Australian Orthopaedic Fixations Pty Ltd v Amplitude Australia Pty Ltd
[2017] SASC 88
•15 June 2017
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
AUSTRALIAN ORTHOPAEDIC FIXATIONS PTY LTD v AMPLITUDE AUSTRALIA PTY LTD
[2017] SASC 88
Judgment of The Honourable Justice Doyle
15 June 2017
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
RESTITUTION - OTHER MATTERS
EQUITY - GENERAL PRINCIPLES - FIDUCIARY OBLIGATIONS - FIDUCIARY DUTY
The plaintiff is a member of a group of companies that is engaged in the manufacture and distribution of medical devices, including hip and knee replacement products and other products used in the event of orthopaedic trauma. It claims that the defendant is indebted to it in the sum of $1,198,901.59, being the amount outstanding on invoices (the Unpaid Invoices) rendered by the plaintiff to the defendant pursuant to a Services Agreement between those parties, together with interest.
The defendant denies that the plaintiff is contractually entitled to the amount claimed. By way of set off and counterclaim, the defendant also seeks recovery of certain amounts paid under invoices previously rendered by the plaintiff (the Paid Invoices). The amounts sought to be recovered relate to the payment of $275,000 prior to certification of the new clean room facility established by the plaintiff (the Prepaid Costs), and the payment of over $400,000 in excess of the $200,000 expressly provided for in the Services Agreement for the cost of setting up the new clean room (the Excess Setup Costs). The amounts are claimed on various alternative bases, namely damages for breach of contract, restitutionary relief for mistaken payment, or equitable compensation for the knowing receipt of funds paid in breach of fiduciary obligation by Mr Balnaves (as managing director of the defendant). The defendant seeks a total of over $800,000, inclusive of interest, by way of set off or counterclaim.
The defendant has also brought a third party claim against the second third party, which is the parent company of the plaintiff, alleging breaches by the second third party of an Asset Purchase Agreement. The alleged breaches rely upon the conduct of Mr Balnaves, in his capacity as the second third party’s executive chairman, in causing payment of the Prepaid Costs and the Excess Setup Costs, and the conduct of the second third party in providing the defendant with a defective dossier, or technical file, in respect of a line of products known as distal centralisers.
The second third party denies that it breached the Asset Purchase Agreement, or that it is otherwise liable to the defendant for the amounts claimed. In the alternative, it seeks contribution from Mr Balnaves in respect of any amount it is held liable to pay the defendant on account of his conduct. Fixations also seeks contribution from Mr Balnaves in respect of any liability it might be found to have under the defendant’s counterclaim alleging the knowing receipt of funds paid in breach of fiduciary obligation by Mr Balnaves.
Finally, Mr Balnaves has brought a claim for contribution against the defendant seeking to recover any sum for which he might be held liable to the plaintiff or the second third party under an indemnity granted to him by the defendant. The defendant denies any obligation to indemnify Mr Balnaves on the bases that the deed was not validly executed, and that the deed does not in any event extend to any liability that Mr Balnaves might incur in these proceedings.
Held per Doyle J:
1. The plaintiff’s entitlement to charge setup costs was capped in the amount of $200,000 (at [231).
2. The plaintiff was not entitled to recover a 10 per cent margin on its setup costs (at [234]).
3. The plaintiff was not entitled to recover all of its costs of providing the services under the Services Agreement. It was confined to the recovery of costs directly attributable to the provision of those services (at [261]-[262]).
4. The plaintiff’s claim in respect of the Unpaid Invoices should be allowed in the amount of $884,122.15 (at [387]).
5. The Paid Invoices included amounts which the plaintiff was not contractually entitled to charge (at [391]).
6. The plaintiff’s overcharging did not involve any breach of the Services Agreement (at [416]).
7. The overpayments made up to 28 April 2015, but not thereafter, were paid under a mistaken understanding by the defendant as to its contractual obligations (at [435], [439]).
8. The defendant has not established that the overpayments involved any breach of Mr Balnaves’ fiduciary obligations to the defendant, and hence that the plaintiff is liable for knowing receipt of funds paid to it in breach of those fiduciary obligations (at [473]-[474], [476]).
9. The defendant’s claim by way of set off or counterclaim should be allowed in the amount of $325,634.01 (at [484]).
10. The defendant has not established any breach by the second third party of the Asset Purchase Agreement (at [498], [508]).
11. The various claims for contribution or indemnity have no work to do and should be dismissed for that reason (at [510]-[513]).
Corporations Act 2001 (Cth) s 191, referred to.
Electricity Generation Corporation v Woodside Petroleum Ltd (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; McGrath Corporation Pty Ltd v Global Construction Management (Qld) Pty Ltd [2011] QSC 178; Director of Consumer Affairs Victoria v Australian Tourism Centre Pty Ltd [2010] VSC 571; Mackowiak v Hagipantelis [2015] NSWSC 1087; Golden Sands Pty Ltd v Davegale Pty Ltd (No 2) [2003] VSC 494; Mildren Enterprises Pty Ltd v Viper Motor Sport Pty Ltd [2004] SADC 94; Peter Pan’s Backpacker Adventure Travel Pty Ltd v Eye Jam Interactive Pty Ltd [2012] QSC 227; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Deutsche Morgan Grenfell Group Plc v Inland Revenue Commissioners [2006] 2 WLR 781; Hookway v Racing Victoria Ltd (2005) 13 VR 444; Barnes v Addy (1874) LR 9 Ch App 244; Breen v Williams (1996) 186 CLR 71; Howard v Commissioner of Taxation of the Commonwealth of Australia (2014) 253 CLR 83; Maguire v Makaronis (1997) 188 CLR 449; Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, considered.
