pleaded, and I cannot spell that representation out of his evidence. [170] The only direct evidence in support of the making of this representation was given by Kevin Dart. He said that Andrew Coventry stated orally that “the Bulldog effect would maintain the signal, would hold the signal, and it wouldn’t be disconnected.” His evidence on this point, like much of his evidence, was inclined to be dogmatic. He did not seem to have thought about the representations in any detail. He was not in my judgment likely to have listened with sufficient care to be able reliably to support the terms of a representation with the precision with which it was pleaded. Given that neither Bryan Dart nor Mr Cole referred to a representation in these 51 Transcript 276. 52 Transcript 286. 53 Transcript 288. 54 Transcript 303. -- 59 of 267 -- 52 terms, it is quite possible Kevin Dart has rationalised the wording after the event, influenced perhaps by the word “Bulldog”. [171] It is true that Andrew Coventry, in answer to an interrogatory, admitted that he described the Bulldog effect as enabling retention of cellular signals despite switching from one cell or relay station to another. However that is a significantly different proposition from the one pleaded. Switching from one cell to another does not result in disconnection. [172] I am not satisfied that this representation was made. 6(s) The Electrocomm software contained a proprietary software module which was designed to “re-try and re-send”, thereby retaining the integrity of all data sent and received through the system. The effect of this module was to ensure that data would be sent and received over the cellular system at the same error free level that users would expect through a standard telephone connection. [173] The defendants admitted making this representation. 6(m) The Electrocomm software had been designed as a “shelf purchase” product. [174] The defendants admitted making this representation. 6(k) The development of the system was complete, it had been exhaustively researched and field tested, the system was now “proven” and was ready to market. [175] The defendants denied making this representation, or, more accurately, these four representations, but said nothing on this issue in their final submissions. [176] It seems clear that at some time or times during November 1992, the Darts and Mr Cole were given copies of two bound booklets. One was entitled “Corporate Profile” and was the company profile prepared in April that year.55 The other was entitled “Company Information” and was dated 7 October 1992, although Michael Coventry thought that some of its contents were prepared after that date.56 These booklets were collections of brochures bound together. The Darts and Mr Cole thought that both booklets were handed over by Andrew Coventry at the same time in one of the early meetings. Andrew Coventry disputed this, but accepted that he had given all the information contained in the booklets to the Darts at the meetings and seemed also to accept that the booklets were given to the Darts by someone, probably Mr Poulsen on Andrew Coventry’s behalf, about this time. He must therefore bear responsibility for any misrepresentation contained in the documents bound into the books. [177] It seems that Michael Coventry assembled G2, but the evidence is not explicit as to who wrote every part of it. I am satisfied that it was written either by or at the direction of Michael or Andrew Coventry. At p 149, appears the following passage: “Why Finance Now? 55 See para [43] and note 10. This booklet was referred to as “G3”. It is exhibit 2, pp 173-243. 56 This one was referred to as “G2”. It is exhibit 2, pp 142-171Z. -- 60 of 267 -- 53 An original decision made by the Directors of the Company ensured that Evtech would not seek either outside Finance or Joint Venture Partnerships before the critical stages of product development testing and completion had been passed. This decision was implemented to ensure and maintain control and ownership of the Company and its intellectual properties during these final stages.” [178] At p 160, the following passage appears in relation to the software: “Evtech has incorporated design features which have been exhaustively researched and field-tested so the user can rely on the program for effective communications sessions - on any telephone network!” Virtually the same statement appeared in G3 in relation to the software and the modem. 57 [179] In answer to an interrogatory, Andrew Coventry said that the substance of what he said on the first occasion he met the Darts was: “The Cell-U-Com system is ready to commercialise. Evtech has tested extensively and is happy to put it on the market as a thoroughly reliable and competent product.” His oral evidence on the point fluctuated, but generally conceded that at least some of the representations were made. [180] Evidence of the conversations on this point was given by a number of witnesses. I do not propose to refer to all of it. I have no doubt that the plaintiff’s allegation is correct. This representation was made. 6(j) All of the testing referred to on the page headed “Action Program & Schedule” (comprising “ex.SC2” to the affidavit of S. Cole dated 7 June 1994), which included beta testing of the system, had been carried out. The defendants denied making this representation. [181] I have already referred to Mr Chambers’ letter to Mr Poulsen in July 1992. Despite Mr Chambers’ request for confidentiality, his letter and his draft business plan were included in the bound set of documents G2. One page of the business plan, the action plan58 , constituted exhibit SC2 to the affidavit referred to above. So far as is presently relevant, that page read as follows: “ACTION PROGRAMME AND SCHEDULE It is Cellular Technologies intention to stage a planned implementation program to introduce the product into the market. In terms of timeframes, this is dependent on a number of issues, viz; • Beta Test: initial products will be available for beta testing. Information from Evtech indicates these will be available within a 2 week timeframe. 57 Exhibit 2, pp 234 and 230 respectively. 58 Exhibit 2, p 171X. -- 61 of 267 -- 54 • Of the six units for beta testing, they will be allocated as follows: 2 units to Telecom 1 unit Bob Chambers 1 unit Mike Dol – Telecom (sold) 1 unit Rick Strafford – Telecom 1 unit Wakefield Laboratory – Telepermit 1 unit demonstration/evaluation Timeline W/E 17th July: six units available from Evtech. Discussions and demonstrations with prospective resellers.” [182] Beta testing is a well-known term in the computer industry. Typically it involves the manufacturer of a product (hardware or software) providing copies of the product free of charge to a range of users for field testing prior to the commercial release of the product. The users report any defects or suggest improvements in the product and the manufacturer may act on the reports prior to releasing the product onto the market. As the passage just quoted shows, Mr Chambers’ proposal envisaged that he and the putative ultimate seller, Telecom New Zealand, would carry out the beta testing of the Evtech product. [183] In support of the claim that this representation was made, Mr Cole gave two versions in his evidence. The first was: “You mentioned there was a question about testing from the blue books?-- Yes. I can’t recall where it is offhand, but there’s a schedule of tests in the blue book and I asked them had all those tests been done and Andrew replied that yes, they had. What page are you referring to? Just take your time?—Can’t seem to locate it. Can you identify it for us? What generally does it say?-- It basically set down in a table format a range of tests that were undertaken by the Evtech staff in confirming the ability of the modem and the Cell- U-Comm item to do the things they had told us it could basically do. I asked them whether those tests had all been completed, and they said yes, they had.” 59 The second was: “MR O’DONNELL: Could you just tell us again what was the conversation about this page?-- On the page it states that there was beta testing undertaken and I’d never heard the term ‘beta testing’ until that stage. I asked them what that was and they told me that beta testing is testing done by people other than those within Evtech. It’s out in the field, field trials. So it was put in a real environment and testing it to see how it actually went rather than under laboratory type conditions. They said yes, that had been done and been done successfully.”60 59 My emphasis. 60 My emphasis. -- 62 of 267 -- 55 [184] Andrew Coventry denied that he said these things. Neither of the Darts was asked about this alleged conversation. Mr Quinn could not recall it. [185] In the affidavit referred to in the statement of claim, Mr Cole had given evidence as to the same conversation: “In response to a question by either Kevin Dart or Bryan Dart, or me, to the best of my recollection Andrew Coventry (in Tom Quinn’s presence) said that all the testing referred to on the page had been done. Furthermore, Coventry said that the activities scheduled in the document to have begun on 17 July onwards were ready to be undertaken, almost immediately.” [186] The tone of that passage is obviously less definite than that of the evidence given before me at trial by Mr Cole. The passage also reveals another difficulty. Mr Cole referred to the activities scheduled to have begun on 17 July onwards. That was the date when the six units61 were scheduled to have become available for beta testing. On its face therefore, Andrew Coventry’s alleged second statement was inconsistent with his first: the units could not have been tested if they were only about to become available for testing. [187] Mr Cole was asked at the trial about his understanding of the relationship between the beta testing and the Telecom New Zealand testing: “MR O’DONNELL: Was there a discussion as to how far the testing had gone or had got?-- They told me that that - those tests in the field were all successful and had all been done, and that’s why the unit was now in New Zealand undergoing testing by New Zealand Telecom so that they could ascertain whether or not they wanted to sell the product themselves through their own marketing organisations in New Zealand. Was ----- HIS HONOUR: So it was apparent to you that they were beta testing six units then?—That’s where I asked them about at that stage, Your Honour, I asked them whether we could have a look at one of the prototypes. They said, ‘We haven’t got any because we’ve only got six of them’, and that they were in New Zealand and with Russ Morgan doing testing and finetuning and they basically said that once the New Zealand testing had been done, which would be thorough, that it would basically endorse the product and say yes, it’s ready to market and my only thought that I carried was if any independent body is going to do a test on a prototype who better than somebody like New Zealand Telecom. So the idea was that this testing was currently going on, not completed?-- No, that the beta tests and everything had been done and that the New Zealand Telecom were undertaking their own tests of the product subsequent to the beta testing, and that they were evaluating it to see whether it was suitable for their market.” 61 Or perhaps seven units. -- 63 of 267 -- 56 [188] The difficulty with that explanation is that it fails to deal with the basic proposition in the document, that most of the beta testing was to be done by Telecom New Zealand. [189] Although Kevin Dart was not asked about p 171X (exhibit SC2), he was asked about beta testing in New Zealand. On 23 December 1992, he received a copy of the letter to Mr Quinn sent by Peter Gillmore the previous day.62 For convenience, I repeat the part of it presently relevant: “As an indication of Telecom’s interest in marketing Evtech’s mobile office portfolio in New Zealand it is our intention to purchase an initial 100 units of the Evtech Computer/Telephone interface [Cell-U-Comm]. Our order will be subject to ... Type Approval [Permit to Connect] and Electrical Supply approvals been obtained by TES and Beta trials of the product by our technical group being successful.” [190] Kevin Dart said that he did not understand the reference to beta testing, but realised that some sort of testing was still outstanding. [191] I deal elsewhere with general considerations relating to the reliability of Mr Cole’s evidence.63 It is true that a statement by Andrew Coventry to Mr Cole in the terms alleged would, as Mr O’Donnell QC submitted, “fit with the general picture” which Mr Coventry was painting. Nonetheless, having regard to my general findings64 and to the evidence just referred to, I am not satisfied that the representation alleged by Mr Cole was made. 6(t) The system was about to receive New Zealand Telecom PTC approval, being an authoritative confirmation that the system worked reliably and was ready for the market, as represented by the respondents. [192] The defendants admitted representing that the System was about to receive New Zealand Telecom PTC approval, but otherwise denied the facts alleged in that subparagraph. [193] “PTC” stood for Permit to Connect. It was a requirement of Telecom New Zealand (probably a legal requirement) that such a permit be issued in respect of each type of device connected to the New Zealand PSTN. Except in a loose sense, a vendor did not obtain a “PTC approval” for a product intended to be connected to the network; it obtained a Permit to Connect in respect of that product. If it did not do so, then presumably, very few people would buy the product. [194] The sting of this alleged misrepresentation lay not in the assertion that the System was about to receive approval, but in the statement that the pending PTC approval was authoritative confirmation of the reliability of the System and its readiness for the market. This was an important part of the plaintiff’s case, because of condition (d) in the First Deed.65 62 Para [242]. 63 Para [701]. 64 Paras [163]-[166]. 65 Para [120]. -- 64 of 267 -- 57 [195] Mr Cole’s evidence in chief on the point was concise: “They told me that New Zealand Telecom were evaluating the product to make sure that it did everything that basically they said it would do and that it was able to be used on a New Zealand network and would be suitable for sale through their outlets in New Zealand.” [196] In cross-examination he at first suggested that his contemporary understanding was that the New Zealand Telecom approval related to sales: “HIS HONOUR: You said that you understood they were testing it for their own purposes?-- Yes, your Honour. What was your understanding of what their purposes were?-- My understanding of their purposes was that should the product pass their testing procedures, they would buy the product and use it themselves or distribute through their normal outlets in New Zealand. MR SPAIN: Where did you form that understanding?-- After conversations with Tom Quinn and Andrew Coventry. And not at all as an outcome of your conversations with New Zealand Telecom?-- Confirmed by my conversations with New Zealand Telecom and also correspondence that was received at Charter’s office from Peter Gillmore.” [197] He did not know of the requirement for a Permit to Connect: “Did you make any specific inquiries designed to elucidate what a permit to connect granted by New Zealand Telecom meant?-- At that period in time that we’re talking about? At all times we’re talking about that period in time?-- No, I didn’t. Was your sole inquiry into the status of Peter Gillmore, New Zealand Telecom, and its permit to connect, was your sole inquiry this one telephone call to a secretary in Peter Gillmore’s office?-- The – I’m not quite sure whether I understand your question. Can you just repeat that again, please? What inquiries did you make between Peter Gillmore’s visit in November 1992 and entry by Charter into the first Deed on 24 March 1993 into any or all of these: namely, the posting and role of Peter Gillmore in New Zealand Telecom; and the nature of New Zealand Telecom permit to connect the device?-- The first part of your question, my inquiry into the posting and nature of Peter Gillmore was my telephone call to New Zealand Telecom to establish that Peter in fact was the general manager of the new equipment division; and, secondly, I had no knowledge at that time that the issuance of a New Zealand permit to connect was required. I was of the opinion that New Zealand Telecom were evaluating the Cell-U-Comm product for their use in the retail/wholesale market that they dealt in. -- 65 of 267 -- 58 Where did you form that opinion?-- After speaking with Tom Quinn, Andrew Coventry and Michael Coventry and reading some of the correspondence that came into Charter Pacific’s offices from Peter Gillmore.” Later he said that he was aware that some regulatory testing would have to be done before the product could lawfully be connected to the New Zealand telephone system. [198] Bryan Dart was asked about this matter on numerous occasions. I set out a selection of his evidence: “In that meeting I was told that it was ready to go, that New Zealand Telecom were testing for it, and that approval from New Zealand Telecom should only be sort of a couple of weeks away and once that approval was through, the product was ready for commercialisation, it was ready to be marketed. What I want to ask you is whether there were any conversations you had with Andrew Coventry or Andrew Coventry, together with Tom Quinn, on this subject leading up to entering into this agreement?-- There was on a number of occasions, both with just Andrew Coventry and myself, Andrew Coventry, Tom Quinn and Kevin Dart and myself, that New Zealand Telecom and - we disregarded NEC and Telecom Australia at that particular stage in our own minds because of representations made from Andrew and Tom that New Zealand Telecom were going to endorse this product, give the approval on the product, and then order the product from us - or from Evtech. You used the word ‘endorsed’. Did they explain what sense they used the word endorsed?-- It meant it had passed all their testing and met with all the standards that were required, such as Bell Standards, and that the product was ready to go to the marketplace, as I had been told on numerous occasions by Andrew Coventry and also Tom Quinn, that the product was ready to go once that approval was completed by New Zealand Telecom; it was a matter of starting the manufacturing, getting the product out into the marketplace.” “And what had you been told by the Conventrys about the endorsement, the subject of the contract?-- That the endorsement would - that New Zealand Telecom were testing the product and if it was - if they were satisfied with the product, that then they would look at placing an order with us to buy it.” [199] Mr Quinn also gave evidence on this point: “And he told them that the New Zealand Telecom were undertaking their testing of the product?-- Yes. And he said that the nature of the New Zealand testing was that it would be a thorough testing which would confirm that the product was indeed ready to market?-- Well, words to that effect, yes. -- 66 of 267 -- 59 And that New Zealand, in giving their approval following the testing, would basically be endorsing the product as confirming it was ready for market?-- Well, would be giving it good credibility in the marketplace.” [200] The evidence of these three witnesses shows that Andrew Coventry and Mr Quinn made representations to the effect that the approval being sought was of such a nature as to confirm the System’s reliability and its readiness for market. It suggests that the thrust of the representation was that New Zealand Telecom were testing with the view to deciding whether to sell the product. It does not suggest a representation that a Permit to Connect constituted authoritative confirmation of reliability or readiness for market. [201] The evidence of Kevin Dart was closer to the pleading: “Could we go back one step and tell us what Andrew Coventry was saying about the question about potential for early sales in the discussions you had with him?-- Andrew stated on a number of occasions, as did Tom Quinn on a number of occasions, that New Zealand Telecom were going to place an order once we had the PTC approval from New Zealand Telecom; that that was an order that was just around the corner, that we were going to get it soon; and it was something that weighed heavily on our decision to invest. Did you know what PTC approval from New Zealand Telecom meant?-- I thought I did at the time. Was it explained to you?-- It was explained to me by Andrew and Tom Quinn that it was the approval to connect, use and - and also to verify that the technology was commercially able and ready for the market. HIS HONOUR: I don’t follow that. It was the approval to connect?- - To New Zealand Telecom on their system; that it was a verification that the technology was solid technology; that it was good technology that would be endorsed by New Zealand Telecom. It would be endorsed by New Zealand Telecom?-- That the PTC approval would be an endorsement also of the product. Endorsement? Mmm?-- The fact that it the approval came from New Zealand Telecom to both connect and be used by them was the endorsement that the product was of a very high standard. HIS HONOUR: So endorsement means written on the back. So you imagined you would be able to market it with the statement from New Zealand Telecom on the back saying, ‘This is a good product.’?-- I don’t know that that was precisely what was meant, but certainly the endorsement that I’m talking about is that, because it had been approved by New Zealand Telecom to be connected to their -- 67 of 267 -- 60 system, it was a good solid product that had been rigorously tested, found to be of high standard. MR O’DONNELL: Did they say what had been done towards obtaining the New Zealand Telecom approval?-- Yes, that Tom and Andrew had been working on it for quite some time. That is, they have commenced an application for the approval?—I’m sorry. I didn’t hear you. Did they say whether they had commenced an application seeking the approval?-- Yes. Yes, they did. Did they say how far the application had progressed?-- They said that it was close to being finalised; that the system had been tested and been presented to New Zealand Telecom over a period of months prior to our discussions; and that it was all but complete; that we could expect it to happen soon. Was there any discussion as to what would occur once New Zealand Telecom approval was received?-- That we would then have an order - an order would be forthcoming from New Zealand Telecom. What sort of order? Did they give you any details about that?-- The numbers, I believe, ranged between 5,000 and 8,000 units. Just explain it for His Honour. Was the discussion about the New Zealand Telecom approval that they were testing it for a permission to connect to New Zealand Telecom system, or were they testing it with a view to New Zealand Telecom buying the product, or was it a combination or something else? Just explain that for His Honour as to what was being said to you at the time?-- What was being said at the time by - and stated by Andrew Coventry on a number of occasions - was that the PTC approval meant that we would then get an order from New Zealand Telecom. The PTC approval was the final approval and sign-off by New Zealand Telecom that the product was commercially viable, that it was good product, and therefore they were going to buy some units and the units were, quite simply, 5,000 to 8,000 in number. That could only happen if the approval came through us first. That was the PTC approval. HIS HONOUR: They were going to buy it themselves?— New Zealand Telecom, yes. This 5,000 to 8,000 was what they were going to buy themselves?— That’s correct. MR O’DONNELL: With a view to doing what with them?-- Using them - they were going to use - as I understood it from Andrew Coventry, that the technology was going to - the system was going to -- 68 of 267 -- 61 be utilised by their own personnel and also sold through their business shops in New Zealand.” [202] As far as I can tell, it was not put to Andrew Coventry that he told the Darts that the Permit to Connect or PTC approval (as opposed to endorsement by Telecom New Zealand) was authoritative confirmation of the reliability of the System and its readiness for the market. [203] It was not alleged that this misrepresentation was made in writing. I must therefore evaluate what was said by the witnesses, having regard to my assessment of them. I found Andrew Coventry’s evidence unsatisfactory having particular regard to his willingness to change what he said. I found Kevin Dart’s evidence equally unsatisfactory. It was assertive and left me with no sense that the witness had any recollection of particular conversations or even of the substance of what was said with any precision. It sits ill with Mr Cole’s evidence that between November 1992 and the execution of the First Deed, he “had no knowledge … that the issuance of a New Zealand permit to connect was required.” In my judgment, what was said is best gleaned from the evidence of Bryan Dart, Mr Cole and Mr Quinn quoted above. Having regard to that evidence, I am satisfied that Andrew Coventry represented to the Darts in substance that the System was being evaluated by Telecom New Zealand with a view to purchasing it in quantity; that if such evaluation resulted in an approval of the product, Telecom New Zealand would purchase it for use and resale; that such an approval would authoritatively confirm the reliability and marketability of the System; and that the System was about to receive a Permit to Connect from Telecom New Zealand. I am not satisfied that he represented that a Permit to Connect was or would be a confirmation of the reliability or marketability of the System. 6(a) Technically, the system was all but ready for immediate commercialisation; 6(aa) The system was ready to be introduced to the market; 6(b) The system was operational, and only required minor work to be commercialised; 6(c) The system would efficiently transmit and receive data and faxes from portable computers via both the mobile cellular network and the PSTN network. [204] The defendants admitted making the representations set out in subparagraphs (a), (b) and (c) and denied that alleged in subparagraph (aa). The admission was qualified by the assertion of a different meaning of “commercialisation” from that asserted by the plaintiff, but the difference is not presently material. The denial was consistent with the denial of subparagraph (k); but I have already found the making of the representation pleaded therein proved. It is indistinguishable from the representation alleged in paragraph (aa). I am satisfied that Andrew Coventry made all four representations. 6(e) The System included an operating MNP10 error correction protocol, which the software allowed to turn on and off. [205] The defendants in effect admitted making this representation, but for the word “operating”. -- 69 of 267 -- 62 [206] The only witness who claimed that a representation was made that MNP10 was operating or working was Bryan Dart. I am not satisfied that the answer which he gave on this topic was correct. It is inconsistent with the flavour of his evidence and seems to have resulted from a particularly inept piece of cross-examination by the solicitor then appearing for the defendants. However there is no need to make a finding on the point. A representation that the System (or more particularly, the modem or its firmware) contains MNP10 to my mind clearly implies that the protocol is not only present in the firmware but also is operational.66 This representation is proved. 6(y) Evtech Pty Ltd owned the technology in the system. [207] The defendants denied making this representation, but admitted that they represented that Evtech owned the technology in Electrocomm. At trial, the plaintiff conceded that the Darts knew that Evtech owned no technology apart from Electrocomm before the making of the First Deed. The issue can be considered on the basis of the representation as admitted. 6(x) The system could readily be adapted to almost all known cellular phones. [208] The defendants admitted making this representation except for the word “readily”. They further pleaded that Andrew Coventry told the Darts: “(i) [that] before the system could be used with any specific brand of mobile telephone, appropriate firmware would have to be developed to enable an appropriate interface between the system and that brand of mobile telephone; (ii) that this interfacing meant reverse engineering the protocols for that specific brand of mobile telephone; (iii) that, as at December 1992, the only mobile telephone for which the task of adjustment had been completed was the Ericsson Hotline, which was asynchronous rather than synchronous and consequently had a shorter bit-stream and was easiest to reverse-engineer; but that (iv) that after the Ericsson Hotline, the next telephone to be ‘interfaced’ would be the NEC P3, then the Motorola and then the Nokia; (v) and that Carsten Anderson in Melbourne was employed full- time by Evtech to perform the task of reverse engineering major brands of mobile telephones, one at a time, but otherwise deny the facts therein alleged.” The plaintiff denied these allegations. [209] Although the defendants denied the use of “readily”, Andrew Coventry admitted its use during his cross-examination. I find that he told the Darts that the System could readily be adapted to almost all known cellular phones. 66 According to the evidence, MNP10 is strictly speaking not correctly described as an error correction protocol, but rather as a protocol dealing with enhanced capabilities or reliability. Nothing turns on this point for present purposes. -- 70 of 267 -- 63 7. FROM DEED TO DEED The employment of Peter Gillmore [210] A large amount of time and energy was devoted by the parties to questions relating to the employment of Peter Gillmore. The issue was said to be relevant to the quantum of the plaintiff’s claim, causation and (particularly) the credibility of Andrew Coventry. Because the relationship was informal and largely oral, any terms of engagement must be inferred from conduct and conversations. This is unfortunate, because the issues have become clouded in the minds of all of the witnesses to a greater or lesser extent, cloudiness induced not only by the effluxion of time but in some cases also by intense personal emotion on the topic. Three questions arise: first, did Evtech ever engage Mr Gillmore; second, if so, when was he engaged; and third, if so, what did Andrew Coventry know of it. [211] Mr Gillmore worked for TES until his resignation at the end of March 1993. In mid-April he came to Australia and worked for the benefit (to use a neutral expression) of Evtech. By mid-August 1993 at the latest, he was employed as general manager of Evtech.67 To understand his position in Evtech up until August, it is necessary to look at how he came to be in that position. [212] There were two versions of whose idea it was that Mr Gillmore should join Evtech. Mr Quinn thought that it was Mr Gillmore’s idea. As he put it in his evidence in chief: “Tell me how that got implemented, if that’s one example?-- Gillmore expressed his interest in working for Evtech to me. I relayed that to the Darts. I was very keen for that to happen. It was implemented. Are you refusing to answer my questions?-- No. You are going back to saying, ‘It was implemented’ again. I have asked you very specifically to tell me what you did?-- I relayed Peter Gillmore’s interest to the Darts. Yes?-- Gillmore then came over to meet the Darts. How did that come about?-- I imagine - I can’t recall for sure, but I would have spoken to Peter Gillmore and said, ‘Look, the Darts are interested in meeting you,’ and it was arranged that he came across. He came over and met the Darts, and they were very positive about him being employed. An employment agreement was drawn up for his employment.” He thought this happened in December 1992. 67 By arrangement between him and the Darts, he was treated as though he were an independent contractor; but that was probably to evade the workers compensation and tax laws. -- 71 of 267 -- 64 [213] Mr Gillmore thought differently. His evidence was: “I passed over something, the question of how you came to be employed by Evtech. Obviously something had occurred prior to 31 March [indistinct]. What’s your first recollection of discussions about your taking employment with Evtech?-- I had a call from Tom Quinn, who said to me that as I was aware, Charter Pacific, or Evtech was looking to sell the company and the technology to Charter Pacific. Charter Pacific had said to him that one of the conditions of that purchase was that I would manage the new entity; was I interested?” [214] Probably not a great deal depends upon who made the first move. The objective evidence suggests that, even if Mr Gillmore was not explicitly expressing interest in a job in December 1992, he was behaving as if he were interested. The tone of his letters was fulsome and, without fee, he volunteered to provide a substantial report for Evtech on the market for its product in New Zealand. It is likely that he had some inkling that the future of TES was clouded. [215] The Darts themselves had no background in the computer industry. The operational control of Evtech was therefore not a matter within their skill. This fact was recognised in the Bundaway Agreement: “19. Employment Agreements Bundaway will require Tom Quinn and Andrew Coventry to enter into employment agreements with Evtech on terms and conditions to be agreed. Tom Quinn and Andrew Coventry will be required to actively assist Evtech on a day to day basis and to make available to Evtech the information and knowledge they have with respect to the Subject Techniques and the general business of Evtech.” [216] On its face, cl 19 was for the benefit of Bundaway and would have been capable of being waived by it. However that does not seem to have been the perception of Andrew Coventry and possibly of Mr Quinn. The latter gave evidence: “You said that at the time of the Bundaway Agreement, it was contemplated that yourself and Andrew would be employed -----?-- Yes. ----- by Evtech. And it was subsequently discussed and agreed that you would not be employed, would not receive a wage?-- Yes. You said that you went along with that. Was Andrew somewhat bitter about that?-- Yes. Did he say words to the effect he was somewhat bitter about that?-- Yes. He was annoyed about that. On the basis that what he expected would be his income stream would be, in effect, diverted to Gillmore?-- Yes. Did he say words to that effect in 1993?-- Yes, I did get that impression, yes.” -- 72 of 267 -- 65 Andrew Coventry was not employed by Evtech in 1993. Michael Coventry said that Andrew told him in about April 1993 that Mr Gillmore had been installed by the Darts as sales manager for Evtech. He said, “Andrew was rather bitter about this as he had planned to do that job himself and he said that the Darts were diverting ‘his’ income stream to Gillmore.” [217] I have described above how work began in early 1993 to draft the First Deed.68 At that time, a provision similar to cl 19 of the Bundaway Agreement must have been envisaged for that deed. The drafting proceeded to the point where a specimen employment contract was created as Annexure B to the draft. However, events overtook the drafting. The Darts had been impressed with Mr Gillmore at their meeting in 1992. During February and the early part of March 1993, having been made aware of his possible interest in working for Evtech, they decided to look at him more closely. Through Mr Quinn, arrangements were made for Mr Gillmore to come to the Gold Coast at the plaintiff’s expense and give a presentation to the Darts. The main reason for this trip was for Mr Gillmore to talk to the Darts about his possible contract. This he did between 2 and 5 March 1993. His presentation comprised a business plan for Evtech. By 22 March, the Darts had decided that he should work for Evtech and that the services of Andrew Coventry and Mr Quinn as employees would not be required. The draft deed was amended accordingly not long before it was signed on 24 March. The Darts wanted Mr Gillmore to manage Evtech and through the power of the purse, they had their wish. Mr Gillmore’s belief that his employment was a condition (at least a de facto condition) of the share purchase by the plaintiff was born out by a file note made by Kevin Dart on 14 May 1993: “If Peter was to walk we would also.” [218] When Mr Gillmore gave evidence, he initially thought that Andrew Coventry had not been involved with him during his visit in early March. He remembered his discussions regarding his contract during that visit; but he seemed to have forgotten the presentation. That provides some confirmation for Andrew Coventry’s evidence that he was not involved in these discussions. However, even assuming that his evidence was correct on this point, I cannot believe that he was completely ignorant of the proposal that Mr Gillmore should come to Australia and work for the benefit of Evtech. [219] The evidence of what precisely was arranged between the Darts (or at least Bryan Dart), Mr Quinn and Mr Gillmore was unsatisfactorily vague. Mr Quinn told Mr Gillmore that he “would have to take a consultancy role with them until such time as the sale was concluded but, for all intents and purposes, I would be general manager of Evtech.” In that context, “them” was the plaintiff. It could hardly have been otherwise. Evtech was being kept afloat by the plaintiff, but Evtech’s directors were in no position lawfully to undertake a liability upon the terms negotiated with Mr Gillmore. Mr Gillmore understood that Bryan Dart and behind him Kevin Dart were the persons to whom he was ultimately responsible. The probability is that this understanding was generated by the Darts. A generous salary and relocation expense package was agreed and an arrangement was made for Mr Gillmore to buy over $18,000 worth of computer equipment for his own use before he left New Zealand. Mr Quinn told him, I infer with Bryan Dart’s concurrence, that even if the sale of shares did not proceed, he would be reimbursed by Charter Pacific. Bryan Dart told him that he would be working from Charter Pacific’s building and 68 Para [118]. -- 73 of 267 -- 66 that it was the intention to move the Evtech office to that building. When asked about the nature of the work he was told he would have to perform, Mr Gillmore said, “Well, it was clear from the discussions I had with Tom and with the Darts that I would be working for Charter Pacific, all right, and that the conditions of my employment would be determined by them.” Bryan Dart also told him that his pay cheques would probably be paid by Charter Pacific until the sale was completed. Bryan Dart and Mr Quinn told him to deal with them, not Andrew Coventry. [220] Andrew Coventry claimed that he was told that Mr Gillmore was to be responsible for sales or marketing. He claimed that he accepted this arrangement, thinking that Mr Gillmore would be paid by the plaintiff. The Darts’ attitude to Mr Gillmore, expressed to Mr Quinn about 22 March 1993, was that he sounded like a very good marketing manager and they indicated to Mr Quinn initially that this would be his position. Mr Gillmore himself always thought that he was to be general manager (indeed, he was hoping to negotiate a position as managing director) and it seems clear that before long, general manager was what his position was called. However he was not general manager in the ordinarily accepted business sense, as a number of important areas were excluded from his authority. These included financial matters, control of assets, leasing of premises and matters concerning the share register. Essentially, his job seems to have been to get the Evtech System to market and sell it. [221] If this was a comedown from his hoped-for position as managing director, Mr Gillmore did not let it show. He had every reason to take the job at Evtech, however it was defined. By the time negotiations with Mr Quinn had begun, Mr Gillmore had heard that TES was to be closed and that he himself would be relocated from Auckland to Wellington. He did not enjoy going to Wellington. It is unclear whether he knew how much the Darts were depending upon the Telecom New Zealand approval. Whatever his knowledge, there is no evidence that he told anyone in Australia of what was proposed for TES. On the contrary, on 22 March he wrote to the Darts on TES letterhead a letter which even by his standards was particularly enthusiastic. It was written at Bryan Dart’s request and Mr Gillmore assumed that it was for use with the plaintiff’s shareholders or something similar. It is not unreasonable to describe it as a letter of comfort. Contrary to his usual practice, he posted rather than faxed it. [222] I was not told when Mr Gillmore gave notice to TES, but his last day of employment with that company was 31 March 1993. That was the day that Mr Underdown wrote his report on the Evtech System. Mr Gillmore obtained a copy before he left, to bring with him to Australia. Whether he gave it to anyone here is not in evidence. He remained in New Zealand until 18 April, although his salary from the plaintiff appears to have commenced on 5 April. He said that his agreement with Mr Quinn and Bryan Dart was that he could remain in New Zealand for a few weeks to sort out some domestic issues; but he also said that he wanted to work closely with TES to get the PTC. There is no evidence that he did anything toward that purpose during this period. He did maintain contact with Mr Underdown69 but the application for the PTC was not submitted until 10 days after he left New Zealand. 69 See his fax of 7 April 1993 to Mr Quinn and the Darts. -- 74 of 267 -- 67 [223] On 13 April Mr Gillmore sent a fax to the Darts, with a copy to Mr Quinn, which read in part: “5. As requested also included with this transmission is a letter to Evtech agreeing to a consultancy agreement from 05 April and up to and including 28 April.” Attached to that fax was a letter dated 2 April 1993, addressed to the directors of Evtech, but at the plaintiff’s address: “The purpose of this communication is to confirm our agreement that I contract to Evtech Pty Ltd as a Consultant from Monday 02 April 1993 until and including Wednesday 28 April 1993, after which time the Employment Agreement which we are discussing will take effect. This Employment Agreement is to be signed by both parties on Thursday 29 April 1993. The terms of this consultancy are basically those that will form the basis of the Employment Agreement.” [224] The letter was probably backdated. There is no evidence that it was ever posted. The employment agreement was to be signed on 29 April, according to Mr Gillmore, because that was the day after the scheduled completion of the First Deed. I infer that Mr Gillmore was not told of the agreement made in Australia on the same day to extend the time for completion to 12 May 1993. [225] Mr Gillmore spent just over two weeks working on matters pertaining to Evtech after he arrived on 18 April; he went to New Zealand on 5 May and did not return to Australia until 12 May which, as he put it, was when he started permanently working for Evtech. When the First Deed was signed, therefore, he had done four weeks’ work. He did that work either from his hotel room or from the premises of the plaintiff at Bundall. He did not go to Evtech’s premises at Strathaird Road. He worked from the plaintiff’s premises because the Darts told him that that was where his office would be. [226] On 1 May Mr Gillmore sent the plaintiff an invoice for his consultancy fees for the period 5 April to 30 April. It was addressed to the plaintiff and on its face claimed payment from the plaintiff. Two days later he sent the plaintiff similar invoices for his removal expenses and fares and for his expenses in relation to a business trip to Adelaide on 29 April. None of these invoices made any reference to Evtech. They were paid by the plaintiff on 7 May. By mid-May however, he was calling himself general manager of Evtech.70 [227] Bryan Dart’s testimony on the subject is instructive: “MR SPAIN: I suggest to you that you made it clear continually from the whiteboard meeting in January or February right through to April that there was no way Charter was going to continue with this proposed investment unless Peter Gillmore was brought in to control sales and marketing?—I don’t recall it that way, no. And that throughout this time Andrew Coventry was allowed to dwell in the delusion that Gillmore’s involvement would be at the expense of Charter Pacific?—No. Everybody knew, from meetings 70 For example, on a memo to Mr Morgan and others (not including Andrew Coventry). -- 75 of 267 -- 68 we were having in Charter Pacific’s office, that Peter Gillmore was coming over to work for Evtech, being paid by Charter Pacific until settlement, and then was working for Evtech. … I suggest that Charter made these arrangements with Peter Gillmore, drafted employment documentation and insisted upon retention of his services whilst indicating to Andrew that he was merely a consultant engaged and paid by Charter?—Well, I disagree with – Andrew knew that he was being paid by Charter and, yes, when he moved over and the settlement had taken place, Peter Gillmore would be working for Evtech and being paid from Evtech.” [228] Did Evtech employ Mr Gillmore prior to 27 May 1993? If it did so, it could only have been by means of an implied contract. On the plaintiff’s case, it did. Counsel for the plaintiff summarised the position in this way: “The CPC witnesses were all broadly the same; that Quinn and also Andrew Coventry promoted the idea of employing Gillmore; that he had the right qualifications for Evtech. They took on board the idea. They became enthusiastic about it and it was common knowledge all the directors - that they all wanted to see Gillmore employed and that all the directors were in favour of it.” [229] In my judgment, however, the evidence falls short of demonstrating that Andrew Coventry promoted the idea of employing Mr Gillmore. By 27 May he must have known of Mr Gillmore’s presence at the plaintiff’s office and that he was at least supposed to be doing work promoting the product. There is evidence that Mr Quinn discussed Mr Gillmore’s conditions of employment, particularly his salary, with Andrew Coventry, but it is unclear whether this occurred prior to 27 May. In any event, mere knowledge is not enough to establish the existence of an implied contract. The facts must point to the actual making of a contract. When all of the circumstances which I have described above are taken into account, it does not seem to me that they do so in respect of the period prior to 27 May 1993. In my judgment, the plaintiff has not demonstrated that any contractual relationship existed between Evtech and Mr Gillmore prior to that date. [230] The position changed significantly after completion of the First Deed on 27 May. Evtech ceased to be insolvent. The shareholders’ agreement was amended to enable the directors to incur liabilities up to $5,000 without the need for unanimity.71 Evtech’s business office was moved from Strathaird Road to the plaintiff’s premises at Bundall. A system of weekly “action meetings” of directors was instituted, most of which were attended by Mr Gillmore and the first of which was chaired by him. Mr Gillmore was in fact in charge of the production and marketing side of the company’s business and its new employees. Mr Gillmore rendered his invoices to Evtech in Evtech’s name and was paid by cheques drawn on the Evtech bank account. After 12 May, Mr Gillmore worked permanently for Evtech, albeit that he spent periods of four or five days in New Zealand from time to time throughout the balance of 1993. In my judgment, the only available inference is that he was employed by Evtech from 27 May onwards. 71 Previously the figure was $500 – see exhibit 5. -- 76 of 267 -- 69 [231] Whether Andrew Coventry knew this is probably relevant only to credit. It was however treated by the parties as a point of some importance on this issue. His evidence was that while he was aware that Mr Gillmore had been engaged, he believed at all times that Mr Gillmore was being paid by the plaintiff to help Evtech with sales. He agreed, indeed he asserted, that he did not like Mr Gillmore personally and he opposed a number of his policies. He claimed that he had no idea that Mr Gillmore was installed as general manager at Evtech’s expense until he happened to see a letter in which Mr Gillmore was so described. He did not say when he saw this letter. [232] This evidence was inconsistent with the fact that Andrew Coventry signed at least two Evtech cheques for Mr Gillmore as wages. To explain those cheques, he claimed that from time to time, Mr Cole asked him to sign a number of blank cheques, which he did. He argued that some of those cheques must have been used to pay Mr Gillmore. Elsewhere I explain why I reject that evidence.72 I am satisfied that when he signed the cheques for Mr Gillmore as wages, he knew their purpose. In these circumstances, he must have realised that Mr Gillmore was being paid by Evtech for his work. His evidence to the contrary was not the truth. Shares in Charter Pacific [233] On 24 March 1993 the parties executed the First Deed. Coincidentally, on the same day, the Federal Court set aside its order for security for costs upon Charter Pacific’s undertaking to advise its opponents immediately its available cash reserves were depleted below $300,000. The plaintiff saw both events as of major importance. It issued a press release headed, “Tide turns for CPC with Court decision and new acquisition”. Recognising the price-sensitive nature of the news, it formally gave notice of its share acquisition to the Australian Stock Exchange under Listing Rule 3A on 25 March. [234] For most of the first quarter of 1993, Charter Pacific’s shares had not been heavily traded. Up to and including 19 March transactions had occurred on only 31 days. On some days they had not been traded at all. There had been some increase in volume after the closure of the issue, but the price had not fluctuated very much. Throughout the period up to 19 March the closing price for the par 50 cent shares had been as low as 48 cents and as high as 55 cents. On Monday 22 March the price began to rise. That was the day that Mr Gillmore wrote his letter of comfort referred to above.73 On 24 March the shares closed at 65 cents. Following the announcement on 25 March they continued to rise, peaking at $1.19 on 8 April. With some exceptions, they continued around this level until 26 April, when they closed at $1.15. From 27 April to 18 May the price fluctuated between $1.00 and $1.08, averaging over the 13 days when trading occurred $1.05. The volume traded during this period was low: less than 20,000 shares per trading day on average. [235] On 18 May 1993 Mr Gillmore wrote to Kevin Dart in the latter’s capacity as managing director of the plaintiff. It was a letter written at the request of Kevin Dart for (as he put it to Mr Gillmore) “one of Charter Pacific’s purposes”. I infer that it was intended by Kevin Dart to promote the market in the plaintiff’s shares. Asked if the letter was simply hot air, Mr Gillmore responded: 72 Para [252]. 73 Para [221]. -- 77 of 267 -- 70 “Of course it is. It is a futures document. I mean, there is some basis in terms of the first part there, but the rest of it is where we are going. That is the sort of thing that analysts and that like to hear.” [236] In early May Mr Quinn also composed a “boosting” letter to the directors of the plaintiff at the request of Kevin Dart. He later signed a copy bearing the date 24 May. It is likely that this letter was intended for the same purpose as was Mr Gillmore’s. I have no doubt Kevin Dart was behind both letters. [237] On and after 19 May (the date the PTC was issued), the pattern of trading began to develop some unusual features. On 19 May, 146,300 shares were traded. This was the second highest daily volume for the year, exceeded only by trading on 30 March of 192,000 shares (that day’s trading had provoked a query from the Stock Exchange.) The price was not immediately affected; the closing price remained steady at $1.05 for 18-20 May. It rose over the next two trading days (21 and 24 May) to $1.30 on relatively low volumes; then on 25 May it rose again to $1.45, with a remarkable 162,600 shares traded. On 26 May Bryan Dart advised the Australian Stock Exchange under Listing Rule 3A that the plaintiff had “received earlier today advice from Telecom New Zealand Ltd that a Telepermit has been granted for the Cell-U-Comm modem”. By then the price had almost peaked: the closing price rose to $1.48 on the day following the announcement, but then fell away. [238] The movements in the Charter Pacific share price suggest that some insider trading may have taken place. In cross-examination the defendants pressed the Darts to ascertain whether they were involved in any such conduct. They denied it. The defendants did not pursue the point in their final submissions, rightly so in my view, since there is no evidence of any such involvement. The movements in price and trading volume are unexplained. It may be that they were contributed to by Mr Gillmore’s letter and Mr Quinn’s letter; but if they were, it is a matter of no consequence for present purposes. Completion of the First Deed [239] Under the First Deed it was envisaged that completion would occur on 28 April. I have referred above to two of the conditions precedent to which the deed was subject.74 Non-fulfilment of the conditions gave each party the right to rescind the deed ab initio. Condition (c) was to be fulfilled by the completion date and condition (d) by 8 April. Condition (c) was satisfied on 13 April when the licence agreement was made. On the same day the parties varied the First Deed to require (among other things) condition (d) to be satisfied by the completion date and by substituting a completion date of 12 May.75 Andrew Coventry claimed in his evidence that he was told there was a degree of urgency about the execution of this deed. However he was unable to point to any circumstance of urgency or explain on what basis such a statement could sensibly have been made. I am not satisfied he was told any such thing. [240] Condition (d) now remained to be fulfilled. It required endorsement of the System from one of Telecom New Zealand, NEC or Telecom Australia. By April NEC had 74 Para [120]. 75 On 27 April they further extended the completion date to 27 May and varied the date for satisfaction of condition (d) to “prior to 19 May”; then on 19 May they further varied the latter date to 26 May. -- 78 of 267 -- 71 lost interest in the product; and no attempt to gain endorsement from Telecom Australia had been made. Satisfaction of the condition therefore depended upon endorsement by Telecom New Zealand. The condition undoubtedly grew out of what the Darts had been told about the interest which Telecom New Zealand had in buying the System. To understand it one must go back to late 1992. At that time Andrew Coventry told the Darts in substance, that the System was being evaluated by Telecom New Zealand with a view to purchasing it in quantity; that if such evaluation resulted in an approval of the product, Telecom New Zealand would purchase it for use and resale; and that such an approval would authoritatively confirm the reliability and marketability of the System. 76 He was not their only source of information on the matter. When Peter Gillmore visited the Gold Coast in November 1992, he met Mr Quinn, the Coventrys and the Darts. He told them that TES was keen to pursue negotiations for the exclusive representation of Evtech in New Zealand. It was arranged that the modem, Electrocomm and the power units would be sent to him for evaluation. As appears from his fax of 16 November 1992,77 this was to be done so that his “QA guys can evaluate and approve them”. Once that approval was obtained, it would be included in Mr Gillmore’s business case which, when signed off, would result in the first order for the product. The approval spoken of in the fax did not refer to the PTC. That permit could not be given by TES. Moreover the PTC related only to the modem, not to the other elements of the System. The approval referred to by Mr Gillmore was a quality approval consequent upon an evaluation carried out for the purpose of deciding whether TES would purchase the product for resale.78 That fax was forwarded to Bryan Dart on 18 November 1992. [241] Mr Gillmore wrote directly to Bryan Dart on 10 December 1992, where he again referred to the evaluation program. There was no suggestion that this was being done for the purposes of granting “PTC approval”. He sent a copy of a further letter of 14 December 1992 to Bryan Dart and in this he again referred to his evaluation of the product and the placement of an order. [242] After TES eventually received the System around 20 December 1992, Mr Gillmore wrote, in a letter which was seen by both Bryan and Kevin Dart, of TES’s intention to purchase an initial 100 units. He added that the order would be subject to (among other things) “Type Approval (Permit to Connect) … being obtained by TES”. This information provoked no reaction from the Darts or from Mr Quinn and I infer that Mr Quinn had authorised Mr Gillmore to apply for the Permit to Connect on behalf of Evtech during his visit to New Zealand at that time. [243] On 31 January 1993 Mr Gillmore again distinguished between the TES evaluation and the PTC in a letter to Andrew Coventry, Mr Quinn and the Darts. The primary focus of that letter was the TES evaluation of Electrocomm. However in the penultimate paragraph, the PTC was mentioned in relation to Cell-U-Com (the modem). Then, on 22 February, in a letter seen by the Darts and Mr Cole, Mr Gillmore wrote that TES would now complete tests “that will enable a PTC application to be made.” He added, “We see no major obstacles to an application being approved.” He explained that the application was to be submitted to Access Standards (the relevant branch of Telecom New Zealand) who would 76 Para [203]. 77 Para [80]. 78 Mr Gillmore’s evidence was that he had authority to give the approval needed for marketing the product. -- 79 of 267 -- 72 approve it. He referred to that organisation in the third person. In his oral evidence, Mr Gillmore said that the testing was for both robustness (marketability) and the Permit to Connect. [244] During April, by a process the derivation of which has not been proved, attention seems to have become focused on the PTC for the purposes of condition (d). On 7 April Mr Gillmore (still in New Zealand, but being paid by the plaintiff) reported in a fax to Mr Quinn and the Darts that Mr Underwood [sic] had “all but completed the PTC requirements”. He made no reference to the evaluation process, nor to any order from Telecom New Zealand. This is hardly surprising, since by this time he knew that TES was to be disbanded. Whether he communicated this fact to anyone in Australia is not in evidence. He had every reason not to do so, for it placed his new job in jeopardy. He was not asked whether he was aware of this. He wrote, “Kevin [Underdown] is aware of our need to get the PTC asap”. [245] The focus on the PTC is also evident in the terms of the licence agreement of 13 April. Under cl 5.2, the initial fee of $150,000 was payable within 14 days after receipt “of formal written approval from Telecom Corporation NZ of a permit to connect to the New Zealand PSTN”. That phraseology suggests that Mr Cunning- ham and those instructing him were unaware of the difference between an endorsement and a PTC. It is markedly different from the phraseology of condition (d) drafted at about the same time but by a different person. [246] In February, March and the first half of April 1993, the Darts appear to have had a policy of spending as little money as possible on behalf of Evtech. A couple of small accounts were paid (by Bundaway) in the first part of February and in both February and March, a fortnight’s wages were reimbursed. However from 20 April until 26 May the plaintiff drew 21 cheques for a total amount of $38,119.62 which it claims were on account of Evtech. The flow of payments was not inhibited by the need on 27 April to execute a further deed of variation extending the completion date to 27 May. It is probable that by this time, the plaintiff took the attitude that condition (d) would be fulfilled by the issuance of a PTC. That conclusion is reinforced by Bryan Dart’s increasing involvement with Mr Gillmore and Mr Quinn in operational matters concerning Evtech. [247] The application for the PTC was dated 28 April. It was made in the name of Evtech through Mr Gillmore to Telecom New Zealand Access Standards branch. When a permit issued on 19 May it was sent to Evtech, attention Mr Gillmore, at Mr Gillmore’s home address. It was received in Australia on 26 May. Its issue was accepted by the plaintiff as compliance with condition (d). On the following day the parties proceeded to complete the First Deed. The plaintiff became registered as owner of half the issued A-class shares of Evtech and option certificates for shares in the plaintiff were executed for the Coventrys and Mr Quinn, to be held in escrow for one year. Evtech cheques [248] Upon the signing of the First Deed, Evtech opened a new bank account with the plaintiff’s bank, the Commonwealth Bank of Australia. Evtech’s overdraft at Westpac was paid out and the account closed. All of the Evtech directors were signatories for the new account. Cheques drawn on it required two signatures: one from one of the Darts and the other from one of the Coventrys or Mr Quinn. Evtech’s first chequebook was a book of 15 unpersonalised cheques. That was -- 80 of 267 -- 73 followed by a book or books of personalised cheques, the first of which was, predictably, numbered 000001. By the time of the Second Deed, cheque number 000075 had been issued. Thus, in the period between the two deeds, Evtech used 90 cheques. Apart from any cancelled cheques, each must have been signed by either Andrew Coventry or Mr Quinn (I assume Michael Coventry in Adelaide signed none). The uncontradicted evidence shows that Andrew Coventry signed at least 26 of them. 79 Four of the 26 were payable to Mr Gillmore. Of these, one (000037, dated 1 July) included $9,632 for wages and accommodation for Mr Gillmore for the four weeks after the First Deed; another (000056) was for $9,632 for wages and accommodation for Mr Gillmore for the next four weeks; and a third (000046, dated 16 July) was for $8,946.47 for expenses incurred by Mr Gillmore on Evtech’s behalf in April and May. [249] Andrew Coventry denied that he knew of Mr Gillmore’s employment by Evtech, even after the First Deed. That denial was inconsistent with his signing cheques in Mr Gillmore’s favour for such large amounts. To explain the inconsistency, he asserted that on three occasions, he signed a number of blank cheques at Mr Cole’s request (an event which Mr Cole denied). The last of these occasions, in August, was obviously irrelevant for present purposes. Andrew Coventry asserted that he signed Mr Gillmore’s cheques on one of the other two occasions. He professed no knowledge of the purpose of the wages cheques. The position with the cheque for expenses (000046) was more complex. [250] That cheque was made payable to “T/T P. M. Gillmore Nat Bank [indecipherable] or Bearer”. It was paid to the Commonwealth Bank to fund a telegraphic transfer of the equivalent amount in New Zealand currency (less bank charges) from Evtech’s account to Mr Gillmore’s account in Auckland. When it was sent to the Commonwealth Bank, it was enclosed with a covering letter which was signed by Bryan Dart and Andrew Coventry.80 The letter plainly shows that the transfer was for the benefit of Mr Gillmore. [251] To explain that, Andrew Coventry sought to suggest that he believed these funds were intended to pay for an NEC computer which Mr Gillmore was acquiring for Evtech. He said that he believed that there was a special arrangement whereby Mr Gillmore would pay for the computer in New Zealand and collect it in Sydney. He agreed that this could have been the NEC computer purchased by Mr Gillmore in April81 , because, he said, the Evtech board and the Darts had agreed to such a purchase before Mr Gillmore came to Australia. He was, however, unable to explain why he would have thought that the telegraphic transfer in mid-July was for this purpose. Moreover he had previously alleged that the computer which he thought Mr Gillmore was collecting in Sydney was a Cardstar computer and had denied any knowledge of the NEC purchase. His change of evidence in an attempt to explain his signature was singularly unconvincing. [252] I accept Mr Cole’s evidence in relation to these cheques. I find that Andrew Coventry signed them knowing for whom they were intended and for how much. He probably did not bother to look at or for vouchers to justify the expenditure – Mr Cole had prepared the cheques and the plaintiff was supplying the money. By 79 Curiously, none of the 26 was dated in June. That curiosity was unexplained. 80 Exhibit 41. 81 Para [734]. -- 81 of 267 -- 74 mid-July he was aware that Mr Gillmore was being paid his wages and expenses by Evtech. His evidence to the contrary was false. Electrocomm [253] In early 1993 Mr O’Connor accepted the need to develop a Windows version of the software. The PC software market was changing rapidly. This was particularly true of communications software. One of the changes was the creation or evolution of Windows versions of such software. Another was a rapid improvement of functionality and ease-of-use. Pure DOS programs had a very limited future, particularly those which, like Electrocomm, could not run under Windows in a DOS window. 82 [254] Soon after his engagement Mr Gillmore directed Mr O’Connor to start work on Windows and Apple Macintosh versions of Electrocomm. This was to take priority over further development of the DOS version. When this instruction was given, Mr O’Connor had not eliminated all of the problems in the fax side of Electrocomm. Mr O’Connor did no significant development work on the DOS version of Electrocomm after March. The defendants contended that this instruction was one of the major causes for Evtech’s subsequent failure. They argued that it arose from Mr Gillmore’s ignorance of and antipathy to DOS and from his affection for the Apple system. It is, I find, true that Mr Gillmore exaggerated his knowledge of DOS. It is probably true that as an Apple user, he was contemptuous of it; but I do not think the evidence demonstrates any active antipathy to Electrocomm simply because it was a DOS program. On the contrary, the market was demanding Windows and Mr Gillmore’s area of expertise was marketing. [255] In April 1993 Mr O’Connor sent Mr Gillmore, probably by fax, an 11 page document 83 dealing with three topics: the resources and timing for a Windows version of the software; an overview of the development of a version of the software for the Apple Macintosh computer; and an overview of the application of the software to the business of the company Fisher & Paykel. As regards Windows, Mr O’Connor formulated a four-phase development program to take the software to the level of functionality which Electrocomm was then supposed to have in DOS. He estimated the program would take nine to ten months to implement. As to resources, he sought a new, fast computer, additional staff in both Adelaide and Queensland and substantial reference materials immediately. He foreshadowed further hardware requirements during the third phase of the development. From Mr Gillmore’s point of view, if the software writer was estimating nine to ten months, it would have been reasonable to assume that in fact the development would take longer. Whether Mr Gillmore made that assumption he did not say. He agreed that he was unhappy with the time estimate and he thought that any additional staff for the project should be based on the Gold Coast, not in Adelaide with Mr O’Connor. The basis for his unhappiness with the time estimate was, he told me, that one of his software developers in New Zealand had told him that the basics of Electrocomm ought to be able to be converted to Windows by two or three programmers in two or three months. That was not very different from what Mr O’Connor was saying. In the event, no additional staff were hired to carry out Windows development and the version never became operational. 82 Para [102]. 83 Exhibit 75. -- 82 of 267 -- 75 [256] Matters were not helped by the existence of a cool relationship between Mr Gillmore and Mr O’Connor. Mr O’Connor thought Mr Gillmore “technically inadequate”. At the same time he viewed Electrocomm as primarily a data transfer program to be customised for corporate use. Mr Gillmore thought that the emphasis should be on the fax capability of the program and that Mr O’Connor was out of control: he could not get answers to questions and often could not even contact Mr O’Connor. He described Mr O’Connor as behaving as though he were an independent contractor, not an employee. The position was complicated by the Darts’ wish to have Mr O’Connor’s contract renegotiated and by a finance company repossessing the computer provided to Mr O’Connor. [257] Mr Gillmore was under pressure to produce an early cash flow for Evtech. He saw Electrocomm as a difficult to use DOS product with an unreliable fax capability. He very soon decided that the Evtech System should, at least until a Windows version was developed, be marketed with third party software. The software which he selected was called Quicklink. It did not claim to have any particular adaptability for use with cellular phones. Bryan Dart accepted his recommendation. This occurred before completion of the First Deed. [258] By the end of May 1993 Mr Gillmore had decided that it was essential that Mr O’Connor relocate to Evtech’s premises on the Gold Coast. Mr O’Connor advised that he could not move until mid-July at the earliest and it was agreed that he would move on 26 July. Evtech was to pay the expenses. When the time arrived Mr O’Connor wanted a further short delay. Whether this was deliberate procrastination or due to a family difficulty does not matter. Mr Gillmore immediately dismissed him. At Mr Gillmore’s request, Michael Coventry collected Evtech property from him and sent it to the Gold Coast. Thereupon, with the concurrence of the Darts, Mr Gillmore (and therefore Evtech) completely abandoned Electrocomm. The IMS modem [259] At the beginning of 1993 Evtech had fewer than 10 IMS modems. They were the mark I version 2 model of the modem, distinguishable by a permanently attached cable to connect them to a computer (RS232 cable). In May, during testing, Evtech personnel reported to Mr Morgan that the MNP10 feature was not working. Mr Gillmore knew this by 26 May at the latest, possibly as early as 15 May. Someone from IMS, probably Mr Morgan, reassured Mr Gillmore that it would be available shortly after the “problem with Rockwell was overcome”. Bryan Dart and Mr Cole knew of the problem during May, probably before the completion of the First Deed on 27 May. According to Mr Morgan, the problem arose from a new release of the firmware code (version 3.3) which he obtained from Rockwell in May 1993. It was fixed by a modified version obtained urgently by Mr Morgan and placed into the modems on 7 June. The evidence as to the position regarding MNP10 prior to May 1993 is opaque. In the end, the plaintiff, wisely in my judgment, did not press the allegation that the code was not present prior to that month. [260] Following completion of the First Deed Evtech sought further modems from IMS. From early June Evtech was pressing IMS to supply 140 of them. There was some delay in obtaining machine printed circuits from the United States. Mr Morgan produced what he called the mark II prototype modem. These modems were hand- built in about July 1993. They contained essentially the same components as the -- 83 of 267 -- 76 mark I version 2 modem but used different printed circuit boards and less internal wiring. Unlike the earlier version, they had RS 232 cables which could be detached. It is unclear why Mr Morgan called them prototypes, but I suspect that he did so because they were hand-soldered. [261] Evtech was anxious to obtain these modems (or at least some of them) for two reasons: first, Fisher & Paykel had placed an order for 6 trial modems and second, there was the prospect of a substantial order from Telecom Australia if successful demonstrations could be arranged. A draft order for 15 modems from IMS was prepared, but it does not seem that a formal contract was entered into. In the meantime arrangements were made with a South Australian company, Jatco, with whose principal Kevin Dart was friendly, to manufacture the necessary cables. These included the interface cable for the NEC P3, reverse engineering for which was now complete save for a problem regarding volume (gain) control. [262] As June wore on a further problem with the modem became evident. There was an incompatibility between the modem and the popular fax program WinFax.84 Then, presumably after at least some modems had been built, chips had to be replaced to get them to function. On 30 June Mr Gillmore warned IMS that the order from Fisher & Paykel was in jeopardy unless modems could be delivered to them within two days. Shortly after, a modem was received by Evtech, but it would not work on battery power. Then, on 5 July, Telecom withdrew from negotiations, having satisfied its requirements elsewhere. [263] In Mr Gillmore’s eyes the problems with the modem were attributable to Mr Morgan. Mr Gillmore felt that he did not give his full attention to Evtech’s affairs and was uncommitted to the project. Mr Gillmore was probably correct. By this stage he was agitating for Mr Morgan to move into Evtech’s premises, but Mr Morgan was proving as resistant to this idea as Mr O’Connor. Mr Gillmore negotiated alternative manufacturing arrangements with IMS, involving a right to engage third parties to further develop the modem, but that provided no immediate solution. By mid-July Evtech had received only four units and two of these were faulty. To compound the difficulties, at least one batch of cables delivered from Jatco was faulty. This magnified the problem of identifying the causes of the faults. Nonetheless, by 30 July, Evtech was able to submit a sample modem to a laboratory for testing for compliance with the technical standards relevant to connection to the Australian PSTN. [264] Andrew Coventry claimed that he was unaware of any quality problems in the modem at this time. The minutes of the directors meeting held on 28 July contained the following entry: “It was noted that the budget should be reviewed on an ongoing basis because of the problems being experienced through the inability of IMS to provide robust working modems”. Andrew Coventry denied there was any discussion about such an inability. He said the discussion was about IMS’s inability to produce modems in the required quantities. He sought to explain his signature on the second page of the minutes by asserting that the first page (where the relevant resolution was recorded) was “fraudulent”. He denied that that page was the first page of the document which he signed. He raised this point for the first time under cross-examination. I shall not set out the whole of the relevant passage, nor the evidence of the other witnesses on this point, save to point out that the first page 84 Mr Morgan attributed that to a defect in WinFax, which is possible. -- 84 of 267 -- 77 was initialled by Michael Coventry without demur and was put to Mr Cole without any suggestion of fabrication. I reject Andrew Coventry’s evidence. [265] In late July or August IMS began delivery of what Mr Morgan called the mark II modem. This was to be the production model. By then, however, other events had occurred to disturb Evtech’s equilibrium. Relationships among the Evtech directors [266] In assessing the interactions of the directors of Evtech, it is helpful first to understand their various interests. Until 27 May 1993 the directors were the Coventrys and Mr Quinn. From 27 May until 16 August those three were joined by the Darts. During the latter period all of them interpreted the articles of association as having the effect that each of the original directors had 162 / 3 percent and each of the Darts had 25 percent of the votes at a meeting of directors. Throughout the period Evtech’s financial position meant that the Darts were able to exercise ultimate control over it. [267] Andrew Coventry’s interest lay primarily in the options in the plaintiff he was to obtain for his shares and secondarily in any bonus options to which he might become entitled under the First Deed in the event that sales were successful. Around the end of 1992 he acquired a half interest, in conjunction with Mr Quinn, in Fern Chemical Company Pty Ltd and thereafter became an employee of that company. He remained there until June or July 1993, when he sold his interest to Mr Quinn’s business partner; he said his reason was conflict with Mrs Quinn. He lived at Runaway Bay. [268] Michael Coventry’s interest was similar to Andrew Coventry’s. However he did not have an alternative source of income; or if he did, it was not as reliable as that of his brother. By March 1993 he was in financially desperate straits. He claimed that was the reason he and his co-trustee entered into an extraordinary agreement with Belrida. For $5,000 they granted Belrida options to acquire their shares in Evtech. Each option was over half of the shares and was for $25,000 inclusive of the option fee. The agreement contemplated the possibility that the shares the subject of one option might be sold to Bundaway, and made elaborate provision for the proceeds of such sale to be substituted for the benefit of the option. Michael Coventry (but not Mr Quinn) was bound to secrecy about the agreement. [269] Neither party to that agreement disclosed it to Andrew Coventry. They suggested its purpose was simply to act as security for a loan of $5,000 though their evidence was halting, hinting and hesitant. I do not believe that suggestion. It is not possible to conclude what the real purpose of the agreement was (except to provide Michael Coventry with cash); but whatever it was probably involved obtaining some advantage vis-à-vis Andrew Coventry. His first knowledge of it came when he “found the document” on Mr Quinn’s desk at Fern Chemical some time in May. He was “pretty annoyed about it”. He claimed that Mr Quinn asked him to sign the notice on the last page of the agreement, although why he should have done so is obscure. He said he refused to sign and thereafter, “Tom got a bit - started to go a bit funny - well, his attitude changed slightly towards me.” [270] Mr Quinn had a somewhat different interest. His primary concern was to recoup the $109,000 which Belrida had advanced to Evtech and to clear its exposure to Westpac on its guarantee of Evtech’s overdraft. His best (and possibly his only) -- 85 of 267 -- 78 prospect of doing this lay in the deal with the plaintiff being completed. The Darts were agreeable to the overdraft being paid out from the funds the plaintiff was to advance to Evtech and were also willing for Evtech to grant Belrida a charge to secure its loan. In addition it would receive options for shares in the plaintiff in exchange for half its Evtech shares and rights to further options if Evtech were a success. As events unfolded the overdraft was paid out after completion of the First Deed, but on McCullough Robertson’s advice, no charge was granted to Belrida. [271] Bryan was the younger of the Dart brothers. He was quieter and less aggressive than his elder sibling. Prior to December 1992 he had played second fiddle to Kevin, the dominant managing director. When the Evtech deal arose he sought and was given the leading role. As Kevin described it: “It was agreed very early in the piece that this was Bryan Dart’s project. Bryan wanted to run this project - wanted me to stay out of it, in fact - which I did as much as I could. It was to be Bryan’s project. He was to work with Andrew and Tom and make it happen.” Because of this Kevin was very reliant on what Bryan told him: “HIS HONOUR: What was the family dynamic here? Was there a sort of older brother, younger brother thing in this?-- A little bit of difference in the family at that point, your Honour. I am sorry?-- There was a difference in the family at that point. Can you explain the dynamic?-- Quite simply that Bryan decided it was time to do his deal and show me how it was done, and that’s what he went to do. Were you sitting back in order to give him a chance to do that, or what?-- We agreed, as I stated earlier, that I would stay out of the day-to-day running of this and let Bryan do this. What was the background to that?-- I think it is a matter of my younger brother wanting to show me that he could get this done by himself and for me to stay out of it. I can understand that. It happens in a lot of families. Were you relying on him?-- Very much so.” [272] Probably this personal exposure added to the pressure on Bryan Dart. It would be surprising if he were unaware of the dangers which would arise in the event of failure: as it eventuated, after Evtech’s failure was recognised, he ceased to be an employee of the plaintiff. In addition to this personal interest, Bryan Dart also had his interest as a shareholder and director of the plaintiff. [273] As the senior managing director, Kevin Dart had an interest which largely coincided with that of the plaintiff. I have already described the perilous position in which the plaintiff found itself in late 1992.85 The share issue was reasonably successful but 85 Paras [74]-[77]. -- 86 of 267 -- 79 in early 1993, the plaintiff’s shares were still trading at only a little above par. Kevin Dart saw Evtech as a vehicle by which the plaintiff could gain cash flow and through which the value of its shares could be increased. As he said, he himself took no part in the affairs of Evtech apart from attending meetings. However he was active in promoting the Evtech System to stockbrokers. He presented this as part of the process of marketing the Evtech System, but I do not accept that evidence. I am satisfied that his concern was the promotion of the plaintiff’s share price. [274] After completion of the First Deed the new Evtech board met each week. The meetings were not formal directors’ meetings and proper minutes were not kept. They were called action meetings and the practice was for Mr Cole to make a list of tasks to be performed as a result of decisions made at the meeting. These lists bore many of the features of minutes and they were frequently referred to by the parties as minutes. Andrew Coventry challenged the accuracy and the authenticity of some of these documents, but I prefer the evidence of Mr Cole: I am satisfied that the “minutes” are genuine. [275] It was probably inevitable that Andrew Coventry and Kevin Dart would clash: their personalities were abrasive. I have already referred to the deterioration in the relationship between Andrew Coventry and the directors of IMS, particularly Mr Burgess.86 Kevin Dart was aware of this deterioration. It seems not to have troubled him. Andrew Coventry claimed he dissented from a number of decisions taken at these meetings and it would not be surprising if they brought out personal animosities. It is common ground that on at least one occasion there was a monumental display of temper by Kevin Dart, the outcome of which was his storming out of the meeting. And more than conflicting personalities was affecting boardroom relationships. Evtech’s cash flow [276] Self-evidently, if Evtech were to be the vehicle for carrying on a business, it had to be provided with working capital. It had none itself. The Bundaway Agreement and the First Deed both envisaged the purchaser advancing $400,000 to Evtech for this purpose. That figure was derived from a projected cash flow spreadsheet included in the document G2 and part of Andrew Coventry’s proposal for funding prepared in October 1992.87 The figures were extremely optimistic. Unusually in this type of case, the plaintiff has not claimed to have placed any reliance upon them. Doubtless that is because by the time the First Deed was executed, the figures were impossibly out of date. [277] Andrew Coventry’s proposal was that the working capital would be employed as to $100,000 to cover existing debts and as to the balance “to complete marketing phase and to be used for ongoing interface development”. By the time the Bundaway Agreement was signed Evtech’s current liabilities were approximately $151,000 and by the end of February 1993 they had increased to about $225,000. Mr Cole was, according to Bryan Dart, “looking after the accounts and ... keeping creditors at bay” and by early March both of them must have had a good idea of that 86 This may not have been attributable solely to Andrew Coventry: compare Igaki Pty Ltd v Coastmine Pty Ltd, Burgess and Ors Federal Court, unreported, no QG 103 of 1991, 2 November 1994 (Drummond J); (1996) 34 IPR 37 (Full Court). 87 Exhibit 2 p 151. Note incidentally that the figures seem to assume that Evtech would be carrying on a sole business, not a joint venture. -- 87 of 267 -- 80 figure. As time dragged on that figure was increasing rapidly. In addition, agreement had been reached in principle with IMS in mid-February and this involved an up-front payment of $150,000. By early March it must have been obvious to all who had turned their minds to the question that $400,000 was quite inadequate for working capital: the outstanding debts and the proposed licence would consume $375,000 before any sales occurred. Plainly Evtech would need additional funding within a couple of months of starting business. [278] Unfortunately, none of Bryan Dart, Mr Quinn or Andrew Coventry was asked specifically about his perception of Evtech’s cash needs at the time of the First Deed. Andrew Coventry affected to believe that the plaintiff was willing to provide whatever sum that was necessary to commercialise the System. While the Darts may have talked loosely about the plaintiff’s enthusiasm for investment in Evtech, there was no doubt about how much money the plaintiff was committed to provide. I do not believe Andrew Coventry was as naive as he painted himself. Mr Quinn was certainly aware of the foregoing figures; but there was no reason for him to question an arrangement which would shortly relieve him of liability on his guarantee and might provide him with security for the balance of his loan to Evtech. Bryan Dart was aware of the figures and, I infer, realised their implication. That realisation explains his statement to Mr Gillmore, as reported by Mr Gillmore in his evidence in chief: “MR O’DONNELL: Did you understand that Charter Pacific was buying the whole of the Evtech company?-- Yes. Or something less than the whole?-- No, I thought they were purchasing it outright. To be honest, that was - I never heard a discussion that said they were buying part of it. I thought it was a purchase of the whole entity, the technology. In fact, I asked Kevin - I asked Bryan Dart at one stage in the first time that I came over to see them after I had been over for the holiday. I said to Bryan, ‘Is this what you are buying?’ He said, ‘We’ll end up buying the whole thing.’ The whole - you know.” [279] Under the First Deed as varied on 27 April, the plaintiff was to advance $400,000: “(i) by such amount/s and at such times as determined by the purchaser during the period commencing on the date of this agreement and ending 7 July 1993; (ii) the sum of $100,000 on the completion date; (iii) the balance of the advance on 7 July 1993”. It claims to have paid or incurred liability for a total of $58,402.33 under para (i) during the period between execution and completion of the deed.88 Of this $8,319.00 was deposited into Evtech’s bank account and the balance was paid or payable to third parties. The defendants denied that $45,153.50 of the balance was paid or payable on behalf of Evtech. I deal with that denial later. If one were to accept the plaintiff’s claims it would mean that on the day of completion, the balance working capital to be made available to Evtech was only $341,597.67. Even on my findings, the remaining working capital was only $367,382.16. [280] On the completion date, 27 May, the plaintiff deposited $100,000 into Evtech’s new bank account, in accordance with the deed. Between then and 7 July (the date by 88 This figure and the following figures are calculated from Annexure G. -- 88 of 267 -- 81 which the full amount of $400,000 had to be advanced) it deposited a further $240,000 and made further payments to third parties. If one were to accept the amounts which it now claims, it would by this date have advanced over $417,000. In fact, by close of business on 7 July it had advanced or incurred liability for almost $390,000. Barely $10,000 remained to be advanced and less than $5,600 remained in Evtech’s bank account. Not a month and a half had elapsed since the completion of the First Deed. [281] Although there is no claim that the plaintiff was relying upon the cash flow spreadsheet prepared by Andrew Coventry in October 1992, I can find no evidence as to whether anyone prepared a replacement prior to the completion of the First Deed. Such inertia on the part of the Coventrys and Mr Quinn is consistent with their previous management style: one would hardly expect otherwise. It strains credulity to accept that the plaintiff could have ventured into what was for it a new business with no financial projections: neither budget nor cash flow. That was not its style. However on the evidence, the plaintiff’s first foray into financial planning was an attempt by Mr Cole and Mr Gillmore to construct a “budget” during June 1993. This work was prompted by a decision at the action meeting on 1 June. What they created was not in fact a budget but a projected cash flow spreadsheet. Mr Gillmore was responsible for the sales figures and Mr Cole for the expenses. At least four versions were eventually created. All used the same sales figures, but the expenses were modified from time to time. All of these spreadsheets can be criticised for inaccuracies, but it is quite plain from them that Mr Cole must have realised by 18 June at the very latest that Evtech was facing an imminent shortage of working capital. [282] The first spreadsheet in evidence was created on 6 June and, it seems, modified by Mr Gillmore on or about 8 June. He then commented that the cash flow “looks great” but warned that they were flying in the dark a lot. On the defence case it was seen by Andrew Coventry at an action meeting either on that day or subsequently. It disclosed only a small deficiency in working capital, but it did not take into account the loan from the plaintiff, Evtech’s outstanding creditors and the liability to IMS for the licence fee. The second in evidence, prepared on 18 June, rectified the first two of these deficiencies but not the third. It projected a deficiency of more than $92,000 by August. There is no evidence that it was shown to Andrew Coventry. The third was prepared on 22 June. It showed the licence fee, envisaging payments of $150,000 in June and a further $100,000 in July. It predicted a cash flow deficiency peaking at over $467,000 in September. [283] It is unclear when this spreadsheet was first shown to Andrew Coventry. The minutes of the action meeting held on 23 June record: “14. Cash flows tabled after meeting. Careful consideration to be given to funding requirements between June and November when requirements peak at about $467,000.” The meaning of that minute is opaque and was not explored in evidence. From the dollar amount mentioned, it seems to relate to the spreadsheet of 22 June. The evidence does not permit a finding that it was then shown to Andrew Coventry. It is unknown whether the item was followed up at the next scheduled action meeting (due on 29 June) because there are no minutes for that day. It cannot be said with confidence that any meeting occurred. Curiously, the issue was not raised at the action meeting held on 6 July. However Andrew Coventry admitted that on 7 July, Kevin Dart told him that “the requisite $400,000 had already been advanced by [the -- 89 of 267 -- 82 plaintiff] to Evtech”. He said he was amazed and asked for a written breakdown. On 9 July Bryan Dart sent a copy of that spreadsheet, together with an updated spreadsheet made on 8 July, to Andrew Coventry by fax. [284] The spreadsheet of 8 July was the fourth put in evidence. It trimmed expenditure significantly and deferred the second instalment of the licence fee ($100,000) for six months. Nonetheless, it projected a deficiency in working capital peaking in September at over $286,000. This spreadsheet was placed before the directors’ meeting on 13 July. [285] The meeting of 13 July was a formal directors’ meeting. There is no evidence that any action meeting was held on that day or subsequently. This may be because the documents have been misplaced; but is more likely that there were no further action meetings of these directors. There is no evidence that the Coventrys or Mr Quinn took, or were invited to take, any active part in operational matters after 6 July. Two formal directors’ meetings were called during July. Each was called on notice and was carefully documented, a marked contrast with the practice up to that point. Mr Cole took the trouble to have the directors sign the minutes of the meeting on 13 July. [286] There were four items on the agenda for 13 July. The first was a formality. The second I shall deal with later. The other two were the budget for the period ending 31 December and the requirement for working capital. A budget was adopted. I am satisfied that the document adopted as the budget was in fact the fourth spreadsheet referred to above. Andrew Coventry at some points in his evidence challenged this; but his evidence was internally inconsistent and flew in the face of the documentary evidence as well as that of other witnesses. [287] It is surprising that the directors should have adopted that spreadsheet as their budget. The sales figures which it postulated were optimistic to say the least. They had been formulated by Mr Gillmore in late May or early June. They projected even higher sales than the figures prepared by Andrew Coventry in October 1992. Mr Gillmore said that he had worked out a detailed spreadsheet for sales and cost of production, but it was not put in evidence and there is no reason to think that the directors saw it. When they saw the first spreadsheet in early June, there may have been some grounds for their optimism in connection with the sales figures. They still expected to receive the long awaited order from New Zealand Telecom; the Fisher & Paykel project89 seemed to be proceeding smoothly; and the Adelaide office of Telecom Australia was showing interest in purchasing the System for internal Telecom use. By July it was known that there would be no order from New Zealand Telecom and no order from Telecom Australia. Any order from Fisher & Paykel depended upon a successful trial being carried out with six modems and so far, none was forthcoming from IMS. There were no other solid expressions of interest in the System. Objectively the sales position was far grimmer than the budget depicted. [288] The expenditure position was also considerably worse than appeared from the spreadsheet, although this would not necessarily have been evident to the directors at the meeting. According to the spreadsheet the accumulated cash flow deficit at the end of June was $23,204. That figure represented the difference between income from the plaintiff of $310,000 and expenditure of $333,204. Both those 89 Described below, para [507]. -- 90 of 267 -- 83 figures were too low in a document intended to be used as a budget. By 30 June the plaintiff had deposited over $333,000 into Evtech’s bank account. It had also incurred liabilities on Evtech’s behalf of about $42,000, giving total expenditure of about $375,000. The amounts claimed to 30 June by the plaintiff at trial were even higher, the total exceeding $400,000.90 Mr Cole was unable to explain the discrepancy between the amount of the plaintiff’s claim and the spreadsheet.91 It was not put to Mr Cole that the spreadsheet constituted a deliberate attempt to conceal the true position from the directors and the discrepancies are consistent with insufficient research having been carried out in preparing the expenditure figures for the spreadsheet. [289] The meeting of 13 July also discussed the question of working capital. The minutes record: “Working Capital: IT WAS REPORTED that the Company requirements for working capital in the short term is imperative to ensure the viability of the company. Because of Evtech’s past financial problems, the company is unable to finance further working capital from the usual lending institutions, therefore, Charter Pacific is prepared to fund the administration costs of the company for a further week until 20th July, 1993. IT WAS RESOLVED that all Directors make it a priority to investigate all avenues of raising further working capital during the next week. IT WAS ALSO RESOLVED that a Directors Meeting be held one week from today (Tuesday, 20th July, 1993) at 8:30am at Level 10, Corporate Centre One, Bundall, to discuss the raising of further working capital.” [290] Kevin Dart gave uncontradicted evidence that he told the meeting that the plaintiff had already provided more then $400,000 and that he did not intend to provide too much more. He said that the plaintiff would provide funds for the next week but that all directors “needed to think about where we were going with Evtech and ways of funding it in the future.” Mr Cole told the meeting that the only way money could be raised was from the shareholders, either by way of loans or as equity. Neither the Coventrys nor Mr Quinn indicated any ability to do this. [291] In fact, the only way by which the Coventrys could have raised money to invest in Evtech was by sale of some or all of their options in the plaintiff. That was not possible while the options remained in escrow. In what it submitted was an attempt to get round this obstacle, the plaintiff sought permission from the Australian Stock Exchange for 100,000 of the options held by each of the trustees to be released from escrow and sold on condition that the proceeds be lent to Evtech. The Exchange refused this permission. The plaintiff sought to characterise this as a genuine 90 The foregoing figures have been calculated from Annexure G. 91 Transcript 1405 ff. The figures referred to at that reference are even higher, but subsequently, the plaintiff excluded some items from its claim. -- 91 of 267 -- 84 attempt by it to help the Coventrys and Mr Quinn to raise money, in much the same way as it sought to characterise the proceedings of 13 July as containing a genuine request to them to see if they could raise the funds. I reject that submission. The Darts knew there was no prospect of the Coventrys or Mr Quinn contributing further funds and just as surely they knew that there was no prospect that the Exchange would grant permission. Mr Cole said: “I didn’t even know the letter had gone. I can’t recall the letter at all, and I don’t know of a reply. My discussions with Kevin and Bryan that I recall about the matter was that it was a non-negotiable listing rule, and that was that. It was a waste of time arguing with them.92 I tried to in the past and had never succeeded.” [292] Despite some evidence from Kevin Dart to the contrary, I accept Mr Cole’s evidence that no meeting took place on 20 July. [293] The agenda for the meeting of 28 July contained the item, “Approval of terms of loan made by Charter Pacific Corporation Limited”. At the meeting, the Darts tabled a loan agreement. It provided for the plaintiff to lend Evtech $70,000. Evtech acknowledged that $50,000 of this amount had already been advanced. The loan was repayable within seven days of receipt of notice to repay. It was agreed that the loan was within the term “financial accommodation” in the fixed and floating charge securing the original $400,000 advance, with the consequence that its non-repayment when due would render all of the monies advanced repayable. The minutes record the resolution that Evtech accept the loan and that the company seal be affixed. 93 [294] There were several versions of what occurred at the meeting of 28 July. Bryan Dart was his usual vague self: “There’s a resolution that Evtech accept the loan of $70,000 from Charter Pacific. Can you recall the discussion that led up to that resolution?-- We wanted to formalise that Charter Pacific had lent money to Evtech and was going to lend more money to the company, and we wanted on record for all Evtech directors and for Charter Pacific’s records as well. Did the other directors suggest in the meeting here means of raising further working capital?-- Everybody said they had no money, and they were very clear about that. Was there any discussion of what would happen when the additional $70,000 had been used up?-- I can’t recall the exact words or detail, but everyone understood that Charter Pacific would be putting no more money in unless other funds were found through the remaining directors.” [295] He denied the defence case put to him: “And I put it to you that this extra $70,000 was obtained deliberately so as to enable a calling in of the moneys at a time it was known that 92 The ASX. 93 It is unnecessary to consider whether the loan agreement would have been void as a preference at the behest of any liquidator of Evtech or whether the Darts acted in breach of their fiduciary duty as directors of Evtech. -- 92 of 267 -- 85 Evtech would be unable to pay them with a view to Charter being able to take over the entirety of Evtech?-- That’s incorrect.” [296] During his evidence in chief, Mr Cole was more forthcoming: “What was the discussion in the meeting about this question of Charter loaning this further $70,000?-- The discussion was led by myself that Charter Pacific had advanced some $55,000 or $58,000 dollars to Evtech at that time at the date of the meeting, 28 July, and that Charter Pacific was prepared to advance further moneys to allow wages to be paid to the staff that were working at Evtech for a short period of time and the only way that Charter Pacific would advance those moneys was if Evtech entered into the loan agreement to document that loan. Was there a discussion about the success the other directors had had in finding other avenues of working capital?-- Yes. Each of the directors in turn were asked whether they had any other source of working capital for the money and each director responded, no, they didn’t. Was there a discussion then as to what was going to happen with the company when the $70,000 ran out?-- Yes, there was a discussion. Andrew and Tom and Michael said that the work that they had been doing with Russ Morgan, at that stage the product should be up and ready for sale and that IMS should have those documents out and we should start to have sales coming through in a short period of time, thereby giving Charter Pacific some comfort that there is an opportunity for it to recoup its loan moneys.... ... MR O’DONNELL: What was said in the meeting as to, ‘What’s going to happen once the $70,000 runs out if the other directors can’t raise any working capital and Charter isn’t prepared to put it in?’?-- Yes. The other directors were advised there would be no further funds advanced by Charter Pacific and that there would be a directors’ meeting when those funds run out and Bryan and Kevin would vote that the business close down so that no further debts were incurred when there was no ability to meet those debts and basically the operation would be wound down. What was said about that from the other directors?-- The other directors were not very happy. There was not a lot of response from either Tom Quinn, Andrew Coventry or Michael Coventry. They already indicated they had no resources to provide further working capital and said that words to the effect that, ‘Surely you wouldn’t close the business down without giving us a real chance to get this thing up and running?’, and Kevin said, ‘Well, I have no alternative. If Charter Pacific is not prepared to stand behind and guarantee the payment of debts as and when they are incurred by Evtech, the company will have to cease trading and that will be that.’ -- 93 of 267 -- 86 Then the loan agreement is signed?-- Yes.” [297] However his recall was less thorough during cross-examination, without prompting: “The directors’ meeting was fairly short and to the point. I recall that - words to the effect that Charter Pacific wanted to fully document its advance over and above the $400,000 as a requirement for its own bookkeeping records and that the directors of Charter Pacific required that to be done. I don’t recall the other discussions. As I said, the meeting wasn’t a long directors’ meeting and after that I left the room.” When the cross examiner gave a prompt, Mr Cole responded: “At this directors’ meeting on 28 July, was clause 2 of the loan agreement, involving repayment of a $70,000 extra advance within seven days of receiving written notice, expressly brought to the attention of the Coventrys and Tom Quinn?-- Yes, I believe it was. You were there. Do you say someone said something about it?-- Yes. I gave a brief overview of the document to the meeting, being the amount that was advanced and what it was covering, the repayment, the interest. I didn’t go through all of the default clauses. I made the comment that there was no personal guarantees involved by the directors and it was a loan between Evtech, the company, and Charter Pacific Corporation, the company, and that should there be a default, it would be a matter between the two companies and wouldn’t involve the directors personally.” [298] Kevin Dart had a somewhat similar recollection: “Did the discussion at the meeting take up what had been left off from the 13 July meeting as regards the raising of further working capital by all directors?-- Yes. To the best of my memory we discussed that further. Words to the effect - when I asked Tom Quinn as to whether he was able to provide any additional funding, Tom Quinn answered, words to the effect, no, that he wasn’t able to provide any more loan funds to the company. I asked Andrew Coventry, words to the effect, whether he was able to provide any - any funds. He said he was not able to, or words to similar effect. I asked Michael Coventry whether he was able to provide funds, he said he was not able to, or words to that effect. How did the discussion proceed from there?-- The discussions went on in that meeting. It was - I believe I used words something to the effect that we had to finalise the issue regarding the $70,000 that Charter Pacific was lending the company. I asked the - for a consensus on that. I believe that Tom Quinn’s words were something to the effect, yes, he agreed. I believe Andrew Coventry’s comments were something to the effect that, yes, he agreed with the loan document being signed. I believe all those present passed that - that - gave approval for that document to be signed off. The loan agreement was recorded in the minutes as tabled at the meeting. What happened about that?-- To the best of my memory, -- 94 of 267 -- 87 that loan agreement was signed by Andrew Coventry and Bryan Dart. Was there further discussion about what was going to happen with the company’s funding position, with its working capital position?-- There was discussion on it. I don’t recall precisely at this point.” [299] Andrew Coventry’s evidence on the point was incoherent and inconsistent and is too prolix to quote verbatim. Its essence can perhaps be seen from one extract: “It was agreed at that stage that we were to cover the backsides of Kevin and Bryan Dart, who explained to us that they had issued money out without the approval of Charter Pacific, to cover themselves and to ensure that whilst this period of this big deal was happening, which was only a few weeks, there was enough money just to cover the wages and that, because there was going to be $800,000 to $1 million sitting in our account within ten days or something. So they needed this approval, thus the loan agreement.” [300] He claimed that Kevin Dart said that the million dollars would come from Chinese interests with whom he was currently negotiating. That oral evidence did not quite accord with the statement which he tendered as part of his evidence in chief, where he said that the Hong Kong group were represented as intending to pay $750,000 for 10 percent of Evtech. Andrew Coventry conceded that the meeting was informed that none of the promoters had been able to raise any funds to invest in Evtech. He also agreed that “in a roundabout way” it was said in the meeting that the plaintiff was only prepared to advance the further money if Evtech would enter into the loan agreement. However he characterised the suggestion that the Darts threatened to close the business down as “absolute rubbish”, asserting “We have got orders coming out of our ears.” [301] Michael Coventry did not describe the meeting in his statement. In cross- examination he agreed that someone (he could not say who because he was present by telephone only) had said “that the meeting was being held because Charter Pacific had already lent $50,000 over and above its agreed $400,000.” He claimed that the loan was put forward (by the Darts) as a bridging loan to cover Evtech for a couple of weeks at which point sales revenue would become available. He denied that Kevin Dart pointed out that without funds from the plaintiff, Evtech would have to cease trading. [302] Mr Quinn was called by the defendants. He encapsulated the events of July in the following exchange with Andrew Coventry: “Can you remember - can you relate to those events leading to that Second Deed?-- Yes. You had agreed to sell 10 shares of the Tabe Trust’s shares to Charter Pacific - yeah, to Charter Pacific, which I believe would have given them control. I voiced my opinion to you that I didn’t think that was a good idea. You rescinded that approval to them, but then shortly after that Charter Pacific made an offer to purchase the remainder of our shares in full. There was a situation where they advanced another amount of money - I think about $70,000. A week later they called up the loan, or thereabouts, and threatened to close the company down if we didn’t sell the remainder of our shares to them. We believed we were in a position where we -- 95 of 267 -- 88 had no negotiating power and we agreed to accept their offer and that effectively ended our shareholdings in the company, in Evtech.” When cross-examined about the loan, to the effect of the version given by Mr Cole, he either agreed with or could not recall the circumstances put to him. [303] I am satisfied that Mr Cole’s version of events at the meeting of 28 July is the nearest to the truth. Andrew Coventry’s version was in my view a fabrication. I deal later with my conclusions regarding Andrew Coventry’s evidence as to the Chinese involvement. I reject that evidence. I also reject the evidence of Michael Coventry that it was said by the Darts that the loan was to be a bridging loan until the receipt of revenue from sales. Some of Kevin Dart’s evidence about the events around this time (though not the substance of the passage quoted above) was also incorrect. I accept the version given in evidence in chief by Bryan Dart, but reject his denial of the proposition put to him in cross-examination and quoted above. [304] I am satisfied that the plaintiff was keen to obtain complete ownership of Evtech from an early stage. It used Evtech’s lack of working capital to achieve this object. The proposition put to Bryan Dart in cross-examination, quoted above,94 was correct. The plaintiff’s demand for the loan documentation had two purposes. The first was to document what the plaintiff perceived as advances in excess of the agreed amount and possibly to bring them within the ambit of the fixed and floating charge. The second was to create a vehicle by which much pressure might be exerted upon the Coventrys and Mr Quinn to acquire the trustees’ shareholding. The Darts, said Mr Cole, saw the loan document as a chain by which those shareholders could be compelled to negotiate: “From discussions with Kevin and Bryan was that, ‘It’s about time we jerked the chain’, Your Honour, ‘and I suggest the way to do that is to issue a letter of demand. They will have to come to the table to talk.’ That’s what happened with [the repayment notice]. What about the ----- HIS HONOUR: Is that one of the advantages you saw originally in the loan deed?-- Yes, Your Honour.” [305] This view is reinforced by what I thought was one of the more frank answers which Kevin Dart gave: “Is the real point that you were spending the money so you could get a lever to get control of Evtech?-- It may well have been.” The Second Deed [306] On 8 July 1993 one of the more mystifying events in this tangled saga occurred. Barry Tabe, the trustee of Andrew Coventry’s Family Trust, delivered a notice to the directors of Evtech pursuant to cl 9.3 of the shareholders’ agreement in respect of 10 A-class shares. Under the agreement the directors thereby became his agent for the sale of those shares to the other parties to the agreement. The circumstances surrounding the giving of that notice were controversial. 94 Para [295]. -- 96 of 267 -- 89 [307] According to the Darts, the offer followed a conversation between Andrew Coventry and Kevin Dart in which Andrew offered to sell the plaintiff 10 shares in order to enable the plaintiff to have control of Evtech. Kevin Dart’s version of the conversation was as follows: “Some time late June, early July, Andrew Coventry called to the office in Bundall - our office in Bundall to see me, said he wanted to talk to me about a matter. I went into the boardroom with Andrew. We talked about the weather initially and then Andrew said that - said words to the effect, ‘How would you like to buy shares that would you give you control of Evtech?’, and I said, ‘What’s this all about, Andrew?" Andrew said, "I’m having a fight with my brother Michael. He’s siding with Tom Quinn. I’ve got Tom Quinn trying to squeeze me out of the business’, the business being Fern Group, the chemical company that Andrew was working in, or a partner in. ‘I’ve had a gutful of all these bastards. I’m going to show them. I’m going to hand over control and go on and develop some technology that I’ve an interest in out at Western Australia that’s going to make me a lot of money’. It was words to that effect, and I said, ‘Yes, we’ll buy the shares.’” [308] Bryan Dart claimed that Andrew told him that he was in dispute with Mr Quinn over the conduct of the Fern chemical company and with his brother for a reason which Mr Dart could not recall. He did not claim to have been present during the conversation between Andrew and Kevin. [309] Andrew Coventry gave several divergent versions of the reason for the offer. The first was given in an affidavit made on 17 June 1994: “5. In or about late July 1993 Bryan Dart on behalf of the Plaintiff approached me with a view to the Plaintiff purchasing 10 ‘A’ Class Shares from The Tabe Trust. The reason given was that the Plaintiff needed control of the Company so as to approach the shareholders of the Plaintiff so that the shareholders could consider a joint venture agreement with another party to invest in the Company.” [310] The second initially appeared in the version of the defence and counterclaim filed on 26 October 1994. It is convenient to quote this version as it appeared in the final version of the defence and counterclaim, notwithstanding that the pleading did not originally contain paragraph (c): “50. In late July 1993, the Darts, acting for and on behalf of the plaintiff, made the following oral representations [hereinafter referred to as “the second representations”] to the fifth defendant acting for the vendors: (a) that the plaintiff had reached agreement with a Chinese entity whereby Evtech Pty Ltd would enter into a joint venture which would manufacture and market the Mule95 globally; (b) that the joint venture agreement would result in an order for 20,000 units of the Mule, half immediately and the other half at the end of the year; 95 See para [635]. -- 97 of 267 -- 90 (c) that the envisaged sales of the Mule would be packaged with Electrocomm and would be treated as if they were sales of the System under the First Deed; (d) the fulfillment of these orders would bring it about that the vendors would receive their performance bonus under clause 7 of the First Deed and their special bonus under clause 9(a) of the First Deed; (e) that the joint venture agreement would drive up the value of the shares of the plaintiff, and thus of the options to which the plaintiffs were to become absolutely entitled at the end of the escrow period pursuant to the First Deed; (f) that in order to enter into the joint venture with the Chinese entity the plaintiff would need to control an absolute majority of the shareholding in Evtech Pty Ltd; (g) that if one or more of the vendors were to transfer any of his remaining shares in Evtech Pty Ltd to the plaintiff then the Chinese joint venture would be entered into forthwith.” [311] Particulars of this pleading were given in February 1999. With some subsequent slight amendments, those particulars were: “Particulars (a) The substance of the words used to constitute the second representations was as follows. The effect of the words was to induce the counter-claimants to believe in and rely upon their veracity. ‘We have negotiated a major deal as regards manufacturing & marketing the System in China. There is a party over there who wants to enter a joint venture with us. He is the head of the Chinese equivalent to the ASC, but because he is forbidden to engage in business, he uses his wife as a front. As you can imagine, he has very extensive business contacts. ‘It will readily be sold to the massive Chinese market because in the near future their communications will be essentially cellular rather than fixed line. There are a lot of problems with security in the existing ‘party line’ Chinese phone system and they are keen to obtain the encryption potential of our System. ‘Part of the deal is an order for 20,000 units ordered in the first six months, half immediately and half by the end of the year. All of this would enable you to receive your performance bonus and your special bonus by the end of 1993! Of course, the value of your Options in Charter Pacific will be driven up high to probably anywhere between $8.00 to $12.00! ‘However, we will not enter an agreement unless Charter Pacific controls Evtech. How about selling -- 98 of 267 -- 91 Charter Pacific say ten shares in Evtech at $100 each so that we can ensure Charter’s control of the deal? Protecting Charter is in your interest. We will also need to do a deal with the other minor shareholders to get their shares.’ (b) The representations were made at the offices of the plaintiff. (c) The representations were made [late in] July 1993.” Andrew Coventry accepted that he was the only person who could have given instructions for these particulars. [312] In reply, the plaintiff denied the statements attributed to the Darts, but pleaded that in discussions prior to entry into the Second Deed, mention was made that: “(i) the plaintiff was negotiating with a Chinese company with a view to setting up a joint venture in China; (ii) the object of the joint venture would be to establish a radio telephone network in China; (iii) the joint venture would be between Charter Pacific International Pty Ltd and a Chinese company; (iv) if the venture went ahead, Evtech Pty Ltd may then sell the System to the joint venture for use in China; (v) the matter was at an early stage of negotiation. Particulars The matters were mentioned by Bryan Dart and Kevin Dart at the Plaintiff’s offices at Bundall in or about late July 1993 to the Second Defendant, Third male Defendant and Fifth Defendant. The radio telephone network referred to was contemplated being set up in the Peoples Republic of China.” [313] The third version given by Andrew Coventry occurred in his written statement, tendered as part of his evidence in chief: “106 On or about 07.07.93 Kevin Dart approached me and said, “Charter needs the legal control of Evtech to be able to do a deal with a major party based in Hong Kong this deal would cause a JV and enough orders for a Chinese group for triggering your extra share options under the agreement with CPC within a year. Charter shares would rise to probably $8.00 to $12.00 a share once the deal is announced, and your family trusts would be millionaires due to royalties and capital gain on shares as well as the profits from Evtech. All Charter needs, is another 10 shares to give them the ability of completing the deal. Would the Tabe Trust be prepared to arrange for these to be transferred to Chart?”.96 He said once this was done he could then sell up to 10% percent of Evtech as discussed in our original deal for about $750,000. He indicated they might only want 5% for about $500,000. In any case he had it all organised and the money was available within a week or two of the legally required time of acceptance, of an offer for sale of shares to 96 Italics in the original. -- 99 of 267 -- 92 the other shareholders. Kevin stated that the top echelon of the Hong Kong Jockey Club were the main players and were also involved with this group in China. He said that noone was to know this; he explained the money for the percentage in Evtech would go towards the payment of the manufacture of the systems (not to the shareholders) to fill the orders that were assured from the Chinese group. 107 I asked how could we produce the required numbers, and he stated Gillmore [sic] had been organising that and indicated that he had Gillmore under control and he was doing a good job, and I was not to mention anything to Russ and IMS. … 110 Kevin Dart told me I was not allowed to mention the Chinese connection at this point to anyone and was only to explain to Tom and Mike about the investors under the same conditions of silence, and not until I had agreed to accept the proposal. As Kevin said, - it was very political and had to be handled in a set carefully planned process. Kevin had to know quickly or it could cause a great deal of trouble and we would loose [sic] the opportunity. 111 I’m sure he said the Chinese fellow’s wife was out here at the moment and he had to give an answer ‘by tomorrow’. He stated that the investors act immediately with the funds; he indicated that we would supply the modems and software through a company who already supplied modems and electrical products into the military in china, and were well established and very credible. 112 I asked him why he came to me and not Tom or Mike, he again explained that it had to be organised quickly and he knew Tom would try to screw more out of them and would want to get ‘all legal and get pedantic and this was the deal that you either jump into or you miss out on’. He said that – Mike they had not met and he was to far away and they did not really know him. (In hindsight they must have realised I was the biggest fool). He then explained Charter would have to buy the other shareholders out at a later stage, so he asked if I knew someone to act as an adviser to talk to them when he was ready. He said I was not to discuss any of this with those shareholders at all, and I was not to let Tom and Mike know about the Chinese or the future orders only about the investors and they were not to say a word. He asked me for my word that I would not tell them at this point in time anything about this meeting or its subject matter until I had agreed to sell the ten shares. I assured him that I would not. I recommended Peter Chapman who was a shareholder, to talk to the other shareholders when the time came, as he was well skilled in negotiation. They did later -- 100 of 267 -- 93 engaged [sic] Peter Chapman to negotiate with the minor Evtech shareholders and bought them all out on deals for options in CPC (but they never injuncted their options!). They evidently told the minor shareholders the story about the Asian investors (not the sale or the quantum or of the orders from the Chinese though) but explained that they needed control for Evtech to do a deal, and if they couldn’t they would have to close Evtech down due to lack of funds. In effect they forced them out as well. I didn’t know what was said at the time as I have only found out since this action. I know they were definitely not told the unit didn’t work they believed the Darts and Charter were doing it to get Asian partners in.” [314] Clause 9 of the shareholders’ agreement provided a mechanism for determining the price of shares the subject of a notice. Fourteen days were allowed for an agreement to be reached between the vendor and/or directors. In default of agreement the price was to be determined by a valuer. Pursuant to cl 9, the agenda for the directors’ meeting held on 13 July 1993 included the issue of agreeing upon a price for the shares the subject of Mr Tabe’s notice. (It will be recalled that the same meeting adopted the budget and passed the resolutions regarding working capital described above.) The minutes record: “Share Sale: IT WAS RESOLVED to accept a sale price of $100.00 per share for sale of ‘A’ Class Shares by Barry Tabe as Trustee of the Tabe Trust. Mr. Andrew Coventry abstained from voting because of his association with Barry Tabe.” Consequent upon that resolution the other parties to the shareholders’ agreement were, pursuant to the agreement, forthwith given notice of the number and price of shares for sale and invited to state their willingness to purchase those shares. [315] Kevin Dart had a contact in Sydney named Leo Respinger. On Tuesday 20 July pursuant to arrangements made by Mr Respinger, Mr Gillmore had a meeting in Sydney with a Mr Wong, then the chairman of the Shenzhen Stock Exchange. Mr Wong was interested in purchasing an integrated paging, voice, data and fax system for use by the Exchange. Mr Gillmore demonstrated the IMS modem and two days later followed up with a letter seeking basic technical information. It is common ground that through this contact, the idea evolved of Evtech entering into a joint venture agreement with a company controlled by Mrs Wong to establish a radio telephone network and to sell modems in China. On 29 July someone in Evtech, probably Kevin Dart, drafted a letter regarding a possible structure for a joint venture company. I am satisfied that, at least in general and possibly optimistic terms, Andrew Coventry was during July kept informed of developments. Heads of Agreement were signed in October 1993, but ultimately nothing came of the proposal. [316] In late July or early August, a series of discussions took place between Kevin Dart and Andrew Coventry. They took place against the background of demands by the Darts that the promoters provide finance for Evtech. I infer they commenced immediately after the signing of the loan agreement on 28 July. Kevin Dart gave his version of the conversations in his evidence: “Andrew said to me on these occasions words to the effect that, ‘I’m having trouble with Tom Quinn. Tom Quinn is trying to squeeze me -- 101 of 267 -- 94 out of the business. I don’t know whether Michael’s helping him. I’ve got problems with Michael as well. I’ve really had enough. I don’t care what happens to them, but I want to get out of this. I just want to go and do my own thing’, words to that effect. How did you respond?-- ‘Andrew, if you want to sell your shares, we’re interested’, words to that effect. There were discussions that went on probably over - as I said, four or five meetings over periods of time where a - Andrew came back and spoke to me on the issue. The negotiations took place. Precisely what happened in the end, other than Andrew saying that he agreed and it was time to do the deal I don’t recall.” [317] Kevin Dart claimed he was interested in acquiring the outstanding shares in Evtech. He was asked why he was interested: “It was a matter of if Charter Pacific was going to fund the future of the company and the commercialisation, we weren’t too interested in seeing anyone else benefit from it. If we were funding it, then - no- one else was prepared to put money in. We were in a pretty embarrassing situation at this time. We had spent a little under half a million dollars, or thereabouts. We had to make it a success. We decided to push ahead but we’d only push ahead for control so that the benefits - that is, the profits - that flowed to the company would come back to our shareholders.” [318] Andrew Coventry denied this version. According to him: “Within 24 hours [of the loan agreement], Bryan Dart rang me and said, ‘We have confirmation of a deal in China. The first order is guaranteed to be 10,000 units and another order for 10,000 will follow shortly. This will mean that all your bonus options would immediately come into play.’ He said ‘the only way we can enter the deal with the Chinese is now to have all the shares in Evtech - not just enough for control, because we will sell a portion to the investors to get the money into the company, and unless CPC owns them all, it will lack a controlling interest after the JV is consummated. It won’t matter to you that you no longer have shares because you will have achieved everything we have promised you.’” [319] He said that after consulting Mr Quinn and Michael Coventry, he rang Kevin Dart: “… and told him we were not interested, Kevin got very hostile and he suggested we change our minds quickly. He then indicated they were offering us a good deal. I suggested as every thing was going so well, then they should be prepared to pay a lot more than they paid for the first half of the company. He scoffed at this and threatened me with sacking the staff, and closing Evtech and then suing us jointly and severally (a term which I did not know). … On the phone Kevin told me that we would accept or else he would shut the company down, so we better come to our senses quickly. I was in no financial position to argue as they had the workers, the money, the contacts, the investors and Tom said he couldn’t afford to fight them as no one would win. Both Tom and I agreed we had no option but to accept.” -- 102 of 267 -- 95 [320] On 30 July, Bryan Dart wrote to each of the Coventrys and to Mr Quinn: “We refer to our discussions of this week. The terms of our offer to purchase your family trust’s ‘A’ class shares in Evtech Pty Ltd are as follows: 1. The acquisition price is $41,000 with a deposit of $3,400 being paid on signing of the agreement. The balance of the acquisition price is payable on 29 July 1994. 2. You will forgive the repayment of the sum of $3,400 which is owing by Evtech Pty Ltd to yourself. 3. You will resign as a director of Evtech Pty Ltd. 4. Your family trust will relinquish any rights that it has in respect to the further issue of options by our company (clause 7 of the Deed for Sale of Shares) and the payment of any bonus moneys by Evtech Pty Ltd (clause 9A of the Deed for Sale of Shares). 5. Your family trust will agree to our company acquiring all of the ‘A’ class shares from Michael Coventry’s interests (M.J. & L.H. Coventry as trustees of the Mike & Lynn Coventry Trust) and Tom Quinn’s interests (Belrida Enterprises Pty Ltd as trustee of the Quinn Family Trust). 6. You will no longer be a signatory to any of Evtech Pty Ltd’s cheques. Could you please confirm that yourself and your family trust accepts the terms of our offer on the enclosed duplicate of this letter, in order that this arrangement may be formalised in writing.” [321] In his evidence Bryan Dart did not identify the discussions referred to in that letter. Indeed he denied involvement in discussions with Andrew Coventry (attributing them to his brother) and said nothing to suggest that he had been involved in discussions with anyone else. Kevin Dart claimed that Bryan had been involved in discussions with Michael Coventry and Mr Quinn.97 [322] Andrew Coventry claimed that this letter caused him to become angry. He said that in order to improve his bargaining position, he caused the Tabe Trust that day to withdraw its offer to sell the 10 shares. He said the withdrawal was sent by fax from his accountant’s office on the evening of 30 July. The plaintiff claimed it was never received. The defendants tendered a copy of a received fax bearing a facsimile machine imprint on it consistent with Andrew Coventry’s version, but with no cover sheet. It is not suggested that this document is a fabrication, but despite Andrew Coventry’s evidence to the contrary, it may be one sent to Mr Quinn. Even if that is so, it seems unlikely that Andrew Coventry would not have caused it to be sent to the plaintiff at the same time as it was sent to Mr Quinn. 97 Andrew Coventry claimed that either before or at about the same time as this letter, he wrote to the Darts with an offer to sell on behalf of himself, his brother and Mr Quinn, but he was unable to produce any such a letter. -- 103 of 267 -- 96 I find it was sent to the plaintiff and received on the plaintiff’s facsimile machine. In light of subsequent events, it is unnecessary to determine whether that constituted an effective revocation of the offer. [323] Andrew Coventry also claimed in his statement that on the same evening, he faxed a lengthy list of questions regarding Evtech’s business, drafted on his behalf by a Sydney barrister, to Bryan Dart. In his oral evidence, he said that he did this on 2 August. Bryan Dart denied receiving it on either day. On 4 August Andrew Coventry re-sent the list of questions. This time it was received but ignored. [324] Events were now moving swiftly. On Monday 2 August, according to Andrew Coventry, a furious Kevin Dart rang him and said, “If you don’t sell us all the shares we won’t be able to do the deal in China. Charter is calling in Evtech’s debt and will be suing you, your brother and Tom Quinn as guarantors. Come over with Tom Quinn right away and sack the workers”. On 4 August (whether before or after receipt of Andrew Coventry’s questions it is not clear) the plaintiff gave Evtech a demand for repayment of the loan. Throughout this time, negotiations for the sale of the shares were continuing, now between Mr Quinn and Bryan Dart. [325] On 5 August Bryan Dart sent Michael Coventry (and I assume the other directors) by fax what he described as “notes for directors meeting today at 11 am”. The so- called “notes” throw light on the Darts’ modus operandi. The first page consisted of a notice of directors’ meeting setting out the business of the meeting and providing for the shortening of notice. The second page consisted of draft minutes of the meeting, notwithstanding that the meeting had not yet been held. The remaining pages consisted of an executed acceptance of the offer of sale of the 10 shares bearing the date 4 August and signed by Kevin Dart on behalf of the plaintiff; a covering letter also dated 4 August from the plaintiff (per Kevin Dart) to Evtech notifying the acceptance and enclosing a copy of it; a letter of acknowledgment of receipt of the acceptance also dated 4 August from Evtech (per Bryan Dart) to the plaintiff; a transfer form of the ten shares; and a statutory declaration for stamp duty purposes, undated and unsigned. [326] This meeting never took place. However negotiations over the sale of the shares continued and agreement was reached on 10 or 11 August. That agreement was given effect in a deed (“the Second Deed”) executed at a directors’ meeting held on 13 August. The agreed price was $100 per share, but it was not payable until 29 July 1994. The shares were to be transferred and the Coventrys and Mr Quinn were to resign forthwith. Arrangements were made for payment of certain debts owed by Evtech to the vendors or interests associated with them. Mr Quinn’s loan of $100,000 was to become repayable on 29 July 1996 instead of in 2017. Various warranties were given. [327] The whole truth behind this agreement will probably never be known. I do not think that either Kevin Dart or Andrew Coventry gave a full and frank account of the events leading up to it. I should say why. [328] Andrew Coventry ascribed both Mr Tabe’s offer to sell 10 shares and his willingness to enter into the Second Deed to misrepresentations about the “Chinese deal”. It is true that there were negotiations taking place with Mr Wong regarding a possible joint venture in Shenzhen. They were however at an embryonic stage during July and early August 1993. In my judgment, Andrew Coventry has seized upon them in his evidence as an excuse for what might otherwise have been -- 104 of 267 -- 97 perceived as malicious or selfish behaviour in offering the 10 shares to the plaintiff.98 Precisely what lay behind that offer I cannot tell. Perhaps there was an element of tit for tat, given his exclusion from the secret deal between Michael Coventry and Mr Quinn in March. The three versions given by Andrew Coventry are replete with inconsistencies and absurdities. I am satisfied that Andrew Coventry changed his story as he perceived some of the absurdities. He also changed it to make it fit with the documentary evidence as he encountered it. The inconsistencies relate to whether it was Bryan or Kevin Dart who first approached him; when the first approach was made (the pleadings still assert that it was late July); and the nature of the venture alleged to have been proposed by the person making the approach. There is no satisfactory explanation for his changes of story. That was best illustrated by reference to the allegation that the Chinese deal was to involve investment in Evtech, an allegation not originally made. In cross- examination, Andrew Coventry admitted that he changed his story to add this claim only after he had seen working notes made by the plaintiff’s auditors during an audit of the plaintiff. I reject the defence submission that the Chinese deal is to be seen reflected in the unduly optimistic sales figures presented in the budget document put before the directors’ meeting of 13 July. Those figures were derived in early June, well before there was any mention of the Chinese deal and they had been given to Andrew Coventry during June. The picture which Andrew Coventry painted of himself as a naive innocent is absurd. [329] On the other hand, it was probably Kevin Dart who opened the negotiations to buy out the Coventrys and Mr Quinn. He did not like Andrew Coventry and he found his presence as a director obnoxious. He resented the notion that the Coventrys and Mr Quinn should participate in future wealth from Evtech or the plaintiff without contributing capital. It had always been the plaintiff’s intention to obtain control of Evtech and the events of July were calculated by the Darts to achieve that purpose. I found their evidence about those events unsatisfactory. Bryan Dart was very vague and sought to distance himself from the significant occurrences. Kevin Dart professed an inability to recall which was in some cases extraordinary. He tacitly admitted that the loan agreement was intended as a vehicle to take control of Evtech. The Second Deed was an outcome of the type which the Darts had envisaged from an early stage. [330] All of the plaintiff’s claims hinge upon the two deeds. The plaintiff’s execution of these deeds is an essential element of its claim for damages. The plaintiff attributes its execution of the deeds to the alleged misrepresentations. It is therefore convenient to turn from the narrative at this point to consider whether the representations were misleading or deceptive and the extent to which, if at all, they influenced the plaintiff’s conduct. The former question depends mainly upon whether the representations were true. 98 Despite Andrew Coventry’s claims to the contrary, I am satisfied that Mr Tabe, his son, customarily acted in accordance with his wishes. -- 105 of 267 -- 98 8. WERE THE REPRESENTATIONS MISLEADING OR DECEPTIVE? [331] I shall deal with the various representations in turn. In doing so I shall consider the precise representations specified in the statement of claim. However I must look to the substance of the representations, not simply to their form. The inquiry must be whether the things said were misleading having regard (among other things) to the manner and the context in which they were said, not simply to whether they were literally true. It is convenient to consider them in a slightly different sequence and grouping from that adopted in relation to the making of the representations. 6(o) The software possessed a capability, referred to as the “Bulldog effect”, which filtered noise from signals and thereby assisted in making the Electrocomm software a very substantial advance in communications software [332] To assess this and related representations, it is necessary to understand what the Bulldog effect was. That is in fact easier said than done, because the term was a marketing slogan dreamed up by Michael Coventry, not a scientific description. According to Mr O’Connor, the name described “a feature I had developed in the Electrocomm software to overcome some problems associated with receiving ASCII text-based transmissions in a noisy environment”. By the end of the trial, both sides seemed to accept that the term referred to two functions performed by the Electrocomm software. These were, first, issuing certain commands to the modem to improve its toleration of “dropout”;99 and second, filtering out unacceptable characters from an incoming data stream. [333] In his written statement, Mr O’Connor said: “15. The first feature changed some parameters on the modem to tolerate noise and drop out. These parameters included but were not limited to timers.” Two changes were made, both of them to timing settings in the modem. According to Mr O’Connor, the settings made by these changes were the result of extensive field-testing carried out in the Adelaide area. Contradicting what he said in his statement, Mr O’Connor said in his oral evidence that these two changes were “the only impact the software has on the modem’s influence on the mobile phone.” That seems to be the correct position. [334] The first modem setting which Electrocomm changed was the one stored in the S9 register of the modem. That register specified the time (in tenths of a second) for which a telephone carrier signal must be present before the modem recognised it as a carrier. The manual described the effect of changing the setting: “As this time is increased, there is less chance to detect a false carrier due to noise from the telco line.” The default setting in the modem was 0.6 seconds. Electrocomm increased the time to 1 second. [335] The second setting changed was that stored in the S10 register (again, in tenths of a second). A modem continuously checks to ensure that it has a live carrier signal. If 99 Para [342]. -- 106 of 267 -- 99 it detects that the carrier has been lost, the firmware causes the modem to hang up after a predetermined period. The S10 register controls the period the modem waits before hanging up. The purpose of the register is to prevent a temporary loss of carrier causing the modem to hang up. The period that the IMS modem allowed by default was 0.8 seconds. Electrocomm version 1 did not change that default. Versions 2.3 and 2.6 (current when the First Deed was signed) increased it to 3 seconds.100 [336] Earlier in these reasons I described the nature of an initialisation string101 and observed that most communications programs allowed the user to construct such strings of commands. Electrocomm was exceptional in that the initialisation string was contained within the software and was not directly adjustable by the user. This was intended to make the program simpler to use, but it meant that for all practical purposes the user could not avoid the effects of any errors or omissions in the string.102 Somewhat surprisingly, the changes to the S9 and S10 registers were made by commands issued as part of the initialisation string. This meant that they operated regardless of whether or not the user had elected to use the Bulldog effect and regardless of whether or not the user had elected to use a cellular phone (both of which could be done by selection of a menu option).103 [337] The filtering component of the Bulldog effect (which was the part covered by the patent application PL3381) involved the computer manipulating incoming ASCII data sent to it from the modem. It is desirable to spell out four of the implications of that rather terse statement. First, the manipulation occurred entirely within the computer; it was independent of and did not affect the modem. Second, by definition, it operated only on incoming data streams, not on outgoing data. Third, it operated only on data, not on faxes. Fourth, it operated only on ASCII104 data streams, not on data in pure binary form. The purpose of the filtering was to remove “static” or “noise” generated in the course of less than perfect telephonic connections. Noise was a much greater problem on the cellular network than on the PSTN. Its effect was to interfere randomly with the electrical signals constituting the characters being transmitted and by such interference, to replace characters with different characters. Since the noise tended to come in bursts, it could result in streams of “garbage” characters on the receiver’s screen. If the changed character happened to be in the first 32 of the ASCII set, random misbehaviour of the receiver’s computer might occur.105 100 This was achieved by the setting S10 = 40; the relevant period (T) was determined by the formula T = S10-S9. 101 Para [33]. 102 Theoretically, the effects of the string could be reversed or supplemented by manually issuing a fresh command string while the program was in the appropriate mode; but to do this was cumbersome and required a level of expertise beyond that possessed by the average user. 103 For this and other reasons, I am sceptical about the defendants’ claim that the Bulldog effect included the adjustments to S9 and S10. However, the plaintiff did not challenge this claim, so I shall not do so. 104 ASCII: American Standard Code for Information Interchange. There are 256 characters in the extended ASCII table. The first 32 are used to control the computer; the next 96 include the English alphabet (upper and lower case separately), the numerals 0 to 9 and various punctuation marks and symbols commonly used in English; and the last 128 extend the set to include common European alphabetical characters, some more symbols and some basic graphic shapes. 105 Such misbehaviour could include the insertion of blank lines, the insertion of new pages, clearing the screen or feeding a sheet of paper through the printer. -- 107 of 267 -- 100 [338] It is important to note that the filtering operated simply by removing what was perceived to be an improper character. It did not substitute the correct character. In that respect, it differed from the several error correction protocols available at the time. These operated by dividing the data stream into segments at the transmitting end and adding a brief descriptor of the segment. As each segment was received, it was checked by the receiving modem or computer against the descriptor. If the segment did not match the descriptor, the receiving modem requested the transmitting modem to resend the segment. On a poor connection this could extend the duration of the transmission many times over. Obviously, this procedure required the same protocol to be installed on both modems (or in the case of a software-based protocol, both computers). [339] The benefit of the Bulldog effect was described by Mr O’Connor: “MR O’DONNELL: Yes. In that situation, what is the benefit of using the Bulldog effect rather than not using it at all, just receiving information without the filtering process? MR O’CONNOR: Okay. There are three possible scenarios that a user can be on while they are in this interactive situation. One is to have no error correction whatsoever. The effect of that would be that all communications would be very fast. However, the screen would contain a lot of rubbish which may scroll the screen off or otherwise make it difficult to read. The second situation is with some sort of filtering applied, such as the bulldog filtering, and there are other filtering mechanisms employed by other communications packages, and the effect of that would be that communications are as fast as the first method. However, most of the corruptions would be removed from the screen view so that the - what is presented on the screen is still very readable. The third option is to use an error correcting protocol, such as MNP10, in which case the speed would be very slow but the information displayed on screen would always be 100 per cent accurate.” [340] The MNP error correction protocols operated through the firmware in the modem. Consequently, when they were in use, the data stream presented by the modem to the receiver’s computer had already been corrected. Therefore, there was no point in using this aspect of the Bulldog effect in conjunction with such a protocol. [341] In its final submissions, the plaintiff did not contend that this representation was misleading or deceptive taken by itself. Doubtless that was a reflection of the difficulty of determining whether the filtering effect was a “very substantial advance”. Nonetheless, the representation is part of the context in which the other representations were made and is properly to be taken into account in considering them. 6(p) The Electrocomm software was unique in that it had been designed to withstand the “drop outs” … commonly associated with cellular and other radio communications systems [342] Under this heading, I deal with the representation referred to in para 6(p) of the statement of claim in so far as it relates to “dropouts”. Its application to “noisy -- 108 of 267 -- 101 lines” is dealt with below.106 “Dropout” refers to loss of carrier or disconnection. There are two aspects to the question: whether Electrocomm had been designed to withstand dropouts; and if so, whether in this respect it was unique. In assessing the first aspect, it must be borne in mind that I have not been satisfied that the defendants represented that the software would prevent dropouts. The present question is whether it was designed to withstand them. [343] The only parts of the software which were allegedly designed to withstand dropouts were the changes to the S9 and S10 registers. I cannot see how changes to the S9 register could affect dropouts. The modem manual (which was essentially copied from a standard manual produced by Rockwell) said of that register, “As this time is increased, there is less chance to detect a false carrier due to noise from the telco line.” That proposition was not challenged and I accept it as accurate; but it seems to have nothing to do with dropouts. In relation to the S10 register, the position is a little more complex. [344] Expert evidence was called on behalf of the plaintiff from Mr Neil Boucher, a highly experienced telecommunications engineer with particular knowledge and experience in cellular phone systems. Mr Boucher was the author of a technical reference book on cellular radio107 which, when first accepted for publication in the USA, was the first such book in its field. Subject to four caveats, I found his evidence generally helpful. Care was needed in assessing his evidence because, first, at times some parts of it were rendered unreliable or exaggerated by his tendency to be partisan. Too often he was combative or sarcastic. He sometimes made unjustified criticisms of the work and the credibility of other experts, although this seemed to be modified toward the end of the period of “evidence in conjunction”.108 [345] Second, he had a confusing tendency to apply by implication propositions which were generally true within his area of expertise, without modifying them to take account of the particular circumstances of the IMS modem. For example, several of the phenomena adversely affecting cellular communications became manifest or were most pronounced in circumstances where the cellular phone was moving, particularly where it was vehicle mounted. Mr Boucher had a tendency to answer questions at a level of generality which gave weight to the impact of these phenomena, notwithstanding that the Evtech System was not intended to be vehicle mounted and was unlikely to be used while moving. For reasons like this, it was necessary to listen very carefully to how Mr Boucher phrased his evidence. [346] Third, his expertise derived primarily from telecommunications systems. His strength was radio and cellular phone networks and his knowledge of modems was primarily derived from their applications to those networks. His knowledge of the interaction between modems and computers, particularly personal computers, was somewhat limited. For example, he was unable to say much about protocols such as the popular and widely used Z-modem file transfer protocol because they were not telecommunications protocols and he had not used them. For him, “telephony” meant professional telecommunications services – telco quality communications, 106 Paras [354] ff. 107 The Cellular Radio Handbook, Quantum Publishing Inc (Mill Valley, CA, USA), first edition June 1990, third edition January 1995. 108 I use this term to refer to the period during which two experts were sworn at once and gave evidence by way of a controlled discussion: see para [482]. -- 109 of 267 -- 102 not end-user-to-end-user operations. He was also obliged to correct at a late stage some quite extensive evidence which he had given about “blanking” and handovers due to an incorrect assumption about the way in which computer modems were connected to cellular phones. I was not persuaded that he had properly familiarised himself with Electrocomm and with the way communications software interacts with a modem. An example of his ignorance of an elementary aspect of PC modem operation appears in this passage from his evidence: “Just before you go to what happens then, you have said the software was set to terminal mode. Could you explain that, please?—Yes. All of our testing had been done directly from the Electrocomm software. Mr Coventry did this testing in terminal mode. I’ve never done any testing in that mode. I don’t know much about it. I’m not even sure if the terminal mode is a functional part of Electrocomm or whether it’s something else. I presume it’s part of Electrocomm.” [347] Fourth, he was not a careful witness. There were a number of examples of this, of which one will suffice: “What does 255 do?—Doesn’t make any difference. No, it didn’t make any difference. It was the same as 100. Did that indicate a fault to you?—No. It’s just that the manual seems to suggest that if you set it to 255, it functions as if a carrier is always present. So that if it didn’t do that, that would seem to suggest there’s something wrong?—Oh, actually, it did. It did. We had to manually disconnect it, now that I think about it. Yes, that was something it didn’t really explain at the time.” [348] I have already described in general terms the problematic characteristics of cellular networks.109 Mr Boucher described the five major characteristics in a little more detail: 1. Handovers. Handovers (or handoffs) occur when one cellular base station takes over a call from another station. In the simplest case, they occur as the mobile phone moves from one area to another. To implement a handover, the original base station sends a relatively complex series of instructions to the mobile phone, causing it to change frequency and carry out various other operations. These instructions are sent over the voice channel, which remains open. If they were passed to the earpiece or speaker of the phone, they would be perceived as noise. To prevent this, the phone automatically blanks off the earpiece during handovers. Around 1993, such blanking lasted for periods ranging from about 0.1 seconds to a second or more. It was unclear on the evidence whether the data stream from the mobile phone to the modem was affected by the blanking process, but even if it was, the modem would not (contrary to the early part of Mr Boucher’s evidence) have interpreted this as a loss of carrier. 