AUSTRALIAN ORTHOPAEDIC FIXATIONS PTY LTD v AMPLITUDE AUSTRALIA PTY LTD
[2017] SASC 88Civil
DOYLE J:
INTRODUCTION
Overview of the proceedings
The Austofix group of companies
Amplitude and Amplitude SAS
The contractual arrangements between the parties
The Asset Purchase Agreement
A change in the supply arrangements
The Services Agreement
The Procurement Deed
THE COURSE OF THE TRIAL
ESTABLISHING A CLEAN ROOM AND PERFORMING THE SERVICES
The new clean room facility
Services provided by Fixations under the Services Agreement
AMOUNTS CHARGED BY FIXATIONS
The Prepaid Costs of $275,000
Communications in relation to Fixations’ charges
Requirement of Amplitude SAS approval of payments
Costs of establishing the new clean room
Fixations’ method of charging under the Services Agreement
Subsequent comparison with actual costs
Notification of amounts charged by Fixations
Amplitude raises queries about invoices
Fixations’ use of the new clean room for its own products
CONSTRUCTION OF THE SERVICES AGREEMENT
Legal principles
A cap of $200,000 on setup costs
No margin on setup costs
Meaning of “cost recovery”
No implied term or variation of the Services Agreement
FIXATIONS’ CLAIM: THE UNPAID INVOICES
The Stand Alone invoices
The distal centralisers
The Joint Research invoices
Budgeted versus actual costs
Costs incurred by other entities
Actual costs incurred in the Joint Research business
Cost recovery in respect of the 2015 financial year costs
Costs incurred by Fixations
Costs incurred by Surgical
The allocation of corporate overhead
Cost recovery in respect of the 2016 financial year costs
Outcome of Fixations’ claim
AMPLITUDE’S SET OFF & COUNTERCLAIM: PAID INVOICES
Excess Setup Costs
Prepaid Costs
Legal basis for recovery of overpayments
Breach of contract
Restitutionary relief for mistaken payment
Mistaken payment of the Excess Setup Costs
Mistaken payment of the Prepaid Costs
Knowing receipt of payments made in breach of fiduciary obligation
No breach of fiduciary obligations in relation to the Prepaid Costs
No breach of fiduciary obligations in relation to the Excess Setup Costs
Outcome of Amplitude’s set off and counterclaim
AMPLITUDE’S CLAIM AGAINST AUSTOFIX: BREACHES OF ASSET PURCHASE AGREEMENT
Alleged breaches in relation to Prepaid Costs and Excess Setup Costs
Alleged breach of warranty in relation to distal centralisers
Outcome of Amplitude’s claim against Austofix
FIXATIONS’ & AUSTOFIX’S CLAIMS AGAINST MR BALNAVES: CONTRIBUTION
MR BALNAVES’ CLAIM AGAINST AMPLITUDE: INDEMNITY
CONCLUSION
INTRODUCTION
Overview of the proceedings
1 The plaintiff (Australian Orthopaedic Fixations Pty Ltd) (Fixations) is a member of a group of companies that is engaged in the manufacture and distribution of medical devices, including hip and knee replacement products and other products used in the event of orthopaedic trauma.
2 In these proceedings, Fixations claims that the defendant (Amplitude Australia Pty Ltd) (Amplitude) is indebted to it in the sum of $1,198,901.59, being the amount outstanding on invoices (the Unpaid Invoices) rendered by Fixations to Amplitude pursuant to a Services Agreement between those parties, together with interest.
3 Amplitude denies that Fixations is contractually entitled to the amount claimed. By way of set off and counterclaim, Amplitude also seeks recovery of certain amounts paid under invoices previously rendered by Fixations (the Paid Invoices). The amounts sought to be recovered relate to the payment of $275,000 prior to certification of the new clean room facility established by Fixations (the Prepaid Costs), and the payment of over $400,000 in excess of the $200,000 expressly provided for in the Services Agreement for the cost of setting up the new clean room (the Excess Setup Costs). The amounts are claimed on various alternative bases, namely damages for breach of contract, restitutionary relief for mistaken payment, or equitable compensation for the knowing receipt of funds paid in breach of fiduciary obligation by Mr Balnaves (as managing director of Amplitude).[1] Amplitude seeks a total of over $800,000, inclusive of interest, by way of set off or counterclaim.
[1] Mr Balnaves was the first third party; however, Amplitude discontinued its third party claim against him. Mr Balnaves remained in the proceedings as a third party to the cross-actions against Austofix and Fixations.
4 Amplitude has also brought a third party claim against the second third party (Austofix Group Ltd) (Austofix), which is the parent company of Fixations, alleging breaches by Austofix of an Asset Purchase Agreement. The alleged breaches rely upon the conduct of Mr Balnaves, in his capacity as Austofix’s executive chairman, in causing payment of the Prepaid Costs and the Excess Setup Costs, and the conduct of Austofix in providing Amplitude with a defective dossier, or technical file, in respect of a line of products known as distal centralisers.
5 Austofix denies that it breached the Asset Purchase Agreement, or that it is otherwise liable to Amplitude for the amounts claimed. In the alternative, it seeks contribution from Mr Balnaves in respect of any amount it is held liable to pay Amplitude on account of his conduct. Fixations also seeks contribution from Mr Balnaves in respect of any liability it might be found to have under Amplitude’s counterclaim alleging the knowing receipt of funds paid in breach of fiduciary obligation by Mr Balnaves.
6 Finally, Mr Balnaves has brought a claim for contribution against Amplitude, seeking to recover any sum for which he might be held liable to Fixations or Austofix under an indemnity granted to him by Amplitude. Amplitude denies any obligation to indemnify Mr Balnaves on the bases that the deed was not validly executed, and that the deed does not in any event extend to any liability that Mr Balnaves might incur in these proceedings.
The Austofix group of companies
7 The Austofix group of companies comprises Austofix, and its two subsidiaries, Fixations and Austofix Surgical Pty Ltd (Surgical). As mentioned, the Austofix group is engaged in the manufacture and distribution of medical devices, including hip and knee replacements products and other products used in the event of orthopaedic trauma.
8 Fixations is the manufacturing arm of the group. Austofix Surgical is responsible for the group’s administration and sales. At all relevant times, Mr Henry was the operations manager and then (from early 2015) the general manager of Fixations, Mr Andrew the chief financial officer of the Austofix group, and Mr Balnaves a director and executive chairman of Austofix and Fixations.
9 Prior to 2009, Fixations was only involved in the manufacture and distribution of trauma devices. The trauma devices were certified by the Therapeutic Goods Administration, with the manufacturing facility registered at an address in Plympton. This was Fixations’ only location at the time.