2. Log normal fading. Also called tunnel fading, this refers to deteriorations in the signal strength due to obstructions between the base station and the mobile phone (in the most extreme case, for example, a tunnel). When the mobile phone is moving (for example, in a vehicle), the field strength may 109 Para [36]. -- 110 of 267 -- 103 vary quite dramatically; when the phone is stationary, it will for practical purposes depend primarily upon the phone’s location.110 Fading causes the amount of noise relative to signal to increase, and in an extreme case, it can cause loss of carrier. Most mobile phone handsets provided a visual display roughly indicating the current signal strength, thus enabling the user to move before placing the call if a location were unsatisfactory. Mobile networks keep the circuit (channel) between phone and base station open for a substantial period (in Queensland at the time, 45 seconds) to allow for resumption of the call, because, I infer, that has been found to be a suitable average time for moving vehicles. 3. Multipath fading. Also called Rayleigh fading, picket fencing or simply multipathing, this term describes interference patterns caused by the incoming signal arriving at the mobile phone simultaneously from several different directions (due, for example, to reflection from objects or the terrain). Cellular networks are more vulnerable to multipathing in the areas where the signal is weak. Sometimes the problem can be eliminated by moving a short distance, perhaps only a few metres. If the problem persists, the network does not disconnect, but a handover takes place to another base station. 4. Interference. There are numerous potential sources of interference in the signal to the mobile phone, a common one being the use of other mobile phones in the vicinity. Mr Boucher wrote in his book, “In cellular radio systems, which have frequency reuse, some interference is inevitable.” Interference manifests itself as noise. Its symptoms range from dropped and blocked calls to cross talk; but cellular equipment designers “have allowed for interference and have incorporated many elaborate countermeasures into this environment.” As a result, if interference becomes severe, handover to another base station takes place. Mr Boucher explained the process in his evidence: “Cellular networks were conceived to work in an interference environment. That means that the original designers envisaged quite large numbers of base stations on the same frequencies in the same area, which means that interference is inevitable and the interference, if it’s low level, looks like noise on the line, and if it’s high level, it’s going to cause blocking of that channel. It’s going to take that channel out of service and it’s going to force the mobile on to another base station or on to another channel, if it’s available. But if it forces it on to another base station or even on to another channel, it’s a handover situation. Even if it stays on the same base station but uses a different frequency because of the blocking, the handover has occurred. It’s much the same sort of mechanical process as to the situation where it hands over to another base station, goes through the same machinations.” The design parameters of cellular network specified a higher level of noise as permissible than did the PSTN parameters. 110 Log normal fading may also cause field strength variations at the one place over time, but with a periodicity of only a few seconds: exhibit 135, p 131. -- 111 of 267 -- 104 5. Stepdowns. Cellular networks attempt to minimise interference by stepping down the signal strength in good conditions. In 1993, on Mr Boucher’s evidence, it was not uncommon to encounter a break in signal of about 200 milliseconds when the stepdown occurred. This seems to have been the least of the problems and little evidence in detail was given of it. I shall assume that Mr Boucher’s reference to a break in signal meant a loss of carrier, not just a period of blanking of the earpiece. [349] Changes to the S10 register could only have an effect on problems associated with a loss of carrier, viz log normal fading and stepdowns. Provided the period of the loss of signal (dropout) was less than the period allowed in the register, the setting would stop the modem from hanging up. In this sense, it could reasonably be said that the software was designed to withstand (not prevent) dropouts. Clearly, the proviso was satisfied in relation to stepdowns. The impact of the change on dropout caused by fading depends upon whether the mobile telephone is moving or stationary. [350] If the mobile is stationary, it may be subjected to fading; but that fading will probably be at its worst every few seconds. If at its worst it is bad enough to cause loss of carrier, it will probably prevent a call from being established, and the possibility of dropouts becomes irrelevant. If the carrier is maintained for the period which it takes the two computers to “handshake”, it is unlikely to be lost thereafter. Of course, statistically there will be a small number of cases where the unlikely happens. In such cases, the extension of the period set in the S10 register will mean that it is unlikely that the modem will instruct the telephone to hang up. In short, where the telephone was stationary, to the extent that the change to the S10 register had any impact at all, that impact did increase the System’s capacity to withstand dropouts caused by fading; but in most cases, the change was irrelevant because dropouts due to fading did not occur. [351] It can fairly be said that this conclusion has not been experimentally verified. That is because Mr Boucher took an a priori approach to the problem. Neither side conducted tests to establish whether the System would have performed any differently with the S10 register set to its default values. I am content to adopt the same approach as the parties. [352] Where the mobile telephone is vehicle mounted, it may encounter much more prolonged periods of fading depending upon the location of the vehicle. These periods will sometimes, depending upon the severity of the fading, cause loss of carrier. If the period of loss of carrier does not exceed three seconds the setting in the S10 register will prevent the modem from instructing the telephone to hang up; if it does exceed three seconds it will not do so. If the Evtech product had been intended for use in a moving vehicle, I doubt if it could fairly be said that in this respect, the software was designed to withstand dropouts. However it was common ground that Electrocomm was part of the Evtech office-in-a-briefcase, and was intended to be used with a hand-held mobile telephone, not a vehicle mounted one. It is difficult, though not impossible, to imagine situations in which the product would be in use in a moving vehicle. In my judgment the representation could not have been understood to mean, and was not understood to mean, that Electrocomm was designed to withstand dropouts in such a context. I do not think that this example made the representation misleading or deceptive. -- 112 of 267 -- 105 [353] Was the design of Electrocomm unique in its capacity to withstand dropouts? It may be that Electrocomm was unique among communications programmes of the day in mandatorily setting the register values. But that was not what the defendants represented. They said that it was unique in that it had been designed to withstand dropouts. That was not true. Other programs were equally capable of giving the same commands to a modem, although there is no evidence that any were configured to do so by default.111 If desired, commands could be built into the initialisation string, which the user (or the vendor) could configure. For greater flexibility, many programs allowed them to be programmed onto a function key or macro key or included in a script file.112 I find that Electrocomm was not unique in its capacity to withstand dropouts and the representation to this effect was misleading. 6(p) The Electrocomm software was unique in that it had been designed to withstand the … “noisy lines” commonly associated with cellular and other radio communications systems 6(r) The Electrocomm software contained an inbuilt data “dictionary” module, which constantly checked and compared all information passing through the mobile phone/computer link. The module retained all valid data while “throwing out the garbage” [354] Although the plaintiff also pleaded that a misleading quality of the “noisy lines” representation lay in the fact that it was not true, the thrust of its case as argued in its final submissions was that the misleading quality of the representation derived from the defendants’ failure to qualify it. The plaintiff raised a number of qualifications of which it claimed it should have been made aware, relying on Wright v Wheeler Grace & Pierucci Pty Ltd.113 I shall not set out the qualifications detailed in the statement of claim. As there listed, they contained a degree of overlap. Essentially they were: (i) the Bulldog effect was irrelevant to the majority of transmissions because it operated only on data transmissions comprised of streamed ASCII text; it did not operate on fax transmissions or non-ASCII data transmissions (eg. binary data); (ii) it did not operate during a file transfer using a file transfer protocol (for example Z-modem); (iii) there was no point in using it when the MNP error correction protocols were operating; (iv) noise did not simply add itself to incoming data, it replaced data characters with noise characters in the incoming data stream, with the consequence that simply removing noise characters (as the Bulldog effect filter did) left the 111 Mr Boucher’s evidence that an even larger timeout change “was being commonly employed in cellular software programs designed to work with cellular network transmissions at the time” was referable to higher level telecommunications programs, not to consumer level computer programs. 112 Quicklink II for Windows, the program which Mr Gillmore substituted for Electrocomm, was such a program. 113 (1989) ATPR ¶40-940. -- 113 of 267 -- 106 data uncorrected and corrupted and with no indication of where this occurred; (v) in some circumstances, the Bulldog effect could mistake valid data for noise and exclude it. [355] There was some evidence, in the testimony of Mr Cole and in Andrew Coventry’s answers to interrogatories, to suggest that in fact affirmative statements to the opposite effect were in some cases made. However that is not how this paragraph was pleaded, and it is sufficient that I deal with it on the basis in the pleadings. [356] The representation set out in subparagraph 6(r) is closely related to the “noisy lines” representation. The plaintiff submitted that it too required the qualifications just listed. In addition (or perhaps in the alternative), it submitted that “retained all valid data” in the second sentence of the representation should not be read literally. In effect, its submission was that “valid data” should be read as referring to all valid data sent from the distant computer, not just to valid data received at the local computer. [357] The defendants pleaded that at the relevant time, ASCII data transmissions “would have approached sixty to eighty percent”. They did not say of what. They asserted that all other data transmissions (including binary data) “could be easily dumped into hexadecimal format” and in that format, subjected to the Bulldog effect. On that basis they denied the irrelevance of the effect on the majority of transmissions. They pleaded that any loss of valid data was slight. By the end of the hearing they did not deny the propositions in subparagraphs (i) to (iii) above; the expert evidence in support of those propositions from all of the expert witnesses was overwhelming. That evidence also demonstrated unequivocally the uselessness of the suggestion that binary transmissions be converted into hexadecimal format. It is unnecessary to say anything further on that point. The importance of ASCII data transmissions [358] It is plain from the pleadings that in this context, the parties meant “data” to refer to everything sent through the modem except fax transmissions. They did not use the term simply to mean information. Data in this sense was either contained in a computer file or it was not. Binary data was invariably contained in a file; executable programs and certain proprietary data base files took this form. Alphanumeric text was usually in the ASCII format. It too would usually be saved in a file by the application (for example a word processor or text editor) in which the data was created. Data in a file was most easily and reliably transmitted using a file transfer protocol built into the communications software.114 On the other hand, data which was not contained in a file would sometimes be transmitted. This would occur when two operators were chatting to each other, or occasionally, when an operator was obtaining information from a bulletin board. In such cases, the stream of characters was almost invariably in ASCII format. [359] The evidence as to the frequency of each type of transmission was understandably vague. It must be assessed with a degree of commonsense. It is not possible to put a percentage on either type of transmission. However I am satisfied that whether one talks in terms of the number of transmissions, the duration of transmission or 114 Such protocols are described in para [375]. -- 114 of 267 -- 107 any other measure, streamed ASCII data occupied a relatively minor place compared with faxes and file transfers. I infer that Mr O’Connor also held this opinion, because the default setting for the filtering component of the Bulldog effect was “off” and users were confronted by a message in the relevant part of the manual, “WARNING: EXPERTS ONLY, SKIP THIS SECTION IF YOU ARE A NEW USER”. I am satisfied that in a majority of cases, the Bulldog effect was irrelevant. The defendants’ contention that streamed ASCII transmissions would have approached 60 to 80 percent was wrong. Loss of valid data [360] The plaintiff contended, based on evidence given by Mr Boucher, that in some circumstances, the Bulldog effect would mistake valid data for noise. The defendants argued that Mr Boucher’s examples were nit picking. A great deal of time and energy was devoted to examining the minutiae of operation of the software in an endeavour to demonstrate one view or the other. Much of the evidence was theoretical and the reasoning a priori, although it is difficult to see how experimental evidence could have been assembled. Unfortunately, some digression into how the code worked is necessary. The evidence was given primarily by Mr Boucher and Mr O’Connor. In the end, I do not think there was a great deal of difference between them on questions of fact (as opposed to value loaded questions such as the utility of the code).115 [361] The theory underlying the code was that ASCII data from a given source, particularly when constituted by alphanumeric characters and associated symbols such as punctuation marks, can be analysed and the frequency with which particular characters occur determined. Over time, the probability of any particular ASCII character being present in a transmission from that source can be calculated. With that knowledge, a table can be constructed setting out all characters and assigning them a weighting which reflects their relative frequency. This table will be valid not only for the data source from which it was constructed but also for all similar data sources; indeed, if there are a number of bulletin boards, for example, whose output is substantially limited to alphanumeric characters and others closely associated with them, an average table for all sources of that type can be constructed. Incoming data can be tested against the table and if sequences of improbable characters appear, they can be assumed to be noise.116 [362] It is in the nature of things that occasionally, the improbable occurs. Any system based on probability recognises that there may be occasional aberrations. Mr O’Connor’s code allowed for the creation of multiple tables; if a source of information was found to depart validly from the standard table, a fresh table could be created for it. I am not satisfied that this task would have been as easy as the defendants contended, but on the other hand, if a user had intended to access a specialised data source, no doubt an expert could have been consulted. The difficulty which I face lies in assessing how likely the code was in practice to delete valid characters with unacceptable frequency and how effective a specialised look- up table would have been in counteracting that possibility. 115 Some of Mr Boucher’s earlier evidence was opinionated and bedevilled by minor or careless mistakes. 116 It was in fact somewhat more complex than that, but that description will do for present purposes. -- 115 of 267 -- 108 [363] I have come to the conclusion that it would be unsafe to make a judgment in the absence of empirical evidence. There is in my view no doubt that in any given transmission of ASCII characters, there was a theoretical possibility under some circumstances (for example, where zero weighted characters were valid) that valid characters would be deleted. However, I am not satisfied that it has been shown that the risk of this occurring was so great as to destroy or even seriously inhibit the utility of the code. [364] This conclusion is reinforced by the fact that every incoming data transmission was logged by Electrocomm. This meant that the unfiltered data stream was recorded in an unformatted text file. That meant that if there were doubts about any part of a transmission, the unfiltered log file could be accessed and checked. Any valid characters which had been filtered out would then be apparent amongst the noise. The utility of this feature was diminished because the Bulldog effect did not give any indication that a deletion had been made. Consequently a user might be unaware of the deletion of a valid character. This was an irritating defect. Mr O’Connor said that it could easily have been overcome by rewriting the code to cause it to replace a deleted character with (for example) a blank space on a red background; but this had not been done. [365] Does it matter that any rejection of valid data might have been highly unusual in practice? After all, the representation was that the module retained “all” valid data. The plaintiff did not contend that the Darts understood this expression literally and it is difficult to believe that anyone would have done so. However the defendants’ representation was made in a context where they also represented that users were assured of receiving all data over the cellular system “at the same error-free level that they would expect through a standard telephone connection”. If I could be satisfied that the rate of rejection of valid characters in practice was high enough to cause a higher level of errors than on the PSTN, I would be inclined to think that some mention of this propensity ought to have been made. However no such a comparison was attempted in the evidence, and I am not so satisfied. [366] To summarise: I am satisfied that in a majority of transmissions (file transfers), the filter in the Bulldog effect was irrelevant; there was no benefit in using it when MNP error correction protocols were operating; and it merely filtered wrong characters without correcting an error. [367] Was it misleading for the defendants to represent to the plaintiff that the software had been designed to withstand noisy lines and retained all valid data without disclosing those matters of which I am satisfied? In my judgment it was. The Bulldog effect was one of the defendants’ major selling points. It was emphasised by them both in the documents given to the plaintiff and in conversation. In fact it was no more than an additional tool of use only in a minority of cases or on a minority of occasions. It did filter noise from the data stream, but what emerged from the filter was not a whole elixir. The Darts could not reasonably have been expected to realise this. In the circumstances, what was said conveyed less than the whole picture in important respects. Saying it amounted to misleading conduct. -- 116 of 267 -- 109 6(q) The System contained patented data correction features [368] The plaintiff pleaded that this representation (which was in writing) was misleading in that the so-called “features”: “(i) were not the subject of a grant of letters patent, but were only the subject of an application for a patent, which had been lodged on 7 July 1992; (ii) did not cause data corrupted in transmission to be corrected, or to be re-sent so that it could be received in its intended form; (iii) would not result in data sent over the cellular network being received at the same error free level that would be expected of a transmission through the PSTN network.” [369] On the fourth day of the trial Bryan Dart in effect conceded that he had been aware that what was involved was an application for a patent, not a grant, by late January at the latest, well before the plaintiff entered into the First Deed. A week later Mr Cole said that in the early negotiations, in his presence, Andrew Coventry had described it as a patent application. Subsequently, the plaintiff did not pursue the first of these allegations. Its witnesses were not cross-examined as to how it came to be pleaded. [370] The third allegation is puzzling. The representation makes no claim as to the performance of the data correction features, nor does it contain anything which calls up a comparison with the PSTN. Another representation does so; but it has been pleaded separately and is dealt with elsewhere in these reasons. [371] The second allegation has more substance. In effect, it asserts the absence of data correction features. In response, the defendants’ pleading asserted that the features referred to consisted not only of the Bulldog effect but also the Z-modem module and the MNP10 protocol. Neither the defendants nor Evtech were entitled to a patent for either product, and they had not applied for one; but the defendants asserted they did not represent otherwise. All they said was that the features were patented - they did not say by whom. That assertion was ridiculous. It was grossly inconsistent with the flavour of the document in which the representation appeared. The reference was clearly to patents (or applications) to which Evtech was entitled, not to software the subject of patents to which others were entitled (albeit included in Electrocomm). In any event, the Z-modem protocol was well known and freely available as shareware. At the trial the defendants made no attempt to suggest otherwise. The claim that the representation referred to Z-modem and MNP10 has the smell of dishonesty or at least of afterthought. The features to which the representation referred were those said to be found in the Bulldog effect. [372] In their submissions, the defendants described this aspect of the plaintiff’s claim as a “beat up”. They did not contend that the Bulldog effect contained data correction features. However they submitted that Electrocomm did so; that noise filtering is similar to data correction in as much as both assist an accurate transmission; and that noise filtering clears the way for data correction to operate. The first submission is irrelevant to whether the representation was misleading, although it may bear upon the issue of reliance. The second is irrelevant to any issue. The question is not whether in some respects there were similarities; it is whether the Bulldog effect performed error correction. The third is simply wrong. -- 117 of 267 -- 110 [373] The thrust of the representation conveys the idea that Electrocomm contained data correction features which were covered by a patent (or a patent application) to which Evtech was entitled. That was untrue. The representation was misleading. 6(s) The Electrocomm software contained a proprietary software module which was designed to “re-try and re-send”, thereby retaining the integrity of all data sent and received through the system. The effect of this module was to ensure that data would be sent and received over the cellular system at the same error free level that users would expect through a standard telephone connection. [374] The statement of claim did not specify in what way it was alleged that this representation was misleading or deceptive. By the end of the trial, however, it was apparent that the representation (which was in writing in the book G2) was claimed to have been misleading in two respects: (a) the modules designed to re-try and re-send in the software were not proprietary; and, (b) those modules did not ensure the same error free level over the cellular system as users would expect through a standard telephone connection.117 [375] Strictly speaking, there were four parts of the software which were designed to re- try and re-send data. They were called, for reasons which I shall not try to explain, X-modem, Y-modem, Z-modem and Kermit. Y-modem and Z-modem were later incarnations of X-modem, and for present purposes, the only two modules which need to be considered are Z-modem and Kermit. Each contained code compliant with a protocol designed to standardise methods of file transfer between computers and the names referred to the protocols rather than to the code. Each, it should be noted, worked through software in the computer, not firmware in the modem, and had to be present in both computers involved in the transfer. Each operated only on file transfers (both ASCII and binary) and not on streamed ASCII downloads or direct “chat” connections. The Z-modem protocol was written by an American named Forsberg, who apparently placed it in the public domain. It seems that the code in the module which conformed to that protocol was written by Mr O’Connor. It was not argued that the code was capable of being subject to copyright, perhaps because it lacked originality. The code in the Kermit module was written at Columbia University, which retained copyright, but which freely allowed anyone to use it provided authorship and copyright were acknowledged. [376] The defendants’ submission on this matter was cryptic to the point of incomprehensibility: “Was the Z-modem proprietary? Certainly Evtech did not own it: but we say use of the adjective ‘proprietary’ in this context does not amount to a representation it did. The adjective is at most neutral.”118 The argument seems to be: “proprietary” means owned by someone; therefore the representation means that someone owned the modules. There was no representation as to who owned the modules. Someone, admittedly not Evtech, did 117 In this context, “module” referred simply to part of the software; whether the relevant code was contained in modules strictly so-called was not in issue. 118 They did not specifically address the Kermit module, but presumably the same submissions will apply. -- 118 of 267 -- 111 own the modules, therefore, the representation was not misleading. I reject that submission. “Proprietary” can indeed be referred to ownership, but in the context in which the representation was made, it conveyed the idea that the software was owned by Evtech. Moreover the only way in which the module could be owned was if the putative owner held the copyright in the code. There is no evidence that copyright existed in relation to the Z-modem module. Even if it did, neither it, nor the copyright in Kermit, was held by Evtech. The representation was therefore misleading and deceptive. [377] Before the second respect in which this representation was alleged to have been misleading and deceptive can be assessed, it is necessary to interpret what the words “at the same error free level” meant in the relevant context. To do that, it is helpful to set out in a little more detail how these protocols worked. This was described in a 1994 Telecom dictionary, extracts from which were tendered by the plaintiff:119 “Protocols break off files into equal parts called blocks or packets. These packets are sent and the receiving computer checks the arriving packet and sends an acknowledgment (ACK) back to the sending computer. Because modems use phone lines to transfer data, noise or interference on the line will often mess up the block. When a block is damaged in transit, an error occurs. The purpose of a protocol is to set up a mathematical way of measuring if the block came through accurately. And if it didn’t, ask the distant end to re- transmit the block until it gets it right.” [378] In other words, an error correction protocol would eventually transfer a file with 100 percent accuracy. Where protocols differed was in their speed and efficiency. Of the two now under discussion, said the dictionary, Z-modem was the newer and more efficient: “Always use Z-modem if you can. It’s the best and fastest data transmission protocol to use. This is not my sole advice. Virtually every writer in data communications recommends it ... According to PC Magazine (April 30, 1991) Z-modem is the first choice of most bulletin boards. The Z-modem, according to PC Magazine, features relatively low overhead and significant reliability and speed. The Z- modem dynamically adjusts its packet size depending on line conditions and uses a very reliable 32-bit C.R.C. error check. It has a unique file recovery feature. Let’s say the Z-modem aborts a transfer because of a bad line (or whatever), it can start up again from the point it aborted the transfer. Other file transfer protocols have to start all over again. The Z-modem’s ability to continue is a major benefit.” [379] In my judgment the phrase “at the same error free level” did not refer simply to the module’s capacity eventually to produce a received file completely free of errors. The juxtaposition of the phrase with the reference to proprietary software and the comparison between cellular and standard connections implied that the module had unique features rendering it more suitable for use over cellular networks than software based on standard protocols. It was well known that cellular networks were usually more noisy, sometimes much more noisy, than the PSTN. It was also well known that all error correction protocols would eventually produce a received file completely free of errors. If that were all the phrase meant, it would not have 119 Newtons Telecom Dictionary (exhibit 140). -- 119 of 267 -- 112 been worth using. I find that, in its context, the phrase implied that, used over the cellular network, the module would produce an error free file within a time and with an efficiency comparable to the PSTN, in a way not available through other software. [380] I find that in this sense the representation was misleading and deceptive in two respects. First, it was misleading to imply that the module would perform in a way not available through other software. The Z-modem protocol was freely available and was included in most if not all commercially available communications software of the day. Second, it was misleading to imply that the module performed at a speed and with efficiency comparable to the PSTN. That is a more difficult finding to make. [381] The plaintiff did not conduct any experiments to determine how Z-modem performed over the cellular network compared to the PSTN. Instead, it approached the problem on an a priori basis. Relying on Mr Boucher’s evidence, it identified the different types of interference and the increased level of noise found on the cellular network, pointed out that the Z-modem was not designed to deal with these problems and argued that therefore, the statement must have been misleading. I have already alluded to Mr Boucher’s flawed approach.120 It would be wrong to judge software designed for PC use by telco standards. The attitude of the PC industry to Z-modem in 1994 is apparent in the extract from the Telecom dictionary quoted above. It would also be wrong to judge it on the assumption that it was intended for use in a moving vehicle; in my judgment, Mr Boucher’s emphasis on tunnel fades was misplaced. Many of the problems which concerned him could in theory be alleviated by the adjustments to the S9 and S10 registers discussed above. [382] On this basis, the a priori approach is decidedly shaky. Nonetheless, the fact is that people were looking for a solution to known problems encountered in attempting to send data over the cellular network. The chances of interference on that network were significantly greater than the chances of interference on the PSTN. More frequent interference must have meant longer transmission times if re-try and re-send were in operation. If Z-modem had solved the problem, there would have been no problem by the time the representations were made and acted upon in late 1992 and in 1993. One does not need to adopt Mr Boucher’s standards to conclude that it is improbable that the module could have given users an assurance of sending and receiving data free from errors within a time and with an efficiency comparable to the PSTN. In this respect also, the representation was misleading and deceptive. 6(m) The Electrocomm software had been designed as a “shelf purchase” product [383] The plaintiff pleaded the manner in which it alleged that this representation was misleading and deceptive: “(l) The software had not been designed as a product to be sold off-the-shelf to the general public. The software was not suited to an unsophisticated user. It was designed so that it could later be customised to the particular requirements of individual customers.” 120 Para [346]. -- 120 of 267 -- 113 [384] In response, the defence made a number of points. They flatly denied the first sentence. As to the second sentence, they asserted: “• The target audience was anyone who had the necessary equipment and desired to use it, and was reasonably familiar with DOS, but the most significant market was the business user. • The software was just as user-friendly as any other DOS software available at the time. • Most users at the time were quite capable of using DOS and were either competent in the use of Hayes AT commands or were capable of ascertaining how to do so by reference to the manual or the on-screen help. • The software was most likely to be required by the relatively sophisticated or professional user.” As to the third sentence, they asserted that the inherent flexibility of the software was an advantage, particularly with respect to large commercial enterprises, and in no way constrained its utility as an off-the-shelf product. I shall set out their pleading in more detail below.121 [385] “Shelf purchase” is not a term of art. During the trial, it was used interchangeably with “off-the-shelf”. That phrase is defined by the Macquarie Dictionary as “available as a commercial product; not custom-made”. A number of witnesses described uncontentiously some of the qualities which at the relevant time a software product would typically have been expected to have possessed to answer the description. It would be sold by retail outlets; it would be contained on floppy disks sold in mass produced boxes; it would have a comprehensive manual and online help; it would have undergone a fairly high level of testing; and it would have an easy to operate user interface which permitted it to be installed, customised and maintained by the user. Pricing would be much lower than for custom built or assembled software. Such a product could have been targeted at a wide range of potential users, but not the general public. In 1992 most of the general public did not have computers. Most of those who did had no interest in communications by computer - the world wide web had not been popularised. Home communications were restricted to a minority of users who connected primarily to bulletin boards, but business usage both large and small was increasing. The profile of a potential buyer was, as Mr Poulsen described it, that of “a fairly technical sort of person”. [386] I have no hesitation in finding that Electrocomm had not been designed as a shelf purchase product. On this question, I accept the evidence of the designer, Mr O’Connor, and of Dr Graham. Mr O’Connor’s attention was drawn specifically to the relevant page of document G2: “MR O’DONNELL: 161, please, Mr O’Connor?-- Yes. Could you read the last paragraph on the page?-- That sort of goes against what I’ve just been saying, but, yeah. Well, could you tell us, was that the design of the Electrocomm, so far as you were involved with it?-- From my point of view, no. 121 Para [392]. -- 121 of 267 -- 114 Why is that?-- Well, because I considered the development was to create a set of tools that could then be applied to custom jobs, rather than as a package solution. It was never my idea to create a package solution for this product. HIS HONOUR: When you say from your point of view, you were the only person who did the designing, weren’t you?-- Yeah, that could be said, yes. MR O’DONNELL: If you were intending to use it as an off-the- shelf product, was it ever in a state where it was commercially ready to be marketed as an off-the-shelf product?-- Not that I can point to, no. Why was that?-- Well, as I said, it was never intended that that was the case, so we never put the effort in to perform that particular action.” [387] He explained the concept of a set of tools at greater length: “What was the intended use to which the software was going to be put, as you saw it?-- From my point of view, the software was a collection of tools that we could then use to build real solutions for real businesses, rather than as a separate product that could be sold in its own right. So from that point of view, a lot of the development was structured towards creating libraries that could be used for different purposes. Could you explain what you mean by real tools for real businesses? In a practical sense, how is it going to be used?-- By separating the functionality out into little logical blocks, like, for example, the ability to control a modem, the ability to run an ANSI terminal emulation, the ability to transfer data files. These were all separated and placed into library objects that could be then reused for any application that needed to do those particular things. Electrocomm at that point was a, if you like, demonstration of how all of those facilities could be fitted together, not necessarily to create one product that some particular person wanted but, if you like, as a test tube to join all the libraries together. ... Before that time, when Peter Gillmore changed the direction, had the development of the Electrocomm reached a point where you stopped adding functions and prepared it to be rendered to be sold to the public as a commercial product?-- No, not really. It never reached that point. HIS HONOUR: But it was never intended in those days that it should reach that point?-- No, that’s right. -- 122 of 267 -- 115 From what you said?-- So there was no point where we said, ‘Okay, we’ll stop adding features and let’s build an off-the-shelf software product.’ MR O’DONNELL: If you had reached that point, what testing would have been involved?-- In my experience, the testing is quite a long-winded process. It would involve, firstly, developing a set of test cases that go into every possible aspect in every possible detail, explaining what the inputs are, explaining what the expected outputs are, and having a rigorous program for running through that test. That’s what I would expect to be done for the development and testing of a commercial product that was going to go on the shelf. It requires quite a bit of time and resources to achieve that.” [388] That description was consistent with what Mr O’Connor had written in his technical report of 24 December 1992, a document of which the Coventrys could hardly have been unaware: “All of the above features combine to make a comprehensive general purpose system for communications in the perceived environment [sic]. All functions have been carefully designed and implemented so that a skilled consultant can take this product, and rapidly create a total automated solution for any type of business. I have always seen this latter aspect as the prime attraction of Electrocomm.” [389] He was asked by Andrew Coventry about the need to write fixes for particular problems which might emerge in the software as it stood. He said, “If it was for an off-the-shelf type of customer, I would say that would be a support nightmare. I wouldn’t even want to consider doing that.” He further pointed out that at the end of 1992, Electrocomm included only one printer driver122 and said, “No effort had been put into writing a broad variety of printer drivers to DOS from our point of view, which would suggest that we were not serious about putting this out on the shelf as a mass market product for DOS users.” He thought that to get the product onto the market as an off-the-shelf product would involve “a major change in direction”. In his view the product was only a couple of months into the six to nine month cycle needed for such a development. Dr Graham confirmed that the software was not immediately ready to be shrink-wrapped and put on a shelf. [390] For these reasons, I find that the representation that the Electrocomm software had been designed as a shelf purchase product was misleading and deceptive. [391] There is another aspect to the evidence relating to this representation which bears upon credibility. The representation was made in the blue book document G2. It was written by Michael Coventry in April 1992. It is clear from a memorandum, which he faxed to Andrew in that month that he then envisaged selling Electrocomm “packaged as a saleable item”. He then said that they should “allow 3 weeks for stockpile ready for major sales.” In an answer to an interrogatory, given in May 1998, Andrew Coventry swore that he told the Darts in late 1992: “As regards the software driver Electro-Comm, all we need do is copy the program onto floppy disks and package them with the 122 A printer driver was a software module which allowed the program to cause its output to be printed. A separate driver was potentially needed for every model of printer. -- 123 of 267 -- 116 manual. The manual is written .... We have 200 manuals prepared ready for blister-wrapping together with the software disks.” [392] I am satisfied that both Coventrys envisaged Electrocomm being sold as a shelf purchase product in the sense already discussed. That remained their position at trial. In their defence,123 they pleaded: “A. The Electrocomm software had been designed as a product to be sold off-the-shelf and was intended to be available as such to the general public; and ... F. That at all material times during the period in 1992 when the fifth defendant first made representations to the plaintiff, a working version of Electrocomm, made ready for off-the- shelf sales (whether with or without a modem) together with manual & disk slippers all prepared for blister wrapping, existed and was made available to the Darts and, through them, to the plaintiff; G. The inherent flexibility of the software to the requirements of individual customers, especially where those customers were large commercial enterprises dependant upon mobile data transfer (such as Fisher & Paykel or Telecom) was a commercial advantage, but one which in no way constrained the utility of the software if sold with usual or standard pre- set parameters on an ‘off-the-shelf’ basis to the general public.” [393] Mr O’Connor gave evidence in the plaintiff’s case. His evidence presented the Coventrys with a difficulty: how to explain the representation. Michael Coventry sought to meet that difficulty during his evidence in chief: “I would like to add that it was while working for Computerland from about 1998 - 1988, sorry, onwards, that I became aware what off-the-shelf marketing methods were used at that time. Computerland in Adelaide in Frame Street had a small area, which was a shop front area, and in that shop front they displayed the hardware from major suppliers, like IBM, Hewlett-Packard, Apple, and so forth. At the back of the store there were shelves and those shelves contained boxes which were software boxes, suites of software and such like. They also had a larger store house in Sydney near the new bridge in Sydney. I forget the actual name of the suburb. When we sold computer systems, the methodology was that we, first of all, sold the computer system, the hardware, and we tried to bundle with that for our customers various other software and that software was, as much as possible, to be what we had on the shelf in the back store or what we had in the Sydney area. So my terminology and Computerland’s terminology of off-the-shelf was what was on the shelf in the back room.” 123 Para 17(l). -- 124 of 267 -- 117 [394] Andrew Coventry attempted the same explanation, attributing it to his brother. I do not believe them. The explanation is both irrational and improbable. I am satisfied that it was fabricated by the Coventrys to enable them to submit that the representation was true in the sense in which they used the term, thus avoiding any conflict with Mr O’Connor’s evidence.124 [395] The change of tack raised the question of how the defendants envisaged the sales referred to in subparagraph A (quoted above) would have occurred. Andrew Coventry suggested in his evidence that dealers, such as Radio Shack, Dick Smith and Computerland would “set it125 up” the way individual customers wanted the product made. His attempts in cross-examination to explain himself and to reconcile his evidence with the defence and his answer to the interrogatory were singularly unconvincing and led him to modify his position: “The statement in the blue book that it’s been designed as a shelf purchase product conveys the message that it’s been designed as something that can be just sold off-the-shelf all the same?-- No, that’s eight years after the event. Now it looks that way. Back then that was not. If you spoke to anyone about an off-the-shelf product in that, they wouldn’t have even known what you were talking about.” This is nonsense. [396] Despite the terms of the defence, the defendants’ final submission was that “Evtech under the Coventrys did not intend to market the System en masse as some off-the- shelf product (let alone market its elements separately in that venue). Rather, its aim was to provide mobile office solutions to specific large enterprises.” I reject that submission. I need not decide whether the Coventrys also intended to provide “mobile office solutions to specific large enterprises”, although I observe in passing that there is no indication of such an intention in the blue books. I am satisfied that they intended to market both the office-in-a-briefcase and Electrocomm as shelf purchase products. In reaching this conclusion, I have not overlooked the reference to “value added vendors” in the marketing policy statement in the Evtech corporate profile document.126 Not only is this statement so vague as to be unhelpful, but also the reference to exclusivity in nominated areas and vertical markets is inconsistent with Andrew Coventry’s evidence regarding multiple dealers.127 [397] I have taken these matters into account in assessing the Coventrys’ credibility. 6(b) the System was operational ...; 6(c) the System would efficiently and reliably transmit and receive data and faxes from portable computers via both the mobile cellular network and the PSTN network [398] The second of these representations effectively particularised the first. The plaintiff attempted to show that the representation was misleading by evidence that the 124 It should also be noted that Mr Morgan, giving evidence in the defence case, expressed his understanding (which he communicated orally to Andrew Coventry “from the first day I met him”) to be: “I have never seen this product as a shrink-wrapped, off-the-shelf product, it’s all been something that got tailored for a specific application.” 125 The software. 126 Exhibit 2, document G3, page 177, paragraph 1.5. 127 Para [394]. -- 125 of 267 -- 118 System was incapable of operating reliably in any of the modes referred to. It did not attempt to show by technical analysis of the hardware, the firmware or the software that as constructed, the System was inherently incapable of performing in any particular mode. The thrust of its case was that the System could not perform reliably. It submitted that unreliability was demonstrated in each of the modes referred to in the representation. [399] Three main classes of evidence were called by the parties: evidence by contemporary users of the System (supplemented by expert opinion); evidence from the designers of the System; and evidence of forensic testing. The defendants also sought to rely upon certain letters written by Kevin Dart on behalf of the plaintiff. This evidence focused on Electrocomm and the IMS modem. Although there was some evidence directed to the power supply unit, it did not go far enough to demonstrate unreliability. Users [400] Mr Poulsen was employed by Evtech nominally as general manager but, in fact, as project manager for the development of the System from early 1992 until late the same year. In January 1993 Andrew Coventry transferred him to work for another of his companies. He worked with PCs for a number of years and had a basic knowledge of the MS-DOS operating system which they used. In addition to coordinating the work of Mr O’Connor (Adelaide), Mr Anderson (Melbourne) and Mr Morgan (Gold Coast), he was involved in demonstrations of the System from time to time. I have already referred to his visits to New Zealand where he participated in demonstrations of the System.128 He was also involved in demonstrations in Australia, particularly to NEC and to the Darts. In his opinion the absence of field testing meant that the reliability of the System was yet to be proven. He thought the System performed “embarrassingly” in demonstrations: sometimes it could not establish a connection, sometimes it would stop in the middle of a file transfer and sometimes the connection would be lost. The problems were continual. The System lacked the functionality to receive faxes. Some of the pull-down menu options had not yet been implemented. The help function was not a fully-fledged help facility. Electrocomm did not always perform in accordance with its manual. Mr Poulsen denied the suggestion put on behalf of the defendants that the System operated with adequate commercial reliability as regards data transfer throughout the last half of 1992. His estimate was it would have taken at least six months from December 1992 for a really robust and marketable product to have been ready for marketing. [401] I have already described how Mr Quinn and Mr Morgan left a copy of Electrocomm and an IMS modem with Mr Gillmore for evaluation by TES.129 The evaluation was carried out by Mr Kevin Underdown. Neither side called Mr Underdown, and no reason for this omission was given. It is a curious and troubling omission: Mr Underdown would, one would expect, have been able to give evidence in some technical detail of the performance of the major components of the System around the time of the defendants’ representations, and perhaps answer some puzzling questions. However, I must make do with such evidence as I have. Mr Underdown’s report, prepared for the purposes of an application for a PTC, is of some assistance. It relates only to the modem, which it notes was a “development 128 Paras [43], [56], [61] and [69]. 129 Paras [97] and [104]. -- 126 of 267 -- 119 model”. It contains a note, “The tests are only applicable to the Modem mode of operation as the Fax driving software was not mature.” Under the heading “Tests Performed”, the report noted, “Data Communication Established Successfully”. It stated that the modem performed satisfactorily. Why it took another 28 days for the application for a PTC to be submitted was not explained. [402] Mr John Frank of NEC also evaluated the System in early 1993. His evidence that, in his view, the System was still under development has been described above.130 [403] Mr Gillmore gave evidence that when he arrived in Australia in April 1993, he tested for the System intermittently from his hotel and apartment for several weeks. He was very disparaging of its performance. Little weight can be put on his evidence. The modem and software which he used could not be identified (he found them in a box in the plaintiff’s office), though it was probably an IMS modem. Mr Gillmore lacked the technical skill to configure a modem in detail and had little skill in using DOS. His testing was unsystematic and unrecorded. It may demonstrate the care which would have been needed in configuring the modem for unsophisticated users; but otherwise I find it of little help. [404] Mr Trevatt of Fisher & Paykel followed his testing and evaluation131 with a written order dated 5 May 1993 for six modems. This was three weeks before the completion of the First Deed. Evtech had no funds and, it seems, did nothing about the order until after that deed was settled on 27 May. I have already described the difficulties which it then encountered in obtaining delivery of production modems from IMS. 132 Few were delivered until late July or August. Fisher & Paykel did not require Electrocomm for their mobile computers: Mr Trevatt wanted Windows- based communications software to operate transparently to the user from within the database program (FoxPro) on those computers. In June Evtech agreed to provide Mr Louis Madon to write this software. Mr Madon worked part time with Fisher & Paykel from June to October 1993, writing a Windows modem driver for the mobile computers and a UNIX133 driver for the Fisher & Paykel server to which they were to connect. [405] As part of his work at Fisher & Paykel, Mr Madon participated in a demonstration of the IMS modem in early August 1993. He reported to Evtech: “I then demonstrated the modem, firstly sending a fax to their fax machine, and then receiving one. Everyone liked the quality of the fax, the only criticisms being that cellular calls would be expensive and that the fax receive may not be very practical since sales reps could not be expected to have their laptops running all the time. I then dialled into F & P Australia’s VAX and let Jeremy demonstrate an online warranty inquiry. At this point it was obvious that quite a few people were impressed by the way their entire online system could be accessed via cellular. Finally I dialled an Australian bulletin board and downloaded a file. One of the systems people wanted to know what baud rate the 130 Paras [93]-[95]. 131 Paras [507]-[508]. 132 Paras [260]-[265]. 133 UNIX was another operating system. -- 127 of 267 -- 120 modem could provide and clearly seemed quite impressed with the modem at this stage. Overall, the modem worked flawlessly throughout the demo.” [406] However most of Mr Madon’s time was spent at Evtech’s premises. He described his work as “mainly testing, trying to come up with the right initialisation string to get them to work as reliably as possible, trying different phones.” He was also writing software for Evtech. When asked what brought about his testing work, he responded: “It was a matter of trying to get them to be reliable, because we were getting a lot of dropouts or pauses in the communication and that was frustrating. Quite often customers couldn’t use the product, so it was trying to come up with a better understanding of some of the conditions and so on and initialisation strings that would make the modem perform to its best.” Questioned further by Michael Coventry during his evidence in chief, Mr Madon continued: “You mentioned getting the right initialisation strings before. Was that before or after this demonstration?-- That was an ongoing thing. That was occurring for a long time because we could never get the modem to work in a satisfactory way where we were happy with it. So, through trial and error, we were always trying to come up with a better initialisation string that might make it work better. Was that on the PSTN side?-- It was - we had - different initialisation strings were needed for PSTN and cellular. We were getting problems occasionally on PSTN, but mostly on cellular. If we used the wrong initialisation string for the PSTN mode - what I meant to say, if we used the initialisation string for mode on PSTN line, the modem would not work well at all, and vice versa. So it was always critical trying to get the right initialisation string.” By this time, Mr Morgan was working at the Evtech premises. That did not seem to make Mr Madon’s task any easier: “And what interaction did you have with Russ Morgan regarding the development of the initialisation strings?-- He would recommend a particular initialisation string and I would try it, but I would find that it still wasn’t working right and so I would use trial and error to try different signal levels or different time-outs, just trial and error with all different things to try and get a better result, and the thing was that I would, say, get a result that I felt was good, but then use that - using that same string later on in different conditions it would fail. So I went back again and did more trial and error. So I never was able to settle on a single initialisation string that I felt that was - that made the modem reliable. It was always being tweaked.” However he does not seem to have provided Mr Morgan with detailed information about the condition of the modem at the time of failure. -- 128 of 267 -- 121 [407] Mr Madon’s testing seems to have been to some degree systematic, although he conceded that he did not use a formal procedure: “What testing did you do with the Ericsson?-- Same as I did with the P3. It was just trying to get connections, transferring data, doing that repeatedly, seeing how consistently it could be repeated, testing the speed, trying to test some different conditions, like not just always in the Evtech-office, but elsewhere, just to see how robust it was.” Nonetheless, the results were unsatisfactory: “How successful was the testing?-- It was very patchy. Sometimes it would work and other times we would get dropouts or pauses, things like that. So like I said, it never sort of got to a point where we felt it was robust.” This applied to faxes as well as to data: “And what about receipt of faxes? What sort of numbers would have been done by you then?-- Over all - I didn’t count. I don’t know. I know there was a lot of fax testing. And was it successful?-- Well, again, it varied. Sometimes it was successful and sometimes it wasn’t. That’s the frustrating part about the modem, was that it just wasn’t reliable.” [408] According to Mr Madon this unreliability was also evident in the modems provided to Fisher & Paykel: “Can you tell us about your experience of how the Evtech product functioned at Fisher & Paykel from what you saw and what you experienced?-- Again, we were having reliability problems. We were having modems failing. So it was sort of like the solution wasn’t sort of robust enough to really roll out.” By the time he came to give evidence, Mr Madon’s view was that there was no initialisation string which would have solved the problems. He suggested their origin lay in the nature of the cellular network. [409] Care needs to be exercised when comparing value judgments made by one witness regarding the modem with those made by another. Words such as “robust” and “reliable” have different meanings for different people. Mr Madon explained his approach: “Why didn’t you take the modem to [Mr Morgan] and demonstrate the fault to him?-- The nature of the problem was intermittent. It is like with the cellular modem. One minute it fails. The next - 10 minutes, it might work perfectly. That’s what makes it frustrating. You need to get the success rate to be a very high percentage in order to be able to rely upon it. Although it was working quite often, it wasn’t often enough to have that confidence. What, and you worked - what do you mean, ‘often enough’? What sort of proportion were you getting?-- It probably would have worked maybe 70 or 80 per cent of the time.” It will be recalled that Mr Trevatt thought the failure rate at Fisher & Paykel (which he thought was 10 to 20 percent) quite acceptable. Mr Madon regarded acceptable reliability as being in the order of 98 or 99 percent, a figure which he admitted he had simply plucked out of the air. -- 129 of 267 -- 122 [410] Care is also needed in assessing Mr Madon’s evidence. His expertise was in software; he knew little or nothing about the firmware or hardware inside the modem. He frequently gave unresponsive answers containing his own inferences, rather than the matters of fact about which he was asked. On a number of occasions I thought he was using words and phrases connoting certainty when that certainty was actually lacking. On other occasions, he gave evidence of his recollected impressions rather than of his recollection of actual events. This was demonstrated in relation to his statement that Mr Trevatt had told him that the modem was not sufficiently reliable to roll out beyond the guinea pig stage, but I do not think it was limited to that occasion. When Mr Madon testified as to his impression of events, Mr O’Donnell QC asked: “When you say your impression, do you mean by that your best recollection?-- Exactly.” I do not think that increases the weight of the evidence. It did not help the position that Mr Madon had made no record of his testing (not even notes for contemporary use) and that his only explanation for this was that nobody told him to do so. That said, this does not mean that his evidence should be disregarded. [411] Some of Mr Madon’s testing was conducted in conjunction with Mr Ken Barr, who was employed by Evtech as its logistics manager in July 1993. Although testing was not part of his job description, Mr Barr was directed by Mr Gillmore to conduct testing. He gave evidence of testing production modems with Mr Madon and also by himself. He inflated his testimony somewhat by (as he admitted) employing “test” as the word to refer to every instance of use of a modem. He recalled that he and Mr Madon had established a standard document for fax testing and a standard file for data testing. Testing would initially take place within the Evtech office, and then, when a modem was working successfully in the office, at designated locations around the Gold Coast. The results were inconsistent, although the failure rate when using fax was greater than when using data. At least some of the results were recorded; but despite Mr Barr’s belief to the contrary, it is probable that this occurred only sporadically. Many modems were tested, but this was not quality assurance testing of production models; it was testing designed to identify the reason for inconsistent results. [412] The procedure was to give a modem an initial test on the PSTN to establish that it was working as a modem, and thereafter to test on the cellular network. When any inconsistent result was obtained, it would be reported to Mr Morgan and the modem would be returned to him for correction. However, Mr Barr had no technical training (he described his testing as that of a “layman user”) and was himself unable to analyse the condition of the modem. [413] When pressed to describe the type of information which he provided to Mr Morgan, Mr Barr became uncertain. He said: “In my testing it was a matter of discussing and reporting the results mainly. It was a matter of stating whether I had a fully charged battery, and I’d like to state clearly that we would not conduct tests without taking two fully charged batteries out with us. It was a matter of recording, basically, was it a fax or was it data that we were trying - attempting to send and receive, and that was it, my recollection, your Honour. There would have been more but that’s all I’m prepared to say.” -- 130 of 267 -- 123 If there was more information provided to Mr Morgan, there was not much more. Mr Barr admitted that he did not provide Mr Morgan with any information as to the state of the S registers at the time of failures. This was potentially vital information in the analysis of a failure, which could have easily been obtained. It is no criticism of Mr Barr, who notwithstanding his lack of expertise was ordered to conduct his testing, to describe it as amateurish. [414] Mr Morgan was contemptuous of the reports of failed modems provided to him. I am satisfied that one factor inducing his contempt was the vagueness and unscientific content of the information provided to him. Mr Morgan had a somewhat egocentric personality and an academic attitude to the question of faults in the modem, which was out of place in the commercial environment in which he was working. He made no serious attempt to identify the cause of the failures being reported to him, dismissing them as probably due to incorrect modem settings. (In fairness to Mr Morgan, it should be pointed out that he was under pressure from Mr Gillmore to manufacture 140 modems quickly and probably had no time to participate in Mr Barr’s testing.) It is not unlikely that Mr Barr sensed his contempt. That may well explain what I felt was an attitude of passive aggression toward Mr Morgan: “We would report its inconsistency and we would report to Russ what it was doing but that’s my understand - he was the technical side of the building of this prototype.” [415] This attitude, Mr Barr’s lack of expertise, the lack of quality control in the manufacture of the production models being tested and the unscientific nature of the testing mean that one must hesitate in drawing a conclusion of inherent defect in the design of the modem from the failures in the testing. Designers [416] I have already referred to Mr O’Connor’s evidence that Electrocomm was written as a suite of software tools or libraries which could be fitted together to create a customised product.134 Measuring by that standard, Mr O’Connor thought that, given an acceptance that one could not have 100 percent reliability over the cellular network, there were “no real issues” as to the reliability of Electrocomm in transmitting or receiving data over either network. He was less comfortable about its fax capacity. If one made the assessment by reference to usage by the general public, he thought that “the fax capabilities were quite behind the eight ball”. He thought the software was functionally complete only as a set of tools, not as a commercial product. [417] Mr Morgan agreed that as late as mid-1993, the modem would sometimes work over cellular and sometimes not. This he attributed to the nature of the cellular network, for which he disclaimed responsibility. He reinforced this point by pointing out that as far as faxes were concerned, there was no difference in the modem between cellular and PSTN. I have already referred to his evidence that he saw the modem as a product to be tailored for a specific application.135 134 Para [387]. 135 Footnote 117. -- 131 of 267 -- 124 Forensic testing [418] The following testing, involving non-party experts, was carried out for the purposes of the litigation: DATE EXPERT MODEMS USED SOFTWARE USED FUNCTIONS TESTED NETWORK 17 Sept 98 Shepherd MK II v 1 Netcomm EC 1 Data Cellular 19 Aug 99 Welstead, Boucher Evtech MK II EC 2.3 Fax, data Cellular, PSTN 30 – 31 Aug 99 7 Sep 99 Graham CPC 14400 Banksia, Evtech (model?) EC 1, 2.4, 2.6 Data, fax Cellular 15 Nov 99 Welstead Evtech MK II EC 2.3 Fax Cellular, PSTN 8 Dec 99 Boucher, Welstead Evtech MK II EC 1, EC 2.3, QL Fax Cellular, PSTN 14 Dec 99 “Joint testing” Welstead, Boucher, M Coventry, Graham Evtech MK II MK I v 2 EC 1, EC 2.3 Data, fax Cellular, PSTN 22 – 24 Jan 00 Shepherd Evtech MK I v 2 (Ex 48) Evtech MK II (Ex 126) Telix Data PSTN 10 Mar 00 Graham Maestro EC 1 Fax PSTN 2 Aug 00 15 Aug 00 16 Aug 00 Welstead, Boucher Evtech MK I v 2, Maestro, Simple EC 1, EC 2.3, QL II Fax, Supercom Lite 1.12 Fax PSTN 26 Aug 00 Welstead Evtech MK I v 2, Maestro, Simple EC 1, EC 2.3, QL II Fax, Supercom Lite 1.12 Data PSTN 17 Sep 00 Welstead Maestro EC 1, EC 2.3 Data PSTN 18 – 19 Sep 00 Welstead Evtech MK II (ex 126), Maestro, Simple EC 1, EC 2.3, QL II Fax Fax PSTN 9 –10 Oct 00 Welstead M Coventry Evtech MK II EC I QL II Fax Fax, data PSTN [419] This testing was extensive, involved a number of people and was no doubt costly to the parties, particularly the plaintiff, which was responsible for most of it. It is a matter for profound regret that none of it was scientifically rigorous, and some of it was simply amateurish. The consequence was that none of it definitively answered the question, “Did the System work reliably?”. I was left to wonder whether this state of affairs was deliberate: on the plaintiff’s part, because such testing might have demonstrated that the System worked, and on the defendants’ part because it might have demonstrated the opposite. [420] The reliability of the System could not be determined simply by connecting an instance of it to a computer and a telephone and trying to use it. There was no dispute that the System sometimes worked. The plaintiff sought to demonstrate unreliability statistically, i.e. by reference to the proportion of failures in a series of -- 132 of 267 -- 125 attempts to use the System. The first difficulty in its approach was that there was no attempt to prove how many tests were required in order to be reasonably confident that the result was statistically correct. Indeed, there was no indication that the plaintiff’s experts had even considered this point. The second difficulty arose from the inability of the plaintiff’s experts in a number of instances to exclude the possibility that a failure was caused by some condition outside the System or by some error in the use or adjustment of the System itself. In some instances this inability was due to poor record keeping; in others it was due to a failure to check or control those conditions. (Examples of conditions which could, in the abstract, have affected testing are operator errors, defects in the computer to which the System was attached, incorrect settings in that computer, defects in the cellular telephone to which the modem was attached, incorrect settings of the telephone or its system, and defects in the computer system or fax machine to which the call was being made.) This difficulty was compounded by the fact that it was not possible to repeat tests on the analogue cellular network after the end of 1999, due to the closure of that network. [421] Ascertaining the reliability of the System was not assisted by the defendants’ strategy. This strategy was to rely upon the fact that the plaintiff carried the onus of proving a negative, viz that the System did not work reliably. Pursuant to this strategy, the defendants made little or no attempt to carry out testing to demonstrate that the System did work. Instead, they examined the testing carried out by the plaintiff to see whether performance failures in the course of that testing might be explained by factors other than imperfections in the System. This might be thought a curious strategy, given the relatively advantageous position they were in to conduct tests to prove the reliability of the System (if that were possible).136 The result of their strategy is that there is little positive testing evidence contradictory of that led on behalf of the plaintiff to consider when assessing this question. I must make my assessment of the reliability of the System bearing in mind that the plaintiff carries the onus of proof; but that this onus is on the balance of probabilities, not beyond reasonable doubt. [422] With the benefit of hindsight, it is apparent that this is a case which would have benefited from the appointment of a court expert under r 425 of the Uniform Civil Procedure Rules. That was not suggested before the start of the trial, an omission which was no doubt influenced by the cost which would have been involved and the fact that at that time, the trial was expected to finish within six weeks. As it turned out, such an appointment have added substantially to the value of the work done, and would probably have saved the parties money in the long run, given the amount of testing carried out subsequently. On the 43rd day of the trial, when some of the plaintiff’s difficulties became apparent, it applied for the appointment of such an expert. At that stage I refused the application. Mr Boucher and Mr Welstead, August 1999 [423] Mr Welstead described himself as a computer technician. He had many years of experience relating to telecommunications applications of computers. Originally, his services were sought not by the plaintiff but by Mr Boucher, who asked him to assist in the August 1999 testing. His personal involvement seems to have expanded after that time. At the theoretical level, his academic qualifications were 136 They had a warm relationship with Mr Morgan and the benefit of Michael Coventry’s expertise and association with the development of Electrocomm as technical director of Evtech. -- 133 of 267 -- 126 probably inferior to those of most other expert witnesses. Initially I was inclined to attribute the deficiencies in testing methodology used in the tests of 15 November 1999 and August 2000 to this factor. However, on reflection, I think that this is unfair to Mr Welstead. The methodology was established by Mr Boucher and Mr Welstead was required to proceed as directed by him. As deficiencies became apparent to him, immediately before he gave his evidence and during the course of it, Mr Welstead demonstrated commendable objectivity and a willingness to re- examine that evidence and any assumptions underlying it. He did so at considerable personal inconvenience. His evidence was balanced and he did not hesitate to bring out points favourable to the defendants. [424] The testing carried out by Mr Welstead and Mr Boucher prior to their giving evidence focused predominantly on the fax capabilities of the System. I have already described the relatively late development of these capabilities.137 That focus was probably driven by a suspicion that fax mode was more likely to fail together with a mistaken belief in the relative importance of that mode (data transmission was easily the more important mode for any mobile office in 1993). Mr Welstead was not instructed to do any data testing until shortly before he gave evidence. Then, and during the progress of his evidence, he sought to remedy the deficiency, with a degree of success. Unfortunately, by this time the analogue cellular network had been closed and testing was possible only on the PSTN. [425] There was some uncertainty about precisely what was being tested, but it was non- critical. This arose from the plaintiff’s failure to safeguard Evtech’s documents and property, including modems and software. A large number of documents was said to have been lost when the plaintiff moved premises, and Evtech’s computerised accounts allegedly became inaccessible for reasons never adequately explained to me. When Mr O’Connor was dismissed in late July 1993 his computer and backup disks and tapes had been recovered and sent to Evtech. The computer motherboard was damaged in transit, but after this was fixed, the computer was used for office correspondence by both Evtech and the plaintiff. No attempt was made to recover the Electrocomm source code which was on the hard disk of the computer (by this time, Mr Gillmore had abandoned the software). The backups emerged late in the discovery process and were copied onto a CD ROM, which became Exhibit 86.138 These folders contained executable versions of Electrocomm identified by Mr O’Connor as 2.3, 2.4 and 2.6 and the source code for version 2.3. They were apparently mirror images of directories and files on Mr O’Connor’s computer and therefore contained several other programs in addition to Electrocomm. A year earlier the defendants discovered a floppy disk containing an executable copy of Electrocomm version 1. No unmodified example of the mark I modem survived.139 The plaintiff had a considerable number of mark II modems, and several of these were used for testing. It would have been better had one of them been selected for testing, checked for physical and electrical soundness and marked with appropriate identifying markings; but the defendants have not sought to demonstrate that any of the modems used was unserviceable. [426] What Mr Welstead called the “first round” of testing took place at the Kenmore premises of CAD Technologies Pty Ltd, Mr Welstead’s company, on 19 August 137 Para [100] (Electrocomm). 138 To be precise, exhibit 86 comprises the contents of three folders on the CD ROM, not all folders on it. The tendered folders were: /MAC/M6-1; /MAC/M6-2, 3; and /MAC/M6-4. 