10 From 2009 to 2013, Fixations also distributed a range of hip replacement products for a company named Evolutis, and a range of knee replacement products for Amplitude’s parent company.
11 Fixations had a clean room facility at its Plympton premises, which it used for its trauma products. A clean room is an area that is isolated and sterile so that products can be cleaned and packed in a sterile environment. As Fixations was merely the distributor, and not the manufacturer, of products other than its trauma products, it did not need to use its relatively small clean room for those other products.
12 In late 2012, Austofix entered into a management arrangement with a company called Joint Research Pty Ltd. Joint Research owned and sold a range of hip replacement products. Under this arrangement, the Austofix group performed management services for Joint Research in return for an administration fee.
13 In early 2013, Austofix acquired the assets and business of Joint Research, which included the issued capital of Joint Research Limited (the Irish subsidiary of Joint Research Pty Ltd), together with the design dossier (also referred to as the technical file) for all of the Joint Research products. The technical file contained all of the technical information and design specifications for the products within the Joint Research product range. It also specified the quality requirements and processes involved in the various manufacturing tasks, and the suppliers or subcontractors to be used in those processes.
14 A manufacturer of medical devices such as the Joint Research products is required to hold certification under the requirements of the European Medical Device Directive (referred to as CE certification), in order that it be entitled to sell those products. This involves certification that the manufacturer and its devices meet the regulatory requirements of the European Union necessary for the sale of the devices in Europe.
15 Joint Research Ltd was the named manufacturer of the Joint Research products under its CE certificate at the time. However, it performed that role as a “virtual” company. It had no employees, and no quality or management system in place to manufacture devices. It did not trade as such. It merely held the intellectual property rights for its hip replacement products, the regulatory approvals necessary for the sale of those products, the technical file and its product inventory. The manufacturing role, and all of the necessary quality assurance processes, were contracted out to another company, Signature Orthopaedics. Signature Orthopaedics was specified in the technical file as the entity responsible for performing these roles.
16 Following the acquisition of Joint Research by Austofix, it was the intention that responsibility for all of the quality and regulatory activities involved in the manufacture of the Joint Research products would be transferred from Signature Orthopaedics to Fixations. To this end, Joint Research and Fixations entered into the Technical Agreement dated 8 March 2013. Steps were taken towards obtaining the CE certification necessary for Fixations to become the manufacturer of the Joint Research products. This involved the inclusion of Fixations in the technical file as the named manufacturer (referred to as a significant or critical subcontractor), and required the approval of the British Standards Institution (BSI) (a relevant certifying authority for the purposes of the European Medical Device Directive).
Amplitude and Amplitude SAS
17 Austofix owns a 25 per cent shareholding in the defendant, Amplitude.
18 Amplitude is owned as to the remaining 75 per cent by a French incorporated entity, Amplitude SAS (formerly Orthofin 1 SAS) (Amplitude SAS).
19 This shareholding structure is the consequence of a transaction in July 2013 whereby Austofix and Amplitude SAS negotiated the sale and purchase of the majority of the business conducted by the Austofix group, on terms that saw those parties each take a stake in a newly incorporated entity, Amplitude.
The contractual arrangements between the parties
20 The Asset Purchase Agreement was entered into by Austofix, Amplitude SAS and Amplitude in July 2013. Under this agreement Amplitude agreed to purchase the property and assets used by Austofix in its hip and knee replacement products business, which included the Joint Research products. In consideration for the purchase of that business, Amplitude issued shares to Austofix equivalent to 25 per cent of its total issued shares.
21 Following the completion of that transaction, the Asset Purchase Agreement regulated the relationship between the entities, the relationship being one in the nature of a contractual joint venture between Austofix and Amplitude SAS. This arrangement was to exist pending a share swap that would mean that by 31 December 2014[2] Amplitude SAS would issue shares and convertible bonds in Amplitude SAS to Austofix in exchange for its shares in Amplitude. Austofix would then be a shareholder of the French parent company, Amplitude SAS, and Amplitude would be a wholly owned subsidiary of Amplitude SAS. The number of shares to be issued by Amplitude SAS to Austofix was to be calculated by reference to a formula based upon the EBITDA and turnover of Amplitude for the financial year ending 30 June 2014.
[2] A date which was subsequently postponed.
22 As an incident of the trading relationship contemplated by the Asset Purchase Agreement, but as a subsequent extension of it that was apparently not contemplated in July 2013, Fixations and Amplitude executed the Services Agreement and the Procurement Deed on 4 and 13 February 2014 respectively.
23 Fixations’ claim in relation to the Unpaid Invoices relates to payment for the services performed by Fixations under the Services Agreement. Those services related to the quality assurance inspection, cleaning, packing and sterilisation of medical devices. These services are sometimes referred to as CPSQA services, and were to be provided principally in respect of the Joint Research hip replacement products.
24 The services were to be provided in respect of products to be purchased by Fixations, but at the request of Amplitude and under the Procurement Deed. Under the terms of the Procurement Deed, the price payable by Fixations for the raw products (prior to the provision of the CPSQA services in respect of those products under the Services Agreement) was to be prepaid by Amplitude to Fixations. Accordingly, while the Unpaid Invoices referred to particular products that were delivered to Amplitude, it is only the charge for the CPSQA services provided in respect of those products that remains outstanding.
25 The only issue arising on Fixations’ claim for payment of the Unpaid Invoices is whether the amounts claimed in the Unpaid Invoices represent charges that were properly recoverable under the contractual formula in the Services Agreement. There is no dispute that the services in question were properly performed.
26 Before continuing with the narrative, and addressing the issues arising between the parties in more detail, it is convenient to identify the relevant provisions from the agreements between the parties.
The Asset Purchase Agreement
27 The parties to the Asset Purchase Agreement were Austofix, Amplitude and Amplitude SAS. It was entered into by these parties in July 2013.
28 Under the Asset Purchase Agreement, Amplitude was to purchase from Austofix the Implant Assets in consideration for the issue of 25 per cent of the shares in Amplitude.[3] Amplitude SAS was to hold the remaining 75 per cent of Amplitude’s issued shares.
[3] Asset Purchase Agreement (APA), clauses 1.3 and 2.1.
29 The Implant Assets acquired by Amplitude comprised, in effect, the operating business carried on by the Austofix group of hip and knee replacements or implants. This was not the totality of the Austofix business. The Asset Purchase Agreement was framed so as to exclude Austofix’s trauma products business.
30 A material part of the acquisition by Amplitude was the acquisition of Austofix’s 100 per cent shareholding in Joint Research.
31 On and from completion of the asset sale under the Asset Purchase Agreement, the parties agreed to carry on business in conjunction with each other in the manner prescribed in Annexure 7 of the Asset Purchase Agreement.[4] The arrangements contemplated by Annexure 7 included the following:
· Austofix was conferred the right to appoint Mr Balnaves to the board of Amplitude as one of its three directors.[5]
· Austofix was to supply services to Amplitude from key personnel (including Mr Balnaves, Mr Andrew and Mr Henry), plus provide administrative services, software, warehouse and office space to Amplitude. The maximum charge by Austofix for the year ended 30 September 2014 was to be $360,000.[6]
· Amplitude SAS was obliged to provide support to Amplitude, both as to working capital[7] and as to the purchase and on-sale of its products through its European operations.[8]
· An aspect of the support to be provided by Amplitude SAS was that it covenanted to sell not less than 1000 Joint Research products (hip implants) into France and Germany in the period from 1 October 2013 to 30 September 2014, provided that they were available for manufacture by 30 September 2013. Moreover, Amplitude SAS was obliged to use its best endeavours to achieve this level of sales.[9]
[4] APA, clause 8.
[5] APA, Annexure 7, clause 1.
[6] APA, Annexure 7, clause 3.
[7] APA, Annexure 7, clause 4.
[8] APA, Annexure 7, clauses 5, 6 and 8.
[9] APA, Annexure 7, clause 8.
32 The Asset Purchase Agreement provided that within three months following 30 September 2014 (that is, within 18 months of the entry into the Asset Purchase Agreement), Austofix was to swap its shares in Amplitude for equity rights (ordinary shares, preference shares and convertible bonds) in Amplitude SAS.[10] The extent of the equity rights conferred upon Austofix was to be determined according to a formula that was dependent upon the financial performance (EBITDA and turnover) of Amplitude over the 12 month period following acquisition. In effect, the better the performance of Amplitude, the greater the equity rights that Austofix would accrue in Amplitude SAS.
[10] APA, clause 10.4.
33 Austofix was the subject of restraints of trade that prevented it from engaging in trade in competition with the Implant Business for a period of five years.[11]
[11] APA, clause 13.
34 The result of the Asset Purchase Agreement was thus that Austofix and Amplitude SAS were engaged in a form of contractual joint venture through the medium of Amplitude for a period of approximately 18 months following completion, at which time, through the contemplated share swap, Austofix would become a shareholder in Amplitude SAS, and Amplitude would become a wholly owned subsidiary of Amplitude SAS.
35 I have mentioned the obligation on Austofix to provide management and administration services in return for a fee for the year ending 30 September 2014 of up to $360,000. As events transpired, Austofix thereafter continued to charge, and Amplitude continued to pay, the management and administration fee at the rate of $30,000 per month throughout the period from October 2014 to June 2015. In addition to the obligation to provide management and administration services, various Austofix group employees were transferred and became employees of Amplitude, including a receptionist, an accounts person and a logistics person.
36 Mr Balnaves became the managing director of Amplitude. He remained in this role until his resignation in August 2015. Mr Andrew became the chief financial officer of Amplitude for 50 per cent of his time, with the remainder of his time spent in that role for the Austofix group. He continued as the chief financial officer of Amplitude until Mr Hassard assumed this role in about May 2015.
37 According to Mr Andrew, the management and administration fee of $360,000 per year, or $30,000 a month, was to cover the work of Mr Balnaves and him, as well as Mr Henry’s consulting advice on the Joint Research technical file. The administration fee also covered the rent for an office for the Joint Research business in New South Wales, which was being paid for by Austofix, the use of the Austofix premises at Plympton, and other administrative costs involved such as Amplitude using the Austofix server and general ledger system.
38 Following entry into the Asset Purchase Agreement, Amplitude initially operated out of the Austofix group’s premises at Plympton. However, in late 2013 Mr Balnaves and Mr Andrew agreed that Amplitude would be better served by having its own premises. It needed more storage space than was available at Plympton, and the premises at Plympton were predominantly a manufacturing base. They were unsuited to Amplitude meeting with surgeons to discuss products and sales.
39 Suitable premises for Amplitude were located in Norwood, and established in January or February 2014. Amplitude entered into a separate lease over those premises.
40 As mentioned, at the time of entry into the Asset Purchase Agreement, Joint Research held CE certification in relation to its hip replacement products. Under the Asset Purchase Agreement, Austofix was required to obtain the certification necessary to enable distribution of the Joint Research products.[12] Steps had already been taken towards this end. Indeed, draft certification had already been issued in favour of Fixations by the time of entry into the Asset Purchase Agreement. The associated rights were transferred to Amplitude under the Asset Purchase Agreement.
[12] APA, clauses 10.5 and 10.6.
41 The contemplated CE certification of Fixations was conferred by BSI on 19 August 2013. A copy of the certification was provided to Amplitude. This certification had the effect that Fixations was authorised to undertake the roles of design and manufacture of the Joint Research products.
A change in the supply arrangements
42 Prior to the arrangements effected by the entry into the Services Agreement, the supply chain for the Joint Research products was required to proceed as follows:
· Austofix would purchase the raw, or semi-finished, products from suppliers listed in the technical file for the Joint Research product (which had the effect that they were approved suppliers for the purposes of the regulatory approvals);
· those semi-finished products would pass through the custody of Fixations as the critical subcontractor under the CE certification;
· the semi-finished products would be sent to Signature Orthopaedics for the provision of CPSQA services, Signature Orthopaedics being listed in the technical file for the Joint Research products in respect of the provision of these services; and
· Signature Orthopaedics would then return the labelled products to Fixations for release to Amplitude (and thereafter release to the market).