139 Exhibit 48 comprised two modified mark I version 2 modems. -- 134 of 267 -- 127 1999. The objective stated by Mr Boucher was to evaluate the Evtech modem and software to determine if the System was reliable and commercially viable. The testing used the mark II modem and Electrocomm version 2.3 for both fax and data testing over the mobile network and the PSTN. It was carried out with a fax machine (a Panafax UF 140) and two computers configured as follows: Chip 80386 80486 Speed SX16 DX4-100 RAM 4 mb 4 mb Video Trident Trident HDD 250 mb 250 mb Com port Multi I/O card Multi I/O card DOS 5.0 5.0 Phone NEC P3 PSTN Each hard drive contained only the contents of exhibit 86, except for operating system software. No manuals were provided, so Mr Boucher and Mr Welstead had to spend considerable time learning the System. The software was used exactly as it came from the CD ROM, without configuration. [427] Five types of tests were performed on 19 August: • Fax from 80486 to fax machine via PSTN only (“tests 1 and 1A/test 4”) • Fax from a fax machine to 80486 via PSTN only (“test 2”) • Fax from 80386 to fax machine via cellular network and PSTN (“test 3”) • Fax from 80386 to 80486 via cellular network and PSTN (“unnumbered/test 5”) • Data from 80386 to 80486 via cellular network and PSTN (“unnumbered/test 6”). [428] Mr Boucher wrote two reports on the results of these tests. The numeration above is taken from these reports. The first report, dated 2 September 1999, was written shortly after the tests. The second, dated 26 September 2000 (one day before Mr Boucher entered the witness box) was written after Mr Welstead gave his evidence. There were significant differences between the two reports. [429] In his first report, Mr Boucher stated that test 1 produced 10 successful calls out of ten attempted. He wrote that later the same day, the test was repeated, with five successful calls out of five attempts. He then attempted to downplay the significance of this testing by pointing out that “in the preliminary testing data on 11 August 1999, 14 calls to a fax machine in this mode resulted in only seven successes”. No information was provided about this earlier testing and no records were kept of it. Mr Welstead did not refer to it. In his second report, Mr Boucher made no reference to testing on 11 August, but he asserted that test 1 “is not properly a test, as it was the first time a successful run of faxes had been sent and it had been decided in advance that testing was not deemed to have begun until after a successful run.” The theoretical basis for that decision (which was not referred to in the contemporaneous report) was not explained. [430] In his first report, Mr Boucher described the results of test 2 as follows: “Repeated attempts were made to receive a fax via the modem and they all failed. A connection could be established and the 486 software would report having received a fax, but the line would be dropped before the fax transmission was made.” -- 135 of 267 -- 128 [431] On the other hand, in his second report Mr Boucher described the results this way: “The first two attempts failed and the modem failed to detect the ring. The ring was heard at the fax machine (from the speaker) and the dialled number was correct (seen on the screen). ... two more tests were made and these also failed (fail mode is not recorded, but if it had been something different to the earlier fail mode it would have been noted).” [432] The third test was described in the most detail in both reports. In the first report Mr Boucher said that there were 25 successful calls and 25 failed calls. He said that the first 13 calls were successful, then there were 20 failures in succession, then 7 successful calls. One failure was attributed to the mobile network, the signal strength of which he described as “a little marginal” at the location. According to the second report 41 attempts were made.140 Twenty-two were successful and 4 of the 19 failures were possibly due to the mobile network. Signal strength was now described as “a bit marginal but … serviceable … should be more than adequate for the testing.” [433] The fourth test listed above was not described in detail in the first report. It was said that it proved impossible to send a fax from one machine to the other. It was further said that when an attempt to do so was made, the receiving machine often reported receiving the fax but nothing was actually logged in memory. The second report asserted that there were 10 attempts, which all failed. It recorded only three instances of the receiving machine reporting receiving the fax. [434] The last test also was not described in detail in the first report. It was said that it proved impossible to send a file from one machine to the other. The second report recorded that “these tests were not recorded in detail as by now we were assuming that it could not send data”. It said that testing consisted of multiple attempts for 25 minutes during which no instance of a successfully sent file was noted. It listed a variety of failure modes. [435] On the basis of these tests, Mr Boucher concluded that the System was “highly unreliable”. [436] Mr Welstead did not describe these tests in his reports. When asked about them, his evidence was somewhat different from that of Mr Boucher. He said that the tests were done in lots of 10 attempts: “Mr Boucher decided that to get a clear indication of how things communicated, how the software and hardware communicated, that he would send or do tests, the same test, 10 times.” He said there were two series of 10 tests141 and that all the tests related to faxes using the mobile network. No data mode testing was attempted because at that time, his only instructions were to test in fax mode. He did not receive instructions to test data until a couple of months before he gave evidence in September 2000. Mr Boucher directed what was to happen and he (Mr Welstead) operated the keyboard. He took no notes. Unlike Mr Boucher, he did not conclude that the System was unreliable. He said: “Signal level hasn’t been that good in that part of Brisbane for a while and so when we started to get these failures and funny problems I decided that it is hard to decide whether we had a technical problem or whether it was just a signal level problem. So I 140 The attempts are numbered up to 42, but there is no attempt 27. 141 Attempts. -- 136 of 267 -- 129 reported what happened and tried not to draw any conclusions from it.” [437] I do not think any judgment can be made as to the reliability of the System on the basis of this testing in this state of the evidence. The absence of a defined testing methodology, the lack of records and the inconsistencies between Mr Boucher’s evidence and that of Mr Welstead leave me with no confidence that the testing was thorough. I am not satisfied that the signal strength in the mobile network at the test site was adequate: I have no reliable evidence of the set-up of the computers or the configuration of the operating system and software during the testing. I prefer Mr Welstead’s opinion that of Mr Boucher, partly because the former seemed to me to take an impartial approach which was missing at this stage of Mr Boucher’s evidence. Mr Welstead, November 1999 [438] The “second round” of testing was carried out by Mr Welstead alone at his Kenmore premises for several days prior to 15 November 1999, the date of his report. Mr Welstead was supplied with two modems of the same model as was used in the first round of testing, but one was found to be faulty. The serviceable modem was connected both to the PSTN and to the cellular network by an NEC mobile phone. Mr Welstead used the same 80386 computer and borrowed a fax machine from Mr Boucher. The software used was Electrocomm version 2.3. Only the fax mode was tested. [439] Mr Welstead reported that a fax was sent successfully 12 times out of 20 tries. The remaining eight tries resulted in the call being answered at the receiving end but no fax was transmitted. In those cases, the call would be disconnected and an error message displayed indicating that the fax was not sent. It seems that the 20 attempts were made on the PSTN: “We basically abandoned the mobile testing because we felt that the signal level probably wasn’t good enough and we went over to doing some PSTN testing, and out of the 20 calls we made to the fax machine, we were able to get a message through 12 out of 20 times.” 142 [440] It is unclear how many attempts were made to send a fax over the cellular network. Attempts were made to send a fax from the fax machine to the computer, but they were not described in detail nor, apparently, were they counted. All such attempts were unsuccessful. In cases where the mobile phone “dropped out” during an attempt to send or receive a fax, the software would hang and the computer would need to be restarted. [441] Mr Welstead concluded that the System was not ready for release to the public as it was unreliable and difficult to use. [442] For the reason given by Mr Welstead (poor signal strength at the test site), the attempts to test over the cellular network should be disregarded. However, there is some support for Mr Welstead’s conclusion in the testing which used the PSTN. That testing showed faxes were sent successfully by the System on only 60 percent of attempts and were never received successfully by the System on this network. 142 Mr Welstead was using the royal plural. -- 137 of 267 -- 130 Those are unsatisfactory results in a network where the success rate should have exceeded 90 percent (Mr Boucher suggested 98 percent). The lack of detail about the conduct of the tests detracts from the weight of the results. Nonetheless, they do tend to support Mr Welstead’s conclusion. Mr Boucher and Mr Welstead, 8 December 1999 [443] Mr Boucher was not involved in Mr Welstead’s “second round” of tests in November, so he called a series of tests which he carried out on 8 December 1999 the “second series”. Its objective was, according to Mr Boucher’s report “to confirm earlier testing in more detail and to attempt to find out whether there is a specific problem with the modems or the software”. By “whether ... specific” he meant whether specific to the modem or to the software; it was not his intent to identify the specific problem. A difficulty in the evidence relating to these tests is the fact that Mr Boucher says that Mr Welstead participated in the testing, whereas Mr Welstead did not include this round of testing in his list of the testing in which he participated during 1999. It seems that the tests were conducted at Mr Welstead’s premises at Kenmore. Mr Welstead agreed that he received a copy of Electrocomm version 1 by e-mail from the solicitors for the plaintiff on 8 December, and Mr Boucher specifically remembered his intervention in test 9. I am satisfied that he participated. Mr Boucher said that the computer set-up was the same as that for the August testing but this may relate only to the obvious physical arrangements. Mr Welstead gave no evidence about this series of tests and there is no evidence of the hardware or software settings. [444] The results of this testing can be seen in Annexure A. The jagged appearance of the table reflects the unsystematic quality of the testing. Test one was discarded as invalid because it was attempted using a class 3 fax machine, for which the System was not designed. Test four was terminated after seven attempts, the System was re-booted and the test was completed using a different version of Electrocomm (test five). Test six was terminated after five successful transmissions. Test seven was abandoned after two attempts because (assuming their conclusion) “by this stage we were beginning to think there wasn’t much chance of making it receive faxes.” Test eight was abandoned after five attempts, including one failure.143 Test nine resulted in failures, but I was not told how many attempts were made. Mr Boucher described what happened during that test: “Then Noel for some reason said that the changing the port cards - I didn’t really understand it, but he said that they had changed a lot over those years, and that maybe the ones we had weren’t contemporaneous with the software. So he has got a huge collection of old junk, and he went and got some other ones and replaced those cards. HIS HONOUR: How many did he replace?-- Just the - I think just one. ... MR O’DONNELL: What is the com port card?-- This is a card that the modem is talking to. And then things seemed to go a bit better. 143 The evidence did not disclose on which call the failure occurred. I have arbitrarily placed it fifth in the table. -- 138 of 267 -- 131 ... Started with the hard one. Started immediately to receive faxes, and two of them were received. This is the first time we’ve actually seen a fax received and - since it’s the Evtech modem that we’re using, it’s looking a bit like - at this stage that the problem is with the Electrocomm software and not so much with the modem ... Having discovered that that was a problem with the Quicklink software, of course throws a shadow of doubt over any previous testing because it could then be the interface between the modem and the computer that’s at fault, because we changed something on the computer and now things are starting to work. So the thing to do then is to go back and try some of these other - repeat some of the tests and see if we can get the Electrocomm software to work. In retrospect, receiving two faxes wasn’t enough. We probably should have done more. That was made up for later. It isn’t conclusive proof it’s working properly.” As the table shows, not all tests were repeated and only two calls were made for those which were. [445] I do not think that the evidence of this testing can safely be used to demonstrate unreliability in the System. I have come to this conclusion because the testing was unsystematic, the settings on the equipment were not recorded, some test results are missing and, most importantly, it is possible that all but the last three tests were invalidated by the use of an inappropriate com port card. In addition, signal strength problems may have affected the tests using the cellular network, although I appreciate that low signal strength could not be the explanation for some of the failed calls. Joint testing, 14 December 1999 [446] By arrangement between the parties, a series of tests was conducted by them jointly on 14 December 1999, less than a month before the closure of the analogue cellular phone system. The arrangement grew out of pre-trial directions given during 1999. 144 Those directions required the parties to develop a testing protocol covering the time and place of testing, the equipment to be used and the method of testing. An agreed list of questions arising from the pleadings was to be submitted to the experts from both sides, to be answered on the basis of the testing. The proceedings were to be videotaped because an earlier conference between the experts had resulted in a squabble between the solicitors as to what each expert had said at the conference.145 [447] No testing protocol was put into evidence and it seems probable, from the manner in which the testing was conducted, that the parties chose to ignore the directions given by the court. The directions envisaged joint testing by the proposed expert witnesses. In the event the proceedings were hijacked by the parties themselves. The testing took place in the offices of the solicitors for the plaintiff. The experts were relegated to the role of passive observers. The equipment was operated by Michael Coventry. The solicitor for the plaintiff, Mr Hamish Fraser, produced a proposal containing a list of six hardware/software configurations with 12 testing modes for each configuration, which Michael Coventry followed in part, adding further tests when he felt they were needed. The list was nowhere near completed 144 The case was on the managed case list. 145 At that stage, the defendants were legally represented. -- 139 of 267 -- 132 by the end of testing, which ran from 11.10am to 6.15pm. There was no attempt to resume them on a subsequent day. The cellular network signal strength for the location was good. The telephones were used to make a call before testing started to check that they were working, which the parties apparently accept as a sufficient test. Each computer was checked only by the expert for the side which produced it. Since both parties were present, I infer that each was satisfied that all of the equipment was serviceable and all settings were optimal. The testing was carried out on a mark I version 2 (or “rats tail”) modem and a mark II modem, using Electrocomm version 1 and Electrocomm version 2.3. Each side provided approximately half of the equipment used to conduct the tests. The test equipment was: Chip 80386 80386 Model/speed SX-16 SX-16 HDD 209 MB 42 MB DOS ? 5.0 Modem IMS mark I v 2 IMS mark II Phone NEC P3 NEC P3 Fax Panafax UF-160 Mitsubishi FA-75. Twenty sets of tests were conducted, but they bore little relationship to Mr Fraser’s proposal. All involved one computer and version one of Electrocomm. Some involved both computers and both versions of Electrocomm; and the others involved one computer and a fax machine. [448] The results of the tests are set out in annexures B1 to B4. The information in those annexures is taken from the report of Mr Boucher which, on this aspect, was unchallenged. Dr Graham recorded the results of testing, but his report omits any detail of attempts which he regarded as invalid. Dr Graham ignored tests involving the mark I modem because of possible mismatches between Electrocomm and the firmware in the modems, but there is no evidence of any such mismatches. I prefer the evidence of Mr Boucher. Because it was unchallenged, I do not propose to verify it by viewing every minute of the videotape of the testing. As can be seen from the annexures, there was little pattern to the testing.146 Mr Boucher’s evidence that Michael Coventry took control of the agenda was not substantially challenged in cross-examination. He seems to have embarked upon a hunt for a gremlin rather than a series of controlled performance tests. With the benefit of hindsight, it would have been better for the court to have appointed an expert pursuant to UCPR 425 to supervise the testing. [449] At first glance, the test results seem overwhelmingly to demonstrate the unreliability of the System. To some extent, however, that impression is misleading. There are several reasons for this. First, there was no agreed test standard. One would have expected that reliability would be assessed by reference to a predetermined performance standard. Mr Fraser’s list defined tasks which the System was to perform but did not specify how many times each task should have been successfully performed for the System to be rated reliable. On the contrary, successful attempts were followed by very few repeat attempts. Second, the total number of attempts was too few to warrant any form of statistical analysis. Third, a substantial number of tests was performed from computer to computer. This meant that on those occasions, the test rig contained two instances in series of the object 146 Why anyone in 1993 would have wanted to send a file as a fax from computer to computer was never explained to me. -- 140 of 267 -- 133 being tested (the System). This nearly doubled the probability of failure at any given attempt. Proper testing required that only one instance of the object under test be used in conjunction with equipment which had been verified as reliable. [450] These criticisms do not mean that the testing was a complete waste of time. By the end of the day, the System had demonstrably failed a significant number of times in a variety of modes. It had done so in a reasonably controlled environment where the parties had equal opportunities to protect their interests. It is true that control over the environment was a good deal less than perfect. For example, one test was invalidated when someone tripped over a power cord; and someone left a mobile phone switched on, which could have invalidated one or more tests if the phone was brought within two or three metres of the modem being tested. Rare possibilities such as that do not without more satisfy me that the testing was useless. When the results are viewed as a whole, it is seen that there was a large number of unexplained failures. These were sufficient, in my judgment, to place an evidentiary onus upon the defendants. As Dr Graham put it, “It was very soon obvious that there were serious problems with the Electrocomm systems.” He advanced what he called “possible reasons” for these problems, but that was as far as his evidence went. I shall not detail his suggestions. They are, in my judgment, speculative suggestions. They are insufficient for the defendants to rebut the evidentiary onus upon them. Mr Welstead, August 2000 [451] On the instructions of the solicitors for the plaintiff, Mr Welstead carried out two further series of tests in August 2000, using several modems and software packages.147 In his report of 26 August 2000 Mr Welstead stated the aims of the tests as being “to report in a clinical manner the performance of each item when used to send and receive fax messages, to send and receive data files over the PSTN telephone network.” He explained that statement in his evidence in chief: “What did you understand that to mean; simply whether or not it worked or didn’t work, or to give some actual detail about its performance?-- Well, to - performance I understood to be whether it actually worked or not. If you could get it working. Not to work out how much memory it used, not to work out any detail about its performance at all?-- In that respect, no. I see. Not to work out why it didn’t work or anything like that?-- No.” [452] He tested both version 1 and version 2.3 of Electrocomm. He described the software: “In the Electrocomm software there are a lot of configurable items. I mean, it’s very, very complicated software and the software came to us in a particular configuration off the CD when we received it and when we had a look through all the options and all the configuration settings we thought that it would be better not to play around too much with it, because we were unsure of what that would cause problems with ... .” 147 By this time, the trial had proceeded for 28 sitting days. -- 141 of 267 -- 134 He stated in his report and initially confirmed in his evidence in chief, that the only settings or adjustments which he made to Electrocomm were to set the communications port and the speed of the modem, and to create some additional directories to store files. [453] It became apparent in the course of Mr Welstead’s evidence in chief that if these were the only settings which were adjusted, there was a risk that significant portions of his testing of data transfers might have been invalidated. On Monday 18 September 2000 the second day of his evidence, he came into court with a document which he had prepared over the weekend and which he swore set out the adjustments which he had made to the software prior to his tests. A number of additional adjustments were listed. He said that he had created the document over the weekend and with the aid of notes which he made at the time of his testing, by redoing on the computer the things which he “would” have done at the time, and making a note of them. He said that the document148 “basically” showed what was in his notes. His manner left me with little confidence as to the accuracy of the document. However, it was not suggested in cross-examination that it was inaccurate, although the defendants had access to Mr Welstead’s notes. I shall therefore proceed on the basis that Mr Welstead’s evidence in relation to the document is correct. [454] The testing which was carried out was in large measure comparative testing using other software and modems in addition to the Evtech products. The other software used was Quicklink II Fax and Supercom Lite version 1.12 which were contemporaries of Electrocomm. The other modems were a Maestro Jetstream modem and a Simple modem, both of which were newer than the IMS modem. The Evtech products tested were Electrocomm versions 1 and 2.3 and the IMS modem mark I version 2. The test computer used DOS version 5 as its operating system. [455] Fax testing was carried out by transmissions made between Mr Welstead’s premises at Kenmore and Mr Boucher’s at Maleny. Instead of being conducted on one day, it was spread over three (2, 15 and 16 August) because “Mr Boucher had, you know, commitments of course to go to and - so we fitted in with his timetable.” The computer was at Kenmore and the fax machine at Maleny. Thirteen combinations were tested and each test was performed 10 times. Nine of the thirteen combinations involved transmissions from computer to facsimile machine and the other four from facsimile to computer. Mr Welstead said that his knowledge of what occurred at Maleny was derived from conversations with Mr Boucher. Unfortunately, Mr Boucher was unable to give evidence connecting the observations at his end with Mr Welstead’s testing. In his report he declared that he was involved in this testing “only to the extent that my fax machine was used for sending and receiving.” He amplified slightly in his evidence in chief: “So he would ring me before a batch of, usually 10 calls, ask me to make sure my fax machine was ready with paper and whatever, and he would then ring me at the end of the 10 calls and ask what was the result and what did I see. Did you collect any pieces of paper that emitted from the machine during his testing?-- I collected all the pieces of paper that emitted from the machine as a result of that testing. 148 Exhibit 108. -- 142 of 267 -- 135 And were you able to identify which bits of paper belonged to which test?-- No, I’m not.” No attempt was made to have him verify Mr Welstead’s report, although he was asked to express opinions upon the matters asserted in it. 149 [456] Mr Welstead’s oral evidence was given without objection by the defendants, but on the assumption that its hearsay aspects would be verified by Mr Boucher. His report was also admitted without objection and there is no doubt that parts of it are properly admissible. Partly because the defendants were not legally represented, I do not think it would be fair to rely upon aspects of the testing which, in the end, were unverified by direct evidence. More importantly, however, it seems to me that the hearsay is unreliable. For example, Mr Welstead claimed to have successfully sent 30 faxes to Mr Boucher on 2 August, using Quicklink software (tests one to three). However Mr Boucher’s fax log shows that he received only 22 faxes on that day. Ignoring hearsay evidence means that a few cases where the hearsay evidence favoured the defendants must also be disregarded. It also means that no statistical approach to this testing could be valid. However, it does not mean that all of the testing must be disregarded. It is necessary to disregard only those attempts where proof of success or failure depended upon what happened at the other end. Broadly, this covers cases where attempts by Mr Welstead to send a fax were successful or were unsuccessful because of an apparent engaged signal and where attempts to receive a fax were unsuccessful. Cases where Mr Welstead attempted to send a fax and failure occurred before transmission commenced, or where he successfully received a fax may still provide usable evidence. [457] In Annexure C I have set out those results the proof of which did not depend upon unreliable hearsay evidence. Read with the oral evidence concerning the testing, they demonstrate three points. First, there appears to have been a fault in the automatic redial function in Electrocomm version 2.3. Second, the same version detected incoming faxes on a number of occasions, but failed to save them to disk. Third, under similar conditions, the Quicklink software operated reliably, even using the IMS mark I version 2 modem. [458] Mr Welstead’s second series of tests in August 2000 were data transfer tests. These tests were carried out shortly before 25 August 2000 at Mr Welstead’s premises. The items being tested were attached to the same 80386 computer as is described above and transfers were attempted between that computer and a modern computer running the Windows 98 operating system. The two computers were in proximate rooms. The same software and modems as are described above, were used for this testing. The results are set out in Annexure D. [459] These results must be read bearing in mind that the other modems were of a later vintage than the IMS modem. Nevertheless, they indicate that the Electrocomm software was unreliable, under conditions where other contemporary software operated efficiently. A number of the failures were catastrophic, requiring rebooting of the computer. They do not demonstrate that the software would never work, but that is not the issue. 149 The plaintiff’s application for a court appointed expert referred to in para [422] was made when Mr Welstead’s inability to verify his report became apparent. -- 143 of 267 -- 136 Mr Welstead, 17 September 2000 [460] On 17 September 2000 during the course of his evidence in chief, Mr Welstead carried out some further data transfer testing. He explained how this came about: “I decided that over last weekend it would be worthwhile to - after some discussions about the file transfer programs, that it would be worthwhile to do some additional testing in that area. HIS HONOUR: I am sorry. Discussions with whom? You have to tell under the circumstances about this?-- There was a bit of comment - I overheard somebody say that the file transfer programs worked. I overheard that and I thought I must mention to counsel that perhaps I should have a look at that again to do justice to that particular side of the software and so I suggested that over the weekend I would have a look at that and see if ----- Why did you think you needed to look at it again?-- Because ----- Because of the risk you might have got it wrong in the first place?-- Yes, of course.” [461] Not having the original test computer, he set up the Electrocomm software on another, but somewhat newer, computer. He did not have an IMS modem, and used a Maestro modem, which was somewhat newer and superior in performance. The test computer was used in conjunction with the Pentium computer referred to above. Both versions of Electrocomm were tested. The testing comprised six attempted data transfers from the Pentium computer to the test computer, three using Electrocomm version 1 and three using version 2.3; in other words, both versions were tested in receive mode. Of necessity, testing took place over the PSTN. [462] The reason for the testing was explained in Mr Welstead’s report: “I had speculated that the failure to communicate and garbage characters seen on the second computer’s display [during the August 2000 testing] may have indicated the failure of the Electrocomm software to synchronise its speed settings with the distant test set.” The purpose of the testing was to verify or disprove that speculation. Mr Welstead explained that the speculation arose because in the August testing, the Pentium computer had been set to automatically sense the speed of the connection between the modems. It apparently occurred to Mr Welstead, while he was preparing his list of adjustments referred to above,150 that the list does not specify the speed selected in the Electrocomm software. When asked about it, Mr Welstead conceded that he had no note of the speed used with the version 1 software, and said that the speed selected for version 2.3 was 9600 baud. As he put it: “I had assumed that the Windows 98 system would communicate at the baud rate that was decided between the two systems so that they would auto baud. As I had the Electrocomm software set at 9600, I had expected that that would be the communications rate and that’s the way it would work.” [463] His new tests were designed to see if explicitly setting the speed on the Pentium computer would make any difference. He performed three tests with each version 150 Para [453]. -- 144 of 267 -- 137 of Electrocomm, making only one attempt at each test. For the first test he set the Pentium computer’s modem to communicate with the other modem at 9600 baud. For the second and third tests he set it at 4000 and 2,400 baud respectively. He said he made the same settings to Electrocomm. [464] In the result not one of the six tests produced a successful data transfer. At both 9,600 and 4,800 baud neither version produced a stable connection, despite handshaking between modems. At 2400 baud both versions established connections but neither succeeded in uploading a file, crashing during the dialog needed for this purpose. Version 2.3 was able to establish a stable chat mode connection. [465] It is unnecessary to examine Mr Welstead’s conclusions in relation to this testing. That is because they are founded on a false premise. Unfortunately, in August and September 2000, Mr Welstead believed that the speed setting in Electrocomm related to the modem to modem connection. That belief was not correct, as Mr O’Connor subsequently made clear. It related to the computer to modem connection, and had little or no impact on the speed of the connection between modems. 151 Mr O’Connor’s evidence is confirmed by the Electrocomm manual. 152 It is also deducible, at least in relation to version 2.3 and the IMS modem, by examining the source code for the software in conjunction with the modem manual. 153 Mr Welstead’s mistake is understandable. For reasons which were not explained, the solicitors for the plaintiff did not supply him with either the Electrocomm manual or the modem manual during his testing. The software itself contained little information. Presumably the point was not realised until after Mr Welstead gave evidence. [466] The conclusions which Mr Welstead reached on the basis of his weekend testing were open to a number of serious criticisms, even apart from the mistake just referred to. The mistake invalidates his reasoning completely. There is no evidence to suggest that auto mode speed selection was not operative in modems controlled by Electrocomm. Moreover Electrocomm was supposed to operate between the computer and the modem at speeds of up to 19,200 baud. It should, therefore, have been able to operate at any speed negotiated between the test modems, the fastest of which in the August testing, operated at 9600 baud during data transfers. The weekend testing did not invalidate the August testing, it confirmed it. [467] Mr Welstead’s mistake also affected the following passage in his cross- examination: “How far can we take that, Mr Welstead? Assuming - just assume that what is being put to you about the Evtech modem is correct, that is, assume that its maximum is 2400, does that mean that all of your testing using that modem that are referred to in Exhibit 125, that is your November ‘99 tests, and the ones referred to in your report of 26 August can be disregarded?-- Certainly if I had have - if I had known that it was a 2400 baud data modem, professionalism would 151 Mr Boucher said that the speed selected for computer to modem communications also operated as a maximum for modem to modem communications. This seems reasonable, although there is no mention of it in the modem manual. 152 Exhibit 2, page 94. 153 By default, the modem was set to enable auto mode speed selection: exhibit 50, pp 4-7. This could only be changed by the software issuing the command ATN0S37=n to the modem: ibid pp 5-8. No such command is contained in the source code files (*.CPP) in exhibit 86. -- 145 of 267 -- 138 point to the fact that I would have not tried running it at a different baud rate, so ----- Is the corollary if you use it with the different baud rate the results are just unreliable?-- Yes, that would be true, yes.” [468] In that passage, the reference to “2400” relates to modem to modem communications. They would have been unaffected by any setting of the modem to computer connection at a higher figure. His answer was wrong. Mr Welstead, 18-19 September 2000 [469] By the end of Mr Welstead’s second day in the witness box, his evidence relating to an important part of the plaintiff’s case, the System’s capacity to send and receive faxes reliably, was looking decidedly shaky. Overnight he decided, or was prevailed upon, to repeat his fax testing of August 2000. This time he set up a fax machine at his own premises, where he could see what was happening himself. Not having the court exhibit, he used another IMS modem of the same type. Otherwise his equipment was the same as that used in August. He cancelled three of the later tests because he was running short of time – he had worked through the night until the next morning and he was due to leave for court. He carefully documented the results of the tests and some (but not all) of the settings of the equipment and described these in extensive oral evidence, given in chief. To avoid any suggestion of unfairness, Mr Welstead offered to repeat the tests in the Coventrys’ presence, at a mutually convenient time. [470] Mr Welstead was not cross-examined specifically in relation to this testing. The test results are set out in Annexure E. Subject to several general issues relating to testing methodology raised by the defendants, I accept their reliability. On their face, they suggest that the System was unreliable, probably because of unreliability in the Electrocomm software. It should be noted that this testing was carried out on the PSTN, without the additional difficulties imposed by the cellular network. Mr Welstead, 9-10 October 2000 [471] Evidence in relation to this testing was heard on the voir dire. It was proffered by the plaintiff, notwithstanding that it was not dealt with in accordance with directions given in relation to expert evidence. I deferred my ruling on whether to receive it. I shall deal with it after describing other testing carried out. Ms Shepherd, 17 September 1998 [472] Ms Shepherd was an electrical engineer and founder of a company called Mosaic Information Technology Pty Ltd, which specialised in the design, development and manufacture of electronic data communications equipment. She had particular experience with modems. In a written report prepared in October 1998 she stated that on the above date, she “operated” a mark II version 1 production model of the IMS modem. She used a modern Pentium computer with Microsoft NT operating system and Telix communications software. She did not have Electrocomm software at the time. She said that she could observe the modem communicating with an NEC P3 mobile telephone and the telephone dialling. She said that with only one such telephone she could not do extensive tests passing data and fax data. -- 146 of 267 -- 139 She said that the modem “behaved as expected”. She was asked what she meant by this during her evidence in chief, but her answer was not particularly illuminating: “Coming back to your October report, the third paragraph of clause 4, what do you mean by ‘Since the IMS modem behaved as expected’?-- well, when I operated it as a normal modem, as a standard modem, and I did all the sorts of testing that I would do in - in a standard modem, it behaved exactly as I would have expected a standard modem to behave. Those were the sorts of tests that you would - sorry -----?-- Yeah, if I were going to - if I were going to test a modem that had been manufactured in our company, before it was sent out to a customer, I went through all those tests. I did the same tests on the IMS modem that I would have done on my own modems.” Subsequently she was provided with a copy of Electrocomm version 1. She said in her report that she tested this in an MS-DOS environment, where she found she “could successfully transfer files to and from a Toshiba laptop”. [473] In cross-examination it emerged that this testing had been done substantially on the PSTN. She had limited her testing with the mobile phone to observing it dial, which she described as “very minimal”. She was pressed on the reason for this: “Why was it minimal? Did somebody tell you to keep it minimal?-- No, somebody didn’t tell me to keep it minimal. The truth is that I was at Russell’s [Mr Morgan’s] place to do that particular test and it all got too difficult to do it with Russell there and - I didn’t take it home and do it in my own time by - at my leisure and to my own satisfaction. It was in somebody else’s desk and that’s very difficult... The time was finished. I had to go home.” [474] Another area which she did not test was the modem’s fax capacity. Her software testing was also done on the PSTN and was confined to the data side. She did not test the software with the IMS modem. Unfortunately, she was unable to give any detail of the testing which she did, though she asserted that she tested everything in the manual. [475] I found this part of Ms Shepherd’s evidence of little assistance in assessing the reliability of the System. Dr Graham, 7 September 1999 [476] Dr Graham first carried out tests on the System in August and September 1999, the definitive testing being on the above date.154 His test equipment consisted of a Compaq Contura 3/25 laptop computer with an 80386 chip to which he connected an IMS modem mark I version 2. With that, he used an NEC mobile phone (presumably a P3). The communications software was Electrocomm version 2.4, which, I assume, is not materially different from version 2.3. He tested that equipment against a Toshiba 420CDT computer equipped with a Pentium 100 MHz chip, running Hyperterminal version 3.0 and connected to the PSTN by a Banksia fax modem. 154 He had been provided with a copy of Electrocomm version 1 in 1998, but was unable then to test its functionality. -- 147 of 267 -- 140 [477] The results of this testing are set out in Annexure F. They reflect what Dr Graham perceived as the aim of the testing: “To establish functionality, rather than reliability.” Ms Shepherd, 22-24 January 2000 [478] Ms Shepherd carried out some further tests of three specimens of the IMS modem mark I version 2 on the above dates. The modems were connected to a computer running MS-DOS, the version of which was not revealed. Again, the testing was done using Telix software to drive the modem. A second computer used was a relatively modern Toshiba laptop with a fast internal modem. The only testing done was on the PSTN and the only mode attempted was data transfer. The object of the testing was simply to see whether the modems could transfer data over the PSTN; it was not to assess their reliability in doing so. Ms Shepherd was able to establish a connection successfully, to chat satisfactorily between the two computers and to transfer files backwards and forwards between them. She did not say how many times she did this, nor how many times the process was attempted unsuccessfully. Her conclusion was that the modem “operates satisfactorily as a ‘standard’ modem”. She was also supplied with Electrocomm version 1 but reported, “without the manual, I could do little testing of value”. Dr Graham, 10 March 2000 [479] On 10 March 2000 Dr Graham carried out testing of Electrocomm version 1 in facsimile mode. He did so using a Maestro modem, so his tests were not tests of the System as a whole.155 He used the Mitsubishi fax machine used at the joint testing, but for reasons not explained to me, used two computers: one was the 80386 SX machine used at the joint testing, the other his Toshiba described above. How this modern computer was used was not detailed in the evidence. Since the fax machine was used in every test the modern computer was presumably used in place of the older computer, which tends to cast doubt on the utility of some of the tests. The purpose of this testing was not definitively stated. It was conducted because of the poor performance of the System at the joint testing on 14 December 1999 and one of its objectives was “to try and find out what the particular problems were with the receipt of faxing”. The IMS modem was deliberately not used: “DR GRAHAM: What I was trying to do was to establish whether it was possible to say whether the faults were - lay with the modems that were used or the software. So I was trying to take the modems out of the equation. HIS HONOUR: Does that mean you were testing for functionality rather than reliability again? DR GRAHAM: In essence, yes, your Honour.” [480] Dr Graham made 11 valid attempts to send a fax from the computer to the fax machine, and 10 were successful. He made 28 or 29 valid attempts to send a fax from the fax machine to a computer. In 10 cases the software crashed; for the remainder it operated properly. A further 10 crashes occurred after the successful receipt and saving of the fax. Just what these figures demonstrate, I am not sure. I 155 However the modem was a 1992 model and it operated at the same speed as the IMS modem. It had a different chip set. -- 148 of 267 -- 141 find them of little assistance in relation to the question which I must consider: the reliability of the System. They hint at an opposite inference from that which might be suggested by the joint testing, but really they do no more than hint. Their limited scope deprives them of value for my purposes. [481] The first of the questions in the agreed list156 was, “Will the System efficiently transmit and receive data and faxes using portable computers via both the mobile cellular network and the PSTN network?”. Initially, Mr Boucher and Dr Graham disagreed on the answer to that question. Mr Boucher thought the answer was, unequivocally, no. Dr Graham’s answer was hedged in ways which made it unresponsive to the question. During the course of the trial, a conference of experts was convened pursuant to directions given by the court. It was attended by Mr Boucher, Mr Welstead, Dr Graham and Ms Shepherd. Its purpose was to identify the areas of agreement and disagreement among the experts. They had before them, the results of all the testing conducted up to that date. Their agreed answer to question 1 was, “We have seen every mode work at least once. ‘Efficiently’ - NO if all cases are included.” [482] Dr Graham was the last of these four expert witnesses to give evidence. After his evidence in chief, and before his cross-examination, evidence in conjunction was given by him and Mr Boucher. Both witnesses were sworn at the same time and sat in the well of the Court at a table, with their documents. In the ensuing discussion of a number of topics, I acted as chairman as well as a judge. Both parties and both experts were permitted to ask relevant questions to one or the other or both experts, and I asked a number of questions myself. In particular, each expert was afforded the opportunity to express opinions about particular matters concerning him in the evidence of the other, and both were given the opportunity to elaborate interactively on their answers to the agreed questions. I found the process very helpful, although at times firm control had to be exerted over the discussion. Important areas of underlying agreement were exposed; as were assumptions and opinions underlying areas of disagreement. [483] In the discussion relating to the first of the questions in the agreed list, it became clear that “efficiently” was a source of some difficulty. Both witnesses were asked to consider the question on the basis that the word included the concept of reliability. I have already referred to evidence of differing views of percentages of successful operation required for reliability.157 The discussion took place without adopting any particular view on this point. Mr Boucher maintained his opinion that the System did not operate reliably. Dr Graham was inclined to take a piecemeal approach to the components of the System and the various modes of testing, but, in the end, he expressed the view that if efficiency included the concept of reliability, and performance across all modes was taken into account, the answer to question 1, in relation to the combined System, was no. The defendants’ submissions regarding reliability [484] The defendants submitted that the System had been shown to operate reliably and consistently or (by implication) that at least the plaintiff had not shown the contrary. I shall deal with their submissions in turn, ignoring the (sometimes pejorative) adjectival flourishes added by the defendants. 156 See para [446]. 157 Para [409]. -- 149 of 267 -- 142 [485] The defendants first pointed to the range of witnesses who gave evidence of having observed every variation of the System working at some stage. The problem with this submission was that it did not address the question whether the System worked reliably. It was not disputed that the System could on occasions do what it was claimed to do. The defendants did not dispute at least some failures: in their final submission they said, “The fact that numerous witnesses, even [Gillmore], [Bryan Dart], [Barr] and [Madon], all deposed to the surprising sporadic nature of the ‘problems’, saying the System ... worked sometimes and not others, is indicative that basically it worked, but just tripped up (from time to time) by some or all of this imported range of unnecessary and incompetent interferences.” I am satisfied that the problems were more than “sporadic”. This submission implicitly accepts that in testing, only failures caused by what might loosely be described as “external conditions” can be regarded as not compromising reliability. I shall deal with these in a little more detail below. [486] Second, they relied upon a number of letters, announcements to the stock exchange and press releases issued on behalf of the plaintiff by Kevin Dart, in which the virtues of the System were extolled. It is true that in some circumstances such statements might be construed as admissions against interest. I am not prepared so to construe them in this case. Most were written at a time when Kevin Dart claimed that he still believed the System could be made to work reliably. In any event he was not a person with sufficient knowledge of the subject to make a reliable admission about it. Moreover it is likely that his statements contained an element of exaggeration; I am satisfied they were calculated to support or enhance the price of the plaintiff’s shares. [487] Third, the defendants submitted that the testing, particularly the joint testing, was flawed158 because it did not use the mark I version 1 modem, nor the Ericsson mobile phone. Those were said to have been the pieces of equipment the subject of the November 1992 representations. I have already found that the design of the mark I version 2 modem was complete by the end of October 1992.159 The reliability representation was not limited to use with the Ericsson phone. I have described Evtech’s involvement with NEC and its P3 phone above.160 I reject this submission. [488] Fourth, the defendants submitted that the joint testing was flawed because the equipment used was old and connections on the cables were corroded and unreliable. The evidence simply does not support that submission. One cable had a loose end, but that was fixed as soon as it was discovered. No other defects were identified. Michael Coventry and Dr Graham were both present at the joint testing and had the opportunity to object if they thought the equipment defective. They did not do so. This submission must be rejected also. [489] Fifth, the defendants submitted “technical problems were probably never resolved arising from issues regarding memory requirements of various editions of DOS and the ability of RAM and processors in the computers used to perform accurately in accordance with contemporary equipment”. I do not understand this submission. There was some evidence that DOS 6.22 used more memory than DOS 5, but the 158 Although they also suggested that the joint testing was largely favourable to them. 159 Para [62]. 160 Ibid. -- 150 of 267 -- 143 evidence does not show that this in any way contributed to failures during the testing. Otherwise, the submission appears unrelated to the evidence. [490] Sixth, the defendants submitted that the “ ‘version of EC’ used was either the pre- representational compiled v.1.0 or v.2.3, 2.4 or 2.6 from February-March 1993, all of which later were essentially un-compiled suites of modular tools which had not been expressly tailored for any sort of solution”. Electrocomm version 1 was indeed the version which was current at the time of the original representations. Because of the continuity of the representations, until at least the signing of the First Deed, it was appropriate to test version 2 also. The differences between the subsets of that version were immaterial. The reference to “suites of modular tools” is simply an attempt to raise the argument which I have already dealt with in relation to the representation concerning an “off-the-shelf” product.161 There is nothing in this submission. [491] Seventh, the defendants submitted that the results of the joint testing were misleading because they recorded many sequential failures of a given configuration; but when a successful transmission occurred, it was never repeated. This submission would have some weight if a statistical approach were being adopted to the test results. I have already rejected such an approach. I have, nonetheless, borne this fact in mind in making my assessment of the testing evidence. [492] Eighth, the defendants submitted that the versions of Electrocomm used at testing did not have initialisation strings tailored for the IMS modems used at testing. A great deal of time and effort was expended in the course of the evidence on the subject of initialisation strings, but it was not directed to this point. The point may be disposed of quickly, on two bases. First, there is simply no evidence that one version of the IMS modem needed any different initialisation string from another. There is no evidence of material changes in the firmware which would require any alteration to the initialisation string. Second, the initialisation strings in the three versions of Electrocomm used for testing are in evidence.162 The defendants have not pointed to any inclusion or omission which could have affected the testing. There is none. I reject this submission. Summary: representations regarding reliability [493] The three classes of evidence relating to the reliability of the System which I have discussed were evidence of contemporary users of the System, evidence from the designers of the System and evidence of forensic testing (including the opinions of the experts). To my mind no one piece of evidence or area of evidence definitively answers the question, “Was the representation misleading or deceptive?” However the evidence is not to be considered piecemeal; it must be considered as a whole. So considered it demonstrates on the balance of probabilities that the System was unreliable. The defendants’ representation regarding reliability was misleading and deceptive. [494] I have reached this conclusion without taking into account the evidence which I received on the voir dire. That evidence, if received, would only support the conclusion. Whether I receive it or not, it cannot influence the outcome. Having regard to this circumstance, it is unnecessary to consider if in the exercise of my 161 See paras [383] ff. 162 Exhibit 85. -- 151 of 267 -- 144 discretion I should admit the evidence notwithstanding the plaintiff’s failure to comply with directions. The evidence is excluded. [495] Finally on this point, I mention that a number of other possibilities were raised by the defendants during the evidence to explain adverse test results. These included the possibility that tests were conducted with Electrocomm set in “debug” mode, incorrect settings for “buffers” and “files” in the test computer’s configuration file (config.sys) and conflicts in the operation of a memory management program called QEMM. I do not propose to rehearse all of the evidence relating to these matters. I am satisfied that they were red herrings, despite the time which they consumed during the hearing. Had the plaintiff performed and documented its testing more thoroughly, they would not have complicated the course of the trial. 6(k) The development of the System was complete, it had been exhaustively researched and field tested, the system was now “proven” and was ready to market. 6(a) Technically, the system was all but ready for immediate commercialisation; 6(aa) The system was ready to be introduced to the market; 6(b) The system ... only required minor work to be commercialised. [496] Both Mr Boucher and Dr Graham were asked whether, in their view, the development of the System was complete. Both thought the question impossible to answer in the absence of any specification or design document defining what was proposed.163 No such definition was ever established for either Electrocomm or the IMS modem. The plaintiff accepted that the development of computer software is always an ongoing process and that, in a sense, it can never been described as “complete”. To a considerable extent, the same is true of hardware. The plaintiff submitted that, in context, the representation that development of the System was complete, really meant that the product had progressed to the point where it could be marketed. In this sense the representation regarding completeness was simply a way of emphasising that the System was ready to market. [497] “Exhaustively researched and field tested” was treated in the evidence as a composite phrase, and “proven” was regarded as little more than a synonym for that expression. [498] The collection of representations set out above, therefore contains essentially two propositions. For ease of reference I shall describe them as “the field testing representation” and “the commercialisation representations”. They are contextually related and both are related to the representations about the reliability of the System. They must also be considered in the context of the representation that Electrocomm was designed as a shelf purchase product and that the mobile office was a complete office-in-a-briefcase “able to communicate with the faxes and other computers anywhere in the world”. 163 Although in a report dated 13 September 1999, Dr Graham described the software as “obviously still under development”. -- 152 of 267 -- 145 The field testing representation [499] One of the deficiencies of the statement of claim was the absence of a one-to-one correspondence between certain representations alleged in paragraph 6 and the facts alleged in paragraph 17 to render them misleading or deceptive. The allegation in paragraph 6(k), relating to field testing is a case in point. The statement of claim does not, in terms, assert that this allegation was misleading or deceptive. However, field testing was, albeit a little indirectly, in issue on the pleadings. The defence asserted: “11 (a) Field testing of the System took place in the latter half of 1992 and in early 1993, and was satisfactorily completed; Particulars Field testing of the System during the latter half of 1992 and early 1993, took place (a) between Steve O’Connor in Adelaide and Russ Morgan on the Gold Coast continuously during said period, such testing & associated ongoing improvements being under the technical direction of Mike Coventry until Peter Gillmore moved to Australia and was appointed by the Darts to oversee technical direction of the System; (b) Testing resulting in software changes to the Electrocomm program (in response to local reverse decadic dialling) that came about during trials conducted by Russ Morgan in late December 1992 in New Zealand; (c) by Steve O’Connor in Adelaide to Telecom South Australia, during early 1993 and April-May 1993; (d) by Fisher & Paykel, whitegoods manufacturers & wholesalers, based in Brisbane.” [500] On this the plaintiff joined issue. In the evidence the issue was debated in terms of the accuracy of the representation referred to in paragraph 6(k) of the statement of claim. There was no suggestion on the part of the defendants that the issue was not alive. Even taking into account the fact that the defendants were not legally represented, I do not think any injustice is done to them by treating the question in this way. [501] Field or beta testing is typically carried out by persons other than the developer of the product.164 For this reason, it might be argued that particulars (a) to (c) above are embarrassing. However that was not argued, and I shall proceed on the basis that the point does not arise. 164 See para [182]. -- 153 of 267 -- 146 Mr O’Connor and Mr Morgan [502] There is very little evidence to support the occurrence of testing as asserted in particular (a). If anything, Mr Morgan and Mr O’Connor were proceeding independently of each other. Mr Morgan was developing his modem using Procomm and WinFax, not Electrocomm; in about January 1993 that was a topic of disagreement between him and Andrew Coventry. He did not even use Electrocomm to send faxes to Evtech! His recollection was that he received only one version of Electrocomm, a recollection confirmed by the fact that he had disks for only one version. He thought that version was produced around October 1992. He claimed that he did some testing with Mr O’Connor, but no detail was provided, he was very vague about it and he had no record of it. Neither Mr O’Connor nor Michael Coventry (who allegedly provided the technical direction) corroborated this evidence. On the contrary, Mr O’Connor said that the only testing which he did was developmental testing. I am satisfied that nothing occurred which would justify the description “exhaustively ... field tested”. Mr Morgan [503] The second particular asserts that Mr Morgan conducted trials in New Zealand in late December 1992. I have already referred165 to the visit to New Zealand by Mr Morgan and Mr Quinn at that time. They demonstrated the System to Mr Gillmore and left it with him for evaluation. During the demonstrations it became apparent that the New Zealand system of reverse decadic dialling caused a problem when the System was used on the PSTN. This problem may first have manifested itself during Mr Poulsen’s visit in August 1992. The weight of evidence suggests that it was not fixed until Mr O’Connor wrote a patch for Electrocomm in about March 1993. By no stretch of the imagination can these events be described as field testing. Telecom Australia [504] The third particular alleges field testing by Mr O’Connor to “Telecom South Australia” (apparently a reference to the South Australian office of Telecom Australia). At some time prior to May 1993 Mr O’Connor demonstrated Electrocomm to Mr Bryn Parrott, a technical analyst employed by Telecom Australia in Adelaide. Mr Parrott was engaged in what was known as the Modems for Remote Access project. That demonstration did not involve the whole of the Evtech System, nor did it involve any field testing. On 10 May 1993 Mr O’Connor had another meeting with Mr Parrott. This time he demonstrated the IMS modem. He reported the next day: “I met with Bryn Parrott from Telecom on the Monday morning, and stayed for approx. 3 hours. The aim of the meeting was to introduce Bryn to our product, and leave the modem with Bryn to perform comparative tests against the opposition product. The outcome of the meeting was that Bryn was impressed with our solution, and he indicated that he felt that our modem was the best solution that he had seen so far. The modem was not left with Bryn, because he wanted us to do some work on the modem BEFORE leaving it with him for a week or two.” 165 Para [97]. -- 154 of 267 -- 147 [505] That meeting did not involve any field testing, as Mr O’Connor himself recognised: “Would you class this type of testing or demonstration that you did with Mr Parrott as good field testing or beta testing to get feedback on how a product performed against others?-- There was no formal testing that I performed with Telecom. It was really just a lengthy three-hour introduction, and we went through the whole use and limitations and benefits.” [506] For the sake of completeness I should add that there was also a third meeting. It occurred on 21 June outside the period alleged in the particular and after the signing of the First Deed. It involved a two-hour demonstration during which the IMS modem achieved a momentary connection but could not retain it. The meeting was designed to see if the modem would perform the tasks which Telecom required. It failed to do so. On 5 July Mr Parrott wrote to Mr Gillmore formally terminating Telecom’s interest in the product. These events cannot be described as field testing. Fisher & Paykel [507] Particular (d) refers to Evtech’s involvement with Fisher & Paykel. Fisher & Paykel was (and is) a major whitegoods manufacturer whose Australian headquarters were at Cleveland, Queensland. In late 1992 it had identified a need to have electronic communication Australia-wide with its field representatives (sales and service personnel). These representatives were constantly on the road between commercial centres. They needed to communicate on at least a daily basis to download stock status, order status, credit status and sales history, information available in electronic form in their head office main computer; and (a minor function) they needed to receive faxes. Ordinarily they would try to dial-up first thing in the morning using the PSTN at their motel. Many motels did not provide the capacity to connect computers, or used PABX systems which impeded communications. To overcome such problems Fisher & Paykel established what it called the Replink project under the management of Mr Jeremy Trevatt. The purpose of the project was to establish a system of communications through the representatives’ mobile phones. [508] Mr Trevatt was introduced to Andrew Coventry and Mr Poulsen in late 1992. He visited the premises of Evtech at Bundall and, a few weeks later, Mr Poulsen brought a modem to the Fisher & Paykel office for a demonstration. The demonstration was successful. Data was sent to Mr O’Connor in Adelaide, then retransmitted to a Fisher & Paykel computer in Brisbane. Also, a fax was sent to a fax machine in the Fisher & Paykel office. Mr Trevatt was impressed. He was given a modem for evaluation. He proceeded to evaluate the modem using a variety of communications software, including Electrocomm, to establish its suitability for Fisher & Paykel’s purposes. He found it reliable and in February and March wrote fulsome letters of praise to Andrew Coventry and to the person who introduced them - he said in evidence he liked encouraging innovative companies and he was conscious that Evtech might find such a letter valuable as a marketing tool. [509] It is important to bear in mind the limitations on Mr Trevatt’s testing. First, his focus was on downloading data, although, he said, he would have tried uploading and would have sent a few faxes. Second, although he sometimes used Electrocomm, he had no real interest in it. Fisher & Paykel’s requirement for its mobile computers was for a Windows-based modem driver, which was custom-built -- 155 of 267 -- 148 and transparent to the user.166 The enthusiasm for Electrocomm apparent in his statement 167 was clouded in his oral evidence by corrections and by redefinition (he included firmware in his original use of the term “Electrocomm” and he thought the Bulldog effect came from the firmware) and by his lack of understanding of the Bulldog effect (he thought it communicated with the remote computer, and by implication, he thought it operated on binary data). No other witness supported his belief that the modem could operate at a rate of 4800 or 9600 bits per second on the PSTN. Moreover he did not test the modem for long. He could have proven it, he said, within a day. [510] These limitations do not prevent the tests fairly being described as field tests. It is quite normal for the third parties carrying out field tests to focus those tests on their particular requirements. That is why such tests are conducted by a range of users. However the limitations do mean that Mr Trevatt’s tests by themselves are not sufficient to justify the representation that the software (or its “design features”) had been exhaustively tested. [511] Finally, both Mr Boucher and Dr Graham were asked to express an opinion on the basis of the results of the joint testing of the System carried out pursuant to directions given by the court. Although they expressed themselves in different ways, they were agreed that the System could not properly be said to answer the impugned description. [512] Michael Coventry conceded in cross-examination that when the relevant statement was written in April 1992, it was “perhaps, overly flowery ... perhaps blue sky a little bit”. That was an understatement. What he wrote was simply not true. It remained untrue in March 1993, when the parties entered into the First Deed. Throughout that period, the representation that the System had been exhaustively researched and field-tested was misleading and deceptive. The commercialisation representation [513] The expressions “ready for commercialisation” and “ready for market”, whether or not qualified by such phrases as “all but”, did not admit of precise definition, mainly because “commercialisation” was an imprecise word. As Mr Boucher said: “I don’t like the term ‘commercialisation’ because it means what you want it to mean. You could have a concept that can be ready for commercialisation where no work has been done on it but it is a good idea. The term itself is extremely vague, and I think everybody, if they sit and think about it, will probably have a different idea what they mean by that. HIS HONOUR: Did it have any general meaning in the industry in 1992/93?-- No, it doesn’t have any general meaning in the industry today either. You are ready for production, you are ready for beta testing - these things have distinct meanings, but ‘commercialisation’ means whatever the user wants it to mean and that’s - it really confuses things.” 166 Para [407]. 167 Exhibit 289. -- 156 of 267 -- 149 [514] However that does not mean that in a particular context, the words are meaningless. They can be given some content by their usage in a particular context; and the identification of that content is a question of fact. In the present case they were used in relation to a system which included a computer peripheral (the IMS modem) and computer software (Electrocomm). The parties did not agree upon their meaning in this context. The plaintiff pleaded: “In the course of those negotiations and up until the entry into the deed referred to in the next following paragraph the third and fourth defendants represented to the plaintiff that: (a) technically, the System was all but ready for immediate commercialisation; Further and Better Particulars (i) Means ‘immediate’ in the sense that upon receipt of New Zealand Telecom PTC or Austel approval, both of which were expected to be received within days or weeks the technology would then be ready for commercialisation; (ii) ‘Commercialisation’ means the manufacturing, packaging, marketing and selling of the System; (ii) ‘Ready’ for immediate commercialisation means ready for manufacture, packaging, marketing and selling of the System to the public straight away, without any further development work being required.” [515] In response, the defendants pleaded: “commercialisation would require: A. the designs of casings, and packaging; B. the writing and production of instruction manuals; C. field testing; D. the development of a marketing plan, the location and appointment of distributors, the commencement of advertising, the location and retainer of manufacturers and the commencement of manufacture (and like matters); E. the obtaining of any necessary regulatory permit; F. would require expenditure of at least $300,000.” [516] The major differences between the parties were that the defendants alleged that that the process of commercialisation included field testing and obtaining any necessary regulatory permit and the plaintiff alleged that it included selling. (The plaintiff seemed tacitly to accept that production of manuals was part of the manufacturing process.) Those differences are, for all practical purposes, resolved by the context. In its context, the focus of the representation was on the stage which the System had -- 157 of 267 -- 150 reached: it was said to be all but ready for immediate commercialisation. Whether “commercialisation” would ordinarily include obtaining necessary regulatory permits does not matter because the defendants undoubtedly made it clear to the plaintiff that regulatory permits (in particular, the New Zealand PTC) were yet to be obtained. Conversely, even if “commercialisation” ordinarily would have included field testing, it could not have done so in a context where the defendants represented that the System had already been field tested. Finally, it does not matter whether “commercialisation” includes selling, because on any view of the matter, selling must follow manufacture; if the product was not ready for manufacture, it was not ready for selling. [517] Several of the witnesses approached the expression “ready for immediate commercialisation” on the basis that it implied development work was complete or that a working prototype had been built. This approach is not unhelpful provided it is remembered that the ultimate question is whether the actual representation was misleading. In a sense, it can be said (as the plaintiff conceded) that development of a product is always ongoing and can never be described as complete. Nonetheless, it is possible to speak sensibly of development being complete in terms of specified functions and capacities of the product. The defendants did specify, albeit largely in non-technical terms, what the System was supposed to do. The plaintiff’s complaint is not that it totally lacked specific functionality; it is that it performed so poorly in so many areas that it could not sensibly be described as all but ready for immediate commercialisation. [518] This approach requires that a judgment be made of the quality of the product. By what standard should that judgment be made? Evidence from several witnesses suggested that it was common in the computer industry for the first release of a product to contain defects – “bugs” to use the jargon - both identified and unidentified, a fact well known to potential consumers. I accept that evidence. It follows that a new product may fairly be described as ready to market, or ready for immediate commercialisation, despite containing some defects. That conclusion is, however, quite consistent with the view that such a product must reliably do most of the things which it is supposed to do most of the time. [519] The plaintiff submitted that the context of the commercialisation representations included the representation that Electrocomm could be sold off-the-shelf and that the System was designed to be sold as part of an “office-in-a-briefcase” in large numbers. The context did not include the notion that the System was to be sold to corporations on the basis that it, and particularly Electrocomm, would be developed and tailored to their particular requirements.168 In the light of my earlier findings, these submissions are correct. Off-the-shelf or large volume sales required that substantially all of the development work on the modem and the software should have been finished. [520] Whether a product is ready for commercialisation or ready for market involves an exercise of judgment, i.e. the formation of an opinion. Whether it is “all but” ready adds a question of degree. The statement that the System was all but ready for immediate commercialisation was therefore one which, to some extent, embodied an opinion. It is therefore possible to imply from the statement propositions regarding the state of mind of its maker and the existence of a basis for the state of 168 The defendants attempted to argue that this was what Mr Madon was doing at Fisher & Paykel, but his evidence and that of Mr Trevatt negate that argument. -- 158 of 267 -- 151 mind. 169 However it is not essential to do so. The mere fact that an element of opinion was involved in the representations does not mean that it is essential to analyse and reformulate them to bring out their implications. The representations in the present case were not informed statements of opinion. They were framed as statements of fact, albeit inferred or adjudged fact. If they were wrong, making them was capable of amounting to misleading or deceptive conduct. The question must be whether in making them, the defendants were guilty of such conduct.170 [521] I have already found that at all material times, the System was unreliable. Moreover Electrocomm, though represented as an off-the-shelf product, was not designed for sale as such and, as Mr O’Connor agreed, substantial work would have been needed to bring it to a state where it could be sold in that manner. A memorandum written by Mr O’Connor in early 1993 identified bugs in Electrocomm which it was intended to fix in the next version (version 3): “serious problems that caused Electrocomm to lock-up and crashed the whole System” and a bug involving re- dialling faxes were specifically identified. Version 3 was never completed. Mr Poulsen and Mr Frank expressed the view that substantial development work remained to be done. It is true that neither was in a position to express an authoritative view about how much work was required to make the System ready for a mass market. It is also true that the joint answer of Mr Boucher, Dr Graham, Ms Shepherd and Mr Welstead to the question, “Was the System operational and only required minor work to be commercialised?” was, “Work was necessary to bring the products to market. None of us has made an in-depth assessment of the amount of work.” However Mr Boucher’s view was that the System was not anywhere near ready for commercialisation and Dr Graham agreed, in cross- examination, that the modem and software he was testing were not close to commercialisation. Moreover field testing had not been carried out. In all the circumstances I am satisfied, on the balance of probabilities, that at no time up to the signing of the First Deed, were the commercialisation representations true. Making them was misleading and deceptive conduct. [522] In its final submissions, the plaintiff argued that at least two further statements of fact were implicit in the representations: “(a) There was nothing of which the defendants were aware which made the System not ready for the market; (b) The defendants knew of facts which justified the opinion that it was, i.e. the defendants’ opinion was held on reasonable grounds.” [523] The first suggested implication is essentially the negative of the commercialisation representations with the complications of the defendant’s state of mind and nondisclosure. It is unnecessary to deal with it. It gains nothing from being propounded as an implication, unless perhaps the third clause is rephrased to mean, “which tended to suggest that the System was not ready for the market”. However, I do not think the evidence bears such an implication. The second alleged implication really contains two separate assertions. They appear to be based on a passage in the joint judgment of Beaumont and Spender JJ in RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd.171 I am far from satisfied that such an 169 Global Sportsmen Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at p 88. 170 See also para [523]. 