43 Following completion under the Asset Purchase Agreement, and in the second half of the 2013 calendar year, Amplitude was revisiting this arrangement. It was looking to obtain CE certification for itself in respect of the Joint Research products. In communications between Amplitude SAS and Austofix, concerns were raised about the reliability of Signature Orthopaedics. Consideration was given to replacing Signature Orthopaedics as the provider of CPSQA services for the Joint Research products, and to doing so urgently so that Amplitude could order those products and service the European market in a timely way.
44 A change to the subcontractor providing these services required the approval of BSI. On 14 October 2013, Mr Henry met with BSI to discuss the transfer of the services undertaken by Signature Orthopaedics to another supplier of those services. The minutes of that meeting were circulated to Amplitude SAS. It emerged from these discussion with BSI that there would be a significant timing advantage to Amplitude in having Fixations undertake the services (because it was already listed in the technical file), as opposed to a new supplier which would need to be integrated into the certified processes. It would not be possible for Amplitude to provide the services itself without significant delay.
45 In November 2013, Fixations provided Amplitude SAS with two related business proposals. One addressed the proposed introduction of Fixations to replace Signature Orthopaedics as the supplier of CPSQA services for the Joint Research products. The other addressed Fixations undertaking the activities that would be necessary to meet the BSI certification requirements for those products.
46 What was contemplated through the proposed introduction of Fixations to replace Signature Orthopaedics as the supplier CPSQA services for the Joint Research products was the following supply chain:
· Amplitude would place an order for products from Fixations;
· Fixations would purchase semi-finished products from suppliers listed in the technical file for the Joint Research products;
· Fixations would receive those semi-finished products;
· Fixations would perform the CPSQA services; and
· Fixations would then supply the finished product to Amplitude for release to the market.
47 As explained later, in order to perform the contemplated CPSQA services in respect of the Joint Research products, Fixations would require a new clean room.
48 On 27 November 2013, Amplitude agreed in principle to a one year contract with Fixations for the provision of the contemplated services. The final terms of the agreement were to be reviewed by Amplitude SAS management.
49 On 24 December 2013, Mr Balnaves circulated to Amplitude SAS management a paper relating to the CPSQA services. One of the attachments to this paper was the initial draft of the Services Agreement. The proposal contemplated establishing a new clean room. It included a summary of the costs forecast by Fixations, which included new equipment costing in the order of $75,000, and regulatory and start-up costs in the order of $145,000, giving a total of approximately $220,000. The draft agreement contemplated the payment to Fixations of a non-refundable amount for the start-up costs occasioned in obtaining certification of $145,000. It otherwise contemplated payment in respect of the provision of the services calculated on the basis of cost recovery plus a 10 per cent margin.
50 The proposal was considered by the Amplitude SAS board on 9 January 2014, and a series of questions were raised. The draft agreement was then negotiated between Mr Balnaves and Amplitude SAS management. The negotiations proceeded with Amplitude SAS management representing the interests of Amplitude and Mr Balnaves representing the interests of Fixations.
51 One of the questions asked by Amplitude SAS in its email communications with Mr Balnaves was what was meant by the price being “based on cost recovery + 10%” profit. The only answer given by Mr Balnaves was that the contract price would be “based on costs incurred by Austofix plus a 10% profit margin”.
52 By email dated 15 January 2014 from Mr Vial of Amplitude SAS to Mr Balnaves, which had earlier been circulated in draft amongst Amplitude SAS management, Amplitude SAS proposed that the setup fee for the clean room be:
· an initial payment of $150,000 (rather than $145,000), payable as to $75,000 upon entry into the agreement, and as to the remaining $75,000 at the certification date;
· an additional setup fee of $100,000, comprising $100 per product for the first 1,000 hip implants, with the $100 spread over the four components of the implants (namely the stem,[13] shell, liner and head).
[13] Mr Vial did not distinguish between cemented and uncemented stems; cf the terms of the Services Agreement.
53 This was not agreed by Fixations. Mr Balnaves’ response was that there were “major issues” with what was proposed.
54 Subsequent drafts exchanged between the parties included reference in Schedule 2 to $145,000 for obtaining certification, and a price based on cost recovery, including a setup fee of $200 per unit for each of the first 1,000 units. At one point in the negotiations, when Amplitude SAS inserted reference in the body of the draft agreement to a “total setup fee of $200,000”, Mr Balnaves responded by suggesting that this be deleted because it was “covered in Schedule 2”.
55 Ultimately, the Services Agreement as executed included an upfront payment of $145,000, and a further $200,000 by way of payment of $200 for each of the 1,000 stems in the first order. An issue in these proceedings is whether this $200,000 was intended as a cap on the recovery of setup costs incurred by Fixations, or whether additional setup costs were able to be charged across the remaining items in the first order.
The Services Agreement
56 The Services Agreement was executed on 4 February 2014, by Mr Balnaves on behalf of Fixations, and Mr Jallabert and Mr Vial on behalf of Amplitude. Mr Jallabert and Mr Vial are both directors of Amplitude, and form part of the Amplitude SAS management team. Mr Jallabert is the Amplitude SAS chief executive officer.
57 The Services Agreement was subject to Fixations obtaining the certification from BSI required to enable Fixations to provide the CPSQA services for the products.[14] The certification that Fixations was required to obtain from BSI was defined as meaning “each certification, approval, authorisation and/or licence as may be required by law in connection with, or for the purposes of, providing the Services.” The date upon which certification was obtained was referred to in the Services Agreement as the Certification Date.
[14] Services Agreement (SA), clause 2(a).
58 Following certification, and during the term of the agreement (two years unless extended by agreement or earlier terminated), the Services Agreement required Fixations to provide CPSQA services (defined as “the Services”) to Amplitude in respect of the Joint Research products.[15]
[15] SA, clause 2(c).
59 The Services Agreement provided that upon Fixations obtaining the relevant certification (that is, on the Certification Date), Amplitude would be deemed to have given to Fixations an order for delivery of the services in respect of not less than 1,000 units of each product. As the products under the Services Agreement were defined to mean “the total hip replacement products”, they included the five parts comprising a hip replacement, namely a cemented femoral stem, an uncemented femoral stem, an acetabular shell (also known as an acetabular cup), an acetabular liner and a femoral head. It follows that an order for 1,000 units of each product involved an order for 5,000 parts or units.