171 (1993) 41 FCR 164 at p 172. -- 159 of 267 -- 152 implication is present in the commercialisation representations. This is not a case where an apparently dispassionate expert opinion was being expressed. It may be that the only implication open in the context of the representations in the present case is that the vendors honestly held the opinions expressed. I do not propose to determine this issue because it seems to me that, if the plaintiff proposed to rely upon such implications, they ought to have been pleaded. Having regard to the conduct of the case, I do not think it would be fair to approach the matter in this way. 6(e) The System included an operating MNP10 error correction protocol, which the software allowed to turn on and off [524] As pleaded, the plaintiff’s case was that the modem either did not include MNP10 or, alternatively, MNP10 was neither operational nor able to be turned on using the Electrocomm software. The defendants denied these allegations. However, by the time of the trial, it was apparent that they conceded that for a period of a few weeks in mid-1993, the protocol had not been operative in the firmware. They attributed this to a defect in an upgraded release of firmware from Rockwell. The plaintiff called no evidence from Rockwell, which would have been the obvious way to prove the non-inclusion of MNP10 in the firmware at other material times. This omission was not explained by evidence, although there were hints from the bar table of unspecified difficulties. None of the plaintiff’s witnesses analysed the firmware code. Nor did any of those witnesses analyse the Electrocomm software to see whether it was able to “turn on” MNP10, although there was a considerable amount of uncertain or hearsay evidence on the topic. This lack of analysis was probably due to lack of expertise. It was not until toward the close of the defence case that any sort of analysis was carried out, and then it was done by Dr Graham. However, by then the issues had changed. Mr Morgan had given evidence and had produced the original Rockwell floppy disk containing all of the code for version 2.10 of the firmware. The issues continued to change as fresh evidence emerged, in piecemeal fashion, about the operation of the firmware and Electrocomm in relation to MNP10. When the evidence finished, the plaintiff submitted that the representation was misleading or deceptive in three respects. The first was that the MNP10 protocol was never operating. The second, which was related to the first, was that, in any case, Electrocomm was not written so as to be able to turn the protocol on and off. The third was that from 26 May 1993 (at the latest) until 7 June 1993, the firmware being loaded into modems (version 3.3) did not contain the protocol. I shall deal with these submissions in turn. Was MNP10 operating in the IMS modem? [525] The first submission was based on part of the evidence of Mr Morgan. Mr Morgan was one of a number of witnesses who were asked to identify the AT command by which MNP10 was invoked. Most of the experts displayed considerable uncertainty in response to that question, probably because they had not been given copies of exhibits 45 and 50. Mr Morgan also displayed uncertainty, revisiting the topic more than once over several days while he was in the witness box; and he ought to have known the answer. I formed a clear impression that by the time he came to give evidence, Mr Morgan had largely forgotten the detail of the modem’s operation and initially had not tried seriously to relearn it. Giving evidence on 15 February 2001, he said that he did not have the documentation in front of him to answer the question; a careful reading would have revealed that he did. However the answer was complex, not a simple yes or no, and Mr Morgan may have meant that to -- 160 of 267 -- 153 answer properly he required more documentation. As he said, “I cannot honestly tell you that this specific command will turn on MNP10. Can I say that if you set up a modem in a specific way and another modem that it’s communicating to is set up that way, they will negotiate or try to negotiate an MNP10 connection, but there is no one definitive thing that says, ‘Turn it on’ or ‘Turn it off’.” [526] What was the “specific way” of setting up the modem, which would lead it to negotiate an MNP10 connection? To answer that question, it is necessary to refer to the error correction and data compression features of the modem in a little more detail than I have done to date.172 The firmware which Rockwell supplied to Mr Morgan supported both the ITU and the Microcom error correction protocols (LAPM and MNP4 respectively), the latter being described as a “fallback”. It also supported data compression (V.42 bis and MNP 5 respectively) and MNP Extended Services (MNP 6, MNP 9 and MNP10).173 MNP10 provided what Microcom called “Adverse Channel Enhancements”. The firmware was supplied on a floppy disk. Some of it was supplied as source code, which enabled Mr Morgan to modify it to suit his particular purposes, but that was not the case with respect to the protocols. They came as machine readable files only. After Mr Morgan made his modifications elsewhere, he compiled that source code into machine readable form and assembled all of the machine readable files (including those with the protocols) into a working program which he “burnt” on to an EPROM (erasable programmable memory chip). He then took the standard Rockwell user manual and adapted and modified it to create the manual for the IMS modem. [527] When two modems connected they undertook what had become, even by 1992, a largely automatic process (“handshaking”), in the course of which they negotiated common operating parameters. Provided error correction was enabled in both modems, a process of detection and negotiation for determining and establishing the best method of error correction took place immediately after the establishment of the handshake. During the detection phase the communicating modems exchanged a sequence of detection patterns to verify that both supported an error correction technique. In the negotiation phase they exchanged configuration information. All of this happened too quickly to permit manual control of the process, but it could be controlled by settings in either modem. These settings were made by sending the modem AT commands before initiating or receiving the call. [528] The first relevant setting was controlled by the command AT&Qn. In that command, a number in the range 0 to 9 would be substituted for n. Error correction mode was selected by AT&Q5. This was also the default position, so that if no command in this format were given, error correction mode would be selected. Which protocol was established depended upon another setting. That was the setting in the S48 register. In that register there were three options. The first instructed the modem to bypass detection and negotiation and proceed with a LAPM connection. The second enabled negotiation between modems. The third bypassed detection and negotiation and proceeded with the action specified in the S36 register. The default setting enabled negotiation. In this state, the IMS modem would establish a LAPM connection, if that protocol were available on the other modem. If it were not available, the action taken depended upon the setting in the 172 I have already described firmware and modem protocols in general terms: paras [37]-[39]. The further detail now to be described is largely derived from exhibits 45, 50, 234 and 236-238. 173 As I have already noted, MNP10 is, strictly speaking, not an error correction protocol as pleaded by the plaintiff, but nothing turned on that in the conduct of the case. -- 161 of 267 -- 154 S36 register. That register provided for six possible outcomes, including disconnection. The default setting (S36=7) meant that an MNP connection was attempted, and if it failed, a Normal mode connection was established. To summarise the default position: the modem attempted to establish a connection using error correction under the LAPM protocol; if that attempt failed, it attempted to use MNP4; and if that failed, it established a Normal mode (non-error correction) connection. [529] The next step in the handshaking process was an attempt to establish a data compression protocol. Whether the modem used data compression was controlled by the AT%Cn command. There were four possibilities for n, ranging from 0 to 3: 0 disabled data compression; 1 enabled MNP 5; 2 enabled V.42 bis; and 3 enabled both V.42 bis and MNP 5. The default set by Rockwell was 3. However Mr Morgan reset it to 1 in version 3.3 of the firmware after he received it from Rockwell in mid-1993. The data compression technique could be selected by the user independently of the error correction protocol. Thus the manual noted, “The combination of V.42 bis data compression and MNP 4 error correction enables the users to benefit from the superior performance of V.42 bis data compression.” When both techniques were enabled (i.e. the Rockwell default position), the compression technique actually used depended upon the error correction protocol selected: V.42 bis was used with LAPM and MNP 5 was used with MNP 4. 174 [530] The final relevant step in the handshaking process was the establishment of a connection using MNP Extended Services. These were available only in association with MNP error correction. In other words, if error correction were disabled or the remote modem did not support it, MNP Extended Services (including MNP10) were unavailable. Whether the IMS modem attempted to establish Extended Services was controlled by the AT-Kn command. At the relevant time there were only two documented parameters for this command, 0 and 1.175 0 disabled Extended Services and 1 enabled them. 176 This was achieved by a protocol facility called MNPX.177 The default was 1; that is, Extended Services were enabled. Thus, if both the error correction command (AT&Qn) and the Extended Services command (AT-Kn) were in their default positions and Extended Services were available on the remote computer, MNP10 would operate. There were other commands which needed to be set to optimise Extended Services178 (unless, of course, their default settings were optimal) but it is unnecessary to deal with these in detail. [531] In support of its submission that MNP10 was never operating in the IMS modem, the plaintiff submitted that there were a number of commands and S-register settings which the modem needed to be given as preconditions for the operation of MNP10. It submitted that the range of necessary commands went beyond those just discussed. It was submitted that Electrocomm did not give those commands and that, in consequence, the MNP10 protocol was never working. The plaintiff related these submissions separately to version 3.3 of the firmware and to earlier versions of it. The submissions raise three questions: what commands had to be “in operation” for the operation of MNP10; did those commands have to be given to the 174 This was achieved by the firmware resetting the S46 register. 175 Several additional undocumented parameters were provided and are readable in the firmware file F24AT.ASM in exhibit 86, but as Dr Graham observed, they “are obviously meant for debugging purposes”. 176 If the error correction protocol in use was LAPM, it was automatically converted to MNP4. 177 The facility is described in detail in exhibit 45. 178 For example, AT*Hn and AT)Mn. -- 162 of 267 -- 155 modem; and if so, did Electrocomm give them. To answer such questions the plaintiff referred to parts of the evidence of Mr Morgan. [532] I shall deal later with questions relating to Mr Morgan’s reliability generally. For present purposes it is enough to say that a good deal of the evidence relied on by the plaintiff was either given carelessly or was given in a context where Mr Morgan was trying to protect himself from blame for difficulties in the operation of the modem. Having agreed that there was no single command to turn MNP10 on, Mr Morgan went on to list the commands which must be executed for that purpose.179 He evidently had not thought about the question before giving his answers, and he did not appreciate that the thrust of the question was on “must”. Consequently, his list was defective in at least three respects. First, it omitted reference to the possibility of establishing an error correction link by using the AT&Qn command. It referred only to the AT\Nn command for this purpose. Second, and more importantly, it took no account of the default position of the various commands. Obviously, in cases where the modem was in the desired state by default, issuing a further command was unnecessary. Third, in one case Mr Morgan’s answer was plainly wrong. In relation to the AT\O command, the following exchange took place: “So this is really if you’re in - this will be effective when you are in answer mode?-- Answer or originate, but specifically if you are in answer mode and you want an MNP10 connection, it will tell the modem at the other end I really want MNP10.” That command did not force an MNP10 connection, it forced an MNP connection. An MNP10 connection could only be achieved by the setting controlled by the AT-Kn command, which Mr Morgan overlooked in his list. The latter command automatically converted a LAPM connection to an MNP connection if MNP was available on both modems. [533] It will be recalled that in mid-1993, Mr Madon and Mr Barr were experiencing a number of problems with modems. By that stage Evtech had abandoned Electrocomm. In his evidence-in-chief Mr Morgan blamed these problems not on the modem, but on their failure to use a correct initialisation string in the Quicklink or WinFax software. The fault, he implied, was theirs. In cross-examination he elaborated on the need for a correct initialisation string, pointing out that not all of the Rockwell default values were ideal for the modem. In this context he cited MNP10 as an example of a feature which would not be enabled by the factory defaults. He said that to get an MNP10 connection, the default values had to be changed by an appropriate initialisation string sent through the controlling software. Eventually, he claimed, he changed the default values in the firmware in an attempt to overcome this problem. [534] I do not accept this part of Mr Morgan’s evidence. In my judgment he was attempting to deflect blame from himself by a loose and thoughtless statement which implicated others. I prefer the evidence of Mr Boucher and Dr Graham who both agreed that the default values in the firmware allowed the operation of MNP10. Their view is confirmed when one examines the changes which Mr Morgan made to the firmware.180 Only a few changes related to MNP10 and of those, only one even arguably set a new default more conducive to MNP10 than the old default. That 179 Transcript 7474. 180 Exhibit 234. -- 163 of 267 -- 156 one, AT%En, was a command which enabled or disabled auto-retrain. The function of this command was to determine whether or not the modem automatically monitored line quality and requested a retrain when necessary during a 2400 bps connection. Mr Morgan changed the default from disabled to enabled, but he described how the condition performed when disabled: “Failure to set this wouldn’t result in failure to make a connection?-- That’s correct. But if you were making a cellular connection and the cellular connection changed characteristic, then it wouldn’t follow that and your transmission would stop, or could stop, depending on what the problem on the cellular network was.” [535] I accept that having this condition enabled improved performance on a poor line. I am, however, not satisfied that the original default condition, i.e. disabled, prevented the establishment of an MNP10 connection or even prevented its continuance on a good line. I find that the condition brought about by issuing the command AT%E1, enable auto-retrain, did not have to be operative for an MNP10 connection to operate. [536] It is unnecessary to refer in detail to any other conditions which were said to be mandatory in order to enable such a connection. That is because in respect of all the possibilities, I find that the default values set in the modem enabled an MNP10 connection to be made. It follows that unless the firmware were defective in some material respect, it would automatically negotiate an MNP10 connection during the handshaking process. Apart from the period 26 May 1993 to 7 June 1993, there is no evidence of any defect in the firmware (I deal with that period below.) None of the commands issued by Electrocomm, either in consequence of the initialisation string or as a result of a menu selection, was needed to enable an MNP10 connection, and none did. The protocol was operating in the modem. The first submission therefore fails. Was Electrocomm able to turn MNP10 on and off? [537] The second submission depends upon whether the Electrocomm software was able to turn MNP10 on and off. The defendants pleaded: “The MNP10 error correction protocol was in the ROM flash firmware of the modem. The presence of ATJ0 & ATJ1 [sic] strings in the Electrocomm source code establish that the MNP-10 error correction protocol could be switched on or off in the Electrocomm software, inter alia via AT commands whilst in terminal mode, by toggling the V.42 selection when configuring the modem.” [538] That paragraph is incoherent. The reference to the AT&Jn command is a red herring: that command did no more than switch between the modem’s two telephone ports (sockets for cellular and PSTN respectively). It had nothing to do with toggling the V.42 selection. However, the Electrocomm menu did contain the heading “Options” under which appeared the item “Use V.42 / MNP”.181 That item operated as an on-off toggle switch, but it was not intended to operate as a toggle switch simply for MNP10. Mr O’Connor said that he deliberately did not put an option for MNP10 on the menu because “our experiments showed that MNP10 was still not a good replacement for a filtering algorithm.” The V.42 / MNP item on the 181 Note that V.42 is not the same as V.42 bis. The former was a performance standard issued by the ITU, not a particular protocol. In fact MNP 5 fell within the V.42 standard. -- 164 of 267 -- 157 menu, said Mr O’Connor, was intended to enable error correction and data compression. The real question, however, is not how the item was intended to operate, but how it in fact did operate. [539] Dr Graham carried out an analysis of the Electrocomm source code in order to answer this question. That analysis revealed that selecting the menu item toggled a variable in the program called Isv42. If that variable were true (i.e. if the menu item was toggled “On”) Electrocomm sent a command string to the modem which included the AT commands “&Q5%E1%C3”.182 The first command in that string, AT&Q5, enabled error correction as described above. This simply confirmed the default state of the modem. The second command, AT%E1, enabled auto-retrain. I have already described this command. 183 The third command, AT%C3, enabled both V.42 bis and MNP5 data compression. This was the default value set by Rockwell, but Mr Morgan had modified the default to “%C1”, which enabled only MNP5. In short, to the extent that these commands had any affect at all, they enabled or facilitated error correction and data compression. I have already described how, when error compression was enabled, the default condition for the command AT-Kn operated to enable MNP Extended Services. Those services included MNP10. Thus, selecting the menu item not only enabled error correction and data compression, it indirectly enabled MNP10. [540] Dr Graham also examined what happened if the variable Isv42 were false (i.e. if the menu item was toggled “Off”). In that case, Electrocomm sent the command string “&Q6”. That command selected asynchronous operation in Normal (as opposed to error correction) mode. In other words, error correction mode was not selected.184 Without error correction mode selected, MNP Extended Services could not be enabled. It follows that switching off the menu item disabled MNP10. [541] It was Dr Graham’s opinion that these were the most appropriate commands to enable and disable MNP10. His analysis of the operation of the commands was correct. Albeit indirectly, selecting or deselecting the menu item “Use V.42 / MNP” enabled or disabled MNP10. The plaintiff’s second submission, therefore, fails. Did the IMS modems contain MNP10 from 26 May to 7 June 1993? [542] I shall set out the plaintiff’s third submission in full (omitting transcript and exhibit references) lest, by paraphrasing, I obscure any of its true worth: “Thirdly, the evidence from Morgan established that Version 3.3 of the Rockwell firmware did not include MNP10. Consequently, the modems into which that firmware had been loaded did not have the MNP10 protocol at all. On his evidence, the only version of the firmware which suffered that inadequacy was Version 3.3. His evidence was that Version 3.3 was released by Rockwell in March 1993, obtained by Morgan in May and was loaded into the modems around mid-May. The absence of MNP10 was noted in some tests which Evtech personnel performed. They in turn notified Morgan. The correspondence records that questions were being asked about the non-operation of MNP10 at least by 26 May. Morgan obtained a 182 Other parts of the string are irrelevant for present purposes. 183 If my earlier finding regarding the necessity for this condition to be enabled in order to enable MNP10 is wrong, it does not matter to the conclusion, since it was enabled by the software. 184 Presumably this command overruled the “\Nn” command, thus preventing error correction being selected by a different route. The contrary was not suggested to Dr Graham in cross-examination. -- 165 of 267 -- 158 new release of the firmware from Rockwell, which did contain the MNP10 protocol, and loaded that into the modem on 7 June 1993. The probability is that at the time of settlement, on 27 May 1993, the modems did not contain MNP10. The consequence was that a representation that had been made prior to the contract being entered into was not, at the date of settlement, true and accurate in all respects. That has relevance to the application of the indemnity obligations in cl.6.4 of the March 1993 deed.” [543] I have already made findings in relation to these events.185 In May 1993 the absence of MNP10 from the modem firmware became a cause celebre. It was known to everyone associated with Evtech including, I find, the Darts. It took a little time to determine the cause of the problem. Meanwhile the Darts refused to pay IMS its licence fee. They were not all deterred from completing the First Deed. Plainly they did not rely upon the continued truth of the representation, nor did they suffer any damage in consequence of these events. Indeed, I am not even satisfied that, on the facts, the indemnity obligations were breached. At this time, Mr Morgan had manufactured about 10 modems. The defective software had not been loaded into all of them. The defendants had never represented that every single modem to be manufactured would be free of manufacturing defects. The representation was not rendered misleading or false or inaccurate merely by the fact that some of the modems contained defective firmware for a few weeks. I reject the plaintiff’s third submission. [544] In summary, I find that the representation that the System included an operating MNP10 error correction protocol, which the software allowed to turn on and off, was neither misleading nor deceptive. 6(x) The System could readily be adapted to almost all known cellular phones [545] The plaintiff specified how this statement was alleged to have been misleading and deceptive: “(v) the System could not readily be adapted for use with almost all known cellular phones, in that: (i) the protocols and the license to use protocols for all known cellular phones had not been secured; (ii) the manufacturers of mobile phones were generally unwilling to disclose the protocols for their phones; (iii) in the absence of the protocols, an exercise of reverse engineering the electronic circuitry of the phone had to be undertaken and, from that exercise, adaptations made to interface in the System so as to produce the correct protocols to enable the System to communicate with the mobile phone; (iv) that exercise would need to be undertaken for each make and/or model of mobile phone and, at least for some of them, the exercise would require significant time and effort; (v) Evtech Pty. Ltd. had only succeeded in reverse engineering the protocols for one mobile phone, 185 Para [259]. -- 166 of 267 -- 159 namely the Ericsson hotline phone and the NEC P3 by about March 1993.”186 [546] In their defence, the defendants: (a) pleaded (in effect) that subparagraph (i) was irrelevant because Carsten Anderson was (as the Darts knew) employed to reverse engineer mobile phones, making the securing of licences for protocols unnecessary; (b) denied subparagraph (ii) and repeated the allegation of irrelevance; (c) admitted subparagraph (iii); (d) admitted subparagraph (iv) save for the word “significant”; (e) admitted subparagraph (v) save for the word “only”. They also made the allegations regarding reverse engineering and Carsten Anderson which are set out above.187 The plaintiff in reply denied the defendants’ allegations and alleged that reverse engineering would infringe intellectual property rights of the makers of mobile handsets. That allegation was not pursued. [547] My findings on a number of the issues raised by these pleadings can be stated or restated briefly. Manufacturers of mobile phones were generally unwilling to disclose the protocols for their phones. It was undoubtedly going to be necessary for reverse engineering to be carried out on most if not all mobile phones other than the Ericsson. Mr Anderson had been engaged to perform this task in respect of the NEC phone. Bryan Dart and Mr Cole knew these things before the First Deed was executed. What is really in issue between the parties is whether the time and effort required to reverse engineer other mobile phones was significant and if so, whether the Darts knew this. The plaintiff’s case was not that the System could not be adapted to other cellular phones; it was that this could not have been done readily. As Mr O’Donnell put it in his submissions, “This representation cried out for qualification”. [548] The difficulty for the plaintiff is that there is very little evidence to show how much time and effort would in fact have been required for the process. Doubtless it was a process which required care and precision. That is not enough to show that the adaptation could not have been done readily. It would not be appropriate to reason, on the basis of the overall time taken by Mr Anderson to develop the NEC interface, that many months would be required for any other interface. There is no evidence of how much effort Mr Anderson was putting into the task; there is no evidence of how his time was spent on it; and there is no evidence of how the NEC phone compared with others in this regard. One would suppose that Mr Anderson could have given evidence on these matters, but he was not called and there was no explanation of his absence. In the circumstances I am not satisfied that the System could not readily have been adapted to almost all known cellular phones. Saying that it could has not been shown to amount to misleading or deceptive conduct. 6(y) Evtech Pty Ltd owned the technology in the system. [549] I shall not set out the pleadings in relation to this alleged misrepresentation, as several of the issues raised did not remain alive by the end of the hearing. The 186 I omit subpara (vi) as it ceased to be in issue. 187 Para [208]. -- 167 of 267 -- 160 plaintiff’s case was that this representation was misleading and deceptive because Intechnologic, not Evtech, owned the copyright in Electrocomm. This was said to be so because the bulk of the code for Electrocomm was written by Mr O’Connor while he was an employee of Intechnologic. The code was a “computer program” as defined in s 10 of the Copyright Act 1968 and as such, was within the definition of “literary work” under that section. Consequently, by reason of s 35(6), Intechnologic owned the copyright. The defendants made two responses to this argument. First, they argued that Mr O’Connor wrote all of Electrocomm after he commenced work for Evtech. Second, they argued that they were entitled to the copyright pursuant to cl 4.1 of the agreement of 31 October 1990.188 In reply, the plaintiff argued that the whole agreement was invalid for want of consideration; and that in any event Silicomm was not a “replacement, update or modification” within the meaning of that phrase in that clause. Silicomm and Electrocomm [550] I have already described the events of 1990 to 1992 in some detail.189 When Mr O’Connor began working on Electrocomm for Evtech, he took as his starting point the code called Silicomm which he had written while employed by Intechnologic. He was able to do so because he had retained copies of that code. The code was embodied in a number of modules. Mr O’Connor gave in evidence his estimates of the extent to which these modules were written while he was employed by Intechnologic. That evidence was unchallenged. I am satisfied that the code written during that employment constituted at least a substantial and important part of Electrocomm. The defendants’ first argument fails. The agreement of October 1990 [551] The defendants’ second argument requires lengthier examination. The agreement contained 10 clauses following two recitals. The first recital proclaimed that the defendants had developed a “marketing method” to obtain and market manufactured and other products and services throughout a worldwide marketing network. The name Multiplex Marketing System was given to this marketing method. The method, based on an idea of Andrew Coventry, is described above.190 It will be noted that the description of the objects to be marketed did not include software, and the general phrase employed has to be stretched to accommodate software within it. Despite this there seems little doubt on the evidence that software was envisaged as the type of product in relation to which Zedprime was expected to use the system. The second point to note is that the recital asserts the defendants possessed “Confidential Product (as hereinafter defined) relating to” the system. Under the subsequent definition confidential product meant “prototypes, written and published information, technical information and know-how (whether in written documentary or other recorded or tangible form) in relation to the Multiplex Marketing System developed by the Licensor”. [552] By cl 3.1 of the agreement the defendants agreed “to grant to the licensee a non- exclusive non-transferable licence to use and to develop and promote” the system. They did not expressly grant rights in respect of the confidential product, but cl 9 provided, “No property in the rights to confidential product licences and provisions 188 The material terms of this agreement are set out at para [11]. 189 Paras [9]-[17] and [42]-[73]. 190 Para [9]. -- 168 of 267 -- 161 hereinbefore mentioned shall be deemed to have passed between the two parties herein until the receipt of the hereinbefore mentioned deposit by the Licensor”. This seems to imply that the licensee was intended to have the confidential product. Indeed it is difficult on the evidence to distinguish between the marketing method and the confidential product as they stood in October 1990. The defendants had no prototypes;191 and although the liquidator’s files were subpoenaed and brought to court, no evidence was put forward of any technical information or know-how in the possession of Intechnologic. Neither the marketing method nor the confidential product included any patents, trademarks or other intellectual property rights, although the agreement envisaged that Zedprime might apply for and register trademarks. Essentially, they comprised Andrew Coventry’s idea. [553] A disinterested observer might think that there was nothing of particular value in that idea; or at least nothing which could conceivably be valued at $150,000. There is, however, no evidence that the idea was absolutely worthless. It constituted information, and although no one element of the marketing method could be described as unique, the combination of elements in the context of the particular industry rendered the idea more than just commonplace. Andrew Coventry was not cross-examined about the source of his idea or whom he told about it; it was not suggested that the idea was obtained from or made known to others. It was not suggested that the deed was a sham, nor that it might have been voidable at the behest of the liquidator of Intechnologic. It must be approached on the basis that it embodied a genuine commercial transaction to which effect was intended to be given. Valuable consideration [554] The absence of recognised property rights was the starting point for the first argument in reply referred to above. The plaintiff submitted that since the marketing method neither constituted nor included property, anyone was entitled lawfully to use it at any time. Consequently, it was submitted, it could not be the subject of a licence, since a licence was a contractual permission to do an act which would otherwise be wrongful or unlawful: Commissioner of Taxation v United Aircraft Corporation.192 It followed that the agreement did no more than purport to confer a legal right to what Zedprime was already legally entitled to do. Consequently, no consideration passed and the contract was invalid. [555] In Commissioner of Taxation v United Aircraft Corporation, Latham CJ said, “Knowledge is valuable, but knowledge is neither real nor personal property ... It is only in a loose metaphorical sense that any knowledge as such can be said to be property”.193 It is true, as Gummow J observed, that “those remarks are to be understood in the light of developments, largely since they were made, in equitable jurisdiction”.194 Nonetheless, it may be accepted that the marketing method did not constitute property. It may also be accepted that had a stranger happened upon the same idea, and implemented it as a marketing method, he or she would have needed 191 In making this finding, I have not overlooked the reference to Silicon Cash in the minutes of the meeting of directors of Zedprime on 29 October 1990. However there is no evidence that at that time Silicon Cash was any more than an idea. 192 (1944) 68 CLR 525 at p 533. See also Commonwealth v WMC Resources Ltd (1998) 194 CLR 1 at p 71 per Gummow J and the cases there cited. 193 Ibid at p 534. 194 Breen v Williams (1996) 186 CLR 71 at p 128; see also Brent v Commissioner of Taxation (1971) 125 CLR 418 at p 425. -- 169 of 267 -- 162 no permission or licence to do so: use of the method would not have been wrong or unlawful. However, Zedprime was not a stranger to the Coventrys, nor did it think of the idea itself. Its knowledge was the knowledge of its three directors. Had Zedprime attempted to use the knowledge without the Coventrys’ permission, it is at least arguable that it might have been restrained from doing so. Its licence was therefore not worthless. It gave Zedprime permission to make use of information which itself had some value for a core purpose of Zedprime’s proposed business, in circumstances where it was at least arguable that such use without a licence would have been unlawful. That was sufficient to constitute valuable consideration for the purposes of the agreement. [556] Since the defendants were unrepresented I should mentioned two other arguments which I have considered, but upon which I do not find it necessary to reach a conclusion. First, although in terms the agreement was to grant a licence for use, development and promotion of the Multiplex Marketing System, it is possible to construe it as one which was “in reality an agreement for the communication of information which would facilitate [the marketing of software]”.195 That was the interpretation given by Latham CJ to the agreement discussed in Commissioner of Taxation v United Aircraft Corporation, despite the fact that “in form the agreement, consisted of a grant by the American company to the Australian company of a licence to manufacture ...”.196 A promise to convey information may constitute valuable consideration even if the information is already known to and able lawfully to be used by the recipient. Mr O’Donnell QC argued that such an interpretation would not be open in circumstances where Zedprime already knew the relevant information. I would accept that, from the time the Coventrys became directors, their knowledge was probably Zedprime’s knowledge. However in circumstances where the knowledge was acquired by them completely independently of Zedprime, I doubt if that factor would inhibit the suggested interpretation. [557] Second, I have given some consideration to whether the agreement (which was made in South Australia and the proper law of which was undoubtedly that of South Australia) is a deed, with a consequence that consideration would be unnecessary. It is not expressed to be a deed and only Zedprime executed it under seal; the Coventrys merely signed it. However an intention that it be a deed is disclosed by the words immediately before the signature block: “IN WITNESS WHEREOF the parties here unto set of their hands and seals the day and year first hereinbefore written”; moreover the Coventrys’ signatures are preceded by the words “signed sealed and delivered”. Under s 41 of the Law of Property Act 1936 (SA), in force in 1990, a natural person executes a deed by signing it; by subs (1), sealing is both insufficient and unnecessary. By subs (5) an instrument so executed is a deed if (among other things) it is expressed to be sealed. If that were all, the agreement in the present case would seem to be a deed. But that is not all. Subsection (2) requires that the execution of such a deed be attested by at least one witness who is not a party to the deed. Here, there was no such witness: each of the Coventrys purported to witness his own signature in the relevant space. [558] No arguments were addressed to me on s 41, and the section is not without its problems. Subsection (5) makes an instrument a deed if it is complied with, and does so “notwithstanding any other law”. It might be argued that the phrase covers 195 (1943) 68 CLR at p 533. 196 Ibid at p 532. -- 170 of 267 -- 163 subs (2), but the argument is unattractive. On the other hand, the effect of non- compliance with subs (2) is unclear. It might, despite the terms of subs (5), deprive a non-complying instrument of its status as a deed; but its words seem to assume that status. It might be argued that its effect is to the deprive a non-complying deed of all legal effect, but that argument is equally unattractive and was not advanced on behalf of the plaintiff. Some other interpretation might be advanced. In the circumstances I prefer to express no opinion on the effect of the section. Interpretation and application of cl 4.1 [559] The second argument put by the plaintiff in reply was that, even if the agreement were valid, Silicomm did not fall under cl 4.1 of it. It argued that Silicomm was developed as a separate product for sale, either as part of the “Mobile Manager” or perhaps as stand-alone software. Alternatively, it argued that Silicomm and Silicon Cash, to the extent that it existed, were no more than tools used to support software sales through the marketing system by facilitating cash transfers. A tool used in the marketing system was not part of the marketing system and therefore could not constitute a replacement update or modification of any part of the system. The defendants argued that Silicon Cash (of which Silicomm was the communications module) was always envisaged as part of the marketing system and constituted an upgrade or modification of the system as each module was written. [560] The earliest reference to Silicon Cash seems to be the minutes of 29 October 1990.197 It is a two-edged reference. On the one hand, Multiplex Marketing and Silicon Cash were apparently perceived as different things; but on the other, it was envisaged that the Multiplex Marketing System would be licensed “together with Silicon Cash”. The perception may not be altogether surprising, given that Silicon Cash did not then exist. By 1 September 1991, when the ASP Compendium was launched, Multiplex Marketing had undergone some development. A description of it appears inside the back cover of the Compendium: 198 “Multiplex MarketingTM is a network marketing system, specifically designed for Australian Software Publishers. The Multiplex MarketingTM system has been trademarked and patented.” The “trademarked” reference is presumably to the term “Multiplex Marketing”. The “patented” reference was presumably to application no PK6665 made by Michael Coventry in respect of “Electronic Funds Transfer Method and Means”. This, I infer, was Silicon Cash. The description then continued under three successive headings: The Developer, ASP and The Marketer. The last heading is evidently used in a sense which includes sales as well as marketing strictly so called. Under it appear the words: “Features and benefits of the Multiplex Marketing TM network include: • Cash flow business.” [561] What Intechnologic then envisaged by “cash flow” in this context is apparent from an ASP Company Profile dated August 1991: “D. CASH FLOW A.S.P. provides a mobile point-of-sale system called ‘Silicon Cash® ’. The purpose of Silicon Cash® in reference to A.S.P. is to: 197 Para [10]. 198 Exhibit 215. -- 171 of 267 -- 164 • Maintain rigorous control of purchase transactions. • Automate the distribution of royalties and commissions to network members. • Reduce outstanding debt due to delayed payment for purchasers. Silicon Cash ® is operated at the point-of-sale by A.S.P. support personnel using a portable computer. It is controlled by two main computer systems located at A.S.P. Head Office and our Associated Bank. A.S.P.’s Computer records sales transactions, releases key information for the ‘Pirate Proof® ’ installer and authorises the bank’s computer to distribute funds between appropriate accounts held by A.S.P. and it network members. The other advantages of Silicon Cash® are: An aid to software sales The system will have already been installed and viewed on a prospect’s computer in its ‘demonstration’ form. The possibility of closing the sale is far greater than in present forms of software retailing, (where in many instances, an end user might choose an ‘off-the-shelf’ product and hope that it can be installed properly). The A.S.P. method provides the necessary professional support to the end-user, a much sought after service in software markets world- wide. Maintains Software Security The sale is agreed to, while the A.S.P. personnel are still at the purchaser’s premises. The A.S.P. personnel then, with the aid of their mobile communications system, log into the Silicon Cash® mechanism to trigger the return of the Pirate Proof® Key, and the software is enabled to work in the correct way. Maintains the image of Professionalism and Support A.S.P. operative, communicating electronically with two large main frames, and getting information down-loaded immediately, make it obvious to the end user that the amount of technical ‘know how’ and professional support available to them is on a level far greater than that currently perceived as available in the software marketplace. Silicon Cash® is a product which can be used in other Marketing Areas” There was no mention of Silicon Cash as a separate product. [562] In September 1991, Intechnologic enlarged its perception of the purpose of Silicon Cash. It then published an “Overview” of the software as a separate product. This change was explained in a newsletter dated October, which was probably prepared during September: “WHAT IS SILICON CASH® SILICON CASH ® was originally developed to support software sales transactions for Australian Software Publishers in order to maintain a -- 172 of 267 -- 165 strong cash flow and good credit control within that organisation. It is however a product that has, in its own right, major Corporate Applications. Silicon Cash® is an EDI product having the following unique features.” [563] The September Overview also asserted, “Silicon Cash was originally developed to support Software sales transactions for ASP, to maintain a strong cash flow and good credit control for our company”. It described the communications aspects of the software, but did not mention the term Silicomm nor suggest that the communications modules were available separately. [564] The change in the way Silicon Cash was described seems to have come about as a result of the realisation that the product ought to be able to be sold in its own right, rather than as a result of a conscious decision to develop it differently. What is important is that it was indeed a change: the product was not originally intended nor developed for sale in this way. There is no evidence that any additional development work was done to bring about the change, nor that any copies of the product were ever sold. [565] In December 1991, after a falling out between Coventrys, Michael Coventry entered into an agreement with Intechnologic entitled “Software Licensing Agreement”. Before me, neither side placed any reliance upon that agreement. Michael Coventry claimed it had been signed under duress, an allegation which he first made as early as April 1992. While he was at the time probably under some pressure from Intechnologic, there is little evidence to support a finding of duress in the legal sense.199 The agreement purported to replace all previous agreements, including that made in October 1990. It was executed by Intechnologic under seal, although there is only one signature by the seal. If valid, it was much less favourable to Michael Coventry than the earlier agreement. It was evidently prepared by or on behalf of Intechnologic. The recitals included an acknowledgement that Michael Coventry was “the developer of the Software” and “Software” was defined to include the program “Silicon Cash”; and an acknowledgement by Michael Coventry that “the subject matter of the [October 1990] licence agreement ... and the software were neither fully complete nor operational” as at 1 July 1991. The accuracy of the recitals was expressly acknowledged by the parties in the body of the agreement and they were expressed to form part of the agreement. The agreement provided for a grant of a licence by Michael Coventry to Intechnologic to reproduce, market and distribute the software. [566] I acknowledge that in the circumstances, great care must be exercised in drawing inferences from this agreement. Even so, some inferences can be drawn without relying on the agreement as a legally binding document. One is that Intechnologic did not then claim to be the owner of the software, although its recognition of Michael Coventry’s claim may have been driven by an ulterior purpose. A second is that both Michael Coventry and Intechnologic apparently regarded the software as something distinct from Multiplex Marketing, although this too may have been done for an ulterior purpose. A third is that both of them recognised that, as at 1 July 1991, Silicon Cash existed, albeit in incomplete form. [567] The plaintiff’s submissions favoured the view that Silicon Cash was never written. For this proposition it relied on the evidence of Mr O’Connor. He was asked about 199 This may be because the question was not examined by the parties in any depth. -- 173 of 267 -- 166 the matter on several occasions. Initially could not recall anyone having written it, but his final answer to Mr O’Donnell QC was: “Whilst you were employed by Evtech do you know if any software that could perform those functions was written?-- No.” [568] Taking the evidence as a whole I reject the view favoured by the plaintiff. There are too many references to the product for it to have been nothing but vapourware. Sufficient code existed to enable a patent application to be made; it was repeatedly referred to in internal company documents in a way which is unlikely if it did not exist: too many people would have known; and it was referred to in the December 1991 agreement in the manner just described. Probably it was not a complete working product, but that is of no consequence. I am satisfied that it was more than name seized upon by the defendants for the purposes of the litigation. It existed, and Silicomm was developed as its communications module. [569] That brings me finally to the question whether it, and through it, Silicomm, was a modification of the Multiplex Marketing System. This is a question on which minds might differ. With some hesitation I have come to the conclusion that the relationship between the software and the marketing was so close that it can properly be said that the former represented a modification of the latter. It was, I think, more than just a tool used or intended for use in carrying on Intechnologic’s business. It was, or was designed to be, integral to the marketing system employed by Intechnologic, which was the whole of Intechnologic’s business. [570] The relevant consequence is that under cl 4.1, Intechnologic’s rights to use Silicomm were to be governed by the terms of the licence. Although there is nothing in the licence which provides for the vesting of property in any modifications in the licensor, it is at least arguable that this is implied. The defendants argued that improvements to the system “reverted” to them. In the absence of a submission to the contrary from the plaintiff, I am prepared to accept that argument without further consideration. I find they owned the copyright in Silicomm. [571] It is common ground that if the defendants owned the copyright, they validly assigned it to Evtech by a written assignment dated 5 November 1992. [572] In my judgment, the representation that Evtech owned the copyright in Electrocomm was not misleading or deceptive. 9. CAUSATION AND RELIANCE General [573] The plaintiff pleads that it suffered loss by entering into the two deeds. By this pleading it invokes s 1005 of the Corporations Law.200 That section is to be understood as taking the common law “practical or common-sense” concept of 200 The plaintiff also relied on s 82 of the Trade Practices Act 1974, but conceded that its applicability was dubious, since the defendants were not corporations; and that it added nothing to the corresponding provision of the Corporations Law. -- 174 of 267 -- 167 causation discussed by the High Court in March v Stramare (E & MH) Pty Ltd201 , it not having been modified or supplemented by statute.202 In that case, the High Court held that causation was essentially a question of fact to be determined by reference to common sense and experience, albeit one into which policy considerations and value judgments necessarily enter.203 The plaintiff alleges that in entering into the First Deed, it relied upon the misleading and deceptive conduct already described. In other words, this is a “reliance” case. But the plaintiff has not alleged that in making the deed it relied solely on the conduct. It tacitly accepts that there were a number of factors which led to that event. That is one of the complexities of the case. Another complexity arises from the plaintiff’s executive arrangements. I have described them above in general terms.204 It seems that the plaintiff’s chairman, Mr Sprod, played no more than a formal role; he was not alleged to have been misled by anything. On the other hand Mr Cole did participate in the decision to enter into the deed. On the plaintiff’s case it was he and the Darts who were misled by the defendants. It is therefore necessary to examine the relevant evidence in respect of each of them individually. A third complexity arises from the number of instances of alleged misleading and deceptive conduct, i.e. the number of alleged misrepresentations. These varied in nature and importance. Some were of a technical nature. They had differing impacts on different people, as might be expected. [574] The defendants accepted that the plaintiff did not have to prove misleading or deceptive conduct the sole cause of any loss. They argued that when all the evidence was reviewed, it would be seen that the plaintiff was not induced to enter into either deed by their representations, but by another factor or other factors alone. The factor on which they placed particular reliance was advice given to the Darts by Mr Gillmore. This led the plaintiff to submit, apparently as a matter of law, that reliance is not displaced by the plaintiff’s having had access to, and having relied on, independent advice with respect to the matters represented before entering into the contract. In a sense, that submission is correct. Once it is determined as a matter of fact that a plaintiff did rely upon a defendant’s misrepresentations, the mere fact that the plaintiff also relied on independent advice does not, as a matter of law, displace the conclusion. However if the sense of the submission was that reliance on independent advice as a matter of law could never prevent the drawing of an inference of reliance upon misrepresentations, I would respectfully reject it. Whether the plaintiff has relied on the misrepresentations is a question of fact, to be determined upon all of the relevant evidence. Nothing in the cases cited by the plaintiff205 determines otherwise. [575] The plaintiff submitted that I should assess causation by taking the multiplicity of misrepresentations into account as a whole. It submitted that all of the representations were related, and that it was the combination of the representations which was calculated to induce entry into the agreement. It was further submitted that it would not be the right approach to ask whether causation was proved in respect of any individual misrepresentation. What was relevant was the overall impression conveyed by the misrepresentations. In this case, went the submission, 201 (1991) 171 CLR 506. 202 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514. 203 (1991) 171 CLR at p 524. 204 Para [3]. 205 Gould v Vaggelas (1985) 157 CLR 215; Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302; Fried v Dixie Holdings Pty Ltd [2000] FCA 1048. -- 175 of 267 -- 168 that impression was that “this product is worth investing in, and worth risking money on”. [576] I agree that in assessing causation, I may take into account the impact on the plaintiff’s conduct of the combination of misrepresentations. I accept that, as Mr O’Donnell QC put it, “It cannot be right that someone who engages in a number of items of misleading conduct, which precede entering into a transaction, can avoid a finding of reliance by arguing that each item of misleading conduct, taken in isolation, was insufficient to induce entry into the transaction.” That combined effect may be measured in relation to other possible causes of the plaintiff’s loss.206 But that is not to say that it is wrong to look at the contribution which each individual misrepresentation makes to that combined effect. Much depends upon the way in which the plaintiff has pleaded its case. [577] A plaintiff might plead conduct consisting of a number of express misrepresentations and further an implied misrepresentation arising from their combined effect. That would be the appropriate course if the “impression” which affected the plaintiff’s mind was derived by implication from what the defendant said. Such a pleading would focus attention on what was in fact precisely the plaintiff’s “impression”, whether it could fairly be held to have arisen from the defendants’ misrepresentations and whether it was causally linked to the defendants’ loss-causing conduct. However a plaintiff is not obliged to approach causation in this way. It may have considered the individual representations and weighed them as such; or it may have considered them cumulatively but without relying on any “impression” which they induced. If the latter is the approach which the plaintiff alleges it took, its pleading will reflect this fact. [578] In the present case the statement of claim reflects that latter approach. A large number of misrepresentations was alleged which the plaintiff claimed induced it to enter into and subsequently to complete the First Deed. Thereby the plaintiff claimed to have suffered loss. It did not plead that it acted in reliance on the “impression” that the System was worth investing in and worth risking money on. It would be unfair now to assess causation on this basis. The correct approach is to assess the combined effect of the various misrepresentations in the context of the effect of other representations which were not incorrect, and any other relevant factors which induced the plaintiff to enter into the deeds. [579] Before turning to the facts, there is one other question of law with which I should deal. The plaintiff cited and relied upon the well-known statement by Wilson J in Gould v Vaggelas:207 “1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case. 2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. 206 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at p 199-200. 207 (1985) 157 CLR 215 at p 236. -- 176 of 267 -- 169 3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation. 4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.” [580] It submitted that the application of this passage focused on the capacity of a representation to induce entry into the contract, i.e. whether the representation was objectively likely to induce. While recognising what was said by Wilson J was not an exhaustive statement of principle, but rather a guide to deciding a question of fact, the plaintiff proceeded, somewhat inconsistently, to make this submission: “In practice, where the representation was, objectively assessed, likely to induce entry into the contract, reliance will only be displaced by establishing either that the plaintiff was armed with knowledge of the true facts, or otherwise made clear that the plaintiff did not rely on the representations, before entering into the contract: McMahon v Pomeray (1991) A.T.P.R. 41-185 at 52,859.” [581] In reading what was said by Wilson J in Gould v Vaggelas, it is necessary to bear in mind that his Honour was dealing with inferences of fact, not with propositions of law. The ratio of the case includes the proposition that the onus of proving causation remains firmly on the plaintiff. The onus which point 3 impliedly places on the defendant was, as his Honour recognised, no more than an evidentiary onus. That is an onus which may shift during the course of the trial. His Honour was not describing a process of reasoning which should be adopted by the tribunal of fact. [582] Although there is some support for the plaintiff’s proposition in McMahon v Pomeray, I do not think that the approach advocated ought to be adopted. Such propositions have a tendency to be elevated into propositions of law or propositions of mixed fact and law. So to treat them is in error. The High Court recognised in March v Stramare (E & MH) Pty Ltd, 208 that the question of causation is one of fact. I respectfully adopt the statement of the New South Wales Court of Appeal in Gipps v Gipps:209 “To state that a person is induced by a statement is to affirm a causal relation which is a question of fact, not of law. That being so, it is impossible to apply to any situation a rule which produces a final result. The trial judge or jury have to answer the question: Did the misrepresentation cause the representee to enter into the contract, it being understood that the representation, as was stated in Australian Steel and Mining Corporation Pty Ltd v Corben [1974] 2 NSWLR 202 at p 207, ‘was one among other factors which induced the contract’. Any other rule would be an affront to commonsense.” 208 (1991) 171 CLR 506. 209 [1978] 1 NSWLR 454 at p 460. -- 177 of 267 -- 170 The risk of error is not avoided by enunciating the proposition as one which operates “in practice”. [583] Subjective evidence of reliance given by the representee is an important consideration; in many cases, the absence of such evidence would seem very odd indeed. However the courts have remarked on the difficulties which such evidence, given after the event, often by a partisan witness and with the benefit of hindsight, can create.210 Such evidence must be scrutinised carefully. It must be weighed against the circumstances and quality of the representations. That necessarily involves an objective evaluation of all relevant evidence. I would not wish the foregoing paragraphs to be interpreted as implying any doubt as to the need for an objective analysis of the evidence relating to causation in misrepresentation cases. Reliance: making the First Deed [584] In relation to the making of the First Deed I have found that the conduct alleged in 10 subparagraphs of para 6 amounted to misleading or deceptive conduct.211 As it happens, all of those misrepresentations were made in writing. They were made in the so-called “blue books” which were seen by all three persons who made the decision to enter into the First Deed on the plaintiff’s behalf. Naturally they had different effects on each person. There is no doubt that the leading role on behalf of the plaintiff was taken by Bryan Dart. In large measure the Evtech “project” was, to use a colloquialism, his baby. Kevin Dart deferred to him to a considerable extent.212 Mr Cole was the plaintiff’s in-house bookkeeper. He was not a director. The Darts respected his views and took them into account; but they were naturally more narrowly focused than those of the Darts. It is therefore appropriate to begin by examining the evidence of Bryan Dart on the question of reliance. [585] That evidence was extensive. Each of the representations which I have found to be misleading was identified by Bryan Dart as a factor which induced him to cause the plaintiff to enter into the First Deed. Indeed, he claimed to have relied upon most, although not all, of what Andrew Coventry said to him either orally or in writing. He had difficulty with hypothetical questions, particularly questions whose hypotheses were complex and variable. On occasion he was unable to put actual events out of his mind and answer on the requested hypothetical basis. Sometimes he gave conditional answers. He said his ultimate decision was based on a combination of many of the things he was told, both misleading and otherwise. Some of these he barely understood. He recognised that he had little detailed comprehension of technical matters. On several occasions he plainly was speculating about the impact of the factor under discussion. Almost invariably he attributed all representations to Andrew Coventry and Mr Quinn together. Some of these features cast a shadow upon his claim of reliance. [586] The evidence of Kevin Dart was less extensive, and more general in its terms. He testified that he read the books and took notice of the information in them. He thought them “quite a professional presentation”. He said he was quite impressed by them. He described their significance: 210 Moukhayber v Camden Timber & Hardware Co Pty Ltd [2002] NSWCA 58 at paras [28]-[29]; Watson v Foxman (1995) 49 NSWLR 315 at pp 318-319. 211 Subparas a, aa, b, c, k, m, p, q, r, and s. 212 See the evidence quoted at para [271]. -- 178 of 267 -- 171 “How significant were the things in the blue books for you at the time of signing this agreement?-- Because it was the written word and the written presentation, very important to us. The document appeared to be professional and well put together, and we had a strong belief and reliance on the blue books. ... What about the various things that you told us yesterday Andrew Coventry had been saying to you about the Evtech product, such as that it was ready for the market, the Bulldog effect, the MNP10 and the other things that you articulated yesterday? Did they have any significance for you at the time of entering into this agreement?-- They had great significance, because that really was what made the System unique. The features that were described, both in the blue book and as represented by Andrew Coventry and Tom Quinn on many occasions, described what we were buying into, why it was unique, and why the product was a world beater, why we were going to sell volumes of it.” [587] His attention was directed specifically to two paragraphs relating to the inbuilt data dictionary and retaining the integrity of all data sent: “Did those two paragraphs have an effect on you?-- Certainly, yes, they did, as did a number of other factors within this blue book. What impression did they form?-- It formed the impression, and what was fact at that time, that those two protocols were unique made this a world-first. It made it a product that could be commercialised and sold and used with the System, the System being the Office in a Briefcase concept.” [588] Other factors which he said influenced his decision were statements by Andrew Coventry that the technology was ready to be commercialised, that it was an off-the- shelf product and that it was easy to use. He regarded MNP10, the Bulldog effect and other protocols in the System as important because they were what made the System unique, although individually they did not mean a lot to him. However, the most important factor was the Telecom New Zealand approval: “What impact did that information, the New Zealand Telecom approval, have on your thinking?-- It was probably the most meaningful point to me because we were able to realistically look at the opportunity, know it was short term and know that the bottom line was something like $40,000 a month or that initial order. It went a long way to financing the growth of the business.” [589] He expressly denied taking advice from Telecom New Zealand, but elsewhere tacitly admitted his dependence on that body for technical evaluation: “MR O’DONNELL: Can you explain why, please?-- With our limited expertise in technology at that point, I was reliant upon the PTC approval in New Zealand Telecom not only as a permit that connected but also … an approval of the validation of the technology and that it was ready for commercialisation. That was the crux of it. -- 179 of 267 -- 172 You know, if you didn’t have that, we weren’t prepared to put up our funds.” [590] Kevin Dart’s evidence on the question of reliance suffered from vagueness and imprecision, understandable at this distance and time. At times it took a partisan slant and sometimes it contained exaggeration. He was not as closely involved in the early stages of the project as his brother and I am not satisfied that he took much notice of oral statements made by Andrew Coventry, whom he did not like. I accept that he read the blue books, probably not in great detail. [591] Mr Cole too was impressed by the blue books: “What effect did [the blue books] have on you?-- I was pretty excited that this product could do all the things that they said it could do and the forecast cash flows that were in there showed pretty sizeable profits. With the background knowledge that I had gained from the media that the telecommunications market had been deregulated and the buzz word was ‘telecommunications’, I strongly recommended to both Kevin and Bryan that we should get a piece of the action.” [592] He was asked about the reference to “patented data correction features”: “How did it influence you?-- Again it goes back to the comments that I had with Tom and Andrew prior to the blue book and the blue book reinforcing those comments that their software had their proprietary data error correction features in it, that when linked with the MNP10, gave it the ability to hold on to the signal, make sure that the data that was sent at that end was received at this end over the cellular network, the same as if it had been sent across a landline and - which no other product existed at that time could do that and do that successfully, and their product did, and that’s what made it unique and that’s what its real ability was all about.” [593] He was asked about the reference to the product hanging onto data signals better than any other communications program: “Did that have any effect on you?-- It did. It goes back to the matters I was saying before, that in discussions with Andrew and Tom, that their Electrocomm software had proprietary features in it which made it possible for the modem to hang on to the signal in both noisy and changing cell sites so that the data going through from the sender to the receiver would go in an uncorrupted manner and be received at the other end the way it was sent and there was no other product out there in the marketplace at that time that would do that.” [594] He also claimed that the availability of Bell protocols influenced his decision. On that point, I do not believe him. [595] Looking at the question objectively, it is likely that the misrepresentations in question would influence the decision of an inexpert listener. While I hesitate to apply a test of “commonsense”, I am, I think, obliged to consider “what effect must be taken to have resulted”.213 I have already described the plaintiff’s financial position in late 1992 and early 1993. Plainly there was a need for the plaintiff to become involved in a revenue-generating activity: it needed cash flow. It had 213 Hanave Pty Ltd v LFOT Pty Ltd (1999) ATPR ¶41-687 at p 42,791. -- 180 of 267 -- 173 largely if not entirely ceased activity as a property developer and had become involved in a technology development joint venture which had brought it only litigation. It remained interested in this field. The proceeds of its capital raising came to hand in early 1993. Its share price was likely to suffer unless it was seen to be doing something with this capital. The misrepresentations relating to readiness for commercialisation and design as a shelf purchase product must have sounded attractive. It was common knowledge that no reliable cellular modem was on the market and that PSTN modems performed unsatisfactorily with cellular phones. Even if they were not fully understood, the misrepresentations relating to the capacity of the System and in particular Electrocomm to overcome these difficulties must have been particularly attractive. They were, in my judgment, calculated to induce the plaintiff to enter into the First Deed. [596] The defendants pointed to a number of countervailing factors. First, they argued that the plaintiff took no notice of Andrew Coventry but relied on Telecom New Zealand to begin with and thereafter on Mr Gillmore. Bryan Dart’s letter of 16 February 1993 to Andrew Coventry214 shows that he was aware of grounds for distrusting the latter. He had serious doubts about the Evtech product, which must have caused him to question the veracity of what Andrew Coventry had told him. He claimed that his doubts were subsequently stilled by reassurances from Andrew Coventry and Mr Quinn. He was, however, an experienced businessman with the background in property development. He did not seem to me to be either gullible or naive and he conceded, “As time progressed, I certainly looked at things a lot more closely.” On the other hand the letter does not irrevocably sever the relationship: its withdrawal of further support is only “until you resolve these matters”. It falls well short of demonstrating that Bryan Dart placed no reliance upon what he was told by Andrew Coventry. [597] There is no doubt that the Darts placed enormous reliance on the Telecom New Zealand evaluation. While Mr Gillmore was in New Zealand he encouraged them to believe that a substantial order was likely to be forthcoming. So important was this evaluation to the Darts that the First Deed was made conditional upon an “endorsement” of the System by Telecom New Zealand. [598] In March 1993 the plaintiff was advised by its solicitors to include a “due diligence” clause in the deed, but it instructed them not to do so. At first glance this seems an extraordinary instruction in the circumstances. By this time the plaintiff was well aware of Evtech’s desperate financial plight and it had grounds to question the veracity of Andrew Coventry. Bryan Dart was asked about the advice: “MR O’DONNELL: The advice there, the advice to include a due diligence procedure clause in the contract -----?-- Yes. ----- what was done in response to that advice?-- Due diligence - the due diligence that we followed was reliant on two things: from what we had been told by the Coventrys and also by the fact that - or what we were relying on was New Zealand Telecom approval with the possible purchase of the product after that. And how did that bear upon whether you included a due diligence clause in the contract or not?-- Well, that was a major function of it. With the contract with Evtech? 214 Para [129]. -- 181 of 267 -- 174 Yes?-- Yes. That was part of, you know, the steps that we wanted to follow, that we got that approval. And just explain, how does that bear upon the decision whether or not to include a due diligence clause?-- Well, as I say, we were relying on New Zealand Telecom - that was what we were basing our due diligence on, what we had been told by the Coventrys and Quinn, and the fact that New Zealand Telecom were assessing the product and were going to endorse it. What New Zealand Telecom were going to do, what relationship did you see that as bearing upon what you had been told by the Coventrys and Quinn about the Evtech product?-- Well, it was backing up what they were representing to us, that the product was ready to be commercialised and marketed. Did you have a response to McCullough Robertson about their recommended - or about their advice on this point, about including a due diligence procedure clause in the contract?-- I can’t recall, other than - you know, I know we explained to them that we were dealing with New Zealand Telecom and that we were hoping for an order to come out of there. What was the substance of what you said to McCullough Robertson - ---- HIS HONOUR: First of all, what do you understand by the expression ‘due diligence clause’?-- Well, to do proper research into the technology.” [599] This was not cross-examination, but the answers were unresponsive and evasive. Bryan Dart obviously understood the concept of due diligence and I do not believe that he did not understand the expression “due diligence clause” which appeared in the letter of advice from McCullough Robertson shown to him immediately before he gave that evidence. Whether or not it was true that he could not remember what his response to the advice had been, he was plainly uncomfortable with even the possibility that he might have rejected it. [600] In itself, that was two-edged, and it proved little. His discomfort might have reflected embarrassment at rejecting the advice because he believed Andrew Coventry. However, that was not what he told Mr Cunningham. Between 9.00am and 9.24 am on 22 March 1993, he and Mr Bruce Campbell, the plaintiff’s in-house solicitor, told Mr Cunningham that there was no need for such a clause because Mr Cole had been looking after the accounts and keeping creditors at bay; they were pretty au fait with most aspects of the company; and they were "relying on New Zealand Telecom for technology advice.”215 [601] Bryan Dart denied the words emphasised above: “Exhibit 169 is the separate piece of paper in your right hand?-- Yes. 215 My emphasis. See also para [123]. -- 182 of 267 -- 175 If you read paragraph 2 to yourself, please?-- Well, that’s basically correct, except for something there that says, ‘New Zealand Telecom for technical advice’, which was - you know, that was never the case. Can I ask you first: can you recall having a discussion along those lines with Mr Cunningham?-- Yes, I vaguely do, when we were putting all this together, yes. What’s your recollection of the discussion?-- I’m just trying to recall. I remember us discussing with him that we were doing company searches on whether the directors and the shareholders and everything that we had been told was correct, and I know - well, Steve Cole was certainly on top of the accounts, and that we were relying on New Zealand Telecom to approve the technology. Did you articulate in what way you were relying on New Zealand Telecom to approve the technology, or in what respect?-- Well, that it was to be in our agreement that it was subject to getting that approval through. All right, thank you. You said a little while ago at 14.37.44 that the phrase ‘relying on New Zealand Telecom for technical advice, which was never the case.’ Could you explain what you meant by that?-- Well, never, ever in my mind was I expecting or - no-one, as far as I’m aware in Charter, but I’m talking about myself here, was relying on any technical advice from New Zealand Telecom. They were always assessing the product for themselves, certainly no technical advice, and, you know, that’s not my note. I don’t know how that’s come about, but it certainly was never - because - and as I said, even our documentation, the whole lot, it was never - well, on technical advice, it was on endorsement.” [602] I do not believe him. Mr Cunningham’s evidence was clear and convincing. His note was made at that time and was intended to record his instructions precisely, not to paraphrase them. I thought he was a careful and honest witness. I have no hesitation in preferring his evidence to that of Bryan Dart. I am satisfied that in March 1993, the plaintiff was relying on Telecom New Zealand for technology advice. [603] This view is reinforced by the evidence of Mr Cole: “HIS HONOUR: You say, ‘We did require a prototype’?-- Sorry, Charter Pacific. Myself, Kevin and Bryan. You discussed it with them, did you?-- Yes, your Honour. Away from the others?-- Yes, your Honour. And what did Bryan say?—‘Yes, we should get our hands on a copy of the prototype if we can.’ -- 183 of 267 -- 176 Just that? That’s all?-- No, and that there were none available. The conversation - substance of the conversation was that we knew the prototype was in New Zealand - or had been told that the prototype was in New Zealand by Tom and Andrew undergoing testing, and that that’s an independent body and who better - what better independent body could you get to test such a product as New Zealand Telecom. Bryan was content to rely on their results?-- Their testing results, yes, your Honour.” [604] The defendants submitted that the person on whom the plaintiff particularly relied was Mr Gillmore. I am satisfied that the plaintiff placed enormous reliance on Mr Gillmore throughout the relevant period. Bryan Dart said in evidence: “I think you told me yesterday that you treat what an inventor says to you with a fair degree of scepticism?-- Yes. The question of whether you thought this was an okay product, and all the other bits and pieces that Mr O’Donnell put to you?-- Yes. Really, did you think that because of what these fellows said to you, or because it looked like there was a real live, genuine order from Telecom New Zealand there on the table? Was that what gave it credibility rather than the other statements?