60 Clause 4 of the Services Agreement provided that Fixations “will, at its cost, provide all Personnel and resources which are necessary or required to provide the Services.” There was no definition of “resources”, but “Personnel” was defined to mean any officers, employees, agents or subcontractors used by Fixations to perform the services.
61 Clause 5 provided for the payment of fees by Amplitude to Fixations. It relevantly provided:
5.1 Service Fees
(a) In consideration for the Provider entering into this Agreement and for providing the Services, the company will pay the Fees to the Provider in accordance with Schedule 2 (or as otherwise agreed between the parties in writing) (Fees).
(b) No other charges will be paid by the Company to the Provider except as otherwise agreed between the parties in writing.
5.2Invoicing and payment
(a) The Provider will issue to the Company invoices for the Fees, and the Company will pay those invoices, at the times set out in Schedule 2.
62 Schedule 2 to the Services Agreement set out the fees payable by Amplitude to Fixations, and was in the following terms:
Schedule 2 – Service Fees
The Company will pay the following Fees to the Provider, subject to prior receipt from the Provider of an invoice for each of the following amounts:
1. on the date of this Agreement, a non-refundable amount of $145,000 for expenditure by the Provider in connection with or for the purposes of the Provider obtaining the Certification;
2. in respect of the first order of Services referred to in clause 2(b);
a) on the Certification Date (being the date of the first order of Services pursuant to clause 2(b)), an amount equal to 50% of the price of the order for 1,000 units of each Product; and
b) on the date of completion of delivery of the first order of Services referred to in clause 2(b), an amount equal to 50% of the price of the order for 1,000 units of each Product; and
3. in respect of orders for Services in addition to the first order of Services referred to in clause 2(b) (each a Subsequent order):
a) on the date of order of the Subsequent Order, an amount equal to 1/3 (one third) of the price of the Subsequent Order;
b) on the date of completion of delivery of the Subsequent Order, an amount equal to 1/3 (one third) of the price of the Subsequent Order; and
c) 30 days after the date of completion of delivery of the Subsequent Order, an amount equal to 1/3 (one third) of the price of the Subsequent Order.
The Company and the Provider agree that the price set by the Provider for paragraph 2 above will be based on cost recovery plus a 10% margin (including a setup fee of $200 per unit for each of the first 1,000 stems). The price set by the Provider for Subsequent Orders will be based on cost recovery plus a 10% margin (and will not include any setup fee).
63 It is apparent from Schedule 2 that the parties intended that Fixations be paid an upfront fee of $145,000 in relation to the costs of obtaining the requisite certification. Upon certification being obtained (the Certification Date), and hence upon the (deemed) first order of services for 1,000 products, Fixations was entitled to 50 per cent of the price of that order. It was entitled to the remaining 50 per cent upon delivery of the first order. The price was to be “based on cost recovery plus a 10% margin (including a setup fee of $200 per unit for each of the first 1,000 stems).”
64 As will be explained below, while the basic structure of the fees payable is clear, the parties are in dispute as to what was intended to be included within the notion of “cost recovery”, whether the setup fee of $200 per unit for the first 1,000 units was intended to operate as a cap upon the recovery of the costs associated with setting up the new clean room, and whether the 10 per cent margin was payable on the setup fee.
65 The Services Agreement also included a restraint of trade provision in clause 11, in the following terms:
11. Exclusivity
The Provider undertakes to the Company that, for a period of five years from the date of the Agreement, the Provider will not use the equipment purchased by the Provider for the purposes of performing this Agreement (using the funds referred to in paragraph 1 of Schedule 2) to provide the Services in respect of any hip & knee joint prosthesis product (other than the Products).
66 Finally, the Services Agreement also included standard “entire agreement” and amendment provisions:
12.2 Entire agreement
This Agreement is the entire agreement between the parties as to its subject matter. It supersedes all prior agreements, representations, conduct and understandings.
12.3 Amendments
No amendment of, nor addition to, this Agreement is binding unless it is in writing and executed by the parties to this Agreement.
The Procurement Deed
67 The Procurement Deed was executed by Fixations and Amplitude on 13 February 2014. It was negotiated between Mr Balnaves on behalf of Fixations, and Mr Garcia and Mr Vial on behalf of Amplitude.
68 Under the Procurement Deed, the raw materials or products that were to be the subject of the services under the Services Agreement were to be purchased by Fixations from third party suppliers for the purposes of the ultimate delivery of the completed products to Amplitude.[16] The Procurement Deed provided that Fixations acquired the raw materials from the third party suppliers as principal rather than agent.[17] However, the purchase was to be funded by Amplitude in the form of an advance of the purchase price that was to be made before the supplier payment was due.[18]
[16] Procurement Deed (PD), clause 2(a).
[17] PD, clause 5(b).
[18] PD, clause 2(b)(ii).
69 It followed that the completed products would only be released to Amplitude following provision of the services under the Services Agreement, but a material portion of the total price for the products would have earlier been advanced under clause 2(b) of the Procurement Deed.
70 Clause 4 of the Procurement Deed made it plain that Fixations was not entitled to recover from Amplitude any charge for its procurement services under the Procurement Deed beyond the third party supplier price, and reimbursement of any procurement costs (as requested in writing, and substantiated with evidence). It provided:
4. Costs
[Fixations] will procure the Products pursuant to this Deed at no charge to [Amplitude], provided that [Fixations’] reasonable costs and expenses incurred from time to time in procuring the Products will be reimbursed by [Amplitude] to [Fixations] promptly following written request from [Fixations] (together with reasonable substantiating evidence of costs and expenses incurred).
THE COURSE OF THE TRIAL
71 At the trial of these proceedings, Fixations called evidence from Mr Andrew and Mr Henry.
72 Mr Andrew is a certified practising accountant with approximately 35 years’ experience in accounting and financial roles. He has been the chief financial officer of the Austofix group of companies, which includes Fixations, since January 2012. As mentioned, and as contemplated by the Asset Purchase Agreement, he also acted as Amplitude’s chief financial officer from the second half of 2013 until about May 2015.