-- Your Honour, I couldn’t separate that. I would have to say it was the complete - being told that the technology was what it was, it was a world-first, leading-edge technology, yes, that New Zealand was certainly very interested in it, and that was passed on to me by the Coventrys and certainly Peter Gillmore, backed up by Peter Gillmore, which gave it more credit again, and, yes, that they were looking at an acquisition of the product.” [605] The Darts were very impressed with his marketing report216 and were I infer much influenced by what took place at the briefing which he gave them in March 1993.217 I have already found that by 22 March, they had decided that he should work for Evtech and that the services of Andrew Coventry and Mr Quinn as employees would not be required.218 They installed Mr Gillmore at the plaintiff’s premises and he worked for Evtech (albeit not as an employee of Evtech) well before completion of the First Deed. Shortly after the signing of the First Deed, he assisted in the preparation of the section describing Evtech’s products in the letter sent by the plaintiff to its shareholders on 8 April 1993 to convene a general meeting to approve the transaction.219 Kevin Dart said that it was the product as there described that the plaintiff’s directors understood the plaintiff was buying into. It was very much in Mr Gillmore’s interest to encourage the plaintiff’s involvement and he did so. The Darts believed him and believed in him. They placed much more reliance upon him than upon what they had been told by Andrew Coventry. 216 Para [97]. 217 Para [217]. 218 Ibid. 219 The reference in the letter to OCR (optical character recognition) flags Mr Gillmore’s authorship. -- 184 of 267 -- 177 [606] A noticeable feature of the evidence given by Bryan and Kevin Dart and Mr Cole about all representations was that almost invariably they were attributed to “Andrew Coventry and Mr Quinn” together. I formed the impression that they all had difficulty in isolating what had been said to them by Andrew Coventry and what had been said by Mr Quinn. I thought they were probably aware of the fact that the precise speaker did not matter provided Andrew Coventry was present when the words were spoken (Mr Quinn was not alleged to have spoken as agent for any of the defendants). Nonetheless I am prepared to accept their evidence regarding the presence of both men because the contrary was not suggested to them in cross-examination. In relation to reliance upon oral statements, the persistent association of the two men creates a problem for the plaintiff. If it relied solely upon Mr Quinn’s conduct (either his statements or his standing by silently in the face of statements by Andrew Coventry), its claim would, to that extent, fail. There is evidence that the Darts trusted Mr Quinn and doubted Andrew Coventry. If the plaintiff’s case depended solely upon oral representations, questions would arise of the relative weight which it placed on each of them. Since the plaintiff’s case does not so depend, I need not resolve such questions. [607] There were other factors which also influenced the plaintiff’s decision to enter into the First Deed. Fisher & Paykel had shown considerable interest in the modem and the Darts were aware of this. Bryan Dart described it as “very encouraging” and Kevin Dart as having “the effect of excitement”. The latter said, “It was certainly a validation that assisted us in making our decisions.” They were aware that the System was being evaluated by NEC, with the prospect of that company re-badging and selling it. Mr Cole had read numerous articles in the financial press about the boom in mobile telephony and the need for mobile computing, and it would be surprising if this information had not been passed on to the Darts. I have referred already to the financial considerations which moved the plaintiff to seek the investment.220 In addition, there was the remainder of what was written in the blue books, both the material the accuracy of which was never challenged and that which I have found not to have been misleading. Mr Cole was influenced by the correspondence from Telecom New Zealand, the keenness of Fisher & Paykel to use the product and the projected profit figures passed to him by Mr Quinn and probably written by Mr Gillmore. In evaluating the plaintiff’s claimed reliance, I must take all of these factors into account. [608] Although the decision that the plaintiff enter into the deed was influenced by all three men, it was Bryan Dart who was crucial. Kevin Dart relied on his brother and Mr Cole and, therefore, his influence was relatively slight. In particular, whether the plaintiff is to succeed on this point must depend upon an acceptance of the evidence of Bryan Dart. [609] After some deliberation I have concluded that I should accept that he relied upon the misrepresentations. It is true that in much of his evidence he demonstrated some imaginative reconstruction. For example I do not believe that Andrew Coventry or Mr Morgan told him (as he claimed) that the modem required Bell standard protocols or that he heard Mr Gillmore and Andrew Coventry continually discuss that matter. It is also true that he showed some propensity to twist a question in order to be able to give an answer which he thought would advance the plaintiff’s case. His responses regarding his knowledge of ownership of the modem are examples of that. However he also showed a willingness to make concessions, 220 Para [595]. -- 185 of 267 -- 178 volunteering on some occasions that he would not have been influenced by a particular factor (for example, the ability to interface the System with mobile phones in addition to the Ericsson and the NEC P3). He readily conceded the concurrent influence which the New Zealand Telecom approval and the projected profit figures provided to him by Mr Quinn had had on his decision. Acceptance of his evidence on reliance is consistent with the objective approach to the question described above. [610] In reaching this conclusion I have taken into account the arguments urged by the defendants, and the various alternative factors which they submitted dominated the minds of those controlling the plaintiff. I have concluded that by the time the plaintiff entered into the First Deed, the defendants’ misrepresentations were no longer the dominant consideration in its directors’ minds. However, that is of no avail to the defendants. “[The representation] is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.”221 In my judgment, the plaintiff relied upon the defendants’ misrepresentations in making the First Deed. Reliance: completion of the First Deed [611] To this point, I have followed the approach of the parties in relation to the First Deed, by focusing upon the making of the deed as the relevant event putatively causing loss. Although I have not heard argument on the point, I am inclined to doubt the correctness of this approach. It may be that the correct approach is to focus on the completion of the deed. That is because the deed was subject to the condition requiring New Zealand Telecom endorsement. 222 The date for completion was extended during April 1993 and completion eventually took place on 27 May, after receipt of the PTC. [612] The plaintiff did not contend that it was obliged to settle the transaction by the terms of the deed. That is undoubtedly correct. The only notification received from Telecom New Zealand was of the issue of a PTC. On its face that did not constitute any sort of notification that that organisation endorsed the System. It related only to the modem, not to the System; and it did no more than grant permission for the modem to be connected to the New Zealand PSTN. In no sense did it constitute an approval or endorsement of the System. Why did the plaintiff complete the transaction when it did not have to? [613] The plaintiff’s witnesses each gave somewhat different answers to this question. Kevin Dart described the significance of the receipt of the approval in these terms: “Do you recall the events when the approval did come?-- Yes, I do. Can you tell us about that, please?-- It again was an exciting day. It was a high point. We had got this long-awaited PTC approval. What it meant to us is that the product has been endorsed by New Zealand Telecom for commercialisation; that an order would follow and that we could connect to the network within New Zealand Telecom.” 221 Gould v Vaggelas (1985) 157 CLR 215 at p 236. 222 Para [120]. -- 186 of 267 -- 179 That answer must be understood against the background of his earlier evidence that he thought the PTC was “the approval to connect, use and - and also to verify that the technology was commercially viable and ready for the market.”223 I have rejected his claim that he was told this by Andrew Coventry and Mr Quinn, but I accept that he did honestly so believe at the time. From the plaintiff’s point of view, Evtech was Bryan Dart’s project, implemented by him with Mr Cole’s assistance. Kevin Dart had not immersed himself in it to the same extent as his brother, and his attention to detail was understandably less than theirs. I am satisfied that Kevin Dart believed that the requisite endorsement had been given; that he wished the project to proceed and had no reason to terminate it by the exercise of any discretion which resided in the plaintiff; and that consequently, he caused the plaintiff to complete the deed. [614] Bryan Dart did not claim in so many words that he ever assimilated the endorsement referred to in the condition with the PTC. However, in his evidence-in-chief relating to 27 May, he seemed to imply such an understanding: “What impression did you form at the time?-- Certainly that we had our approval, which was fantastic. That’s what we had been waiting on. The letter didn’t quite go as far as, you know, saying that there was an order there by any means, but certainly we had our approval. And what attitude did you take to Charter Pacific then settling the order?-- Well, that - as I say, we had been waiting on this letter for quite some time, and this was the endorsement that we needed, that it was approved, and with the discussions continuing with New Zealand Telecom, we were keen to keep proceeding.” [615] In that answer he seems to assimilate “approval” with the PTC and to assert that it was the required endorsement. However, in cross-examination he answered rather differently: “Looking at condition precedent D, the agreement is subject to the satisfaction of the purchaser in its absolute discretion that certain endorsements issue from New Zealand Telecom, NEC or Telecom Australia. Is it correct to conclude from the fact that this agreement did settle that you were satisfied with -----?-- Yes, we were satisfied, but we hadn’t received New Zealand Telecom approval. Yes. The word ‘endorses’ is used there. Were you satisfied that New Zealand Telecom had endorsed the Cell-U-Comm System?-- We were satisfied that it had been approved.” In the light of this evidence, I am not satisfied that Bryan Dart believed that the PTC constituted an endorsement within the meaning of the condition. [616] Why then did he agree to the plaintiff’s settling the deed? An explanation may be found in the evidence of Mr Cole. At the time of the initial negotiations, Mr Cole was unaware that a PTC was required. Subsequently (it is unclear when), he formed the belief that the approval which was expected from Telecom New Zealand would include permission to connect to the New Zealand telephone system. At the time of completion, he believed that the PTC satisfied the condition in the deed. However, 223 His evidence is set out at length in para [201]. -- 187 of 267 -- 180 he also thought that the plaintiff still had a discretion under the condition to accept or reject the approval. He explained his reasons for recommending acceptance: “What was your recommendation about the exercise of the discretion?-- My recollection of the conversations - sorry. I should answer your question first and then explain. My recommendation was to proceed. I based my recollection - my assessment to proceed on several things, your Honour. The approaches from Fisher & Paykel at that time were very strong. They were very, very keen to get their hands on six prototypes immediately to undertake some field testing with their sales representatives in the marketplace here in Australia. Peter Gillmore confirmed conversations that I had had with Tom Quinn and Andrew Coventry at that stage that there were ongoing negotiations with New Zealand Telecom about undertaking a distributorship for the product in New Zealand, and that there were also negotiations taking place with Telecom Mobile Net in Australia for their acquisition and distribution through their own outlets here in Australia, and there was some other companies that were mentioned. I remember, your Honour, Toshiba and NEC are two others that I remember at the time.” It is probable that the Darts accepted his recommendation. [617] It is worth noting in passing at this point that in Mr Cole’s eyes, the expected imminent order for the System had, prior to completion of the First Deed, slipped to the status of “ongoing negotiations ... about undertaking a distributorship”. It is inconceivable that the Darts did not know this. [618] The Darts said that at the time of settling the First Deed, they were still relying upon the defendants’ representations. That claim is not negated by their acceptance of Mr Cole’s recommendation. It is necessary to determine its truth, applying the principles discussed above. [619] The plaintiff does not allege that any fresh misrepresentations were made between the signing and the completion of the deed. It claims that throughout that period Andrew Coventry continually offered reassurances in support of the original representations, and he probably did. Certainly there is no allegation by the defendants of any withdrawal of anything contained in the blue books. Is it reasonable to conclude that the plaintiff was still acting in reliance upon the misrepresentations already identified as inducing it to sign the First Deed? [620] The situation at 27 May 1993 was not the same as it had been on 24 March. During those two months, Bryan Dart had become more involved and more familiar with Evtech. Mr Gillmore had been working at the plaintiff’s premises since mid-April, and must have developed a working relationship with Bryan Dart. I am satisfied that the Darts trusted and relied upon him. This reliance went beyond trusting him for technical advice. In mid-May 1993, Mr Gillmore wrote a letter to Kevin Dart containing a considerable amount of technical information and lauding the System. He wrote that letter at Kevin Dart’s request. He thought the latter “may have had a press release or some requirement from the stock exchange or from an analyst or something”. He conceded that the letter was “just hot air … a futures document”, but said that it contained nothing untrue. To the extent that the letter constituted an exaggeration, I am satisfied that Kevin Dart was well aware and approved of it. -- 188 of 267 -- 181 Another example of such trust (and of Mr Gillmore’s complaisance) can be seen in this passage: “I think that Kevin was always very keen to get some publicity. We did on the China trip a few times which concerned me, I must admit, that made this look pretty tame. But it wasn’t something I thought was unusual. Sometimes it was a gloss he wanted me to put on it that I didn’t agree with.” [621] On the other hand, their distrust of Andrew Coventry had increased. Kevin Dart noted in mid-May, “Many problems with Andrew etc”. Those problems “related to a developing distrust of [Andrew Coventry’s] truthfulness and a developing appreciation that [he] needed to be very closely watched and managed in the future.” He said that he picked up on some lies and was told of others by Mr Burgess of IMS. He did not see Andrew Coventry’s willingness to lie to him as “serious enough to affect the plaintiff’s proceeding with the deal”. He said, “I’ve dealt with a lot of people that don’t always tell you the truth and it doesn’t always mean that you throw the deal away or throw the job away.” He said he relied on what was in the blue books notwithstanding his knowledge of Andrew Coventry’s untruthfulness. [622] By 27 May the Darts had other reasons to doubt at least some of the relevant misrepresentations. Since his arrival in Australia Mr Gillmore had been unable to get the System to work reliably. He must have told the Darts this. In addition the problem with MNP10 had surfaced, but had not yet been remedied. Kevin Dart also said that he had been involved in some unsuccessful demonstrations of the System, particularly to stockbrokers. Bryan Dart was aware of these failures. Despite all this they claimed that they were reassured by Andrew Coventry and that the failures were caused by minor glitches which could easily be fixed. [623] Weighing all the evidence I have come to the conclusion that in deciding to settle the First Deed, the plaintiff did rely upon the relevant misrepresentations. They played a relatively minor part among the panoply of considerations which led to that decision, but it was not an insignificant part. Developments after 24 March did not specifically focus on those misrepresentations. They did not even focus on the content of the blue books. When I weigh them with the other evidence, I reach the same conclusion in relation to the completion of the deed as I reached regarding its making. 10. THE CONTRACTUAL REPRESENTATIONS AND NONDISCLOSURE The contractual representations [624] By paragraph 8 of the statement of claim, the plaintiff pleaded: “By the terms of the First Deed (so far as presently relevant): (f) each of the first, third and fourth defendants represented and warranted to the plaintiff that as at the date of the First Deed, and separately as at the completion date, all of the information that had been given by or on behalf of those defendants, and the directors or officers of Evtech Pty Ltd to -- 189 of 267 -- 182 the plaintiff or to its solicitors in the course of the negotiations leading to the First Deed was true and accurate in all respects; (g) each of the first, third and fourth defendants represented and warranted to the plaintiff that as at the date of the First Deed, and separately as at the completion date, all the information that was known to the first, third and fourth defendants or any of them relating to Evtech Pty Ltd or otherwise the subject matter of the First Deed which was material to be known by a purchaser of shares in Evtech Pty Ltd for value, had been disclosed to the plaintiff; (h) each of the first, third and fourth defendants represented and warranted to the plaintiff (inter alia) that as at the date of the First Deed, and separately as at the completion date: (i) that Evtech Pty Ltd was the owner of all the technology used by the company, including the ElectroComm computer software.” [625] The defendants admitted this part of the pleading. The plaintiff subsequently pleaded that each of these representations was misleading and deceptive. That the defendants denied. (Strictly speaking the plaintiff should have pleaded that the making of the representations by signing the deed was conduct which was misleading and deceptive, but that point was not taken.) The misleading and deceptive quality subsequently identified was identical to that attributed to the specific misrepresentations pleaded in paragraph 6 of the statement of claim. The information or omissions alleged to have been given or not disclosed were identical with those separately pleaded. [626] By their wording, the representations referred to purported also to be warranties. It has been held that contractual warranties may constitute representations even in the absence of such wording.224 I shall deal with the question of contractual warranties later. [627] It is not easy to see what this adds to the pleading, in terms of misleading and deceptive conduct. Its purpose appears to be to enable the plaintiff to rely as against the trustee defendants upon representations which were misleading or deceptive at the time of the making or completion of the First Deed, but which were not so (or which the plaintiff could not prove to have been so) when they were made. As the case has turned out, the plaintiff has not sought to establish an alternative case along these lines. In case I have misread the position, I should make at least brief findings in relation to the matter. [628] Schedule 2 of the First Deed contained a number of warranties. Those presently relevant were: “(c) All information which has been given by or on behalf of the Vendors, the directors, auditors or officers of the Company to the Purchaser or to the solicitors for the Purchaser in the course of the negotiations leading to this Deed is true and accurate in all respects. 224 Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470. -- 190 of 267 -- 183 (d) All information which is known to the Vendors or any of them relating to the Company or otherwise the subject matter of this Deed which is material to be known by a purchaser of the Shares for value, has been disclosed to the Purchaser. … (nn) The Company is the owner of the technology (including intellectual property) described in Schedule 3 (‘Property’) under the titles described in Schedule 3 and:” Electrocomm was described in schedule 3. [629] Clause 6.1 provided as follows: “The Vendors covenant, warrant, undertake and represent with and to the Purchaser in the terms set out in Schedule 2 as at the date of this Deed and separately as at the Completion Date (it being a term of this Deed that each of the covenants, warranties, undertakings and representations are true and correct in every respect and shall be construed separately and the meaning of each shall in no way be limited by reference to any other paragraph contained in this Deed).” [630] The First Deed was drafted by Mr Bruce Campbell, the plaintiff’s in-house consultant solicitor, and settled by McCullough Robertson. It is quite lengthy and to anyone but a lawyer would constitute a daunting document. The trustee defendants executed it, without obtaining legal advice, at the request of the Coventrys. Andrew Coventry was dyslexic. He had considerable difficulty with complex or lengthy documents, a difficulty which he demonstrated often enough during the trial. Kevin Dart claimed that he specifically drew Andrew Coventry’s attention to the clauses which I have quoted above. I shall assume that he did so, and that this affected the trustee defendants, although his evidence in regard to what he said was very vague. If, contrary to that assumption, the trustee defendants signed the document in ignorance of the relevant clauses, a question would arise as to whether their conduct could be characterised as misleading or deceptive. No argument was addressed to me on that point. [631] Both the Darts gave evidence that the existence of the warranties influenced their decision to have the plaintiff execute the contract. I found this part of their evidence unsatisfactory. It was given baldly and, without meaning any disrespect for Mr O’Donnell QC, after some leading questions. I sense about it the wisdom of hindsight. It was not set in any context, nor was any history given to explain the Darts’ interest in these particular clauses. Mr Cunningham gave no relevant evidence and Mr Campbell was neither called, nor his absence explained. Some 50 warranties are contained in Schedule 2; from an objective viewpoint, it is surprising that the Darts should have been aware of those quoted in particular. Presumably they knew that their solicitors had included warranties in the deed; and presumably, had there been an objection by the Coventrys to signing the deed with any of those warranties in it, the Darts would have reconsidered their position. That, however, falls short of demonstrating that the Darts relied on the Coventrys’ signing of the deed as amounting to a representation of the truth of the warranties. They may have drawn comfort from the existence of the warranties as such, but that is not enough for present purposes. I am not satisfied that the execution or completion of the First -- 191 of 267 -- 184 Deed by the plaintiff was induced by the trustee defendants’ conduct in signing the deed with the clauses quoted above in it. [632] Moreover there is one point of interpretation which the plaintiff must overcome in order to gain any comfort from warranty (c). Clause 6.1 is argued to found a representation by the trustee defendants. It is “in the terms set out” in the schedule. Warranty (c) covers all information given to the “Purchaser or to the solicitors for the Purchaser”. “Purchaser” in the deed means the plaintiff. However, the alleged misrepresentations were made to the Darts as directors of Bundaway, not as directors of the plaintiff. Consequently, the clause does not cover the plaintiff. Nondisclosure [633] The plaintiff pleaded in the alternative that it would not have entered into either the First Deed or the Second Deed had it not been for the failure of the defendants to disclose material information to it. This claim may be disposed of summarily. The material information is pleaded in substantially the same terms as the representations. Presumably this pleading is intended to cover the possibility that the Court finds the representations were not made.225 In relation to the First Deed, I have found that some of the representations relied on were not made. In three such cases226 , the plaintiff has relied on nondisclosure. In two of those cases, I am satisfied that the plaintiff was under no obligation to disclose the information in question.227 In the third, I have already found that I am not satisfied that Bryan Dart was confused as to the true nature of the PTC.228 None of these matters was material in relation to the Second Deed. It is, therefore, unnecessary further to consider the question of nondisclosures. 11. THE SECOND DEED [634] By para 15 of the statement of claim, the plaintiff alleged: “The plaintiff was induced to enter into the Second Deed by representations made orally by the Second defendant, the male third defendant and the Fifth defendant, on behalf of the third and fourth defendants, over the period of June to August 1993 that the problems being experienced with the System were minor and would be resolved in a short time frame.” The plaintiff further alleged that it was also induced to enter into the Second Deed by the pre-contractual representations already discussed. [635] The defendants denied that they made the representations alleged in para 15 and that the plaintiff was induced to enter into the Second Deed by anything done or said by them. They asserted that any problems being experienced by the plaintiff were not problems in the System, but were problems in the “Mule”. That was the name given to the combination of Quicklink software and the IMS mark II model of the 225 I do not understand the statement of claim to rely on misrepresentation and nondisclosure cumulatively. 226 Statement of claim para 6(j)/17(i), 6(n)/17(m) and 6(t)/17(q). 227 Statement of claim para 6(j)/17(i) and 6(n)/17(m). 228 Para [614]. -- 192 of 267 -- 185 modem in the defence settled by counsel. They further asserted that the plaintiff entered into the Second Deed in reliance upon its own due diligence examination. The making of the further representation [636] The plaintiff pointed to three passages of evidence given by the Darts and Mr Cole respectively in support of the proposition that before the Second Deed there were further representations by Andrew Coventry that the problems being experienced were minor and would shortly be solved. The first passage was in the evidence of Bryan Dart.229 On a careful reading, that passage relates to the period between mid-February 1993 and the First Deed. The second, in Mr Cole’s evidence, related to the meeting of directors on 13 July and was as follows: “Do you recall what, if anything, Andrew said on this topic at the meeting?-- Yes. During the course of that meeting, Andrew said that the problems that they were experiencing with both the hardware and the software were relatively minor and it was just a matter of getting the two heads together, being Russ Morgan and Steve O’Connor from Adelaide, to resolve the problems quickly and efficiently to speed the process up.” [637] That is significantly different from what was pleaded. More importantly, nobody on behalf of the plaintiff claimed to have relied upon that statement in relation to the Second Deed. (To do so would have been difficult: Mr Gillmore sacked Mr O’Connor during July.) It is unnecessary to decide on whether Mr Cole’s evidence was accurate. [638] The passage relied upon in the evidence of Kevin Dart, together with some evidence immediately following that passage, was as follows: “Were you involved in the procedures by which each of the parties came to sign a deed or a copy of the deed?-- ... I was present and part of the decision making process to formulate this document. ... What was your belief at the time in the prospect of the Evtech product becoming a success?-- My belief was that with the right people involved in this commercialisation process that we would make it profitable, there would be a way of finding - finding - there would be a way of finding our way forward. It just meant that we had to be - we had to work harder and put more money into the issue. That was my belief at the time. The product would work, that we would get there somehow. What led you to form the view that the product would work?-- I still believed in the product that - as represented by Andrew Quinn - Andrew Coventry and Tom Quinn, that it was a good product, that it would get there and I just had blind faith at that stage, coupled with the representations of Andrew and Tom, that it was a product that would eventually work and we could get it over the line. It was simply a matter of putting more funding into it, and I shouldn’t say 229 T315 ll 20-60. -- 193 of 267 -- 186 ‘simply’ but it was a matter of putting more funding into it and finding other people who could assist us. ... What had Andrew Coventry and Tom Quinn - Tom Quinn insofar as he was in Andrew’s presence - been saying about the product in the lead-up to this agreement?-- Basically the discussions I had with Andrew - normally they were discussions. I would say to Andrew, ‘Andrew, we have got more bloody problems. How do we fix this issue?’, and there were always - there was always a good reason. There was always - in fact, a plausible reason that Andrew would give me. Andrew could quite often state, ‘It is Russ Morgan. If we can only get Russ to do this.’, ‘If we can only get someone else to do something else.’ It was always another problem other than the actual System itself, whether it be cables, whether it be poor batteries. Even the phones got blamed at some stage as not being good enough to work with the System. There were just numerous reasons as to why the System still worked and numerous reasons why the System wouldn’t work at the moment because of something that just needed to be fixed. HIS HONOUR: You knew it was a dud by this stage, didn’t you?-- No, your Honour. We knew it had problems but we didn’t accept - we didn’t think for one moment it was a dud. If we thought it was a dud - that is, we couldn’t commercialise it and make money out of it - we simply would haven’t put any more funds into it. We would have had to take it on the chin. You told me yesterday that you said to Quinn, ‘This bloody thing doesn’t work. You promised us that it worked. You represented it would work. You mislead us. The thing’s a bloody dud.’?-- Yes. Those were discussions - went on for quite some time. Were you telling Quinn the truth when you said that to him?-- Beg your pardon? Were you telling the truth when you said that to Quinn, as to your own thoughts?-- Yes, yeah. Well, if you thought the thing was a dud, then that means it wouldn’t work, doesn’t it; you thought it wouldn’t work?-- Your Honour, there were many discussions on the subject of the product not working. Yes, I don’t resile from the words that I said yesterday, and it was said on a number of occasions, ‘This bloody thing is a dud’, but we – we’d be convinced with one issue or another that there was an opportunity to make some money out of it and we proceeded on the basis that we believed that it would work, that we would get there commercially and we tried everything and we got a long way down the track. It didn’t work in the end. We lost substantial money on it.” [639] By late July 1993, the modems in Evtech’s possession consisted of any residual mark I version 2 modems and not more than 15 or 20 mark II “prototype” modems. -- 194 of 267 -- 187 These had been manufactured by Mr Morgan for IMS. Some were sent to Fisher & Paykel; some were used for giving demonstrations, particularly to stockbrokers; and some were being field tested by Mr Madon and Mr Barr. The “prototype” modems were built on circuit boards sent from the United States to Mr Morgan on 31 May and were delivered during June or July. Delivery of the mark II production modems began in late July or early August 1993. They were being used with Quicklink software. [640] During June and July, Evtech personnel made numerous complaints to Mr Morgan alleging defects in the modems. Mr Gillmore wrote to IMS: “Over the past weeks we have been demonstrating the modem to many groups. After a great deal of reconfiguration by Louis and, at infrequent times, Russ, we have been able to show the product working well even in marginal network conditions. However, we have found that of the modems that Russ has released to us, virtually all have had faults – some obvious (e.g. the resistor episode) and some intermittent when used after several days at a time. We have constantly had to swap modems around until we have found one that works. When one does work, it really performs well, but we are every vigilant.” Even making allowance for Mr Gillmore’s tendency toward hyperbole, it is clear that a number of modems were causing problems. [641] It is likely that these problems would have been reported to Kevin Dart, who, by July, was becoming concerned about the lack of sales. As time wore on he became increasingly frustrated and agitated, particularly when a demonstration he was supervising in Sydney saw a modem erupt in smoke, to his intense embarrassment. The precise statement attributed by Kevin Dart to Andrew Coventry does not quite match the representation pleaded, but I shall ignore that point for the moment. The former was not put to Andrew Coventry, but this exchange occurred: “I want to suggest your regular theme [in June/July 1993], when you would drop in on a casual basis and the Darts would talk to you, they would mention the problems being experienced with the Evtech product and your constant theme was that the problems were only minor, they would shortly be overcome, this was a great product. You would soon be out there marketing it and selling it?-- I can assure you if I had been told about any problems I would have been on them instantly. I was not told of any problems at all. In fact, I was told the exact opposite. I kept getting told about all these wonderful deals and how wonderful everything was, even down to the extent of being shown the new Office in the Briefcase and the excitement that I had when I saw the thing. I thought, ‘Well, they certainly are doing a good job.’” Nonetheless, Andrew Coventry did give evidence that after the action meeting on 6 July, he spoke to Mr Morgan about a problem in battery circuitry and was told that it was only something minor and had been rectified. [642] It is probable that Kevin Dart spoke to Andrew Coventry about problems that were being experienced. If the latter perceived them as minor problems, it is likely that he would have said so, and unsurprising that he should not now remember this. I -- 195 of 267 -- 188 have concluded that he probably did tell Kevin Dart that the problems being experienced with the System were minor and would be resolved in a short time. Was the further representation misleading or deceptive? [643] Although its pleading referred to “the System” in this context, the plaintiff related the alleged misleading and deceptive quality of the representation to the modem. 230 The vagueness of the evidence relating to the problems which were the subject of the further representation creates an immediate difficulty in determining whether it was misleading or deceptive. How does one determine whether a statement that a problem is only minor is misleading without knowing what the problem was? If the point is incapable of resolution, the plaintiff, upon which the onus of proof rests, must fail on it. As it happens, I think the point can be resolved, though it is to be resolved adversely to the plaintiff. This is because I am satisfied that any problems which were concerning the plaintiff were resolved by 1 October; and if they were able to be resolved that quickly, then it was not unreasonable to call them “minor”. The Fujitsu order [644] On 1 October, barely seven weeks after the Second Deed, Evtech placed an order in writing with Fujitsu Australia Ltd for the manufacture of 2000 modems. By any reckoning this was a substantial order: the manufacturing was then estimated to cost Evtech about $250 per modem. It is unlikely that this would have been done had there been any major modem problems which needed fixing. [645] Bryan Dart was unable to remember this order and could give no useful evidence about it. Kevin Dart was not referred to the order, but did remember Evtech going to Fujitsu. He claimed that the modems delivered by Mr Morgan were defective, and that this was the reason for placing the order: “We got four from the best of my memory, two of which worked and two didn’t. It was - those that worked didn’t work to full capacity and weren’t completely reliable, so we went out to source a manufacturer. Fujitsu indicated that they believed that they could fill our requirements ...” By suggesting that Evtech placed the order notwithstanding the existence of the problems, he implied that those running Evtech attributed the problems to manufacturing defects. No other witness suggested that the order was placed in the teeth of problems. His reference to receipt of only four modems suggests that he was confusing the position as at 1 October with that which existed at some earlier time. [646] Mr Cole at first attempted to suggest that the order was merely a pro forma order, intended to be modified subsequently upon finalisation of the design of the printed circuit board by Mr Morgan. The implication of this assertion was that the intention was for Fujitsu to manufacture not the mark II modem, but the later model referred to below.231 Mr Cole explained the placing of the order (with which he was personally involved) on the basis that there was an impending worldwide shortage of chipsets due to the destruction of manufacturing facilities in Japan by the Kobe earthquake, and Fujitsu required a written order to secure the necessary parts. That 230 Mr Gillmore had caused Evtech to use Quicklink in place of Electrocomm before the completion of the First Deed and to abandon Electrocomm completely toward the end of July: see para [258]. 231 Paras [681]-[695]. -- 196 of 267 -- 189 could not have been so: the Kobe earthquake struck in January 1995. It was also inconsistent with a detailed costing of the production by Fujitsu of the mark II modem prepared by Evtech on 3 November 1993. After Mr Cole was shown that document, the following exchange took place: “Would it be correct to presume, then, that at that time, having placed an order and being involved in costing its componentry and profitability and so on, would it be correct to presume that at 3 November 1993 Evtech was confident that it had a solid, useful, saleable product?-- Yes.” Later he said that it was his understanding that the modem had started working properly in September or October. [647] That view was confirmed by the evidence of Mr Gillmore. He said he authorised Mr Barr to write the letter enclosing the order. His evidence was: “MR SPAIN: You knew that the modem worked reliably at that stage, didn’t you?-- We assumed it did, yes, sir, otherwise we wouldn’t have placed that order. That wasn’t my question. I said you knew it did, not assumed?-- No, sir, my answer was I - I believe was correct. My assumption was that we had a design which was able to be manufactured and would work successfully.” He based his assumption on Evtech’s testing of the modems delivered by IMS. He said the Darts authorised the placing of the order. [648] Mr Barr denied that a definite order had ever been placed, and claimed that the modem continued to give problems. He said Mr Gillmore had never authorised him to place an order. Unfortunately Mr Barr was never shown the document containing his signature. I prefer the evidence of Mr Gillmore, though I do accept that Mr Barr believed that the modem continued to have problems. He listed what he perceived those problems to be on 26 October 1993 and 25 February 1994.232 These lists formed the foundation for Evtech’s refusal to accept or pay for any of the modems manufactured by IMS.233 His concerns evidently did not agitate Mr Cole, Mr Gillmore or, I infer, Bryan Dart sufficiently to cause them to withhold the order of 1 October, whatever their attitude to paying IMS. [649] Lest it be thought that I have paid insufficient attention to the two lists, I should deal with what was in them. Seven deficiencies were asserted in the first list. Three of these234 were original design characteristics of the modem. The wisdom of the decision to omit them was dubious but arguably justifiable in the context of the office-in-a-briefcase concept; in any event, they were unlikely to be changed until a new specification was developed. They were well-known to those at Evtech and were unlikely to have been the subject of the further representation. One deficiency235 related only to use with the NEC P3 phone. It was a defect in the modem-phone interface designed by Mr Anderson. Because it could have been overcome by Mr Morgan, Mr Gillmore seems to have attempted to make it his problem. Mr Morgan took the attitude that it could be fixed by the user adjusting 232 Although Mr Madon thought that he had prepared the former list. 233 Despite this refusal, Evtech did use them to carry out testing and demonstrations and charged Fisher & Paykel for the six sold to it. 234 No indication of battery level, no speaker and no on/off switch. 235 Inadequate AGC. -- 197 of 267 -- 190 the volume control on the telephone and was reluctant to do anything about it, at least until a new model was specified. Again it was unlikely to have been the subject of the further representation. Two other items236 were related: fixing one would fix the other. Mr Morgan claimed he had taken steps to reduce power consumption by the time the list was written. Even so, there is an element of personal judgment involved in assessing what is excessive; at that time, the complaint was common throughout the industry. This could have been a subject of the further representation, but Kevin Dart never mentioned it. [650] The final item on the list237 depended upon a controversial allegation that the supplied battery took three to four days to charge. Mr Barr said: “The issues with that were simply a matter of working out the mathematics for charge rate and the size of the battery and it seemed to - at that point in time excessive - would take excessive hours to charge a battery so you could get a couple of hours use the next day. Those were the figures we roughly put together.” The allegation is inconsistent with Mr Barr’s own memorandum of 23 November to Mr Gillmore, where he wrote that the process took approximately 30 hours. Mr Morgan denied it (presumably on the basis that Mr Barr had his figures wrong) and neither side made any serious attempt to establish the true position. There is no evidence that the point was raised prior to 26 October 1993 and Mr Gillmore had not thought it an issue when he used the product in April 1993. It is unlikely to have been the subject of the further representation. [651] The memorandum of 25 February contained a generalised complaint and three enumerated points. The generalised complaint was: “Adding to the frustration is the continuing failure of the Version one model to perform as per specification sheet provided and repeated hardware/firmware failures. ie. MNP10, Bell Protocol, Encryption capability not switched on. V1 would not function if used via a PABX., etc, etc.” [652] There is no evidence of any problem with MNP10 between 7 June and 13 August, when the Second Deed was signed. It was unlikely to have been the subject of the further representation. As to the absence of the Bell protocols, it is doubtful whether this even constituted a deficiency. Those protocols could not lawfully be used in a modem connected to the PSTN in Australia and were for all normal purposes useless in this country. However they came as a standard part of the Rockwell chipset and were not usually disabled by modem manufacturers. Mr Morgan had removed them from the firmware in order to make room for some of his changes but had omitted to amend the manual to reflect this. In late 1993, Evtech was negotiating with a company called Hutchinson which, for some unexplained reason, required the Bell protocols. That was the reason for Mr Barr’s reference to them. The reference to “encryption capability not switched on” was unexplained. The reference to use via a PABX related to a problem which arose at Fisher & Paykel. Mr Trevatt and Mr Morgan said in evidence that the problem was fixed. In any event it arose after the Second Deed and could not have been the subject of the further representation. 236 Excessive power consumption and inadequate AC adapter 237 Lack of fast charging. -- 198 of 267 -- 191 [653] The first of the enumerated points related to the Bell protocols, to which I have already referred. The second was a complaint about compatibility. It is too vague to understand. The third referred to intermittent hangs on the Evtech bulletin board. That bulletin board was not established until late 1993 and could not have been the subject of the further representation. Distributor and representatives [654] The Fujitsu order was not the only step which Evtech took at this time. On 8 October negotiations for the appointment of a distributor culminated in the execution of a distribution agreement for Queensland, South Australia and Northern Territory with QSoft Australia Pty Ltd. A fortnight later Mr Gillmore recommended to Bryan Dart that regional sales managers be appointed in Melbourne and New South Wales. That recommendation was accepted and the positions were created and, presumably, advertised. In November Mr Drew Cossar and Mr Robin Reeman were offered the positions, which they accepted. It is unlikely that the Darts would have authorised these appointments unless the modem was seen as free from problems which would prevent its being marketed. Those were the only sort of problems which concerned the Darts. [655] On balance, the evidence is insufficient to satisfy me that the further representation pleaded against Andrew Coventry was misleading or deceptive. Reliance [656] The plaintiff claims that it entered into the Second Deed in reliance upon the further representation and also upon the pre-contractual representations. It submitted that the effect of the latter was not spent. Mr O’Donnell QC frankly recognised some of the problems in the way of this submission: “The Darts had a good deal more first hand knowledge of the operation of the System than they had prior to entering into the contract. They had experienced first hand problems with the System, at times causing them considerable frustration. Evtech had made a decision to use commercial software for the time being, whilst work continued on the Electrocomm software in Adelaide. By 26 July O’Connor’s employment had been terminated. And A. Coventry and Quinn were involving themselves less and less in the business as time went on.” [657] Another problem in relation to some of the pre-contractual representations is that the majority of them related specifically to Electrocomm. As the Darts knew, Electrocomm was no longer being used. Kevin Dart said (in effect) that he had not realised that any part of the System’s claimed “unique” capacity to operate on the cellular network depended upon Electrocomm. If that is true it suggests he paid very little attention to what was written in the blue books, and particularly to the specific passages upon which he claimed to have relied. Mr O’Donnell submitted that his alleged confusion “highlights the danger in making representations on technical matters to people who are uninformed.” However, the relevant pre- contractual representations were not particularly technical. The argument, and the evidence in support of it, highlight an unattractive inconsistency in Kevin Dart’s evidence. -- 199 of 267 -- 192 [658] There are several factors which by August 1993 mitigate against reliance by the plaintiff on either the further representation or the pre-contractual representations. By late July, relations between the Coventrys and the Darts were deteriorating. Kevin Dart saw Andrew Coventry as an obstacle to his plans for Evtech. He disliked him personally. He wanted complete control of Evtech and by 28 July, when the loan agreement for $70,000 was tabled, the plaintiff had begun to implement its plans to achieve such control. Evtech plainly needed more capital; the Coventrys and Mr Quinn could not or would not provide it, nor any part of it; and, in these circumstances, the plaintiff was unwilling to allow them to participate in any benefits which sales of the modem might produce. As Mr Cole put it: “I believed that the product was a good product, that we had, for want of a different word, just some dickheads running it, that we needed to get rid of them and focus on the problems, find out exactly what the problem is and fix it, get it done and move forward. I couldn’t understand why it was so bloody difficult to fix a problem, take the next step forward and get on with it.” I have found that the Second Deed was an outcome of the type which the Darts had envisaged from an early stage. Their original desire for complete control of Evtech arose at a time when the effect of the contractual representations was not spent. By August, only the desire remained. [659] Mr Gillmore was firmly in the seat at Evtech, and was providing advice to the Darts. He believed the modem’s problems could be overcome, and, I infer, said as much to the Darts. The Darts were aware of the problems and Kevin Dart distrusted Andrew Coventry. If he happened to have said something which they still believed, it was coincidence. By early July, said Kevin Dart: “The situation, your Honour, had reached a point and a climax in our investment that I felt that if we – if we were in total control of the company, we would employ the people to do the work that was needed to commercialise this opportunity. I was sick and tired of dealing with people that were buying – not telling us as it was and finding reasons and excuses as to why we couldn’t go forward. Who are you talking about when you say that?-- I’m talking about Andrew Coventry, I’m talking about Tom Quinn, I’m talking about Michael Coventry, I’m talking about Russ Morgan and the crew down at IMS. I couldn’t get a straight and honest word out of any of them at this point. … It was probably distrust, dislike for the parties, because of the lying and deception that was being perpetrated on us.” If the Darts happened to act in reliance upon any proposition which had been articulated by Andrew Coventry, it was a coincidence. It was not because it came from him. -- 200 of 267 -- 193 The Second Deed as mitigation [660] The plaintiff raised another point in relation to the Second Deed: “16. Further or alternatively, the plaintiff entered into the second deed in an effort to avoid or minimise the loss it was facing arising out of its involvement in the first deed, in that: (a) the plaintiff had made a significant investment in the System through the performance of its obligations under the first deed; (b) the System was still not a marketable commodity; (c) the plaintiff held the view that the continued involvement of the defendants was an obstacle to completing the development of the System; (d) the plaintiff held the view that the best prospects of achieving a product that could be commercially marketed was if the plaintiff acquired the remaining shares the defendants held in Evtech Pty Ltd, thereby eliminating the defendants’ involvement in the technology.” [661] Unfortunately, it did not spell out the consequences of the matters there alleged, nor did it address the point in its final submissions. It would seem, however, that the paragraph represented an attempt to invoke the rule expressed elsewhere in those submissions: “If a plaintiff undertakes a course of action in an attempt to lessen the damage he would otherwise suffer by reason of the defendants’ conduct, and that course of action in fact leads to further loss to the plaintiff, the plaintiff is entitled to cover that additional loss, provided that he acted reasonably: Simonius Vischer & Co v Holt & Thompson (1979) 2 NSWLR 322.” It may be accepted that the proposition is supported by the case cited. [662] Bryan Dart gave evidence about why the plaintiff entered into the Second Deed: “Why was Charter Pacific wanting to buy the other shareholders out?-- They were having no input on a day-to-day basis. They were having no input financially, and we had had a very long drawn out, frustrating period since we had been involved with them, and I can’t say that everyone was totally relaxed with each other’s company. Peter Gillmore, he was looking after the arrangement following on with the business, and there was no input from Andrew or Tom. What did you ----- HIS HONOUR: I can’t quite follow what you mean by all of that. I can understand that you would be less than delighted that they are squabbling with each other?-- Yes. But I don’t quite see how that affects their shareholding?-- We wanted them just totally out of the company, Your Honour. Andrew -- 201 of 267 -- 194 approached us. He wanted out. He had had enough and we said, “Well, if you are going, we want everyone out.” We didn’t need to have them on as Evtech’s - especially if there was more money to be advanced. It was easier for us to advance further funding to keep this project going without having any other directors to deal with. That’s a bit different. You wanted them out because you were envisaging advancing further moneys and to do that you wanted total control?-- That ultimately, at the end of the day, we were advancing further moneys, yes. MR O’DONNELL: You have already explained to us that Charter Pacific wasn’t prepared to put up, to advance further funds to Evtech unless the other shareholders were also prepared to do likewise?-- That’s correct.” [663] Kevin Dart said: “Could you explain why was Charter, from your perspective, interested in acquiring the shares held by the Coventrys and Quinn?-- It was a matter of if Charter Pacific was going to fund the future of the company and the commercialisation, we weren’t too interested in seeing anyone else benefit from it. If we were funding it, then – no-one else was prepared to put money in. We were in a pretty embarrassing situation at this time. We had spent a little under half a million dollars, or thereabouts. We had to make it a success. We decided to push ahead but we’d only push ahead for control so that the benefits - that is, the profits - that flowed to the company would come back to our shareholders. You said before you were in an embarrassing situation. Could you explain what you meant by that?—The embarrassing situation that I referred to was Charter had invested the moneys in this company. We had promoted Evtech was a great opportunity, the company. We had exposed it to the brokers and in some areas to the media. We were looking down the barrel of failure, so that’s the embarrassment I was referring to.” [664] The plaintiff had a number of reasons for making the Second Deed. They were a wish not to share future profits with the Coventrys, particularly if the latter were not contributing further capital; personal animosity towards the Coventrys, particularly Andrew Coventry; and a long held desire for control of Evtech. I am not satisfied that the reasons included an attempt to avoid or minimise loss arising out of the First Deed. It is true that the plaintiff was anxious to obtain a return on its investment as soon as possible. That probably reflected a desire to sustain or increase the price of its shares, and there is no reason to criticise that desire. The Darts believed that whatever problems existed were being overcome. They did not wish to share future profits with the Coventrys. The purchase of the outstanding shares was intended to advance that objective. It was not intended to mitigate loss. In early August 1993 the Darts did not expect the venture would produce a loss. Kevin Dart’s reference to “looking down the barrel of failure” either related to the absence of an increase in the share price or (more probably) was the product of hindsight. -- 202 of 267 -- 195 [665] Moreover purchasing the outstanding shares was not a step reasonably calculated to mitigate any loss. By early August Andrew Coventry’s presence, though annoying the Darts, was not inhibiting the development of the System, nor was the trustees’ presence on the share register doing so. Michael Coventry seems to have been a completely passive participant at that time and Mr Quinn had been assisting Bryan Dart one or two days a week. Entering into the Second Deed was not an act reasonably done to mitigate any loss suffered by the plaintiff from its involvement in the First Deed. Miscellaneous [666] It will be necessary in due course, to deal with the consequences of the plaintiff’s reliance upon the misrepresentations and with the contractual warranties and the indemnity in the First Deed. It is convenient first to complete the story of Evtech. 12. AUGUST 1993 TO MARCH 1994 Performance of obligations under the deeds [667] Clause 3 of the First Deed provided for the transfer by the trustees of a total of 1,230 A-class shares in Evtech to the plaintiff. On completion duly executed transfers were delivered and these were in due course registered. The plaintiff thereby became the owner of half of the issued A-class shares in Evtech. The consideration was supposed to have been the issue to each of the trustees of 400,000 options in the plaintiff. The trustees executed deeds of escrow by which they agreed to hold the options on terms therein set out, one of which prohibited any dealings in the options for 12 months without the consent of the Australian Stock Exchange. Option certificates were created by the plaintiff, but they were not then issued. The transferors made no objection to this, apparently in the belief that the options were held by an escrow holder. In fact they were retained by Mr Cole, he said by oversight. They were eventually delivered to the trustees in late May 1994, but on 1 June 1994 the plaintiff commenced the present proceedings and obtained interlocutory injunctions restraining dealing in the options. These restraints remained in force until after the expiry of the options in 1997. Part of the trustee defendants’ counterclaim seeks to enforce the plaintiff’s undertakings as to damages given upon obtaining the injunctions. [668] Clause 5.3 of the deed provided (among other things) for the amendment of the shareholders’ agreement and the adherence of the plaintiff to the amended agreement. Appropriate deeds were executed by the parties to give effect to this provision. [669] Provision was made in cl 8 for the plaintiff “to provide financial accommodation” to Evtech. The clause is set out above.238 Interest was payable at a rate calculated by reference to the National Australia Bank benchmark rate. How the plaintiff complied with that clause has already been described.239 238 Para [279]. 239 Para [280]. -- 203 of 267 -- 196 [670] By cl 3 of the Second Deed, the third defendants sold 410 A-class shares, and the fourth defendant sold his remaining 400 A-class shares to the plaintiff for $100 per share. $5,800 was payable immediately and the balance on 29 July 1994. The vendors were required to deliver executed transfers and letters of resignation of the Coventrys as directors forthwith. This they did. They were paid the $5,800, but the balance remains unpaid. [671] The plaintiff immediately began negotiations with the holders of the B and C class shares and eventually acquired them in exchange for options in the plaintiff. The Chinese project [672] I have already described (briefly) what became known as the “Chinese project”.240 It became the primary focus of Evtech’s activities during the third quarter of 1993. The impetus for this project came through Kevin Dart and his business acquaintance Leo Respinger. By 6 August the finalisation of arrangements with Mr Anderson for the development of an interface to the Motorola mobile phone (the predominant brand in China) was a priority task for Bryan Dart and Mr Gillmore. The former was provided with equipment taken from Mr Morgan, but satisfactory arrangements were not made. On 16 August Mr Morgan was told that Mr Anderson was unable to complete the firmware development and he agreed to undertake the task. He also developed a cable assembly for the phone. By the beginning of September the Darts had decided that the plaintiff and Evtech should send a team to China to demonstrate what Mr Gillmore then called “our system”. This involved getting the modem to work on a new type of cellular network as well as on VHF radio, using the Motorola phone with both an Apple and an MS-DOS computer. By the end of that month Mr Respinger was in China, apparently as some sort of advance party. Bryan Dart and Mr Gillmore visited Motorola Australia Pty Ltd in Sydney, I infer to obtain technical information regarding that company’s mobile phone. By early October it was realised that Mr Morgan’s presence would be necessary, and in mid- October he accompanied the Darts to China. [673] It is unnecessary to describe the trip in detail. It culminated in heads of agreement being signed between a new subsidiary of the plaintiff (Charter Pacific International Pty Ltd) and a Chinese company called Shenzhen International United Investment Ltd. The heads of agreement provided for two joint ventures. The first (and more important) was for the establishment by the new subsidiary of a radio telephone network with encryption capabilities in China. The second was for the Chinese company to distribute the IMS modem in China. Despite at least one further trip to China by the Darts in early 1994, nothing came of the heads of agreement (although the plaintiff later did explore the possibility of obtaining export market development grants from the Commonwealth government); but they provided the opportunity for the plaintiff to issue a notification to the stock exchange on 19 October and, three days later, a bullish press release which doubtless helped to sustain the significant rise in the price of the plaintiff’s shares in the three weeks preceding the notification. 240 Para [315]. -- 204 of 267 -- 197 The IMS modem [674] I have already described Mr Madon’s activities with Fisher & Paykel.241 Evtech was unable to fulfil the latter’s order of 5 May 1993 for an initial supply of six modems 242 until late July or August 1993, when it began to receive modems from IMS through Mr Morgan. It then delivered what I infer were six of the hand soldered products, but without having obtained a permit from the Australian regulatory authority, Austel.243 That permit was issued on 16 September 1993. [675] As it turned out, those six were the only modems which Evtech ever sold. They were placed in brief cases designed to carry both the modems and portable computers and in about October or November, Mr Trevatt took them to New South Wales where they were issued to field representatives. Mr Trevatt said that they were used mainly (at least 90 percent of use) to download data from the Australian head office. Normally this would be done between 7.00am and 7.30am in the morning and the PSTN would be used if available. If it was not available an NEC P3 cellular phone would be used. The reaction of the field representatives was overwhelmingly favourable. Subsequently he took a System to New Zealand where he demonstrated it successfully at the Fisher & Paykel head office. [676] Mr Trevatt estimated that there was a call failure rate of about 10 to 20 percent, which he considered quite acceptable. He gave evidence of two types of failure. First, he said that the modem had difficulties when used over a PABX switch board. This was a problem for all modems at that time. Second, on a number of occasions, probably between August and about October 1993, modems began to smoke. This caused some disruption to Mr Trevatt’s trials and he became annoyed about the resulting waste of his time. Fisher & Paykel engaged an unidentified consultant from the University of Queensland to locate the cause of the problem. Mr O’Donnell QC successfully objected to the receipt of hearsay evidence of his findings. In October Mr Gillmore (whom Mr Trevatt disliked) sent Fisher & Paykel an invoice for $7,500 for “consultancy requirements” - presumably a reference to Mr Madon’s work. Mr Trevatt wrote on it, “less five days of wasting my time because of crappy modems”. Although he had claimed in his written statement that the smoking modems were returned to Evtech and quickly repaired, in oral evidence he said that the people at Charter Pacific would not believe that there was a problem and were not helping him. This seems to have been a reference to Mr Gillmore and Mr Barr. Matters were not helped when a copy of the copy invoice bearing Mr Trevatt’s comment was sent to Mr Gillmore in early 1994. Mr Gillmore wrote a conciliatory letter and the problem was not referred to again. Nonetheless, the expected order for a substantial number of modems did not eventuate. [677] Throughout the second half of 1993, Mr Gillmore was active in attempting to market the modem. The original concept of the “office-in-a-briefcase” was given little emphasis. As Mr Gillmore put it: “ ... -- Your question is that under my management did we pursue potential sales for the modem on its own? Yes?-- And the Evtech software? 241 Para [404]-0 242 Para [261]. 243 It had not submitted the modem for testing for this purpose until 30 July: see para [263]. -- 205 of 267 -- 198 Yes?-- The answer was, yes, of course, I pursued sales of the modem. I didn’t pursue sales of the Evtech software. I also did not pursue the Office in a Briefcase. I made a decision early on and the number of the documents there show that the focus was on the modem rather than putting a configuration together similar to that that I had in New Zealand.” [678] This represented a significant repositioning of Evtech, although it was not until late January 1994 that Mr Gillmore was recorded as turning his mind to the question of how this would affect Evtech’s competitive advantage (such as it was).244 The repositioning had implications for how the company was conducted. A stand-alone modem had a much more acute need for indicator lights and an audio speaker than one buried beneath a computer in a briefcase. More importantly the market for the office-in-a-briefcase was essentially a niche market. The modem market was relatively a mass market which was very competitive. It was important to have the latest technology. That implied a degree of research and development, an area in which the Darts were reluctant to become involved. It also implied the need for a new model of the modem as early as possible. Competitive modems were, by October 1993, providing speeds up to 14,400 bps. As Mr Gillmore put it, “The market had moved forward and the specifications of the modem were no longer the specifications that the market required.” By October 1993 the window of opportunity identified by the Coventrys in the first half of 1992 had closed. [679] These developments impacted on Evtech’s strategic planning, its association with IMS and its plans for manufacture of the modem. Each of these themes can be seen in a memorandum written by Mr Gillmore for a meeting with the Darts and Messrs Burgess, Fitzpatrick and Rovazzini from IMS on 2 November 1993. At that time, Evtech had received only 37 of the 140 modems ordered from IMS and deliveries from Fujitsu were not expected until the following year. Mr Gillmore summarised the situation in these terms: “1.1 The Situation 1.1.1 NetComm have introduced a pocket 14.4bps modem that can be attached to a redesigned InterCel interface. 1.1.2 They have also announced that they will soon introduce a PCMCIA version of this complete with cellular interface. 1.1.3 Already Evtech’s modem is considered too slow and out of date by large potential customers and distributors. 1.1.4 Only 37 of the promised 140 modems have been received by Evtech from IMS. 1.1.5 Various problems still occur with the modem e.g. power management, dialling through a PABX etc. These have been discussed with Morgan but still are to be resolved. 1.1.6 The source codes for the various cables such as Motorola, Uniden, Nokia etc. have yet to be completed. 244 He then considered the question in relation to the PCMCIA card: “One key issue we are addressing is that of competitive advantage. If we offer a PCMCIA modem what advantages can we have over the competition?” -- 206 of 267 -- 199 1.1.7 Development of faster smaller and PCMCIA versions of the modem are well behind schedule or have yet to begin. 1.1.8 We still have a concern about Morgan’s ability to meet requirements both in terms of time, modem expertise and quality.” [680] The document asserted fault for past deficiencies on the part of, and attempted to impose responsibility for future development upon, IMS. Its terms suggest that the Netcomm modem had caught Mr Gillmore by surprise and had made him realise that Evtech was about to manufacture substantial quantities of an outdated modem at a time when the competition already had a much more attractive product on the market. By contrast, Evtech had done nothing to develop a new model. With breathtaking audacity the memorandum asserted that IMS had an obligation to undertake further development of the modem, laid down an impossible timetable for that process and recommended a penalty of $10,000 per week if any time requirements were not met. [681] That memorandum and the subsequent meeting produced a vigorous but restrained response from IMS pointing out various deficiencies in Evtech’s position. Mr Gillmore did not pursue the debate. He wrote a soothing letter and ended the correspondence. However on 5 November 1993 he put onto paper what he saw as the specifications for a new mobile modem. That document is in the nature of a wish list. It sets out Mr Gillmore’s vision for what he called version 2 of the Evtech pocket mobile modem. Its content was plainly influenced heavily by the Netcomm Pocket Rocket modem. From that point forward Mr Gillmore’s interest was in the production of a new model. [682] On 11 November Evtech flew Messrs Gillmore, Barr and Morgan to Melbourne to meet representatives of Fujitsu. They discussed the proposed new model, on the basis that it would replace the existing order.245 Two days later Mr Gillmore sent Bryan Dart a memorandum on the subject “Notes for coming few days”: “1. Meeting with IMS Monday 08:00am. 1.1 There needs to be agreement as to who does what re the Modem Project. My recommendations are these. - Russ manages the development, that is he does not do hands on R&D - Fujitsu undertake all R&D for Version 2.0 [current case and design but with 14.4 chipset]; Version 3.0 [new design with 14.4 chipset] and Version 4.0 [PCMCIA]. They also undertake the Power Management R&D. - Andrew Hannam begins the ‘long’ task of developing firmware / software for the encryption options. That is he does not do anything else. - Bob Seignior works on the problems that we have with the current modem [see below] and after completion of this works with Andrew on the hardware encryption requirements [for all versions]. 1.2 The matter about the four problems that we have with the modem need resolving immediately. Russ should manage this but the work should be done by Bob. 245 Para [644]. -- 207 of 267 -- 200 1.4 Re Development costs: Fujutisu will have this to us later this week. This is acceptable as we have changed design etc.” [683] The changed design referred to in the last paragraph was, I infer, what Mr Gillmore termed the version 2.0 modem (the new 14.4 Kbps model). Mr Gillmore here proposed to Bryan Dart that Fujitsu undertake all research and development for this model. What Fujitsu would have charged to do this is not in evidence. For whatever reason the proposal was not implemented. Instead it was decided that Mr Morgan would design the new modem and Fujitsu would build two prototypes. Mr Gillmore wanted the new model available in February 1994 and proposed a very tight timetable aimed at achieving this. Under pressure Mr Morgan agreed to Mr Gillmore’s request that he “finalise more interfaces” and agreed to, or did not dissent from, the timetable, which he described in his evidence as “an impossible time frame which, in my opinion, showed his complete ignorance of research and development and commercialisation procedures”.246 [684] The timetable was undoubtedly unrealistic, but that comment said more about Mr Morgan than it did about Mr Gillmore. It was largely gratuitous and was one of many examples of Mr Morgan’s partisanship. Mr Morgan did not explain why he failed to express his opinion of the timetable when it was proposed, nor why he did not actively dissent from it. One would expect a proposal of this nature, emanating from a person in marketing, not to allow sufficient time. Mr Morgan described his feelings: “I felt that an impossible load was being imposed on me, by someone who was not my employer and was not paying me, and had completely failed to sell any of the Mark II modems, which were a perfectly good product Evtech already had.” [685] The production of the new model involved a number of sequential steps: circuit design by Mr Morgan; prototype manufacture by Fujitsu; revision and amendment of Rockwell firmware code by Mr Morgan; loading of firmware into the prototypes by Mr Morgan; alpha testing and development of production model standards, presumably by both Fujitsu and Mr Morgan; Austel testing by an independent laboratory and an application to Austel for a Permit to Connect; and an initial production run by Fujitsu. Mr Morgan completed the circuit design some time in November and sent it to Fujitsu either late that month or in early December. A number of factors then delayed production of the prototypes. Fujitsu closed down for Christmas, and Mr Gillmore subsequently claimed that Mr Morgan was late in getting his designs to them. In addition the support chips for the Rockwell chipset specified by Mr Morgan were different from those used in the earlier version of the modem. This meant that some of the chips ordered by Fujitsu in response to the order of 1 October could not be used. New chips had to be acquired. That became a source of aggravation and blame-shifting amongst those involved. A third factor was that for aesthetic reasons Mr Gillmore and Mr Barr wished the modem to have a new plastic case. That had to be designed and customised tooling built for it. Finally, an official order for the two prototypes, together with the new case, was not sent to Fujitsu by Evtech until 21 December.247 246 Mr Barr somehow understood that the new model would be available on 10 January 1994! 247 The order included 20 pre-production units in addition to the two prototypes, but apparently it was orally agreed that the former were not to be manufactured until the prototypes were approved. -- 208 of 267 -- 201 [686] Mr Morgan received the two prototypes from Fujitsu on 24 January 1994. He then decided that some design changes were necessary. He told Fujitsu of these on 27 January and by 10 February he had received the altered prototypes from Fujitsu. He worked on the firmware from then until the end of that month. In the meantime, Mr Gillmore was trying to pacify Evtech’s distributor and representatives and through them, its potential customers. IMS had stopped making the existing model without completing the order for 140, and Evtech personnel continued to have difficulties with the modems on hand. 248 In any event customers wanted a faster modem. The new model was delayed and no time could be given for its availability. Worst of all, the “sea change” brought about by the announcement in America of the PCMCIA card was evoking great interest among potential customers. In a memorandum to Messrs Cossar, Reeman and Madon on 28 January, Mr Gillmore said that development of a PCMCIA version was under way,249 but urged them to focus on prospective sales of the forthcoming model. [687] Toward the end of January a meeting took place between Bryan Dart, Mr Bruce Campbell and Mr Gillmore to discuss whether the current arrangements between Evtech and IMS could be terminated. Nothing was said of this at the meeting between IMS and Evtech on 31 January. However on 18 February Mr Gillmore wrote to the directors of IMS seeking a meeting in Mr Morgan’s absence on two issues: first, the Bell standards problem with the existing modem250 and second: “ 2. Russ has yet to overcome the problem with the Version 2.0 modem which as you may remember Kevin he promised he would have fixed by Wednesday this week. We are now at a critical stage with production of the modem with the need to make commitments with suppliers. Already the delay by Russ has meant lost sales and has pushed production out to over a month after schedule. We are also finding it difficult – once again – communicating with Russ over these matters. He is unable to handle stress …” [688] Mr Gillmore said that meeting took place, but gave no evidence of what transpired at it. However on 21 February he wrote what even Mr O’Donnell QC described as a “strident” letter to the directors of IMS asserting that Evtech required “a comprehensive quality analysis” in respect of each unit before it accepted any further deliveries of the existing model. Three pages of detail regarding the content of that proposed analysis followed. For good measure he asserted that Evtech required a complete user manual for the new model by Friday 25 February. These demands were clearly impracticable. On 25 February Kevin Dart wrote to the directors of IMS and Glenorn Holdings Pty Ltd (Mr Morgan’s company): “I refer to discussions held yesterday and today between Bryan Dart and Kevin Fitzpatrick, in which the following matters were agreed upon:- 1. Evtech Pty Ltd (as Licensee) and Integrated Memory Systems Pty Ltd and Glenord Holdings Pty Ltd (as 248 It is worth noting that when they took the time to iron out the “obvious bugs” from the software which they were using in April 1994 (presumably Quicklink), the System worked well, even after rigorous testing: see memorandum from Mr Barr to Mr Gillmore dated 8 April 1994. 249 This was false. Development had not commenced. 250 Para [652]. -- 209 of 267 -- 202 Licensor) would, as at (say) midday today, dissolve the Agreement of 13 April 1993. 2. Neither the Licensor nor the Licensee would make any claims against the other, howsoever arising, about any party’s performance under that agreement. 3. Evtech will accept, without being obliged to make any payment for the, 140 modems of version 1, when they are delivered to Evtech and when Evtech is then satisfied as to their working condition. 4. The role of our respective companies in any future development of the subject matter of the agreement is a matter for negotiation at that time. Would you please sign and return to me the duplicate of this letter signifying acceptance of the above.” [689] There is no evidence that anyone complied with the last paragraph of the letter, but it seems that thereafter the Darts regarded the licence agreement as at an end. On the following Monday Mr Gillmore wrote to the same directors urging that termination of the agreement be kept secret from all but senior staff, in view of the expectation by “the market, Evtech’s distributors and Evtech’s sales personnel” that the new model of the modem would be released in the near future. Presumably, on this occasion the stock exchange was not informed of the development. [690] The immediate consequence of the termination of the licence agreement was the decision of Mr Morgan to move out of the plaintiff’s offices and back to his premises at Bond University. This provoked an indignant memorandum on 3 March from Mr Gillmore to the directors of IMS: “Gentlemen, Surprise, Surprise!! We do not appear to have got much further with the ‘break through’ on Version 2.0. We note today that Russ is packing ready to move out tomorrow and the weekend despite our offer for him to stay to achieve ‘the breakthrough’. Once again it seems that he has his priorities misplaced. Can one of you call either Bryan or myself as a matter of some urgency to discuss this situation as we are all still in need of a workable Version 2.0.” [691] Mr Morgan responded that he had finished his work. That produced a further fax from Mr Gillmore to Mr Burgess of IMS. In it Mr Gillmore complained that the proposed modem would have speeds of less than 14.4 Kbps over the cellular network and fretted that Mr Morgan had not sent the completed hardware and software files to Fujitsu because his computers were not set up due to the move. He also demanded that Mr Morgan write and provide to Evtech full specifications of -- 210 of 267 -- 203 the new version and one of the two prototypes for testing. After that testing Evtech would advise Fujitsu to manufacture the first 20 units. [692] For the next week correspondence passed between Mr Gillmore and Mr Morgan regarding what was to be done. Mr Morgan sent the necessary files to Fujitsu and expressed his willingness to produce the required specification. However he pointed out that if Evtech took one of the two prototypes, none would be available for submission for approval by Austel. This highlighted the fact that if Evtech wished to carry out its own testing the application for Austel approval would be delayed. (No changes to an approved product were possible without further approval.)251 This was not the only potential delay. Mr Barr had highlighted a number of others in his memorandum of 25 February to Mr Gillmore. It is unnecessary to describe them, but they related to third party manufacturers. [693] Following the correspondence between Mr Morgan and Mr Gillmore, the latter met Mr Burgess.252 Thereafter, on 22 March, IMS wrote to Mr Gillmore, “At this point in time there appears to be no incentive for either of us to continue to spend money without any likelihood of any return.” It summarised the position as IMS saw it in relation to each model of the modem and enclosed a quotation for $3,850 from Austest laboratories for the testing required for a Permit to Connect. Mr Gillmore did not respond. On 8 April Mr Barr advised him that further delays were being experienced in obtaining the chips necessary for production models. He also advised that Mr Reeman “seems to have a new outlook since learning of our direction into the PCMCIA arena”. [694] IMS received no response to its letter of 22 March until 21 April. Then Bryan Dart wrote as follows: “I refer to your facsimiles dated 18 April and 22 March 1994, addressed to Peter Gillmore. In respect of Version I, I direct you to clause 3 of our letter to you of 25 February 1994 disolving [sic] the Licensing Agreement. Under clause 3, our company is under no obligation to pay any monies for the acquisition for up to 140 modems of Version I. Indeed, your company is obliged to deliver to our company a further 29 modems to bring the total number up to 140. In respect to Version II, I wish to reiterate what was said to you in late February, that is, we did not wish to continue with the Imprimis C.A.E. development of Version II and for Imprimis CAE to vacate our company’s premises. However, we stated that if I.M.S. was able to offer any 14.4 modem acceptable solely to our company, then our company would consider manufacturing and marketing this. This has not occurred to date and as the PCMCIA versions are already in the marketplace we have once again missed the window of opportunity. Evtech, therefore, does not wish to consider any Version II from IMS/Imprimis CAE.” 251 The exchange brought out the different perceptions of Mr Gillmore and Mr Morgan about the 20 pre-production units ordered from Fujitsu. Mr Morgan regarded them as prototypes, to be used for testing. Mr Gillmore regarded them as production models, to be ordered only after testing and approval. 252 The meeting occurred sometime in the week commencing 14 March 1994. -- 211 of 267 -- 204 [695] That was the end of the IMS modem. The plaintiff did proceed to develop a PCMCIA card, but switched the development to another subsidiary. It was not a commercial success - hardly surprising, since it was little more than a rebadged import. Evtech ceased to trade. Bankruptcy for the Coventrys [696] Meanwhile things had not gone well for Andrew Coventry. On 9 March 1994 he was made bankrupt. He remained so until 21 April 1997. On 1 June 1994 the plaintiff commenced the present action and applied ex parte for an injunction to restrain the trustee defendants and Belrida from dealing with their options. There was no letter before action and the material before me indicates no justification for an ex parte application. The action represented the first time the plaintiff made any complaint in writing that it had been induced to become involved with Evtech by misrepresentations. After several hearings the plaintiff was successful in obtaining an interlocutory injunction. On 22 August 1994 Michael Coventry was declared bankrupt; he was not discharged until 22 September 1997. [697] The foregoing findings of fact do not include my findings in relation to the expenditure of money provided by the plaintiff to or for Evtech. Much of the detail of this expenditure was controversial. To have dealt with it above would have interrupted the flow of the narrative unduly. I shall deal with it when I come to deal with questions of damages. I have made observations on the credibility of various witnesses throughout these reasons so far. At this point, it is convenient to summarise my findings on credibility. 13. FINDINGS ON CREDIT [698] I shall deal under this heading with the major witnesses of fact, although some of them also gave evidence as expert witnesses. To the extent necessary I have expressed my views on the reliability of the (solely) expert witnesses in the course of referring to their evidence. My findings on the other witnesses of fact can be discerned from my discussion of their evidence. Bryan Dart [699] I thought Bryan Dart’s evidence was reliable only in part. He had an unfortunate tendency to reconstruct events in a form favourable to the plaintiff. For example, contrary to his evidence, I do not believe that Andrew Coventry or Mr Morgan told him that the modem needed Bell standard protocols or that he heard Mr Gillmore and Andrew Coventry discuss that matter. I cannot accept that he believed (as he claimed) that the Chinese projects would give the plaintiff the capacity to repay the $70,000 loan in late July 1993. He was evasive when a direct answer might have tended to embarrass him, for example in relation to his understanding of the expression “due diligence clause” previously referred to.253 Another example appears in the following exchange: “Would you have a look at this document, please? See if you can identify it?-- I’m unsure whether I have seen this document or not. 253 Para [598]. -- 212 of 267 -- 205 Were you aware at any time that the shareholders in Evtech had signed a shareholders’ agreement?-- I was aware that there were other shareholders in Evtech other than Tom Quinn, Michael Coventry and Andrew Coventry, yes. But were you aware that they had signed an agreement between themselves rather than simply being a separate sand heap of shareholders within the company?-- No, I can’t recall that I had seen the agreement. HIS HONOUR: That’s twice you have dodged it. Were you aware that there was one?-- I was aware that there were shareholders, A- class and B-class shareholders, but I can’t recall actually seeing this document. Were you aware that the various shareholders had entered into an agreement amongst themselves?-- Yes. I - yes.” During his evidence in chief I thought he often gave answers calculated to assist the plaintiff’s case without really knowing whether what he said was accurate. I do not accept his denial of reliance on New Zealand Telecom for technical advice.254 His assertion in the letter of 16 February 1993 to Andrew Coventry that the Darts believed the plaintiff would only be required at worst to provide a maximum of 25 percent of the costs of the joint venture was false,255 as was his denial of his conversation with Mr Cunningham discussed above.256 On the other hand, he sometimes showed a willingness to make concessions (for example, the ability to interface the System with mobile phones other than the Ericsson and the NEC P3). He exhibited less personal animosity toward the Coventrys and was less aggressive than his brother but lacked some of Kevin’s forcefulness. I did not assess him as a person who would shamelessly tell an outright lie on oath. I have scrutinised his evidence carefully before accepting it, but I have not felt it necessary to find absolute corroboration before I relied upon it. Kevin Dart [700] Even in the witness box, Kevin Dart was burdened by anger and animosity which sometimes he struggled to control. I found him to have a forceful, even aggressive, personality, inclined to anger and with a tendency to bluster. As Mr Cole’s evidence demonstrated, that animosity dated back at least to July 1993: “MR SPAIN: I suggest that during that period it would have been politically impossible for my client to have co-operated in the execution of any cheques?-- Can I answer that question by saying I can clearly remember one occasion in exactly that period of time - I cannot remember the day - that Andrew came in to Charter Pacific’s offices. I required some cheques to be signed. I called Andrew in to my office, and whilst I had Andrew in there signing some cheques, Kevin Dart walked past the door and looked in my office and saw Andrew and stormed back out of the office, and after Andrew had left the office, he came in and berated me for speaking 254 Para [601]. 255 Para [129]. 256 Para [602]. -- 213 of 267 -- 206 with Andrew. I then tried to explain to Kevin that I required signatures on cheques from Andrew at that time to continue Evtech’s business, and he still berated me. He just did not want Andrew talking to me at all. I clearly remember that. I clearly remember saying to Kevin that, ‘I’ve still got to draw cheques and the signatories of those cheques are Andrew and Tom and/or Kevin and Bryan’ and that I still needed their signatures and he said, ‘Well, I don’t ever want to see the bastard in here again.’” Despite the fact that he had less involvement in Evtech than his brother, he was often assertive about that company’s affairs in ways which I found unconvincing. He displayed a particular willingness to give evidence adverse to the Coventrys, for example about conversations of which he had no real recollection. His manner was dogmatic. I have already given my reasons for not accepting in full his version of events leading up to the Second Deed.257 I have also referred to the unsatisfactory nature of his evidence relating to the making of the First Deed.258 He was willing to give definite answers on matters of detail when he really had no idea, as exemplified in the following exchange relating to exhibit 23: “Was Mr Tabe at the meeting?-- Yes, your Honour. MR O’DONNELL: Did you see on the minutes of the meeting at 607 opposite the heading ‘Transfer of Shares’ -----?-- Yes. ----- the following, ‘Duly signed transfer of shares were tabled’?-- Yes. Do you recall if that document was tabled at the meeting?-- I believe it was, yes. Do you recall anything said about it by Andrew Coventry?-- Nothing that comes to mind, no. Thank you. HIS HONOUR: What did Mr Tabe say about this, if anything?-- I don’t know whether Mr Tabe was in the meeting or outside the meeting or not, your Honour, so I don’t think I had contact with Mr Tabe. How do you know he was at the meeting?-- I don’t know, your Honour.” (Mr Cole had earlier given evidence of taking such documents to Mr Tabe’s home for him to sign.) Another example can be found in his quite extensive evidence about Mr Gillmore’s facsimile letter of 1 April 1993259 . Subsequently, when pressed on the document in cross-examination, he said, “Whilst I previously acknowledged that I’ve read this, I don’t know whether I have or not, when I start thinking about it now.” He was prepared to exaggerate or invent evidence to further the plaintiff’s cause, for example his evidence, given for the first time in cross-examination, that Andrew Coventry guaranteed that the modem would pass 257 Paras [327] ff. 258 Paras [170], [203]. 259 Exhibit 2 p 418A. -- 214 of 267 -- 207 the New Zealand Telecom evaluation. Despite the obvious importance of such an assertion, it was not made by either Bryan Dart or Mr Cole, nor was it put to either Andrew Coventry or Mr Quinn. I am satisfied that his evidence must be scrutinised closely and relied upon only with great care. Steven Cole [701] Mr Cole’s evidence resembled the metaphorical curate’s egg. At the outset, I absolutely reject the defendants’ submission that he manufactured evidence and was guilty of perjury. I am satisfied, however, that some of his evidence was not reliable. Perhaps unsurprisingly he was at his best when dealing with accountancy matters. There his evidence was carefully researched and well considered. It conformed to the available documents. I also accept his evidence relating to the signing of cheques by Andrew Coventry and Mr Quinn. He told the truth as he remembered it and on that topic, his memory was reasonably accurate. On other topics he was less reliable. He was a loyal servant of the plaintiff and had a tendency to rationalise the events of 1992-4 to accord with what he thought must have happened, for example his claim that the availability of Bell protocols influenced his decision to recommend that the plaintiff acquire shares in Evtech. The result was that he sometimes gave evidence that something happened when in fact he did not have a specific recollection of it. His claim that he had discussions with the defendants and Mr Quinn about Evtech paying rent for office space is an example. His versions of conversations involving the defendants tended to be loaded in favour of the plaintiff. On some topics, for example the loss of a number of important documents by the plaintiff and its inability to produce computerised accounting records due to alleged computer malfunctions, I thought his evidence was unconvincingly vague and possibly protective. For all of these reasons I have been selective in adopting his evidence. Andrew Coventry [702] Andrew Coventry had an aggressive personality, with a tendency to become emotional. He told the court (and it was not challenged) that he had several times been a millionaire, but “I have lost it, I built it, I lost it”. He was a completely unreliable witness. He frequently said whatever seemed to him at the moment to suit his case best. Much of what he said was outright false. To what extent the falsehood was a reflection of perjury as opposed to self delusion I cannot tell; but it is difficult to believe that it was all self delusion. His demeanour and conduct might be thought to reflect a significant level of obsessive-compulsive disorder coupled with paranoia. He was argumentative and unresponsive to questions to an extent which at times was farcical: “Could the witness see Exhibit 211, please? That’s the fax to you from Bryan Dart on about 9 July, isn’t it?—Yes, I think this is the one that he sent me to tell us how many millions we were going to make with the ----- It’s a simple question, Mr Coventry?—I’m just trying to associate --- -- Is that the fax from Bryan Dart? Do you feel you need to argue your case at every possible opportunity? Is that your approach in giving evidence?—I don’t know. I’m just trying to do the best I can. I’m not experienced. If I’m doing it wrong, I’m sure you will pull me up. -- 215 of 267 -- 208 HIS HONOUR: I’ve pulled you up hundreds of times and you take no notice.” His evidence regarding the signing of cheques for Mr Gillmore was fabricated, as was his evidence regarding exhibit 219. His evidence regarding the Chinese venture and the sale of 10 of the fourth defendant’s Evtech shares to the plaintiff contained many deliberate distortions. I shall not repeat what I have already said on these subjects.260 I do not criticise him simply for reconstructing events on the basis of documents or other known facts. All the witnesses did that, and it was probably inevitable and in some cases helpful given the time which had elapsed. My distrust of his evidence arises from his willingness to say whatever was adverse to the plaintiff if it seemed to fit the incontrovertible facts; for example his evidence in relation to Kevin Dart’s threats to sue him as a guarantor. Sometimes he was unable to distinguish hope or expectation from existing reality, a problem which may have been embedded in his own perceptions or may have arisen from a difficulty in the controlled use of the correct tense in his speech. His evasions, inconsistencies and distortions, coupled with the other matters to which I have referred, have led me not to act on his evidence in relation to controversial matters unless it is corroborated. Michael Coventry [703] Michael Coventry presented as a controlled and somewhat tense person who, at least in court, avoided confrontation. Although not as unreliable as his brother, he too was generally unreliable. He was less willing to tell an outright lie in the witness box than was Andrew and endeavoured to evade embarrassing questions where possible. However his evidence regarding his participation by telephone in the meeting of directors of Evtech at which the IMS licence agreement was signed by Mr Quinn was false, and it is inconceivable that it was innocently so. His attempt at explaining his description of Electrocomm as an “off-the-shelf” product was starkly disingenuous. His demeanour when giving evidence on these points confirmed their improbability. On other points his evidence was more vague. There are significant inconsistencies within his evidence relating to his knowledge of the Chinese venture, and I do not accept his explanation for why he agreed to sell his shares in August 1993. I am not prepared to use the inconsistencies to find that his evidence regarding the Chinese venture was fabricated because it is possible that he was misled by his brother. I am however satisfied that his evidence in relation to his letter of 27 July 1993 to Mr Cole was false. That letter was probably an attempt by him to extract payment of wages for himself for a period after July 1992, possibly through to February 1993, wages to which he was not entitled.261 On some points I have accepted his evidence uncorroborated but only if clearly satisfied it was correct. [704] To some extent he was put forward by the defendants as an expert witness. He plainly had knowledge of computers and computer programs equivalent at least to that of a very sophisticated user. His expertise in these matters was, however, less than he tried to convey. He ought to have known more about the nature of Mr O’Connor’s work, how Electrocomm worked and how DOS worked. His role in the joint testing and his evidence about it suggest a lack of expertise at the level of a professional. 260 Para [328]. 261 Para [49]. -- 216 of 267 -- 209 Tom Quinn [705] Mr Quinn was a witness who wanted to be somewhere else. He seemed uncomfortable in the witness box for most of the time he was there and professed an inability to remember events and documents which I found extraordinary and troubling. I do not believe that his mind was as blank as he claimed. His forgetfulness was not biased in favour of or against either party, nor was his evidence, though he was sympathetic to the defendants. He seemed concerned to protect himself and his reputation from criticism. When pressed on a topic which might expose into criticism, he employed equivocation or absence of memory, as for example in his cross-examination in relation to exhibit 263. On other topics, although occasionally he was a little suggestible at the behest of whoever was asking questions, such answers as he gave were I thought truthful, and I have relied upon them, generally without seeking corroboration. Peter Gillmore [706] I thought Mr Gillmore an honest witness who generally gave his evidence to the best of his recollection. Occasionally he tended to exaggerate, but perhaps that was due to his background as a salesman. He lacked expertise in relation to DOS and DOS products (including the IMS modem), although sometimes be attempted to downplay or conceal that fact. That lack was a little surprising, even in someone whose area was marketing. An example appeared in his misunderstanding during cross-examination of the letter from Austest laboratories to Evtech dated 11 August 1993. 262 He was not biased in his attitude to either side in the case; occasionally his evidence was a little self-defensive. I have generally accepted it, although I have weighed the foregoing considerations in evaluating it. Russell Morgan [707] Mr Morgan gave evidence both as a witness of fact and as an expert. He was basically an honest witness who got carried away by partisanship263 . The result was that some aspects of his evidence were so slanted as to be unreliable. He had no vested interest in the outcome of the litigation, except to protect his own reputation and rebut anything reflecting adversely on him. That he was concerned and quick to do. Beyond that, he sought to help the defendants as much as he could, particularly in relation to historical events. An example of this was the evidence in his initial statement relating to MNP10 which he changed significantly before the trial when it seemed that his first version was adverse to the defendants. Initially he gave me the impression that he treated the trial as something of a game, being carefree in his attention to detail, but he became more serious the longer he was in the witness box. He seemed to regard Mr Gillmore and Mr Barr as incompetent; possibly he was aware that they blamed him for many of Evtech’s problems. Despite all of these criticisms, I found much of his evidence helpful. His detailed knowledge of the IMS modem including his understanding of how it worked far exceeded that of any other witness. I do not think he told a deliberate falsehood on matters of expert evidence and it is possible to guard against relying on his equivocations. 262 Scan 1065.awd, part of exhibit 8. He clearly thought that the non-compliance referred to in the letter was the absence of the Bell protocols, not their presence. Ironically, the author of the letter must have assumed the presence of the protocols on the basis of the manual; they had in fact been removed from the firmware: see para [652]. 263 For an example, see para [684]. -- 217 of 267 -- 210 Steven O’Connor [708] I have accepted Mr O’Connor’s evidence without any significant reservation. I thought him completely honest, careful and a person who was trying to help the court to the best of his ability. He conceded fallibility of memory, particularly in relation to dates and sequences of events, but in all the other respects he impressed me as a reliable witness of fact. I was also impressed by his expertise in programming, although this is tempered somewhat by his unprofessional approach to documenting his work and his lack of understanding of the firmware in the IMS modem. Like many programmers he had a weak spot in understanding how to create an interface for a range of lay users of varying skill levels. 14. THE PLAINTIFF’S REMEDIES The losses [709] At the beginning of the action, the plaintiff claimed that it had suffered loss as a result of its reliance upon the defendants’ misrepresentations in a variety of ways: 1. The value of the options. The plaintiff alleged that it had entered into the First Deed in reliance upon the misrepresentations; that pursuant to its obligation under that deed, it had issued 400,000 options each to the first, third and fourth defendants; and that, by reason of the defendants’ misleading and deceptive conduct, it had lost the value of those options. That value was not then quantified, but based on the evidence at trial, it exceeded $1 million. 2. Money advanced to Evtech. The plaintiff alleged that this comprised $400,000 lent to Evtech pursuant to the First Deed and a further amount of $455,806.25 advanced to Evtech “to finance its attempts to make the Cell-U- Comm system into a viable commercial product.” It alleged that Evtech was unable to repay these amounts. 3. Payments and liabilities under the Second Deed. The plaintiff alleged that it had paid the trustees the sum of $5,810 and had incurred liabilities to them for the balance purchase price of $116,190 due on 29 July 1994. [710] Shortly after the writ was issued the plaintiff obtained interim and interlocutory injunctions restraining dealings in any of the options. The interlocutory injunction remained in place until after the options expired on 10 November 1997. It was never dissolved, nor was any step taken to relieve the plaintiff of its undertakings as to damages. In the meantime, in late 1994, the plaintiff compromised the action as against Mr Quinn and Belrida. Under the compromise Belrida surrendered 214,303 of its 400,000 options, retaining the other 185,697 for its own benefit. The plaintiff’s outstanding liability to Belrida under the Second Deed was extinguished, as was Evtech’s liability to Belrida. [711] The action was then allowed to go to sleep for about three years. Following its revival it was placed on the managed case list, where it was reviewed on a number of occasions during 1998 and 1999. In the course of these reviews the statement of claim underwent a number of changes. It is unnecessary to recount all of them. In late 1998 the plaintiff deleted the allegation of loss of the value of the options (number 1 above). It added a fresh allegation of loss: -- 218 of 267 -- 211 4. Value of Evtech shares. The plaintiff alleged that this loss comprised the difference between the value of the shares in Evtech received by the plaintiff and the value which those shares would have if the contractual warranties had been true. [712] During the course of the trial there was a further application by the plaintiff to amend the statement of claim in relation to loss. In the course of the plaintiff’s case the Evtech System and its market prospects were subjected to intense criticism by some of the plaintiff’s witnesses. It became apparent that if this evidence were correct it was likely that the Evtech shares would have had little value even if the warranties had been true. Consequently the plaintiff sought to amend by deleting reference to the loss numbered 4 above. At the same time, possibly inspired by the reporting of the decision of the Full Court of the Supreme Court of South Australia in Duke Group Limited (in liquidation) v Pilmer,264 it sought to reinstate its claim for the value of the options but in varied form. It reduced the number of options the subject of this claim from 1.2 million265 to 985,697 by deducting the 214,303 options surrendered by Mr Quinn as part of his compromise. I refused to allow this amendment on day 29 of the hearing on the ground that the pleading as formulated did not disclose an arguable claim. Some months later (as it happened, just after day 87 of the trial), the Court of Appeal allowed the plaintiff’s appeal and granted leave to make the amendments sought. Those amendments were duly made in December 2000. [713] Despite that success, when final addresses commenced on 28 May 2001 the plaintiff accepted that it did not suffer a loss in respect of the 800,000 options issued to the trustee defendants. It submitted that as a result of a combination of the escrow restriction and the subsequent injunctions, those options expired without being exercised and that consequently the loss which it otherwise would have suffered was avoided. Its only loss was the value of the 185,697 options retained by Mr Quinn’s trust under the compromise. However it also submitted that it should be entitled to recover the liabilities and expenses it incurred in obtaining the injunctions, on the basis that they were incurred in mitigating its loss. It particularised them in its written submissions as its liability under the undertaking as to damages and its legal costs on a party and party basis. It sought no amendments to reflect this change in its position. Perhaps because my eyes were by then on the finishing line rather than the immediate hurdle, I did not realise that this argument was not open on the pleading as it stood. Not surprisingly, the defendants made no submissions on that question. [714] On 31 May 2001, while addresses were continuing, the High Court handed down its decision in Duke Group Limited (in liquidation) v Pilmer,266 reversing the decision of the Supreme Court of South Australia. In the light of that decision the plaintiff conceded that no loss was recoverable in respect of the value of the 185,697 options. However it pressed its submission in respect of the liabilities and expenses it incurred in mitigation, on the basis that the steps taken were not unreasonable at the time. 264 (1999) 73 SASR 64. 265 3 by 400,000. 266 (2001) 75 ALJR 1067. -- 219 of 267 -- 212 Non-monetary remedies [715] The non-monetary relief sought by the plaintiff was claimed against the trustee defendants. It consisted in substance of three alternative claims: rescission, avoidance or variation. In its final form, the relevant part of the prayer for relief was as follows: “AND THE PLAINTIFF CLAIMS against the third and fourth defendants: 1. That the orders be made: (a) varying the deed dated 24 March 1993 so as to delete the obligation to issue to each of the third and fourth defendants options to take up 400,000 fully paid ordinary shares in the plaintiff; (b) varying the deed dated 13 August 1993 by extinguishing the plaintiff’s liability to pay the balance purchase price of $116,190 [sic; semble $116,200] due on 29 July 1994; 2. Further or alternatively: (a) a declaration that the deeds of 24 March 1993 and 13 August 1993, respectively, have been rescinded or an order avoiding such deeds ab initio; (b) orders, directions and inquiries necessary to effect a substantial restitution between the parties, including an order that the third and fourth defendants repay to the plaintiff the sum of $5,810 paid pursuant to the deed of 13 August 1993.” Rescission [716] The plaintiff claimed that its entitlement to rescind arose from the various misrepresentations and nondisclosures already referred to; that by the service of the writ and/or delivery of the statement of claim it exercised its right to rescind;267 and that it was ready and willing to make restitution. In response the defendants denied the plaintiff’s entitlement to rescind and pleaded that restitution was impossible and that the plaintiff was guilty of laches. There is considerable merit in these defences and I am inclined to accept them, although it might be argued that technically the circumstances amounted to affirmation as well as laches.268 I need not resolve these questions however, for the plaintiff did not press for a declaration of rescission in either its written submissions or its oral address at the end of the trial. It argued for 267 There was in fact no claim for rescission in the writ. On the contrary, there was a cumulative (not alternative) claim for damages for breach of contract. That claim was dropped in the first edition of the statement of claim. At the same time the claim for a declaration of rescission in respect of both deeds was included. That claim was advanced as an alternative to claims made pursuant to s 87 of the Trade Practices Act for variation of the First Deed by cancelling the options and of the Second Deed by extinguishing the plaintiff’s liability to pay the balance purchase price. 268 See the matters referred to in paras [719] and [769]. -- 220 of 267 -- 213 orders under s 1325 of the Corporations Law, which implied the continued existence of the contract to that point. Avoidance and variation under s 1325 [717] The primary relief sought by the plaintiff under s 1325 was variation of the First Deed to remove the obligation to provide 400,000 options to the trustee defendants. It submitted that such an order would better accord with the approach advocated in the authorities than one avoiding the deed, because a court was empowered to make orders under the section “only in so far as those orders will compensate (or will prevent or reduce) the loss identified”269 . It submitted that an order avoiding the deed would have wider consequences. Both Evtech and the first defendant, Belrida, would be affected by such an order. (It will be remembered that the plaintiff compromised the proceedings against Belrida on terms involving that company’s retention of a substantial number of its options). [718] The defendants pleaded that restitution was not possible and that the plaintiff had suffered no loss causally related to any action or to an action of any of the defendants. [719] The plea relating to restitution has most force as a defence to a claim for avoidance of the First Deed. By the time the plaintiff came to seek relief in mid-1994, Evtech had been its subsidiary for nearly a year. It had used Evtech not simply to commercialise the System, but also to develop new systems and to attempt to penetrate the Chinese market in respect of another and different product. Evtech’s business had changed significantly compared with the position at the end of May 1993, both in terms of staff and objectives and activities. As the plaintiff itself pointed out, there was also the problem of Belrida. It is true, as the plaintiff submitted, that inability to make restitution is not an absolute bar to relief under s 1325.270 It is, however, a powerful discretionary consideration. To circumvent it the plaintiff submitted that an order for variation should be made in preference to an order avoiding the deed. That would not affect Belrida and would not be unfair. [720] The plaintiff accepted that in order to obtain relief under s 1325 it had to prove loss or damage suffered by contravention of the Corporations Law or that (but for the orders sought) loss or damage would be suffered by such a contravention. The exercise of the power conferred by the section has as a precondition a finding by the court that the party “has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention” of the relevant part of the Law. In addition the power to make the order is limited by the condition “if the Court considers that the order or orders concerned will compensate the first- mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage”. The plaintiff submitted that the loss which would be prevented by the proposed order is the plaintiff’s exposure to liability on its undertakings as to damages. It was implicit in this argument that if there were no such liability the proposed variation would be unnecessary. However the plaintiff recognised the possibility that it might be liable on the undertaking, by reason of the fact that it no longer sought a permanent injunction restraining dealing in the options or an order cancelling them. It submitted that such orders were now 269 Marks v GIO (Australia) Holdings Ltd (1998) 196 CLR 494 at p 513. 270 Ibid; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at pp 564, 571. -- 221 of 267 -- 214 pointless because the options had expired through the effluxion of time.271 It submitted that if it were liable on the undertakings, such liability was incurred by conduct (obtaining the injunctions) calculated to mitigate its loss; that the liability was, therefore, a loss flowing from the defendants’ contraventions of s 1005; and that this potential loss could be prevented by varying the deed to delete the obligation to furnish options to the trustee defendants. [721] It may be accepted that if a plaintiff has suffered or is likely to suffer loss because of conduct by the defendant in contravention of the relevant part of the Law, the cost of mitigating such a loss is itself a loss caused by the conduct. The problem for the plaintiff is that the only loss which it suffered or could have suffered in respect of the First Deed was the amount of its advances to Evtech.272 The injunctions were not calculated to mitigate that loss. The conduct of the defendants caused the plaintiff to issue the options, but it did not thereby suffer any loss. Even if the plaintiff’s actions in obtaining the injunctions be regarded as conduct intended to be in mitigation273 , there was no loss to be mitigated. Any costs or liabilities incurred by the plaintiff were incurred because of its mistaken view of the law, not because of the defendants’ conduct. It is true that but for the defendants’ conduct, the occasion for the plaintiff’s mistake would not have arisen. However that is not sufficient to satisfy the statutory words “because of conduct” in s 1325.274 This is particularly the case when the cost of mitigation relied on is a liability pursuant to the undertaking as to damages.275 If such a liability exists it does so only because after due consideration, the Court has concluded that the plaintiff “ought” to pay damages. 276 A variety of factors is taken into account in reaching such a conclusion. [722] The variation sought by the plaintiff, therefore, could not compensate it in whole or in part for loss or damage which it suffered or was likely to suffer because of the defendants’ misleading and deceptive conduct, nor could it prevent or reduce any such loss or damage. For the same reason avoidance of the First Deed could not so compensate the plaintiff. An essential element of s 1325 has not been proved. The plaintiff’s claim for relief under that section must fail. [723] The plaintiff also sought orders that the Second Deed be varied so as to relieve it of the obligation to pay the balance of the purchase price of the Evtech shares. In view of my findings in relation to the Second Deed277 it is unnecessary to consider whether any of its provisions should be varied or the deed rescinded. The plaintiff cannot succeed in relation to the Second Deed. 271 As will be seen below, it argued that in fact it was not liable on the undertakings where its ultimate failure to obtain relief was due to supervening events. 272 Duke Group Ltd v Pilmer (2001) 75 ALJR 1067. 273 Because it was never pleaded, the issue of the plaintiff’s intention in obtaining the injunctions was not squarely addressed in the evidence. 274 March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506. 275 I have not overlooked the fact that the plaintiff’s claim for the “cost” of mitigating included its legal costs assessed on a party and party basis. That question is dealt with below, para [776]. 276 See para [811]. 277 Paras [634]-[659]. -- 222 of 267 -- 215 Monetary remedies claimed [724] The plaintiff makes three money claims: 1. Damages pursuant to s 1005 of the Corporations Law - against the defendants; 2. An order for payment of its losses pursuant to the contractual indemnity provisions of each deed - against the trustee defendants. 3. Damages for breach of warranty - against the trustee defendants. Indemnity and breach of warranty [725] The plaintiff conceded that what might be recoverable pursuant to the contractual indemnity provisions in the First Deed would correspond to the assessment of damages under s 1005; that in both cases the loss was one and the same, being the loss suffered by the plaintiff in entering into the relevant transaction. It also conceded that in the circumstances of the present case, the amount which it could recover as damages for breach of warranty under that deed was the same as the amount it could recover for misrepresentation (i.e. under s 1005). Since I am of the view that it is entitled to recover damages under s 1005, it is unnecessary for me to determine either claim. [726] As to the Second Deed the plaintiff pleaded breach of warranty. It did not refer to this claim in its final submissions, nor in its address, so I shall deal with it briefly. Clause 9.1 of the deed provided: “Each of the Vendors covenant, warrant, undertake and represent [sic] with and to the Purchaser in respect of its Shares or matters concerning each Vendor in the terms set out in Schedule 1 …”. The relevant warranty was numbered (c) in Schedule 1: “All information which is known to the Vendors or any of them relating to the Company or otherwise the subject matter of this Deed which is material to be known by a purchaser of the Shares for value, has been disclosed to the Purchaser” [727] The plaintiff pleaded in para 22 of the statement of claim: “Further, each of the third and fourth defendants was in breach of: … (c) the warranty contained in the second deed … by failing to disclose the matters pleaded in paragraphs 16 and 17 above prior to completion of the second deed.” [728] The drafting of the warranty clauses is less than elegant. I do not propose to embark upon an analysis of them in the absence of argument from the parties, but I am far from persuaded that their terms are apt to cover all of the matters set out in paras 16 and 17 of the statement of claim. There is no need for me to do so because I am satisfied that the warranty has not been breached. The plaintiff has abandoned a number of the allegations in para 17 and I have found that other were not correct. I have come to the conclusion that of the remaining matters referred to in paras 16 and 17, either the subject matter was not material within the meaning of the warranty (e.g. matters relating to Electrocomm, which had been abandoned by the time of the Second Deed) or it was known to the plaintiff (e.g. matters relating to New Zealand Telecom). This claims fails. -- 223 of 267 -- 216 Damages under s 1005 of the Corporations Law [729] Section 1005 of the Corporations Law provides: “(1) Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in contravention of a provision of this Part may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.” [730] Section 995, which is in the same Part, provides: “(2) A person shall not, in or in connection with: (a) any dealing in securities; ... engage in conduct that is misleading or deceptive or is likely to mislead or deceive.” Plainly, the defendants’ misrepresentations amounted to conduct “in connection with ... any dealing in securities”. Advances by the plaintiff [731] I have already described the plaintiff’s obligation to advance $400,000 to Evtech.278 The plaintiff claims to have advanced far more than this sum, either by direct payments to Evtech or by payments to Evtech’s creditors with Evtech’s consent. The defendants denied for the most part that any such consent had been given. I am satisfied that from the time of the signing of the First Deed, the administration of Evtech’s financial affairs was wholly in the hands of the plaintiff, through Mr Cole. That was an arrangement which the plaintiff wanted in order to keep financial control, but it was one which the Coventrys found congenial. Mr Cole sought to explain the practice by suggesting that some suppliers were unwilling to accept an Evtech cheque because of that company’s poor credit history. I assessed that explanation as an after the event rationalisation. However the point is of no consequence. There was nothing in cl 8.1 of the First Deed which specified how the money was to be advanced, and payment of Evtech’s creditors was as good a way as any. [732] In June 1994 Mr Cole prepared a list of payments in a spreadsheet, and this became the foundation of the plaintiff’s claim. 279 Some amounts on the list were paid direct to Evtech. The making of these payments was not in dispute, but the defendants contended that the plaintiff was not entitled to recover in respect of money allegedly spent improperly by Evtech at the plaintiff’s instigation. Some payments to third parties were also undisputed, in the sense that there was no challenge to either the fact of the payment or its propriety. Other payments were disputed, primarily upon the basis that it was alleged that they were not made for Evtech’s benefit nor to one of Evtech’s creditors. It is, therefore, necessary to make some analysis of Mr Cole’s list. The list was in date order, and it is convenient to use it as a reference point for my findings. 278 Para [669]. 279 Exhibit 26. -- 224 of 267 -- 217 [733] I have incorporated those findings into a fresh spreadsheet based upon Mr Cole’s list.280 Some items have been placed against the date when the liability in question was incurred rather than against the date of payment (the method in Mr Cole’s list). I have done that where it throws light on the payment in question. It is helpful to refer to my findings in that spreadsheet in relation to the immediately following sections of these reasons. Payments to third parties [734] Although it was not brought to account until 30 June 1993, the first liability incurred was $18,674.21, incurred on 14 April 1993. This was the cost of buying a new Apple laptop computer ($9,448) and a new NEC laptop computer ($9,226.21) for Mr Gillmore’s use at Evtech. The defendants disputed this payment on the same basis as they disputed all payments relating to Mr Gillmore: they asserted that he was employed at all times by the plaintiff, not by Evtech, and that all expenses incurred by the plaintiff in relation to him were incurred on its own account. The items disputed on this basis were: 14/4/93 PM Gillmore Apple and NEC $18,674.21 22/4/93 Sorrento real estate $2,345.65 23/4/93281 American Express travel $869.90 05/5/93282 Cost Less Car Rentals $738.60 07/5/93 PM Gillmore $9,232.00 07/5/93 PM Gillmore $1,776.80 07/5/93 PM Gillmore $3,120.34 07/5/93 Bank (T/T fee) $30.00 [735] All but one of those payments were wholly the result of Mr Gillmore’s employment prior to completion of the First Deed, and of the conditions of employment negotiated between him and the Darts. I have already found that there was no contract of employment between Mr Gillmore and Evtech prior to 27 May 1993283 ; he was contracted to the plaintiff. Evtech was not responsible for payments made by the plaintiff to satisfy its obligations under that contract. The one exception is the payment for the two computers. The Evtech board agreed to purchase the NEC computer in April, and after 27 May Evtech took it over and used it. It should pay for it. [736] The defendants disputed a payment on 14 May 1993 of $6,725.00 to Sawyer Public Relations. In cross-examination they put that this payment had been made for the benefit of the plaintiff, not for Evtech. The cross-examination failed to prove any such thing and no other evidence was led on the matter. I accept Mr Cole’s evidence that this liability was properly incurred and discharged for the benefit of Evtech. [737] The next substantial item in dispute was a payment to McCullough Robertson of $11,529.21 on 3 June 1993. I am satisfied that this amount was paid to McCullough Robertson for their work on the licence agreement between Evtech and IMS, not for their work on behalf of the plaintiff on the First Deed (that was paid separately). It was properly paid on behalf of Evtech by the plaintiff. 280 Annexure G. 281 Date liability incurred. 282 Date liability incurred. 283 Paras [229]-[230]. -- 225 of 267 -- 218 [738] On 11 June 1993 the plaintiff paid $5,158.00 to Advanced Microsystem Research, an Adelaide firm, for the purchase of a computer. That was plainly the computer which was purchased for Mr O’Connor and which is now Exhibit 104. It was properly paid on behalf of Evtech by the plaintiff. [739] An entry on Mr Cole’s list for 30 June 1993 asserted a payment of $22,050.00 to Evtech, but the plaintiff now concedes that this payment was not made. It also concedes that it cannot claim an amount of $1,867.40 shown on the list as a payment for an oscilloscope on 15 October 1993. [740] By journal entries dated 31 December 1993 the plaintiff debited Evtech $3,900 for a motor vehicle, $29,167.00 for rent and $29,479.15 for interest. It now asserts the last of these payments should be increased; it is unnecessary to go into the detail of this. Interest was payable by Evtech in respect of the loan under the First Deed. It is, however, not open to the plaintiff to claim it as damages for misleading and deceptive conduct. The plaintiff’s damages must be calculated on the basis that it puts forward itself, namely that it would not have entered into the transaction had it known the true position. Interest on the amount of any judgment is a different question.284 [741] The amount for rent derives from an apportionment made by Mr Cole. The decision to levy Evtech for rental was taken by the plaintiff only toward the end of 1993. No sublease was ever entered into and the matter was a purely internal accounting arrangement between the plaintiff and its, by then, wholly owned subsidiary. The Darts and Mr Cole decided amongst themselves at an internal meeting of the plaintiff on 31 May 1993 to charge rental to Evtech, but said nothing of this to the defendants. Although Mr Cole suggested at one point that the possibility was discussed with the defendants, his evidence was internally inconsistent, was also inconsistent with that of Bryan Dart on the same subject and was unsupported by any “minute” of an action meeting. There was nothing improper in the making of the entry in Evtech’s books, but it did not reflect a pre-existing liability. [742] The debit in respect of the motor vehicle was for the rental charges for a vehicle for Mr Gillmore from July 1993. I am satisfied that the question of providing him with such a vehicle was discussed at several Evtech action meetings during June 1993 and that the cost of $650 per month was properly incurred on account of Evtech. [743] There were numerous other payments on the list which the defendants said they disputed but about which they neither cross-examined nor led evidence. All but three were for less than $1,000. Mr Cole’s evidence in relation to all of them was uncontradicted and I accept it. The defendants raised arguments of impropriety in relation to these payments. I reject those arguments for the reasons set out below.285 Payments to Evtech [744] The defendants also argued that the money which the plaintiff advanced to Evtech in fact remained under the plaintiff’s control, because the plaintiff kept and operated all of Evtech’s books and was responsible for its financial affairs. They raised the same arguments of impropriety in relation to the expenditure of these funds. 284 See para [778]. 285 See paras [771] ff. -- 226 of 267 -- 219 The $400,000 loan [745] In its final submissions, the plaintiff divided its claim for damages into two parts. The first was the loss represented by the loan of $400,000. The second was the loss represented by advances in excess of that sum. The first loss, the plaintiff submitted, was suffered “by” conduct of the defendants in contravention of Part 7.11 the Corporations Law, within the meaning of s 1005 of that law. The second loss was claimed on two different (but related) bases: as consequential loss, and/or as expenses incurred in an attempt to mitigate loss. It is convenient to deal first with the first loss. [746] Under the First Deed the plaintiff was obliged to advance $400,000 by 7 July 1993. The loan was to be for five years unless the deed was terminated for a reason other than breach of the deed by the plaintiff. Interest was payable annually in arrears at a rate 1 percent higher than the benchmark rate of the National Australia Bank. The loan was secured by a fixed and floating charge over Evtech’s assets. Taking the foregoing adjustments into account, the amount advanced by 7 July 1993 was some $10,000 short of $400,000. The transfer of $12,000 on 12 July remedied that deficiency. By that date, the plaintiff had advanced a total of $402,022.10, of which $360,319.00 had been paid directly to Evtech.286 That satisfied the plaintiff’s obligation under the deed. As it turned out, Evtech never paid interest and never repaid the principal. It was never able to do so. Without financial support from the plaintiff Evtech was at all material times insolvent. General principles [747] The plaintiff’s claim for loss of that principal is a claim for economic loss. In such cases, “The central inquiry is what consequence has a contravention of the Act had on the party in question. That requires comparison between the position in fact of the party which alleges loss and the position that would have obtained had there been no contravention.”287 As is well known, that is the measure of damages in tort: “Actions based on s 52 are analogous to actions for torts. It follows that, in assessing damages under s 82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases [citations omitted].”288 An action for damages for deceit is closely analogous to an action for damages for breach of s 52. In such cases, “The courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it.”289 Of course that does not mean that the remedy provided by s 1005 is confined by the analogy: “But the analogy cannot be pressed too far. It should not be pressed to the point of concluding that the only damages that may be allowed under s 82 are those that would be allowed in an action for deceit. The question presented by s 82 is not what would be 286 Annexure G. 287 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at p 515. 288 Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at p 290. 289 Ibid at p 291; Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at p 526. -- 227 of 267 -- 220 allowed in deceit, it is what loss or damage has been caused by the conduct contravening the Act.”290 In the present case, the plaintiff claims nothing which would not be claimable in an action for deceit. “It is well established that in an action of deceit where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase, the measure of damages usually applicable is the difference between the real value of the property at that time of the purchase and what the plaintiff paid for it.”291 This rule is applicable whether the property being acquired comprises goods, land, or a chose in action.292 It is, therefore, necessary to examine and compare the value of what the plaintiff paid with the value of what it received. [748] The plaintiff submitted that the loss occurred when recoupment became impossible; and that the earliest that that occurred was when Evtech first made default. For this proposition it cited Kenny & Good Pty Ltd v MGICA (1992) Ltd293 . I reject that submission. That case, like Wardley Australia Ltd v State of Western Australia294 , was one where the plaintiff suffered no loss until a time well after settlement of a contract. In both cases the plaintiff incurred loss (at the earliest) only when demand for indemnity was made upon it by a third party. Until then the plaintiff’s liability to the third party, and hence its loss, was only contingent. It is otherwise in the present case. Here the chose in action constituted by the secured loan vested in the plaintiff immediately upon the making of the loan. Leaving aside for the moment any consequential losses, that was when the plaintiff’s loss occurred. The price the plaintiff paid [749] What the plaintiff gave under the deed comprised a bundle of liabilities and duties which it incurred and undertook. Only two of the obligations in the bundle were suggested to have substantial value: the duty to issue shares pursuant to the options and the liability for the loan. No claim is now based upon the options. The plaintiff did not suggest that the cost of the loan was any greater than its nominal value of $400,000. That figure can, therefore, be regarded as the price which the plaintiff paid. The value of what the plaintiff acquired: the loan [750] In return the plaintiff received the chose in action constituted by the debt obligation and the A-class shares in Evtech. The parties made no systematic attempt to prove the value of the loan. Perhaps this was because they regarded the answer as obvious. It may be assumed (in the defendants’ favour) that a secondary market for secured loans exists in Australia.295 I find it inconceivable that on either 27 May or 12 June 1993 the loan could have had any value whatsoever. In other words I cannot conceive that anyone in the business of purchasing secured loans would pay 290 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at p 512. See also Manwelland Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436. 291 Gould v Vaggelas (1985) 157 CLR 215 at p 220. Older authorities to like effect are Potts v Miller (1940) 64 CLR 282 and Toteff v Antonas (1952) 87 CLR 647. 292 Compare Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, particularly at p 514. 293 (1999) 199 CLR 413. 294 (1992) 175 CLR 514. 295 I would hesitate to take judicial notice of this fact. -- 228 of 267 -- 221 anything for this one. The debtor had a large deficiency in net assets, with many outstanding creditors; the security (the floating charge) was worthless. The debtor’s continued existence was wholly dependent upon the plaintiff’s financial support and goodwill. Its prospects of repaying the loan were highly speculative, being dependent upon the successful development of the System, and none of the people involved in the company had any proven history of involvement in successful technological development. The plaintiff was involved in litigation with two major corporations; and the defendants and those associated with them had been involved in the failure of Intechnologic. Although in legal form the $400,000 was a loan, in reality it constituted venture capital. As an asset in the hands of the plaintiff its worth depended upon hope. Its market value was nil. The value of what the plaintiff acquired: the A-class shares in Evtech [751] The value of the A-class shares in Evtech was a hotly disputed issue. The plaintiff submitted that they were worthless. The defendants submitted that they had substantial value, their submission focusing on late 1992. They did so on two bases. First they submitted that the best evidence of value was to be found in the Bundaway Agreement. This was an arm’s length agreement specifically for the purchase of Evtech shares. It satisfied the test propounded in Spencer v The Commonwealth296 . If this argument is correct, it would be legitimate to refer to that value to establish the position in mid-1993. Second, they submitted that the value of the shares could be ascertained by valuing Evtech’s assets on the basis of their revenue-generating capacity, the assets being the software (Electrocomm and Electrocash), the two patent applications and what they called “the sales potential of the Cell-u-Comm system under a cooperative arrangement with IMS”. [752] As to the first submission, it is true that the test propounded in Spencer v The Commonwealth may in some circumstances be applied to the valuation of shares. In Gregory v Federal Commissioner of Taxation, Gibbs J cited Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd 297 for the proposition: “Broadly speaking, the courts have applied, although with caution, the same test as that applied in determining what would be the proper amount of compensation to be paid for the compulsory acquisition of property, where, as in the case of shares not listed on the stock exchange, there is no market for the property”.298 In support of the submission the defendants relied on the evidence of Mr Cooper, a chartered accountant. Mr Cooper gave evidence of the value of the A-class shares on the basis of the Bundaway Agreement. He applied a discount because the parcel did not give the purchaser control of Evtech, but added a component calculated on the basis of a 75 percent chance of achieving the performance bonus envisaged in the First Deed. However in adopting the approach which he took, Mr Cooper assumed that the Bundaway Agreement was not the product of any misleading representations by any party; he was not told of the agreement between the trustees of the Michael Coventry Trust and Belrida made on 19 March 1993;299 and he ignored the prices paid in the First and Second Deeds because he was instructed to carry out the valuation as at 10 December 1992. In addition, his 296 (1907) 5 CLR 418. 297 (1947) 74 CLR 358 at pp 361-362. 298 (1971) 123 CLR 547 at p 565. 299 Para [268]. -- 229 of 267 -- 222 calculations regarding the performance bonus were falsified by an incorrect assumption regarding Mr Budde’s evidence about projected sales. [753] One interesting consequence of his approach is worth noting: he said that on the basis of his valuation, the amount of $40,000 attributed in the Evtech balance sheet to intangible assets300 should have been $2,676,257. Mr Cooper seemed to think that the requirements of the Corporations Law produced distortions in balance sheets. It was his view that even among publicly listed companies, “It rarely happened that the true value of a company appearing in the balance sheet was in fact its true value”. He thought the requirements of the Australian Accounting Standards made balance sheets conservative in nature. In cross-examination Mr Cooper seemed to have difficulty giving responsive answers. In fairness to him, it should be mentioned that he explained that his wife was having an operation and he was having difficulty concentrating. [754] The major difficulty with Mr Cooper’s valuation is that it ignores the fact that at the time of the Bundaway Agreement, the Darts were labouring under the misapprehensions induced by the defendants’ misrepresentations. In such circumstances, the test in Spencer v The Commonwealth is not satisfied: “[T]he value of what in fact was acquired is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it. It is only by comparison with the value assessed in this way that there can be an assessment of whether the party that is misled could have obtained some greater benefit or incurred less detriment.”301 A similar point was dealt with explicitly in relation to shares in Potts v Miller: “[I]n finding the fair or real value of shares at the time of purchase or allotment, the fact that it is then possible to sell the shares at a price that will go far to cover the outlay may be disregarded, if that price is delusive or fictitious, is the result of a fraudulent prospectus, manipulation of the market or some other improper practice on the part of the defendant or those associated with him.” 302 For these reasons the Bundaway Agreement does not assist in establishing the value of Evtech shares.303 [755] The methodology inherent in the defendants’ second proposed method of valuation assumed that Evtech had value only to the extent of the earning capacity of its assets. That is a generally accepted approach to the valuation of shares, but it is not universally applicable: “What is the most appropriate method of estimating the value of shares in a proprietary company depends upon a variety of factors. They include the purpose for which the valuation is made, the nature of the shareholding, the character of the company’s business, its capacity to earn profits and the net value of its assets. It has been said that a valuation based on earning capacity is generally most appropriate because the hypothetical purchaser of shares in a 300 Until it was written off on 30 June 1993 as patent and research and development expenditure. 301 Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at p 514. 302 (1940) 64 CLR 282 at p 299. 303 The plaintiff also relied upon dicta of McHugh J in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 at p 436. It is unnecessary to determine whether those dicta should be interpreted literally. -- 230 of 267 -- 223 company which is a going concern is looking, not to a winding up, but to the profits which will ensue from the company continuing to trade. But it has been recognised that valuation by reference to assets backing or a liquidation basis will be appropriate where earning capacity provides no real measure of the true share value or presents overwhelming difficulties or where the shareholding is such as to enable the holder to bring about liquidation of the company.”304 The plaintiff submitted that the only possible basis for valuation was estimation of future economic benefits (as opposed to earnings) from Evtech’s assets. The plaintiff’s expert, Dr Venning305 , identified the assets as the Electrocomm software and the two patent applications. I have already made some findings in relation to the latter, but it is convenient to summarise the position here. A diversion: the patent applications [756] About 14 June 1991 Michael Coventry applied for a patent entitled “Electronic Funds Transfer Method And Means”. This application was numbered PK6665. It was not proceeded with during the 12 months of its validity but was effectively given a 12 month extension on 15 June 1992, when it was refiled and numbered PL2932. At an action meeting attended by the Evtech directors (other than Michael Coventry), Mr Cole and Mr Gillmore on 15 June 1993, it was decided to refile the application again.306 This was done under number PL9455. In mid-1994, this application lapsed. None of the applications was put into evidence. Evidently they related to the software known as Silicon Cash. [757] About 7 July 1992 Evtech applied for a patent in respect of “Computer/Telephone Interface Apparatus”. Despite its name, that application related only to the Bulldog effect. It was numbered PL3381. A complete application was required on or before 7 July 1993. I can find no evidence that such an application was lodged, but on that date an international patent application was filed on Evtech’s behalf at a cost of nearly $8,000. That had the effect of keeping the application alive until 7 February 1994. It also meant that an international search report was prepared by the Australian Patent Office in its capacity as an international searching authority. That search did not identify any documents of sufficient relevance to impact on the validity of the claims in the application. On or just before 7 February 1994 a request for an international preliminary examination was lodged on Evtech’s behalf at a cost of $1,135. That was done expressly “to provide a delay of ten months before having to enter the national phase” in relation to the application. Thereupon the Australian Patent Office acted as the examining authority and established in the international preliminary examination report dated 18 February 1994 that in the opinion of the reporting officer, each of the claims in the application was novel, included an inventive step and had industrial applicability. Publication date was set for 20 January 1994. The application lapsed on 30 March 1995. 304 Mallett v Mallett (1984) 156 CLR 605 at p 627 (citations omitted). Although that was said in a judgment which was not a majority judgment, the point is not controversial. 305 Dr Venning had degrees in science and economics but had no formal training in valuation or valuation theory. His employment background was initially with the Commonwealth government and latterly in private industry, evaluating research projects for commercialisation. From 1992 he operated his own business valuing technology and reviewing technology projects. 306 By then it had been assigned to Evtech. -- 231 of 267 -- 224 [758] The plaintiff tendered a report by Mr M Horsburgh, a patent attorney. Mr Horsburgh was provided with Mr Boucher’s initial opinion on the Bulldog effect, which he understood to mean that the effect could lead to a higher net error rate in the processed signal than existed in the original signal. On this basis he expressed the view that the validity of any patent which could have been granted from the application would be in serious doubt on the ground of utility. I doubt whether Mr Horsburgh has accurately understood Mr Boucher’s original opinion. In any event I have already described the course of the evidence of Mr Boucher in relation to the Bulldog effect. Mr Horsburgh’s basis is not valid, and his opinion can not be accepted. [759] I have already found that Evtech notified IMS of application PL3381 in late October 1992. It did so by a document which contained the following paragraphs: “4/ The invention relates to an apparatus to interface a computer to a telephone and in particular relates to an interface suitable for telephone which may be a cellular telephone and may utilise the public switched telephone network (PSTN). 5/ The application is generic in that it describes the total function of the system including, for example, the date received filter processed (a function of the Electrocomm software) and, therefore, includes the software necessary to control communications which [sic] the telephone via and including a modem device.” The author of that document was not identified, but it was probably Andrew Coventry. He explained his understanding of the application during his evidence about that document: “Basically, your Honour, where the explanation is it is including the Electrocomm software and it’s explaining what I have said in my statements, that the software is an integral part of this patent, and it was one of the very reasons that we were able to get the patent because, your Honour - well, there were several reasons, but you could not patent the modem because they are out there, couldn’t patent the power supplies, couldn’t patent this because they were individual things already there, but the combination of them, with the description of the software in it, enabled the patent to go through - or enabled us to believe - to know that we had a product that would probably go through - it had enough novelty to go through to final patenting steps, and was that the basis of what would have given us an edge over other products at the time and in the future.” As I have already said the substance of the application in fact covered only the Bulldog effect. The A-class shares (continued) [760] Dr Venning thought it would be premature to base a valuation of the assets on a future income approach. He thought that the only basis for valuing the assets of Evtech would have to be a consideration of the amount for which an asset would be exchanged between a knowledgeable, willing, but not anxious investor and a knowledgeable, willing, but not anxious developer acting at arm’s length in an open and unrestricted venture market. In reaching this conclusion he took into account reports by Mr Boucher and Dr Graham, although these reports appeared to have had -- 232 of 267 -- 225 only a limited affect on his conclusion. The available information did not permit a precise valuation. However based on matters known in 1993, he thought that the intellectual property associated with the software (presumably, the copyright) and the patent application relating to the Bulldog effect “could not be valued at more than $250,000”. He further considered that if market developments after 1993 were taken into account in hindsight, those items would have a value of between nil and $100,000. [761] In some respects Dr Venning’s valuation is excessively favourable to the defendants. First, there is no evidence that Dr Venning appreciated that apart from the Bulldog effect, there was virtually nothing unique about Electrocomm. More importantly, it attributes significant value to “the Evtech System”, which it describes as “a novel concept at the time”, despite initially identifying the Electrocomm software as the relevant asset to be valued. However a concept is not an asset. To the extent, but only to the extent that the System included Electrocomm, it had value which belonged to Evtech. At most, it might be said that the concept or idea could give Evtech a head start, which might be beneficial in cash flow and market position terms; but these matters would be relevant only if the valuation methodology were based on future income. It was not. [762] In some respects, he may have erred in favour of the plaintiff. He took into account the reports of Mr Horsburgh and Mr Boucher in relation to the Bulldog effect, and expressed doubts about its utility. He also relied on information provided to him in discussions by a Mr Andrew Martin, whom the plaintiff did not call. Reliance on information provided out-of-court, which cannot accurately be reproduced, is to be deplored. He agreed that he would have used a different (or additional) methodology had the information provided to him suggested that the Evtech product would have required only six months development and testing prior to marketing rather than the two years which he assumed. I have already described the Bulldog effect at some length.307 Dr Venning described the value of the patent application as “limited”, but he did not put a separate figure on it. He lumped it with Electrocomm for valuation purposes. Despite the criticisms of his evidence, I am satisfied that if he has given insufficient weight to the application, that has been at least balanced by the matters referred to in the preceding paragraph. When all is said and done, there were a number of established communications programs on the market which did everything that Electrocomm could do except the Bulldog effect.308 Unlike Electrocomm they were fully developed and ran under Windows. I am satisfied that the combined value of Electrocomm and the Bulldog effect patent application did not, on the balance of probabilities, exceed $250,000. Probably they were worth much less. 307 Paras [332]-[341]. 308 Electrocomm also had an interface to enable the AT&Jn, command, but that was trivial. -- 233 of 267 -- 226 [763] Mr Walker’s evidence demonstrated that at all material times Evtech had a large deficiency in net assets, even when Dr Venning’s valuation was taken into the balance sheet: “ 28 February 30 June 1993 1993 $’000 $’000 Assets Cash 2 8 Plant and equipment 10 31 Intellectual property (per Venning’s valuation) 250 250 262 289 Liabilities Bank overdraft 61 3 Creditors 127 156 Loans - CPC 24 26 - Belrida Enterprises (Quinn) 110 100 - Others 3 400 325 685 Net assets/(deficiency) (63) (396)” On this basis, his opinion was that the issued capital of Evtech was worthless. In some cases that might be regarded as an inadequate foundation for such an opinion. That is not so in the present case. Shares in Evtech had value only to the extent that a prudent purchaser would pay money to acquire them (or, possibly, to the extent that such a purchaser would have paid money sooner than fail to obtain them).309 An informed and prudent purchaser, viewing Evtech’s balance sheet in the light of the prospects for its intangible property and the cost of realising those prospects would not have paid anything for the shares. They had no real or market value. [764] It follows that as a result of the misrepresentations, the plaintiff made the advance of $400,000 and received nothing of value in return. Subject to certain arguments to be mentioned shortly, the amount of the advance is properly claimable as part of the plaintiff’s damages. Consequential loss [765] In Kizbeau Pty Ltd v W G & B Pty Ltd, the High Court said: “In some cases of deceit it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business.”310 That is a particular example of damages being allowed for consequential loss. The principle was expressed in more general terms in Gould v Vaggelas: “There may be cases in which the purchaser continues to trade, either because he has no real alternative or because he has not become aware of the nature of the fraud, and in those circumstances incurs losses which are not represented by the difference between the price 309 Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 at p 565. 