73 Mr Andrew gave evidence about the operations of Austofix and Fixations, with a focus upon the financial aspects of those operations. He gave a detailed explanation, by reference to numerous spreadsheets, of the manner in which he allocated and invoiced the budgeted costs in relation to the services provided by Fixations to Amplitude under the Services Agreement, and then later reconciled those invoiced costs against the cost actually incurred. I have later summarised the effect of that evidence.
74 I accept the evidence given by Mr Andrew. In my view, he was an honest and reliable witness. I was impressed by the careful manner in which he gave evidence, and the content of his evidence. He demonstrated a command of the detail contained in the spreadsheets that he prepared and about which he gave evidence. He withstood a relatively detailed cross-examination, making some concessions where appropriate. To the extent that there was any significant controversy about his evidence I have addressed these matters where they arise in my reasons.
75 In addition to accepting his evidence, I accept that he approached his task of allocating the budgeted and actual costs in relation to the services provided under the Services Agreement in good faith, and in a detailed and careful way. While this has led me to be satisfied that he reliably implemented the methodology he described in his evidence, this does not of course resolve the issue of the proper construction of the charges recoverable by Fixations under the Services Agreement, and hence the recoverability of the amounts invoiced by Fixations.
76 Mr Henry was the operations manager of Fixations from around 2011, and became the general manager in early 2015. He gave evidence about the establishment of the new clean room facility used for the Joint Research products, as well as the work involved in providing the services contemplated by the Services Agreement. I accept the evidence of Mr Henry, albeit there does not appear to have been any significant dispute about the matters he addressed.
77 While an affidavit was filed on behalf of Mr Balnaves, it was not read and he did not give evidence.
78 Amplitude filed affidavits from Mr Hassard (an Amplitude director and chief financial officer), Mr Vial (an Amplitude director and Amplitude SAS vice president (international)), Mr Garcia (Amplitude SAS vice president (finances)) and Mr Thevenin (the Amplitude quality and regulatory affairs director). However, their affidavits were also not read, and they did not give evidence.
79 In addition to the evidence of Mr Andrew and Mr Henry, the parties relied upon a large number of documents tendered and received largely without objection.
80 A number of these documents were communications (predominately by email) to which Mr Vial, Mr Garcia and Mr Jallabert (a director of Amplitude and the chief executive of Amplitude SAS) were party. At times I refer to these men as Amplitude SAS management, so as to distinguish them from Mr Balnaves and Mr Andrew – who held positions with Amplitude, but were often representing Austofix or Fixations rather than Amplitude in their communications with Mr Vial, Mr Garcia and Mr Jallabert.
81 In my view, the knowledge and conduct of each of Mr Vial, Mr Garcia and Mr Jallabert, as described by me in these reasons, is to be attributed to Amplitude. In the cases of Mr Vial and Mr Jallabert this follows from their position as directors of Amplitude. In the case of Mr Garcia, while not a director of Amplitude, he was given responsibility to act on behalf of Amplitude in various respects. This included his role in receiving invoices and associated information from Mr Andrew (in Mr Andrew’s capacity as chief financial officer of Fixations) and in authorising payment of those invoices. To the extent that Mr Hassard later became involved in this process, he too was acting for and on behalf of Amplitude.
82 The factual narrative contained in the introductory section of these reasons, and in the section that follows, constitute findings of fact made by me and are based on the evidence of Mr Andrew and Mr Henry, and the documents relied upon by the parties. The matters summarised are largely uncontroversial. To the extent that it has been necessary for me to resolve controversial issues of fact, my findings on those matters will become apparent when those issues are addressed later in these reasons.
ESTABLISHING A CLEAN ROOM AND PERFORMING THE SERVICES
The new clean room facility
83 Fixations’ existing clean room at its premises in Plympton was adequate for use in the manufacture of its trauma products, which were classified for regulatory purposes as class IIb devices. However, it was a small facility, and not approved for the manufacture of the Joint Research products, which were class III devices.
84 The Plympton clean room was not able to be upgraded quickly to the standard required for class III devices, and would have been too small in any event for the volume of product anticipated by the Services Agreement. It was thus necessary for Fixations to establish a new clean room if it was to undertake the contemplated CPSQA services in respect of the Joint Research products.
85 In late 2013, Mr Henry located suitable premises for a new clean room in Thebarton. In February 2014, following entry into the Services Agreement, he commenced establishing the new clean room, and all the associated technical documentation and testing required for review by BSI.
86 From February 2014, Mr Henry spent almost all of his time on this project, with a view to ensuring it was completed in time for it to be audited by BSI in June 2014. About seven of Fixations’ employees also worked on the clean room during this period, often on a full time basis. This included training them in the required processes so that they would be able to operate the clean room for the Joint Research products. Throughout this period, Mr Andrew was spending around 50 per cent of his time at Amplitude’s Norwood premises in his role as its chief financial officer.
87 Mr Henry summarised the work involved in setting up the clean room as including reviewing and upgrading the air handling systems at the new premises; reviewing the documentation for the water system at the new premises; purchasing the packaging materials and equipment required for the Joint Research products; dealing with sterilisation contractors to undertake the sterilisation services that would be required; engaging Sabre Medical as consultants to assist in setting up the clean room and obtaining certification from BSI; considering and documenting how Fixations would go about cleaning, packing and sterilising the Joint Research products; hiring and training staff in clean room policies and procedures specifically for the Joint Research products; undertaking product testing; documenting the quality systems, policies and procedures in preparation for the BSI audit; reviewing the product testing reports; and addressing some issues which arose in relation to the facility’s water quality.
88 The BSI audit took place on 19 and 20 June 2014. No concerns or issues were raised, and the assessment report indicated that certification of the clean room would be achieved. The purpose of the assessment report was stated in the report to be “for extension to the certification scope for location activities at the new location” of Fixations in Thebarton. The “Overall Conclusion” in the report was that “the objectives of this assessment have been achieved.”