310 (1995) 184 CLR 281 at p 291. -- 234 of 267 -- 227 and value of the business. There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud, he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has [sic] already been taken into account in determining the value of the business.”311 The plaintiff submitted that this principle covered the present case. Its claim under this head, adjusted for items admittedly unproved, was for $432,337.98.312 [766] By 12 July 1993, when the full amount of the agreed advance had been paid, the Darts had substantial grounds for thinking that they had been misled. Any residual doubt was dispelled some time later that month. However they did not close Evtech down. On the contrary they manoeuvred to enable the plaintiff to buy the outstanding shares in Evtech and achieved this object in early August. By then, they were no longer influenced by the various misrepresentations made to them, but they still thought that it would be possible to market the modem and generate profits. They also thought that Evtech’s position might be improved by the China venture.313 It was important to them to succeed with Evtech if this was at all possible. They had invested in Evtech a substantial portion of the funds raised by the plaintiff early in the year. Plainly, if that investment were written off, it would have an adverse effect on the plaintiff’s share price. This was a matter which centrally concerned the Darts. The terms of the First Deed (and of the Bundaway Agreement before it) show that it was a matter of concern to the defendants also. It was reasonable for the plaintiff to continue to fund Evtech. [767] Nor was it unreasonable for the plaintiff to believe that with a little more work, its problems with the modem might be solved. The modem was always the aspect of the purchase which was of primary interest to the Darts, particularly after Mr Gillmore told them that Quicklink would be satisfactory as communications software. $150,000 had been paid to IMS as the licence fee. The fact that the plaintiff realised it had been misled did not alter the position. If Evtech were to be turned around, the expenditure of more money was inevitable, a fact known to the plaintiff since March.314 Salaries had to be paid, marketing had to be undertaken, and recurrent expenses had to be met. The plaintiff therefore continued to advance money to Evtech. No steps were taken to document the position and it is now unnecessary to consider what terms might be implied as between the plaintiff and Evtech. By November the plaintiff had advanced a further $204,634.30 on top of the $400,000 loan. By the end of February 1994 the total advanced (including the $400,000) was $744,585.14.315 311 (1985) 157 CLR 215 at p 221-2 per Gibbs J. 312 See Annexure G. 313 Para [672]. 314 Paras [277]-[278]. 315 Annexure G. -- 235 of 267 -- 228 [768] The defendants submitted that both before and after the execution of the Second Deed Evtech spent money on “the Mule”.316 They submitted that very little of the money which the plaintiff advanced was spent in relation to the original System, i.e. the System as at the end of 1992. Implicitly they submitted that this broke the chain of causation, at least in relation to consequential loss. I have already described developments in relation to the System during 1993.317 Evtech’s original concept of selling an office-in-a-briefcase did change. Driven by the desire for quick cash flow, the emphasis shifted to selling the IMS modem. By themselves, these changes were not sufficient, in my judgment, to have the effect for which the defendants contended. More was needed. [769] At the beginning of November the plaintiff realised that a new model of modem was essential and took steps to begin its development. This was not a minor change. The new model was to be based on a completely different chipset and would operate at six times the speed of the existing modem. 318 Competitors already had such a model on the market. Evtech had now to pay the price of its refusal to invest seriously in research and development. The advent of the PCMCIA card was now known to be imminent and a major competitor, Netcomm, had announced it would be selling the card. IMS had been abandoned as manufacturer of the new model in favour of Fujitsu. The expense of developing the new model would be considerable as would development of a PCMCIA card. Moving into research and development was the very thing which the Darts had originally been determined to avoid. No- one in Evtech had the skill or experience to design a new modem, so the task was contracted to Mr Morgan, despite the history of difficulties in the relationship with him. The office-in-a-briefcase concept and Electrocomm had both been abandoned. The plaintiff had now spent half as much again as it originally contemplated spending, and had nothing to show for its money. In short, it had hung on for long enough. To continue presented an unreasonable risk that it would bring further misfortune upon itself.319 Prompt action was now called for.320 Continuing to carry on the business could no longer be regarded as a consequence of the misleading and deceptive conduct. The defendants’ arguments [770] The defendants raise several matters by way of defence to both the primary claim and the consequential loss claim. First, they argued that the plaintiff was in breach of its obligations under cl 8.1(a) of the First Deed because it did not advance the amount of a loan as a lump sum. That argument may be disposed of shortly. That clause as amended expressly provided that the plaintiff could advance the money “by such amount/s and at such times as determined by [the plaintiff] during the period commencing on the date of this agreement and ending on 7 July 1993”. The one exception to that was an obligation to pay $100,000 on the completion date, an obligation with which the plaintiff complied. [771] Next the defendants argued that the plaintiff, through the Darts and Mr Cole, controlled Evtech’s financial affairs and used this control to make improper 316 See para [635]. 317 Paras [634]-[645]; [654]-[678]. 318 For data. Fax would operate at double the existing speed. 319 Compare Gould v Vaggelas (1985) 157 CLR 215 at p 256 per Brennan J. 320 Compare Gould v Vaggelas (1985) 157 CLR 215 at p 244 per Wilson J. -- 236 of 267 -- 229 payments from Evtech’s account. There is I find no doubt that the plaintiff, from 27 May 1993, kept tight control of Evtech’s financial affairs. [772] The first impropriety alleged was that payments were made without the authority of the Evtech board. I have already made specific findings adverse to the defendants on this point in relation to the IMS licence agreement and the employment of Mr Gillmore after 27 May 1993. As to other liabilities, the evidence on behalf of the plaintiff did not seek to establish that each payment was approved by the board. Rather, it went to establishing that the various liabilities were incurred with the authority of the board, either directly or (in case of small amounts) as liabilities incurred within the scope of the authority of Evtech’s officers. The evidence of the Darts and Mr Cole was supported by the “minutes” of the action meetings. The defendants attempted to suggest that some at least of these documents were fabricated or distorted. I reject that suggestion. I am satisfied that the liabilities were incurred with the authority of the Evtech board or of an officer of Evtech duly authorised by the board. The system of paying accounts without presentation to the board was accepted by the defendants. Indeed, Andrew Coventry signed a number of cheques for payment of such accounts.321 It is perhaps unfortunate that no system of presenting reports to the board on the state of Evtech’s finances was ever instituted, but it must be remembered that the period of joint control of Evtech was only two and a half months and for a good part of that time the board was dysfunctional. [773] A further submission was that some of the money was expended in breach of cl 13.1(d) of the shareholders’ agreement.322 It will be recalled that this was an agreement entered into by the Evtech shareholders among themselves shortly before the Bundaway Agreement.323 It was amended upon the completion of the First Deed to take account of the plaintiff’s presence on the share register of Evtech and for various other purposes, and the plaintiff became a party to it.324 As amended it provided that the parties should “procure” that Evtech not, without the unanimous approval of the directors, make any contract which would commit it to liability exceeding $5,000. The defendants submitted that the agreement was breached in relation to the employment of Mr Gillmore, the purchase for him of the Apple and NEC laptop computers, the IMS licence agreement and the rental charges for Evtech’s premises. I have already found that the Coventrys concurred in the employment of Mr Gillmore by Evtech after 27 May 1993 and in the IMS licence agreement. No question of the breach of the shareholders’ agreement arises in relation to those contracts.325 I have also found that expenditure by the plaintiff in relation to Mr Gillmore’s employment prior to 27 May and of the acquisition of the Apple laptop computer was on the plaintiff’s own account and did not form part of moneys advanced to Evtech. The shareholders’ agreement is irrelevant in relation to the rental charges levied at the end of December 1993; and in any event, I have found that the plaintiff cannot recover in relation to that rent.326 As to the NEC laptop computer, Mr Gillmore’s original authority to purchase came from the plaintiff in the person of Bryan Dart and the defendants concurred in that purchase. 321 Paras [248] ff. 322 It is apparent from the context of the submission that the reference in the defence to cl 13.1 (a) is a misprint. 323 Para [78]. 324 Para [230]. 325 The licence agreement was in fact made before the amendment of the shareholders’ agreement, but nothing turns on that fact. 326 Para [741]. -- 237 of 267 -- 230 I infer that they subsequently accepted the use of the machine by Evtech and that, at the latest time Evtech incurred its liability, there was no breach of the shareholders’ agreement. [774] It is unnecessary to consider what consequences might have arisen if there had been a breach of the shareholders’ agreement. Conclusion regarding advances [775] The plaintiff has proved its loss to the extent of the whole of the loan to Evtech pursuant to the First Deed and has also proved that it suffered consequential loss to the extent of $204,634.30. Costs of the interlocutory injunction [776] The plaintiff submitted that its costs of obtaining the interim and interlocutory injunctions were recoverable as damages being expenses reasonably incurred in mitigation of loss. It may be accepted that as a matter of general principle, expenses reasonably incurred in mitigation of loss are recoverable; the cases cited by the plaintiff adequately demonstrate that.327 At this stage it is unnecessary to consider whether the costs in question were reasonably incurred. That is because they are recoverable only as an award of costs embodied in an order of the Court. To allow them as damages would be to depart from the principle embodied in a long line of cases extending back at least as far as the middle of the nineteenth century. In QIW Retailers Ltd v Felview Pty Ltd, Macrossan J said: “In civil cases it is well-established that the rule should be adhered to that the taxed costs are what the law recognises as recoverable under the heading of expenditure for legal costs. The rule appears to be based upon a policy of not permitting double adjudication on the same point and the necessity to limit litigation in the administration of justice.”328 If the plaintiff is to recover these costs, it must do so pursuant to a costs order. Damages for liability on the undertakings [777] As an alternative to its claim for variation of the First Deed by deleting the obligation to issue the options, the plaintiff claimed as damages the liability that it incurred in obtaining the injunctions, namely any liability it is found to have on its undertakings as to damages. It is convenient to consider this matter later, when I consider whether there is any liability pursuant to the undertakings.329 Interest [778] The plaintiff claims interest pursuant to the Supreme Court Act 1995. No argument has been advanced against that claim and I can see no reason why interest should not be ordered. The plaintiff has been out of pocket since 1993. It is appropriate that it have interest on the amount of its judgment calculated from the date of the writ. The rate of interest should be that provided in the First Deed in respect of the 327 For example, Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322; Mudginberri Station Pty Ltd v The Australian Meat Industry Employees Union (1986) ATPR ¶40-708. 328 [1989] 2 Qd R 245 at p 261. The cases were considered at some length by Sheller JA in New South Wales Court of Appeal in Avenhouse v Hornsby Shire Council (1998) 44 NSWLR 1 at pp 34 ff. 329 Para [818]. -- 238 of 267 -- 231 advance, namely 1 percent above the rate stated by the National Australia Bank to be its benchmark rate from time to time. The amount of the latter rate is ascertainable from exhibit 328 for much of the period. If the parties cannot agree on the rates for the balance of the period, there should be an inquiry. 15. OTHER DEFENCES The bankruptcy of the defendants [779] The Coventrys pleaded that after the claims against them arose they became bankrupt. They further pleaded that in 1997, they were discharged from bankruptcy. At the end of the trial the plaintiff admitted these facts. The defendants pleaded that the plaintiff’s claims against them were claims for provable debts within the meaning of s 82 of the Bankruptcy Act 1966 (Cth). They pleaded that by reason of their discharge they were discharged by operation of s 153(1) of that Act from provable debts. The plaintiff did not challenge the last proposition, but denied that its claims were claims for provable debts. Andrew Coventry [780] Of the three money claims which the plaintiff makes, 330 only the first (damages pursuant to s 1005 of the Corporations Law) is made against the fifth defendant. It is, therefore, convenient to consider his position first. Liability under s 1005 is, on the face of things, within the scope of s 82(1) of the Bankruptcy Act. However that subsection is subject to s 82(2). It provides, “Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.” The question is whether the claim answers that description. [781] There is no doubt that the damages discussed above are in the nature of unliquidated damages. The amount of the damages is not fixed, but has to be determined at trial on the facts. It is not susceptible of simple mathematical calculation. Until the amount becomes the subject of a court order, it is indeterminate. The first part of the exclusion is proved. [782] The second part is less obvious. There are a number of arguments based on the history of the section, its function in the Act and the circumstances of this case which support the view that the damages are “by reason of a contract” (or perhaps, having regard to the contract as a deed, “by reason of a … promise”). However I must interpret the section having regard to precedent. Similar questions have been considered at first instance in the Supreme Court of New South Wales and the Federal Court, and by the Court of Appeal of Victoria.331 While it is possible to distinguish the cases individually, their collective weight leads me to the conclusion that the view to which I have referred is not open, at least to a judge sitting at first instance. The considered decision of the Court of Appeal is not one which I am 330 Para [724]. 331 CCA System Pty Ltd v Communications & Peripherals (Australia) Pty Ltd (1989) 15 ACLR 720; Re NIAA Corporation (in liq) (unreported), NSWSC, McClelland CJ in Eq, 2 December 1994, Reid v Interarch Australia Pty Ltd [2000] FCA 1328; ACCC v Kritharas (2000) 105 FCR 444; Aliferis v Kyriacon (2000) 1 VR 447. -- 239 of 267 -- 232 convinced is wrong; far from it. It is, therefore, my duty to follow it.332 The Court of Appeal held “that the correct test to apply for the purpose of deciding whether a demand is within the exclusion provided by s 82(2), leaving breach of trust to one side, is whether a contract or promise constitutes an essential element of the cause of action.”333 In the abstract neither a contract nor a promise constitutes an essential element of the cause of action against Andrew Coventry. The exception to the exclusion therefore does not apply. It follows that his liability under s 1005 was not provable in his bankruptcy. Michael Coventry [783] Michael Coventry’s position differs from that of his brother in that he is sued not only for damages under s 1005 of the Corporations Law, but also for damages for breach of warranty and for an indemnity. I said earlier that it was unnecessary to analyse the position of the third and fourth defendants with regard to these claims.334 Was this true of Michael Coventry? Putting it another way, if he is liable on this basis, does he have a defence under s 157 of the Bankruptcy Act 1966? [784] There is no doubt that if the claims for breach of warranty and indemnity provided the only cause of action available against Michael Coventry he would have a defence. The claims would undoubtedly arise “by reason of a contract” within the meaning of s 82(2) of the Bankruptcy Act 1966 and consequently they would be demands provable in the bankruptcy. The inevitable consequence would be that Michael Coventry was released from them upon his discharge from bankruptcy. But the plaintiff made no attempt to prove in the bankruptcy (or so I assume in the absence of any allegation to the contrary). Can it now pursue its statutory claim? [785] In my judgment the facts are indistinguishable from those in Aliferis v Kyriacou335 . In that case, the plaintiff sued a solicitor in both contract and tort, claiming a liquidated damages for the negligent performance of a retainer. The solicitor then entered into a deed of arrangement under Part X of the Bankruptcy Act 1966, but the plaintiff did not participate in it. The deed provided that the defendant was released from all provable debts upon its termination by the trustee making payment of the final dividend. It was so terminated. After it was terminated the plaintiff proceeded with her action. Section 233 provided that it was not competent for a creditor to take any fresh step in a legal proceeding except with the leave of the court so long as the deed remained in force. The plaintiff sought to proceed with the tortious claim without leave. The Court of Appeal held she was entitled to do so on the basis that the contract did not constitute an essential element of the cause of action in negligence, with the consequence that the claim was not one falling under the exception contained within s 82(2) of the Act. [786] The point argued on the appeal was carefully described by Phillips JA in the following terms: “This appeal was argued over whether the plaintiff’s claim in tort was within s.82(2) of the Bankruptcy Act 1966: was it a claim ‘arising otherwise than by reason of a contract’? If it was, then the plaintiff’s claim, which was for unliquidated damages, lay within 332 Australian Securities Commission v Marlborough Goldmines Ltd (1993) 67 ALJR 517 at 519. 333 (2000) 1 VR at p 463. 334 Para [725]. 335 (2000) 1 VR 447. -- 240 of 267 -- 233 s.82(2) and, being on that account not a provable claim under s.82(1), it could still be maintained by the plaintiff without regard to the deed of arrangement which the defendant entered into under Part X on 21 February 1995. On the other hand if the claim which the plaintiff was seeking to pursue by administering interrogatories was properly regarded as ‘arising ... by reason of a contract’, then the claim was provable and accordingly prejudiced by the Part X deed.[336] ” [787] It is arguable that the reasoning in the decision follows that formulation of the argument on the appeal and that the case decides only the question whether the cause of action in tort, considered without regard to the coexisting cause in contract, was provable. On this argument it would remain an open question whether the concurrent existence of a cause of action in contract for the same loss produced the result that the “demand” was not provable.337 That question would depend upon whether there was one demand or more than one demand when there was one loss recoverable by more than one cause of action. That is not a question which I ought to consider in the present case. The question is implicitly resolved in the decision of the Court of Appeal of Victoria; I am sitting at first instance; and I have not had the benefit of argument on the question. The facts of the present case being indistinguishable from those in Aliferis v Kyriacou, the outcome should be the same. Michael Coventry’s bankruptcy affords him no defence to the plaintiff’s claim under s 1005 of the Corporations Law. I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd338 [788] On 22 September 2000, the 47th day of the trial, the Court of Appeal delivered its judgment in the above case. On or shortly after 16 October, I understand Mr O’Donnell QC gave the defendants the reference to that case. They made no application to amend the defence and counterclaim to raise the point in the case. However during addresses, Andrew Coventry submitted that I should apportion blame for the plaintiff’s loss and referred to the case in support of that submission. Mr O’Donnell QC submitted that the case was distinguishable; and that in any event the issue had to be pleaded by the defendants. The matter was left on the basis that I would call for further submissions in the event that I held that the case was not distinguishable and that it needed to be raised in the defendants’ pleading.339 [789] There is no suggestion that I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd can be distinguished on the basis that it was decided under s 87 of the Trade Practices Act 1974, whereas the present case is primarily concerned with s 1325 of the Corporations Law. The distinction which the plaintiff draws between that case 336 See Bankruptcy Act ss 187(2), 237(2). The consequences of the latter were, in effect, considered by Brooking, Tadgell and McDonald JJA in Something Better Pty Ltd v Pyramid Building Society (in liq) [1996] 2 VR 352, which involved the equivalent section (s 243) affecting compositions under Part X. 337 See also McDonald, Henry & Meek: Australian Bankruptcy Law & Practice, at p 4,078. 338 [2000] QCA 383. On 21 November 2001, the High Court reserved its judgment in an appeal from this decision (B48 of 2001). 339 Two related questions would arise: first, whether the plaintiff carries the onus of proving the extent of its damages recoverable under the Law or whether the defendants must prove that they should be “reduced” under s 1325; and second, to what extent the defendants must raise the matter in their defence. Differences in the form of the legislation mean that these questions are not determined by decisions on the contributory negligence legislation, e.g. James v McCarthy [1958] QWN 32; Christie v Bridgestone Australia Pty Ltd (1983) 33 SASR 377. -- 241 of 267 -- 234 and this is one of fact. It submits that there, the trial judge found that there were two independent causes of loss. In the present case, it submits, the only cause of loss was the defendants’ misleading and deceptive conduct. It submits (or perhaps accepts), I think correctly, that in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd the court left open the question whether it had power to award only part of the loss causally connected with the defendants’ conduct in circumstances where the plaintiff’s conduct is not independent of the defendants’ breach. [790] Although in theory it would be open to me to attempt to resolve that question, it would be inappropriate for me to do so. There is a substantial body of authority which suggests that the court has no such power.340 On the other hand, if I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd is correctly decided, it is difficult to see how that can be so. It may be expected that some light will be thrown upon this problem when the High Court delivers its reserved decision in that case. Until then the decision should not be given any wider operation than is strictly required by the doctrine of precedent. [791] The first question is therefore whether in the present case it is possible to identify any independent cause of the plaintiff’s loss for which the plaintiff itself is responsible.341 The absence of any pleading raising such a cause in this context is a difficulty, but not an insurmountable one. The defendants did plead or raise alternative causes in other contexts. They denied that the plaintiff was induced to make or complete the First Deed by any of their representations and alleged that the Darts arranged for Peter Gillmore to report on the System; and that the Darts carried out their own study of the Evtech business plan, cash flow projections, product details and capabilities and relationship with IMS.342 During the trial they suggested that the Darts were motivated by a desire to take over Evtech and a desire to boost the market price of the plaintiff’s shares. It might also be argued that the plaintiff’s failure to carry out a proper due diligence examination of Evtech and its assets was a cause of its making and completion of the First Deed and thereby of its losses, although this would tend to contradict the defence as pleaded. [792] With some hesitation I have come to the conclusion that none of these allegations constitutes (or would if made constitute) an independent cause of the plaintiff’s loss. To the extent that they have been proved they operated to facilitate the plaintiff’s reliance upon the defendants’ representations, rather than directly to cause the plaintiff to make or complete the First Deed. I confess to some difficulty in rating the independence of multiple causes in this context, but I attempt that exercise because I think it is compelled by the decision in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd. It follows that even if these matters were pleaded they would not enliven the power to make a pecuniary order for part only of the plaintiff’s loss under s 1325 of the Corporations Law. In view of the fact that the matter was specifically drawn to the defendants’ attention around 16 October 2000, 340 Sutton v A J Thompson Pty Ltd (1987) 73 ALR 233 at 239; Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 516-7. It might also be thought that the decision of the High Court in Henville v Walker (2001) 75 ALJR 1410 supports this view. 341 It might be argued that on the logic of I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd, the power to allow only part of the plaintiff’s loss extends to a case where there is an independent cause of that loss for which the defendant is not responsible, regardless of the plaintiff's involvement. However so to decide would also constitute an extension of the decision. 342 Defence and counterclaim para 7(c)-(e). -- 242 of 267 -- 235 it would not be appropriate to allow them to reopen to plead any other possible cause. [793] I record that if this were a case to which s 10 of the Law Reform Act 1995 applied, I would assess the plaintiff’s share in the responsibility for its damage at one third. 16. THE COUNTERCLAIMS AND CROSS-CLAIMS [794] The cross-claimants counterclaimed against the plaintiff and cross-claimed against the Darts personally. Their claims can be divided into four categories: 1. misrepresentations in late 1992 2. misrepresentations in late July and early August 1993 3. breach of the plaintiff’s undertaking as to damages 4. the Second Deed. The 1992 representations [795] The cross-claimants pleaded the following representations: “(i) That the Darts personally were, and that the plaintiff was, widely experienced and highly competent in the commercialization of technology and had major contacts with industry and the media; (ii) That the Darts personally were, and that the plaintiff was, well-placed, swiftly & competently, by themselves or by the plaintiff or by some person or company in their control or under their influence, or by & through all of these, to exploit the fleeting ‘window of opportunity’ available for profitable commercialization of the Cell-U-Comm System in the swiftly-changing global electronics market; (iii) That the Darts or such company, would float, or arrange flotation of, the System on the Canadian Stock Exchange and market the System in the United States of America.” These representations were alleged to have been made by both the Darts: “(i) On Thursday 29 October 1992 in the offices of the plaintiff at Level 10, Corporate Centre, Bundall; (ii) On Tuesday 3 November 1992 at 4 Strathaird Road Bundall; (iii) On Friday 6 November 1992 in the offices of the Plaintiff at Corporate Centre, Bundall; and, (iv) On Monday 9 November 1992, in the offices of the Plaintiff at Corporate Centre, Bundall.” The cross-claimants alleged that they were induced by those representations to abandon the other avenues of financing Evtech and to enter into the Bundaway Agreement. They further alleged that Bundaway orally nominated the plaintiff to be the purchaser of one-half of the vendor’s shares in Evtech and that as a result of the -- 243 of 267 -- 236 execution and completion of the First Deed, the plaintiff took effective control of Evtech. Thereby, they claimed, they lost the value of their shares in Evtech. They pleaded that the plaintiff was liable in deceit and under s 52 of the Trade Practices Act 1974 and that the Darts were liable as the actual perpetrators of the deceit and by reason of s 75B of the Act. The making of the representations [796] There is no doubt that the Darts’ experience, competence and contacts in the commercialisation of technology were discussed during the meetings which preceded the Bundaway Agreement. The plaintiff submitted that there was no evidence that they claimed to be widely experienced or highly competent. I am satisfied that Kevin Dart set out to achieve an image of expertise for the plaintiff. He told the Coventrys that both he and his brother were experts in the commercialisation of technology. He initially admitted this in cross-examination and I do not accept his subsequent attempt to resile from the admission. The Darts backed this up with some detail of the plaintiff’s history, referring to its initial focus on property development as well as it is more recent involvement with the CSIRO. The Coventrys were told of the pending litigation against CSIRO and that the plaintiff was currently evaluating other technology. They were given copies of the plaintiff’s latest annual return and of the prospectus which was then current. They were told that the plaintiff had a contact base that could be utilised to assist in areas such as manufacturing, distribution, marketing and sales opportunities. [797] Andrew Coventry said that he was told that the plaintiff had been involved in technology for a long time and seemed to suggest that he was also told that the plaintiff was involved in commercialising technology other than through its association with CSIRO. In this respect, he was not corroborated by Mr Quinn. His claims do not sit happily with the terms of the two documents which he was given. They are vague and general, as is the allegation that the Darts said that they were “widely experienced” and “highly competent” in the commercialisation of technology. No doubt the Darts, and in particular Kevin Dart, were trying to impress the promoters. It would not be surprising if the conversations involved some element of hyperbole or “puffery”. By the end Andrew Coventry’s evidence did not reflect the particularity of the cross-claimants’ pleading. On the most charitable assessment of it from the defendants’ point of view, I thought he was reconstructing the conversations and including in them whatever he thought would have been said. In Watson v Foxman, McClelland J said: “Where [alleged misleading] conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly when disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by -- 244 of 267 -- 237 perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”343 That passage is particularly relevant in relation to the evaluation of Andrew Coventry’s version of these conversations. I am not satisfied that the conversations went as far as Andrew Coventry claims. [798] The plaintiff’s approach to commercialisation of technology was described by Kevin Dart in his evidence in chief in these terms: “Looking at the technology opportunities of the kind you have described, to what extent did you see the lack of technology abilities within the company personnel as hindering or otherwise the pursuit of those opportunities?-- Certainly it would have been better to have had a person that knew and had technology expertise, but it was certainly - our contact base was fairly large and wide at that point. We always worked on the - whether it was real estate or technology - that you worked on a contact base to assist you on the areas that you were short on. You could do a property development without being the builder or the carpenter or the electrician.” He initially implied that the plaintiff’s contacts had experience in commercialisation of technology, but when he was pressed for detail, even during evidence in chief, it emerged that most of the so-called contacts were investment bankers, accountants or stockbrokers. Mr Dart sought to justify this on the basis that these people had clients who would be able to help commercialise the technology, but he was unable to give particulars. [799] Of the statements which I have found were made by the Darts two were, in my judgment, misleading and deceptive. The Darts were not experts in the commercialisation of technology and the plaintiff did not have a contact base that could be utilised to assist in areas such as manufacturing, distribution, marketing and sales opportunities. It should be noted that these are not statements in the precise terms pleaded by the cross-claimants. [800] The representation numbered (ii) in the pleading344 is vague and imprecise. It is doubtful whether it adds anything to what has already been discussed. In any event, there is no evidence that it was made. [801] As to the third alleged representation it was common ground that there was some discussion in late 1992, at least regarding the possibility that Evtech or an associated company might be floated in North America to market the System. The Darts, Mr Cole and Mr Quinn all said that the matter went no further than being discussed as a possibility. Andrew Coventry’s version was somewhat different. He said that he or Mr Quinn mentioned that they had been thinking of floating a company in America with IMS. He continued: “They had convinced us, even our desire to put the unit on to the American stock exchange with IMS assistance, was the wrong way to go and they could do it better through the Canadian exchange 343 (2000) 49 NSWLR 315 at pp 318-319. 344 Para [795]. -- 245 of 267 -- 238 which was easier. They had told us that we would be wealthy overnight (they later provided Tom a letter, showing how much it would be worth to us and what they had done in the past ie the buildings they had built). We took great comfort in what they told us, especially that they had said, they had ‘all the contacts’ and knew how to go about all the things that we had wanted to do. At the meeting (the third meeting) Kevin Dart said he knew the chap we had been talking to re an American stock exchange float in conjunction with IMS, and told us that he was a crook, and both Kevin and Bryan convinced us that they were the best at that sort of thing, and had the knowledge and experience to make it all happen. They stated money was no problem and would be there whenever we needed it. They said that literally over night from Evtech listing on the stock exchange we would be rich. They indicated that with them onside we would have a company well financed and leading the world in this area of technology. We were impressed that they were able to fulfil our objective and came away convinced. Kevin did most of the talking re the stock exchange but Bryan Dart said ‘We have good contacts on the Canadian Stock Exchange and can get Evtech listed there no worries. This is much easier than getting listed on the American stock exchange, but has the same results because Americans invest in Canadian stocks. You will be millionaires overnight’.” Even that version does not amount to evidence of a representation that the Darts (or anyone else) would float or arrange flotation on the Canadian stock exchange. The obscure reference in cl 15C of the Bundaway Agreement to “Evtech International Pty Limited” hardly takes the matter any further. [802] I am not satisfied that the representation alleged in paragraph (iii) of the pleading was made. Inducement [803] The cross-claimants pleaded that they were induced by these representations to abandon other avenues of financing Evtech and to enter into the Bundaway Agreement. They gave particulars of other avenues of finance allegedly abandoned. This claim may be disposed of briefly. Mr Quinn had neither the willingness nor the capacity to fund the commercialisation of the Evtech System. The suggestion that Evtech could have self-funded through its development of New Zealand markets is quite unsupported by evidence. There is no direct evidence that Robert Brown had the capacity or the willingness to fund the development, either through loan moneys or equity investment,345 and I am not prepared to draw such an inference on the basis of Andrew Coventry’s evidence. There is no evidence that finance could have been made available by “venture capitalist investors”. Finally Andrew Coventry’s evidence regarding possible Indonesian investors is vague and unsupported. I am unable to find that finance was available from this source. [804] Evtech was in dire financial straits. The Darts represented the defendants’ only prospect of profiting from their shareholdings. The Darts’ statements regarding their expertise and contact base were so peripheral to the defendants’ decision to 345 Although at one point named by the defendants as a witness, Mr Brown was not called. -- 246 of 267 -- 239 enter into the Bundaway Agreement as to be immaterial. They would have made the First Deed regardless of those statements. The cross-claimants fail on the issue of inducement. Causation and damage [805] The causal mechanism alleged by the cross-claimants (nomination of the plaintiff by Bundaway to be the purchaser of half of the defendants’ Evtech shares) was not made out on the evidence. Even assuming a different approach is open, the cross- claimants have not shown that they suffered any loss. Had the Bundaway Agreement and the First Deed not been made, they would have retained their Evtech shares. In the absence of finance to commercialise the shares, they were certainly of no value; and I have found that even with the finance provided by the plaintiff, they were still valueless.346 The cross-claimants suffered no loss. The 1993 representations [806] I have already set out paragraph 50 of the counterclaim and discussed the cross- claimants’case regarding the so-called Chinese venture at some length.347 I have rejected Andrew Coventry’s evidence in relation to it. The misrepresentations alleged to have been made by the Darts in July and August 1993, relate to that venture and are covered by findings already made. I am not satisfied that the Darts were guilty of misleading or deceptive conduct nor that their conduct induced the cross-claimants to part with their shares in those months. The claim pursuant to the plaintiff’s undertaking as to damages [807] On the 30th day of the trial, the cross-claimants obtained leave to amend the counterclaim to include a claim for damages pursuant to the plaintiff’s undertakings as to damages given when it obtained injunctions to restrain dealings in the options. The amendment was in these terms: “60. (a) On 1 June, 1994 the plaintiff gave an undertaking as to damages in the usual form (being the form set out in order 58 rule 12 of the Rules of the Supreme Court) upon the grant of an interlocutory injunction restraining the defendants from exercising rights under the options referred to in paragraph 8 of the Statement of Claim. (b) As a consequence of the injunction the defendants were prevented from exercising their rights under the options until the options expired on 10 November, 1997 and thus sustained damage by reason of the grant of the injunction: Particulars of Damage (i) the present value of the options is nil (ii) the value of the options as at the first date (1-06-94) upon which the defendants could have exercised their right under same was 346 Para [763]. 347 Paras [309]-[329]. -- 247 of 267 -- 240 nine hundred and twenty thousand dollars (being $1.15 per option by 800,000 options). (c) The counterclaimants are entitled to an assessment of damages in the above sum by reason of the matters set out in the defence together with interest at the rate of 10% per annum from 1 June, 1994 to date of judgement.” They had sought to amend in wider terms, claiming to have damages assessed on several later dates up to 1997, but leave was refused in that respect due to the lateness of the application and the extent of the fresh issues which would have been raised. The injunctions and the undertakings [808] The writ was issued on 1 June 1994. On that day the plaintiff obtained an interim injunction restraining the trustee defendants from dealing with the options. It was granted upon the plaintiff’s giving the usual undertaking as to damages. It was extended from time to time during the next fortnight, and on 16 June, an interlocutory injunction was granted, upon the same undertaking. At that time Order 58 rule 12 of the Rules of the Supreme Court of Queensland provided: “12 (1) Every interlocutory order for an injunction shall contain an undertaking by the party at whose instance it is granted to pay to the opposite party any damages which such opposite party may sustain by reason of the injunction, and which the Court or Judge may think the party ought to pay. (2) An application for an order for payment of such damages shall be made by motion, and the damages may be ordered to be assessed in any manner in which damages may e assessed in an action.” [809] It was not the practice of the court to insist upon literal compliance with that rule. Instead, Practice Direction no 5 of 1982348 provided: “ UNDERTAKINGS AS TO DAMAGES 1. In any matter in which a party is subjected to a restraint imposed by an interlocutory or interim injunction or undertaking (whether such imposition is ex parte, by consent, or otherwise) the Court or Judge or Master will require the party (whether or not named in the proceedings as a party) having the benefit of the restraint to give to the Court the usual undertaking as to damages in the terms set out hereunder. 2. Such undertaking may be expressed by the party giving it and in any order recording it, by the use of the words ‘usual undertaking as to damages’. 348 [1982] Qd R 651. -- 248 of 267 -- 241 … Usual Undertakings as to Damages ‘The plaintiff [or defendant] undertakes to the Court that he will pay to any party restrained or affected by this injunction [or undertaking or caveat] any damages which such party may sustain by reason of the injunction [or undertaking or caveat] and which the Court or a Judge may think he ought to pay.’” [810] That form of undertaking is substantially what was described by Aickin J as “the customary form which has been in use since about the middle of the nineteenth century in cases where an injunction is granted either ex parte or on motion on notice to operate until the determination of the action or further order.”349 Its function is that described by Stephen J: “A claimant under an undertaking cannot complain of any breach of contract nor of any breach of duty, tortious or otherwise, owed to him, nor, of course, of any breach of the undertaking. What occurs when such an undertaking is extracted from a plaintiff is that the court, as a condition of its grant of interim or interlocutory injunctive relief, has ensured that, should it turn out that that relief should never have been granted, it will have the power, so far as monetary compensation allows, to make good the harm which the grant has done to the defendant. The court acquires powers to do justice between the parties which it would not otherwise possess.”350 In the same case, Gibbs J said: “The object of requiring a plaintiff who seeks an interlocutory injunction to enter into an undertaking of this kind is to attempt to ensure that a defendant will receive compensation for any loss which he suffers by reason of the grant of the injunction if it appears in the event that the plaintiff was not entitled to obtain it. The insistence upon the giving of an undertaking is a very important, if not an essential, means of preventing injustice from being done by the court when it makes an order at an interlocutory stage, before the rights of the parties have been finally determined.” 351 [811] It is evident from the terms of the undertaking that to succeed in a claim pursuant to it, the claimants must demonstrate that they were restrained or affected by the injunction; that they have sustained loss or damage sounding in damages;352 that they did so by reason of the injunction; and that the plaintiff ought to pay such damages. There is no doubt that the trustee defendants satisfy the description in the first of these elements. The plaintiff submitted that the cross-claimants sustained no “real harm” by reason of the injunctions (the second and third elements); and that the court should refuse to enforce the undertaking in the exercise of its discretion (the fourth element). 349 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-81) 146 CLR 249 at p 260. Aickin J was sitting at first instance, but there was substantial agreement with his formulation of the law in the reasons delivered on appeal. 350 Ibid at p 318. 351 Ibid at p 311. See also F Hoffman-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 at p 361 per Lord Diplock. 352 The expression “any damages which such party may sustain” is elliptical, but I take it that this is its meaning. -- 249 of 267 -- 242 Harm suffered by the cross claimants [812] The cross-claimants identified the harm suffered as the loss of the value of their options. The plaintiff tacitly conceded that the cross-claimants had lost the market value of their options, but argued that this was only part of the story. It submitted that the injunctions also produced the consequence of reducing the trustee defendants’ exposure to paying damages to the plaintiff in an amount equal to the market value of the options at the time of issue. By reason of the injunctions the loss which would otherwise have been recoverable by the plaintiff from the trustee defendants (namely the market value of the options at the time of issue) was avoided. This, went the argument, reduced their exposure to paying damages to the plaintiff. “Real harm” had to be assessed taking this into account. Harm would be suffered only if the market value of the options on 1 July 1994 exceeded the value at the time of issue plus interest. On the facts of the case the two amounts cancelled each other out. [813] The validity of that submission depends upon the plaintiff’s entitlement to recover damages from the trustee defendants for the value of the options. In its supplementary submissions the plaintiff conceded that no loss is recoverable for the value of the options by reason of the decision of the High Court in Duke Group Limited (in liquidation) v Pilmer353 . The corollary is that the argument that the cross-claimants suffered no “real harm” must fail. Discretionary factors: supervening event [814] It is generally accepted that enforcement of an undertaking as to damages is discretionary. However some variety is to be found in the expressions of the ambit of the discretion. Gibbs J described it these terms: “The court has a discretion not to enforce such an undertaking, but unless the defendant has been guilty of conduct that would render it inequitable to enforce the undertaking it would seem just, speaking generally, that a plaintiff who has failed on the merits should recompense the defendant for the damage that he has suffered as the result of the making of the interlocutory order.”354 Mason J (albeit that he was dissenting on the facts) said: “There are statements which indicate that the court has a discretion to decide whether it shall order an inquiry for damages for breach of an undertaking given to the court - see Smith v. Day (1882) 21 ChD, at pp 425, 427. But the discretion is to be exercised according to well-settled principle. Generally speaking, so long as the claim for damages is not trivial or trifling an inquiry should be directed and the defendant will be entitled to recover the loss which is the natural consequence of the grant of the injunction.”355 The latter formulation has been applied by a Full Court of the Supreme Court of Western Australia.356 On the other hand, in Cheltenham & Gloucester Building Society v Ricketts, Peter Gibson LJ described the discretion as “not limited in any 353 (2001) 75 ALJR 1067. 354 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-81) 146 CLR 249 at 311-312. 355 Ibid at 323. 356 McCleary v Commonwealth Director of Public Prosecutions [1998] 20 WAR 288. -- 250 of 267 -- 243 way”.357 Enforcement of the undertaking is itself a form of equitable relief.358 It is, therefore, easy to conclude that the discretion must be exercised in accordance with the principles of equity. In my judgment it is not an unconstrained discretion. [815] It is now settled that the relevant enquiry focuses upon the plaintiff’s success or failure at trial, not upon whether it was correct in the circumstances prevailing at the time to grant the interlocutory injunction. The contrary view, enunciated by Jessel MR in Smith v Day359 , was rejected by the English Court of Appeal in Griffith v Blake360 and by the High Court in Ansett. In the latter case Aickin J observed that in Smith v Day, “Cotton LJ dissented from those observations [of Jessel MR] and pointed out that in Novello v James ((1854) 5 De G M & G 876) Knight Bruce LJ and Turner LJ had said that the fact that the law was doubtful was no reason for not ordering damages.” 361 [816] The plaintiff submitted that although as a general rule a court would consider it just to enforce the undertaking where the plaintiff fails on the merits at trial, that was not so where it was only through the occurrence of subsequent events that the grant of final relief became inappropriate. This, it submitted, was such a case. The subsequent event upon which the plaintiff relied was the expiry of the options in 1997. For the legal proposition it relied principally upon a passage in Spry: Equitable Remedies362 . Authoritative support for the proposition is lacking363 ; at least, none was cited to me. Counsel cited a number of United States decisions and also passages from the Corpus Juris Secundum and American Jurisprudence. I am reluctant to rely upon such authority in view of what was said by Aickin J on the question of American authorities in this context: “I have not found the American authorities helpful upon the general nature of the equitable principles which are applicable. They appear to me mostly to proceed upon a view of the principles the same as or similar to that adopted by Jessel M.R. and subsequently rejected by the later English authorities referred to above.”364 On the other hand, the conclusion for which the plaintiff contends (if there is no other relevant factor) produces a fair result, at least provided that the case is one where it can be said that, but for the supervening event, the final injunction would have been granted. [817] It is unnecessary that I express a concluded view on this point. It is also unnecessary for me to determine whether the expiry of the options on a predetermined date between the date of grant of the injunctions and the date of trial in accordance with terms known to all parties when the injunctions were granted constituted a supervening event. Even if it did this was not a case where, absent the supervening event, a permanent injunction would have been granted. On the contrary, even if the options were still exercisable, permanent relief would be 357 [1993] 1 WLR 1545 at p 1555. 358 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-81) 146 CLR 249 at p 61 per Aickin J; Cheltenham v Ricketts [1993] 1 WLR 1545 at p 1545. 359 (1882) 21 Ch D 421. 360 (1884) 27 Ch D 474. 361 (1979) 146 CLR 249 at p 261. 362 Sixth edition (2001) at p 656. 363 The plaintiff conceded that the case cited by Spry, Ushers Brewery Ltd v P. S. King & Co (Finance) Ltd [1972] Ch 148, did not directly support the proposition for which it is cited. 364 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1979-1981) 146 CLR 249 at 262. -- 251 of 267 -- 244 refused. When the injunctions were granted the permanent relief sought by the plaintiff against the trustee defendants was an order cancelling their options and an order restraining them from dealing with the options. It may be assumed in the plaintiff’s favour that the former order is materially the same as that which was ultimately sought.365 Even if the options were still exercisable, neither order would be made. For the reasons which I have already given366 , the plaintiff is not entitled to variation or avoidance of the deed under s 1325 of the Corporations Law. By parity of reasoning it would not be entitled to a permanent injunction restraining dealings in the options. It has demonstrated no interest which such an injunction could protect.367 The plaintiff’s lack of success on the issue at trial is not due to the supervening event (the expiry of the options), but to a lack of merits. Discretionary factors: attempted mitigation [818] I have referred above to the plaintiff’s argument that it is entitled to damages equivalent to the amount payable by it pursuant to the undertakings.368 If that argument is correct, it would in my view be appropriate to refrain from ordering payment of damages pursuant to the undertakings, in order to avoid circularity. The essence of the plaintiff’s submission was that the liability on the undertakings was incurred in an attempt to mitigate damage. It submitted that the mere fact that the High Court had decided that it suffered no damage in respect of the options did not foreclose this argument. Mr O’Donnell QC recognised that it is unusual for a party to be claiming for liability incurred in an act of mitigation where it subsequently turns out that the apprehended damage was not loss at all and frankly admitted that no case dealing with this situation had been identified. He submitted that it was well established that the fact that an expense or liability incurred in an act of mitigation turned out to be well in excess of the damage in fact suffered (or which otherwise would have been suffered) is no bar to recovery provided the act of mitigation was reasonable. The same result should logically follow, he argued, if the anticipated loss turned out to be minimal or even non-existent. He submitted that the critical question was whether the action taken was a reasonable at the time, on the basis of what was known at the time. The standard of reasonableness in this context was not high. I set out part of his argument in full: “At June 1994 it was not established that CPC would suffer no loss by issuing the options. Indeed, there was no clear authority on the point (as was noted by the Full Court of South Australia (1999) 73 S.A.S.R. 64 at p. 159, para. 430 & ff.). What slim authority there was on the point favoured the view that substantial damages were recoverable, equal to what CPC could have realised had it sold the options to others (less the value of the shares it received): see Banco de Portugal v Waterlow & Sons (1932) A.C. 452 – as discussed by the Full Court in Duke Group v Pilmer at pp.160 – 161. Also, see Scott Group Ltd. v McFarlane (1978) 1 N.Z.L.R. 553 (in which the Court of Appeal in New Zealand proceeded on the basis that damages could be awarded by reference to the value of shares allotted by a public company to acquire assets). The view could 365 Namely an order varying the First Deed so as to delete the obligation to issue the options, or an order avoiding the First Deed. 366 Paras [717]-[723]. 367 It was not argued that the plaintiff would have had standing to act on behalf of shareholders or option holders. 368 Para [777]. -- 252 of 267 -- 245 reasonably have been taken, at that time, that CPC did suffer loss by issuing the options, the loss being the difference between what CPC could have realised by issuing the options to a willing but not anxious buyer, less the value of the shares in Evtech Pty. Ltd. which CPC received in the transaction. Indeed, the fact that in May 1999 the Full Court of South Australia in Duke Group v Pilmer unanimously reached a like conclusion (at pp.160 – 162), is strong support for saying that such a view could reasonably have been taken in June 1994.” [819] This claim was not made on the pleadings.369 Nor, as far as I can discover, was the question whether, when the plaintiff sought the injunction it was attempting to mitigate its loss explicitly addressed in the evidence. Those are serious obstacles to an argument based on the proposition that it was not the mitigatory effect of what was done which justified the claim, but the reasonable mitigatory intention which did so. And there is an even more substantial obstacle. It is now settled that the risk of error in the grant of an interlocutory injunction must be borne by the applicant. It is not to the point that the law was doubtful at the time the injunction was sought or that the plaintiff did not act unreasonably in the circumstances prevailing at that time. In the absence of unusual circumstances an applicant for relief given on the uncertain basis which always surrounds interlocutory injunctions carries the risk of error.370 The plaintiff’s submission would circumvent this settled rule. The plaintiff is not entitled to damages on the basis claimed and consequently, circularity does not afford a reason for refusing to enforce its undertakings. Other discretionary factors [820] Apart from the foregoing issues the plaintiff expressly disclaimed any argument that the Court should refuse to enforce the undertakings in the exercise of its discretion. It did not refer to any other factors as matters justifying such a refusal, and I have been unable to identify any. On the contrary some aspects of the plaintiff’s conduct leading up to the application for the injunction reflect poorly upon it. First, the plaintiff knew of the misrepresentations in August 1993 (as I have found above371 ), but made no application to the court until June 1994. This delay is unexplained. Second, it is apparent that the application had been in preparation for some time; the plaintiff had several lengthy affidavits. Kevin Dart testified: “HIS HONOUR: What was the urgency? I shouldn’t assume something, sorry. The Court record seems to indicate that the proceedings proceeded with some degree of urgency; is that right?-- From memory, I think, your Honour, it was approaching the end of the escrow date. But this had been known for 12 months. What was the sudden rush? What brought about the sudden rush?-- It was a lot of - it wasn’t a sudden rush, though it may appear that way. There was quite a lot of discussion that led up to this at that period of time, as to whether we 369 Para [713]. 370 See para [809] above, and Air Express Ltd v Ansett Transport (Operations) Pty Ltd (1979-81) 146 CLR 249 at pp 262-2 per Aickin J, p. 310 per Barwick CJ, and at 322-3 per Mason J. See also Novello v James (1854) ER 1111 at 1112 per Turner LJ; Graham v Campbell (1878) 7 Ch D 490 at 494 and Griffith v Blake (1884) Ch D 474. 371 Paras [656]-[659]. -- 253 of 267 -- 246 were actually going to go down the path of litigation. It was serious consideration. It appears from the Court record that, when you first came to Court, you did so ex parte, that is, without the other side present; was that right?-- I don’t recall, your Honour, whether that was the case. Can you think of any circumstances that existed around about 1 June, the day the writ was issued, which amounted to urgency?-- Nothing comes to mind. We would have had advice on it. There would have been a reason for us to do it.” The plaintiff offered no explanation of why it did not bring the application on notice. It did not even send a letter before action. The circumstances suggest an attempted ambush. In light of my findings it is unnecessary to elaborate on these matters. Amount of damages [821] The amount which should be ordered to be paid pursuant to the undertakings is the full amount of the cross-claimants’ loss caused by the injunctions. None of the difficult questions involving remoteness and measure of damages discussed by Aickin J in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd372 arises in this case. The amount of the cross-claimants’ loss is the value of the options of which they were deprived. The options were of course a chose in action, but they were readily marketable (being listed on the stock exchange) and were freely assignable. Their value is to be measured by the amount for which the trustee defendants could have sold them on the date of the injunction.373 The trustee defendants each held 400,000 options. The evidence of Mr Willis (who was called by the plaintiff) established that the level of trading in the plaintiff’s options was so low that any attempt to sell parcels of that size on market would have depressed the price significantly. Mr Willis gave evidence that the options would have realised their best price through a private placement. A vendor endeavouring to place parcels of options of this size would have been obliged to accept a discount on the market price. That effect, called “blockage”, has been recognised in a number of cases.374 Mr Willis valued the options by this method. His opinion was that on 1 June 1994 the options so valued were worth 90 cents each. [822] That represented a very substantial discount from the market price of $1.40 on that date. I felt some scepticism about the size of that discount. However in the end Mr Willis’ evidence was unshaken by cross-examination and uncontradicted by any other witness. I have come to the conclusion that I must accept it. It follows that each of the pairs of cross-claimants is entitled to damages of $360,000 pursuant to the plaintiff’s undertaking as to damages. 372 (1979) 146 CLR 249 at pp 262 ff. 373 It might have been replacement cost had the defendants treated the plaintiff’s conduct as repudiation of the option contracts, elected to determine those contracts and gone into the market to obtain replacements. 374 Gregory v Commissioner of Taxation (1971) 123 CLR 547 at pp 570-572 per Gibbs J; Executors of the Estate of Bruce-Smith v Commissioner of Taxation (1973) 130 CLR 340 at pp 345-348 per Stephen J; Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd (1981) 146 CLR 336 at p 382 per Mason J; Commissioner of Taxation v Pacific Dunlop Ltd (1999) 87 FCR 253 at p 277 (Full Court). -- 254 of 267 -- 247 The balance payable under Second Deed [823] Under the Second Deed, the third defendants sold their remaining 410 A-class shares in Evtech to the plaintiff and the fourth defendant sold his remaining 400 shares. The third defendants were paid $3,400 on the signing of the deed and the fourth defendant was paid $2,400. A balance of $37,600 each remained payable to the cross-claimants. Curiously, they sought a declaration that the deed remained binding on the plaintiff, but did not seek judgment for the outstanding price. [824] The cross-claimants have succeeded in relation to the Second Deed.375 There is, however, a possible problem in making the declaration sought, since Belrida is party to the deed and has compromised its position with the plaintiff. In its written submissions the plaintiff recognised that unless it could avoid its obligations under the Second Deed, it would be liable to the cross-claimants for the outstanding portion of the price. There seems to be no reason why judgment should not be entered accordingly. Interest [825] No specific submissions were addressed to me on the question of interest. The cross-claimants are entitled to interest on the balance of the price payable under the Second Deed from the date when payment was due, namely 29 July 1994. As regards the damages payable pursuant to the undertaking as to damages, interest should be payable from 1 June 1994. It is true that the claim was brought only in 2000, but claims of this nature are often not brought until after the trial of the action. In the absence of any reason to adopt a different figure, it seems equitable that interest should be at the same rate as that payable on the plaintiff’s judgment. [826] I propose to make the following orders: 1. Judgment for the plaintiff against the third, fourth and fifth defendants for $604,634.30 plus interest to date, calculated from 1 June 1994 at the rate which is one percent higher than the benchmark rate of the National Australia Bank from time to time. 2. Judgment for the first cross-claimants against the plaintiff for $397,600 plus interest to date, calculated on $360,000 from 1 June 1994 and on $37,600 from 29 July 1994, at the rate which is one percent higher than the benchmark rate of the National Australia Bank from time to time. 3. Judgment for the second cross-claimants against the plaintiff for $397,600 plus interest to date, calculated on $360,000 from 1 June 1994 and on $37,600 from 29 July 1994, at the rate which is one percent higher than the benchmark rate of the National Australia Bank from time to time. [827] I shall relist the action for argument as to the form of the order and costs. 375 Para [723]. -- 255 of 267 -- 248 ANNEXURE A TESTING BY MR BOUCHER AND MR WELSTEAD ON 8 DECEMBER 99 (a) Test Sware From/to Network 1 2 3 4 5 6 7 8 9 10 Total 1 EC 2.3 Cptr Î fax Cellular NA (b) 2 EC 2.3 Cptr Î fax Cellular r r r r(c) r r r r r r(d) 0/10 3 EC 1 Cptr Î fax Cellular 9 9 r r r r 9 r 9 r 4/10 4 EC 1 Fax Î cptr Cellular r r r r r r r 0/7 5 EC 2.3 Fax Î cptr Cellular r r r 0/3 6 EC 2.3 Cptr Î fax PSTN 9 9 9 9 9 5/5 7 EC 2.3 Fax Î cptr PSTN r r 0/2 8 QL Cptr Î fax PSTN 9 9 9 9 r 4/5 9 QL Fax Î cptr PSTN 0/? 10 QL Fax Î cptr PSTN 9 9 2/2 11A EC 1 Cptr Î fax PSTN r r 0/2 11B EC 1 Fax Î cptr Cellular r r 0/2 12 EC 2.3 Fax Î cptr PSTN r r 0/2 (a) All tests used the Evtech mk II modem (b) Incorrect class of fax machine invalidated test 1 (c) Probable mobile phone problem (d) A further three redials also failed -- 256 of 267 -- 249 ANNEXURE B1 JOINT DATA TESTING USING CELLULAR NETWORK ON 14 DECEMBER 99 Test Swre Modem From/to 1 2 3 4 5 6 7 8 9 10 T 3 EC 1 ET mk II Cptr Î BB(a) r r r r r 0/5 4 EC 1 ET mk II Cptr Î BB(b) ? ? ?/2 4A EC 1 ET mk II Cptr Î BB(a) ? ? r ?/3 5 EC 1 ET mk II Cptr Î ? r 11 EC 1 ET mk II Cptr Î cptr 9(c) 1/1 14 EC 1 ET mk I v 2 Cptr Î cptr r r r r r r r r r r r r r r r 0/15 15 EC 1 ET mk I v 2 Cptr Î cptr(d) NA r NA r r r 0/4 20 EC 1 ET mk II Cptr Î cptr r r(d) r(d) r(d) 0/4 (a) download from bulletin board (b) upload to bulletin board (c) file received but sending computer crashed (d) receiving computer on PSTN NA manually aborted -- 257 of 267 -- 250 ANNEXURE B2 JOINT DATA TESTING USING PSTN ON 14 DECEMBER 99 Test S’ware Modem From/to 1 2 3 4 5 6 7 8 9 10 T 8 EC 1 ET mk II Cptr Î cptr 9 1/1 13 EC 1 ET mk I v 2 Cptr Î cptr r 9 9 2/3 16 EC 1 ET mk I v 2 Cptr ' cptr r r r r r r r 0/6 20 EC 1 ET mk II Cptr Î cptr r (a) r(b) r(b) r(b) 0/4 (a) Cellular to cellular (b) Sending computer using cellular -- 258 of 267 -- 251 ANNEXURE B3 JOINT FAX TESTING USING CELLULAR NETWORK ON 14 DECEMBER 99 Test S’ware Modem From/to 1 2 3 4 5 6 7 8 9 10 T 1 EC 1 ET mk II Cptr Î fax 9 9 2/2 2 EC 1 ET mk II Fax Î cptr r r r r r r r 0/7 6 EC 1 ET mk II Cptr Î fax r r r r 0/4 9 EC 1 ET mk II Cptr(a) Î cptr 9 Fax Î cptr r(b) 9 2/3 10 EC 1 ET mk II Cptr Î cptr r(c) r 12 EC 1 ET mk I v 2 Cptr Î cptr r r r r 0/4 18 EC 1 ET mk I v 2 Cptr Î fax 9 r r r EC 2.3 Fax Î cptr r r 1/6 19 EC 1 ET mk II Fax Î cptr r r EC 2.3 r r r r r 0/7 (a) Sending computer was using PSTN (b) QEMM error, ie possible extraneous cause (c) Fax sent, but computer crashed -- 259 of 267 -- 252 ANNEXURE B4 JOINT FAX TESTING USING PSTN ON 14 DECEMBER 99 Test S’ware Modem From/to 1 2 3 4 5 6 7 8 9 10 T 7 EC 1 ET mk II Fax Î cptr NA r Cptr Î fax 9 9 2/3 8 EC 1/EC 1 ET mk II Cptr Î cptr (a) r EC 1/EC 2.3 9 9 2/3 17 EC 1 ET mk I ver 2 Cptr Î fax r 9 r r r 1/5 (a) data test -- 260 of 267 -- 253 ANNEXURE C FAX TESTING BY MR WELSTEAD USING PSTN ON 2, 15 AND 16 AUGUST 2000 Test Software Modem From/To 1 2 3 4 5 6 7 8 9 10 Total 1 QL II Evtech(a) Cptr Î Fax 2 QL II Maestro Cptr Î Fax 3 QL II Simple Cptr Î Fax 4 EC 2.3 Maestro Cptr Î Fax r r r r 0/4 5 EC 2.3 Simple Cptr Î Fax r r r r r 0/5 6 EC 2.3 Evtech Cptr Î Fax 7 EC 1 Evtech Cptr Î Fax 8 EC 1 Maestro Cptr Î Fax 9 EC 1 Simple Cptr Î Fax 10 EC 2.3 Simple Fax Î Cptr r r r r r r r r 0/8(b) 11 EC 2.3 Maestro Fax Î Cptr r r r 0/3(b) 12 EC 2.3 Evtech Fax Î Cptr r r r 13 QL II Evtech Fax Î Cptr 9 9 9 9 9 9 9 9 9 9 10/10 (a) Reference to the Evtech modem is to the IMS Mark I version 2 (“rat’s tail”) modem (b) The failures referred to in the evidence have arbitrarily been attributed to the earliest attempts -- 261 of 267 -- 254 ANNEXURE D DATA TESTING BY MR WELSTEAD USING PSTN ABOUT 25 AUGUST 2000 Test Software Modem Mode 1 2 3 4 5 6 7 8 9 10 Total 1 EC 1 Evtech(a) Send r r r r r r r r r r 0/10 2 EC 1 Maestro Send r r r r r r r r r r 0/10 3 EC 1 Simple Send r r r r r r r r r r 0/10 4 EC 1 Evtech Receive r r r r r 0/5 5 EC 1 Maestro Receive r (b) (b) (b) (b) 0/1 6 EC 1 Simple Receive r (b) (b) (b) (b) 0/1 7 Supercom Evtech Send 9 9 9 9 9 9 9 9 9 9 10/10 8 Supercom Maestro Send 9 9 9 9 9 9 9 9 9 9 10/10 9 Supercom Simple Send 9 9 9 9 9 9 9 9 9 9 10/10 10 Supercom Evtech Receive 9 9 9 9 9 9 9 9 9 9 10/10 11 Supercom Maestro Receive 9 9 9 9 9 9 9 9 9 9 10/10 12 Supercom Simple Receive 9 9 9 9 9 9 9 9 9 9 10/10 13 QL II Evtech Send 9 9 9 9 9 9 9 9 9 9 10/10 14 QL II Maestro Send 9 9 9 9 9 9 9 9 9 9 10/10 15 QL II Simple Send 9 9 9 9 9 9 9 9 9 9 10/10 16 QL II Evtech Receive 9 9 9 9 9 9 9 9 9 9 10/10 17 QL II Maestro Receive 9 9 9 9 9 9 9 9 9 9 10/10 18 QL II Simple Receive 9 9 9 9 9 9 9 9 9 9 10/10 19 EC 2.3 Evtech Send r r r r r 0/5 20 EC 2.3 Maestro Send r (b) (b) (b) (b) 0/1 21 EC 2.3 Simple Send r (b) (b) (b) (b) 0/1 22 EC 2.3 Evtech Receive r r r r r 0/5 23 EC 2.3 Maestro Receive r (b) (b) (b) (b) 0/1 24 EC 2.3 Simple Receive r (b) (b) (b) (b) 0/1 (a) Reference to the Evtech modem is to the IMS Mark I version 2 (“rat’s tail”) modem (b) Possible failures – the evidence was ambiguous -- 262 of 267 -- 255 ANNEXURE E FAX TESTING BY MR WELSTEAD ON PSTN ON 18 – 19 SEP 00 Test Modem Software From V to 1 2 3 4 5 6 7 8 9 10 Total 1 Evtec II QLII Fax Cptr Î fax 9 9 9 9 9 9 9 9 9 9 10/10 2 Maestro QLII Fax Cptr Î fax 9 9 9 9 9 9 9 9 9 9 10/10 3 Simple QLII Fax Cptr Î fax 9 9 9 9 9 9 9 9 9 9 10/10 4 Maestro EC 2.3 Cptr Î fax 9 9 r r 9 r 9 9 r 9 6/10 5 Simple EC 2.3 Cptr Î fax 9 9 9 9 9 9 9 r 9 r 8/10 6 Evtec II EC 2.3 Cptr Î fax r 9 9 9 9 9 9 r 9 r 7/10 7 Evtec II EC 1 Cptr Î fax 9 r r r r r r r r r 1/10 8 Maestro EC 1 Cptr Î fax r r r r r r r r r r 0/10 9 Simple EC 1 Cptr Î fax r r r r r r r r r r 0/10 10 Simple EC 2.3 Fax Î cptr r r r r r r r r r r 0/10 11 Maestro EC 2.3 Fax Î cptr r r r r r r r r r r 0/10 12 Evtec II EC 2.3 Fax Î cptr r r r r r r r r r r 0/10 13 Evtec II EC 1 Fax Î cptr r r r r r r r r r r 0/10 14 Maestro EC 1 Fax Î cptr r r r r r r r r r r 0/10 15 Simple EC 1 Fax Î cptr CANCELLED 16 Evtec II QLII Fax Î cptr 9 9 9 9 9 9 9 9 9 9 10/10 17 Maestro QLII Fax Î cptr CANCELLED 18 Simple QLII Fax Î cptr CANCELLED -- 263 of 267 -- 256 ANNEXURE F TESTING ELECTROCOMM AND IMS MODEM BY DR GRAHAM USING CELLULAR NETWORK ON 7 SEPTEMBER 1999 Test Action Phone 1 2 3 4 5 6 7 8 9 10 1 Send short file NEC 9 Receive short file 9 2 Send long file NEC ? 9 3 Various NEC 9 9 ? ? 4 Receive fax NEC r r r r Send fax 9 9 Receive fax r 5 Receive fax Ericsson r r r r Send fax 9 9 9 Receive fax r r r 6 Send short file Ericsson 9 Receive short file 9 -- 264 of 267 -- 257 ANNEXURE G: FINDINGS ON MONEY ADVANCED BY THE PLAINTIFF Payments to third parties claimed by plaintiff Payments direct to Evtech Claimable by plaintiff Not claimable by plaintiff Date (a) Payee Disputed Total dspd Undsptd Total undspd Item Total Item Total 14/04/93 PM Gillmore Apple & NEC $9,226.21 $9,448.00 20/04/93 Mobiles Galore $1,290.00 21/04/93 Petty Cash $18.95 21/04/93 Evtech Pty Ltd $8,319.00 22/04/93 Sorrento Real Estate $2,345.65 23/04/93 Network Printing $65.00 23/04/93 Allens Fax Hire $120.00 23/04/93 American Express travel $869.90 27/04/93 Network Printing $78.00 27/04/93 Qld Newspapers $899.95 28/04/93 Computerland $521.00 05/05/93 Petty Cash $137.63 05/05/93 Cost Less Car Rentals $738.60 07/05/93 Telecom Australia $572.30 07/05/93 PM Gillmore $9,232.00 07/05/93 PM Gillmore $1,776.80 07/05/93 PM Gillmore $3,120.34 07/05/93 Bank T/T Fee $30.00 14/05/93 Sawyer Public Relations $6,725.00 14/05/93 Telecom Australia $343.75 18/05/93 S. O'Connor $1,501.00 19/05/93 Coventrys TV $56.75 20/05/93 NJK Computer Repairs $495.00 20/05/93 Scotpac Freight $40.00 20/05/93 Power GC Insurance $115.00 21/05/93 Petty Cash-Fuel $33.50 21/05/93 Petty Cash-Travel $137.50 21/05/93 Petty Cash-Repairs $16.50 21/05/93 Petty Cash- Promotion $69.95 26/05/93 Petty Cash-Bank A/c $59.05 Before settlement of First Deed $17,592.21 $4,929.83 $27,561.29 $8,319.00 27/05/93 Evtech Pty Ltd $100,000.00 28/05/93 Petty Cash $198.10 28/05/93 Evtech Pty Ltd $15,000.00 31/05/93 Mastercard $95.80 01/06/93 Evtech Pty Ltd $15,000.00 03/06/93 Cost Less - see 05/05/93 03/06/93 McCullough Robertson $11,529.21 03/06/93 Amex travel - see 24/04/93 03/06/93 TNT Air Couriers $144.60 03/06/93 Telecom Australia $285.15 04/06/93 Petty Cash $44.05 09/06/93 Power Sonic $291.30 09/06/93 Evtech Pty Ltd $30,000.00 11/06/93 Advanced Microsystem Research $5,158.00 16/06/93 Petty Cash $43.55 16/06/93 Evtech Pty Ltd $150,000.00 18/06/93 Evtech Pty Ltd $15,000.00 24/06/93 Allens Fax Hire $240.00 24/06/93 TNT Air Couriers $33.40 30/06/93 Telecom Australia $320.40 30/06/93 F Vaughan $49.95 30/06/93 Evtech Pty Ltd Withdrawn 30/06/93 AMR - see 11/6/93 30/06/93 Gillmore - see 14/4/93 30/06/93 Mastercard $470.90 01/07/93 Evtech Pty Ltd $15,000.00 07/07/93 Deed date for full advance $35,776.67 $5,649.78 $27,561.29 $348,319.00 -- 265 of 267 -- 258 09/07/93 Petty Cash $201.65 09/07/93 Bailleu Knight Frank $75.00 12/07/93 Evtech Pty Ltd $12,000.00 12/07/93 Actual date of full advance $35,978.32 $5,724.78 $27,561.29 $360,319.00 16/07/93 Evtech Pty Ltd $10,000.00 20/07/93 Qld Newspapers $379.10 20/07/93 TNT Air Couriers $432.32 20/07/93 K Barr Travel to WA $300.00 21/07/93 Courier OfficeSupplies $86.40 21/07/93 Frank O'Neill Locksmiths $87.50 23/07/93 S O'Connor $750.00 28/07/93 $70,000 loan agreement $36,278.32 $7,460.10 $27,561.29 $370,319.00 28/07/93 Petty Cash $8.50 30/07/93 Evtech Pty Ltd $16,000.00 03/08/93 Petty Cash $420.00 04/08/93 Demand for $65,293.75 $36,698.32 $7,468.60 $27,561.29 $386,319.00 10/08/93 Petty Cash Melb Travel $500.00 12/08/93 Telecom Australia $120.50 12/08/93 Evtech Pty Ltd $4,000.00 13/08/93 BelridaEnterprises Pty Ltd $3,000.00 13/08/93 Fern Group Travel $1,107.00 13/08/93 Wetspac Bank Springwood $3,414.93 13/08/93 MJ Coventry $3,427.00 13/08/93 Second deed $40,733.75 $15,002.60 $27,561.29 $390,319.00 18/08/93 Petty Cash $170.00 20/08/93 Hong Kong Travel $4,000.00 20/08/93 Evtech Pty Ltd $40,000.00 27/08/93 Evtech Pty Ltd $20,000.00 27/08/93 Petty Cash $106.30 03/09/93 Evtech Pty Ltd $20,000.00 03/09/93 Petty Cash $100.00 09/09/93 Petty Cash $198.15 23/09/93 Petty Cash $88.25 24/09/93 Evtech Pty Ltd $30,000.00 30/09/93 Petty Cash $141.80 08/10/93 Centrelease Photocopier lease $420.00 08/10/93 Evtech Pty Ltd $10,000.00 08/10/93 Petty cash Travel $754.45 12/10/93 Evtech Pty Ltd $20,000.00 15/10/93 Imprimis CAE oscilliscope Withdrawn 29/10/93 Evtech Pty Ltd $10,000.00 31/10/93 Evtech Pty Ltd motor vehicle $2,600.00 (see also 31/12/93) 01/11/93 New modem proposed $49,312.70 $15,002.60 $27,561.29 $540,319.00 05/11/93 Petty Cash Sydney Trip $400.00 12/11/93 Petty Cash $57.80 12/11/93 Evtech Pty Ltd $10,000.00 24/11/93 PM Gillmore Travel Reimbursements $74.70 24/11/93 Phone Adaptor $8.25 07/12/93 Petty Cash $15.00 16/12/93 Evtech Pty Ltd $25,000.00 -- 266 of 267 -- 259 17/12/93 Petty Cash $108.75 17/12/93 McCullough Robertson Not proved $245.40 22/12/93 Petty Cash $33.80 31/12/93 Tabe Trust $1,000.00 31/12/93 B Karahalios $1,000.00 31/12/93 Evtech Pty Ltd Motor Vehicle $1,300.00 (see also 31/10/93) 31/12/93 Evtech Pty Ltd Rental Premises Not proved $29,167.00 31/12/93 Evtech Pty Ltd Loan Interest Not proved $29,479.15 07/01/94 Petty Cash $62.60 14/01/94 Petty Cash $247.35 14/01/94 Evtech Pty Ltd $25,000.00 04/02/94 Konica $50.12 04/02/94 Telecom Australia $654.29 04/02/94 Petty Cash Travel $141.00 04/02/94 Petty cash Materials $29.60 04/02/94 Telecom Australia $152.25 04/02/94 Evtech Pty Ltd $25,000.00 16/02/94 Petty Cash $109.90 16/02/94 Petty Cash Materials $222.40 16/02/94 Petty Cash Sales Lunch $32.80 18/02/94 Telecom Australia $430.03 18/02/94 Evtech Pty Ltd $50,000.00 25/02/94 Petty Cash $120.20 TOTAL TO DATE $51,632.22 $17,633.92 $87,752.84 $675,319.00 NOTE: (a) In most cases, the date is the date shown on exhibit 26 (date of payment); but some dates have been changed to the date when the liability was incurred, in order to more accurately show the true position. SUMMARY Accumulated total to date 26/05/1993 07/07/1993 12/07/1993 28/07/1993 04/08/1993 13/08/1993 01/11/1993 25/02/1994 Disputed and claimable: paid to third parties $17,592.21 $35,776.67 $35,978.32 $36,278.32 $36,698.32 $40,733.75 $49,312.70 $51,632.22 Disputed and not claimable: paid to third parties $27,561.29 $27,561.29 $27,561.29 $27,561.29 $27,561.29 $27,561.29 $27,561.29 $87,752.84 Undisputed: paid to third parties $4,929.83 $5,649.78 $5,724.78 $7,460.10 $7,468.60 $15,002.60 $15,002.60 $17,633.92 Paid to Evtech $8,319.00 $348,319.00 $360,319.00 $370,319.00 $386,319.00 $390,319.00 $540,319.00 $675,319.00 Claimable: paid to third parties $22,522.04 $41,426.45 $41,703.10 $43,738.42 $44,166.92 $55,736.35 $64,315.30 $69,266.14 Claimable: paid to third parties and Evtech $30,841.04 $389,745.45 $402,022.10 $414,057.42 $430,485.92 $446,055.35 $604,634.30 $744,585.14 Claimed: paid to third parties $50,083.33 $68,987.74 $69,264.39 $71,299.71 $71,728.21 $83,297.64 $91,876.59 $157,018.98 Claimed paid to third parties and Evtech $58,402.33 $417,306.74 $429,583.39 $441,618.71 $458,047.21 $473,616.64 $632,195.59 $832,337.98 -- 267 of 267 --