89 Further work was then undertaken to finalise the product labels, to recruit staff to operate the new clean room, and to train those staff in the required quality systems. Three full time staff were recruited to staff the new clean room, and undertake the CPSQA services for the Joint Research products.
90 On 7 August 2014, BSI issued a certificate to Fixations confirming that it could use the new clean room facility for the cleaning and packaging of orthopaedic implants.
91 Given the definition of certification in the Services Agreement (as quoted earlier in these reasons), I find that the relevant certification was not obtained, and hence the Certification Date did not occur, until 7 August 2014.
92 On this date, and by reason of the provisions of the Services Agreement summarised earlier, the first order under that agreement was deemed to have been made, and Fixations became contractually entitled to 50 per cent of the price of that order.
93 Fixations had in fact earlier placed orders with suppliers so that it would be in a position to meet the quantities of Joint Research products it anticipated supplying to Amplitude. It had placed orders in February and April 2014, after discussing and agreeing the same with Amplitude. Indeed, some products had been received from suppliers by April 2014 and hence prior to certification. Once Fixations received certification in August 2014, it was able to, and did, commence using the new clean room facility to provide the CPSQA services for the Joint Research products, with a view to those products being released to Amplitude for sale to the market.
Services provided by Fixations under the Services Agreement
94 Mr Henry explained that as the critical subcontractor in the technical file, and under the Technical Agreement, Fixations was responsible for undertaking the following steps in order to get the Joint Research products to market:
· placing orders for parts with approved manufacturers;
· receiving those products from manufacturers and inspecting all incoming paperwork in respect of those orders and supplies;
· reconciling quantities of products ordered and supplied;
· checking the manufacturers’ certification and the relevant materials certificate accompanying each product;
· carrying out a quality assurance inspection for incoming products, including to check the dimensions of the part against its specifications;
· cleaning acceptable products in the Thebarton clean room facility, in accordance with the procedures and standards as prescribed in the technical file and Fixations’ quality system;
· packaging the products to the standard prescribed in the technical file;
· sending the products to sterilisation suppliers for sterilisation in accordance with the procedures and standards prescribed in the technical file;
· once products are returned from sterilisation suppliers, inspecting and reviewing all manufacturing records;
· confirming that the products met all quality and regulatory requirements in accordance with the technical file and Technical Agreement, and that the products could be released by Fixations to Joint Research for approval and, upon Joint Research’s approval, that the products could be released for sale to the market;
· following the release of the products to the market, monitoring the market place for Joint Research products, and investigating and responding to any customer complaints; and
· at all times, maintaining appropriate quality and regulatory accreditation, and participating in quality and regulatory audits by the regulator for the Joint Research products.
95 Mr Henry said that he took responsibility for establishing the systems and procedures for the new clean room for the Joint Research products that were necessary to ensure product quality, and to ensure that the devices met the required regulations. He did not release any products until he had performed a review of all of the batch manufacturing plan product information involved in the manufacture of the devices. This review occurred at the final stage of the manufacturing process.
96 Mr Henry explained that there were three staff involved full-time at the new facility. There were also about six or seven other Fixations’ staff involved in the process, often spending over 50 per cent of their time on the Joint Research products. During busy times, such as when they received urgent product requests from Amplitude, additional staff were required from Fixations to assist so that they could deliver the products on time.
97 Fixations utilised numerous departments to supply the Joint Research products, and overall about nine or 10 people were required at different stages in the above process, from logistics, quality assurance, cleaning, packaging, regulatory and administration. Most of Fixations’ employees were involved in the manufacture, release and continual surveillance of the Joint Research products to the market.
98 From the time a purchase order was placed by Fixations with the suppliers, it took upwards of about six months before the particular product could be processed by Fixations and released for sale, particularly if issues were encountered with delays in product manufacturing or products from suppliers not meeting design specifications. Once the devices were received by Fixations from a supplier, it would usually take at least a month to process, inspect, clean, pack and sterilise the devices.
99 In the event that the devices received from suppliers did not meet specification, Fixations had to contact the manufacturer, identify the problem, determine whether the devices could be reworked or had to be rejected. If the devices could be reworked, then they were sent back to the manufacturer, and would be received again by Fixations once this had occurred.
100 Mr Henry explained that he managed the entire process from procurement to product release for Fixations. He was involved through to December 2015 in approving the products to be released to Amplitude. As a director of Joint Research, Mr Henry was responsible for approving the release of all Joint Research products to the market. If he did not approve the devices, then they were not released to Amplitude and hence not sold to the market.
101 Mr Henry said that the cleaning and packaging process was validated only for the devices listed within the technical file. The products that formed part of the first and second orders were all listed in the technical file. For any other products requested by Amplitude, Fixations needed to assess the requirements of the requested product, and if necessary place a “change control” for the product. This involved preparing a mini technical report of the change to these devices relative to what appeared in the technical file. Fixations would then have to internally justify the suitability of those devices under the medical device directives. A change control could take anywhere between one to three weeks, and would ordinarily involve one or two staff.
102 By way of example, when Amplitude ordered distal centralisers and solid fin plugs (both of which parts are the subject of Unpaid Invoices), a change control was required and involved significant time and cost. Those products were not part of the first and second order, and before they could be processed by Fixations, it had to investigate the products to determine if a validation was required based on the technical file, and if so, a change control had to be undertaken. In the case of the solid fin plugs, Fixations had to develop new technical drawings, undertake testing and validation, and determine a pathway to supply the product.
103 Mr Henry explained that there were also many activities required to be undertaken by Fixations in order to maintain the new clean room facility, and manage the processing of the Joint Research devices. This involved ensuring that Fixations’ quality system that had been confirmed by the BSI audit was maintained at all times. Mr Henry listed a number of tasks that Fixations was required to perform in order to maintain, and be able to operate, the new clean room in respect of the Joint Research devices.
104 According to Mr Henry, these tasks were required to be undertaken on a constant basis to maintain accreditation. All staff at the Thebarton clean room were involved in some capacity in performing these tasks. Even when there were no products being processed at the facility, they were kept busy undertaking these maintenance tasks and processes and, where possible, continually improving the processes to demonstrate compliance with the relevant quality standards, and to ensure that the facility was at all times available for an unannounced audit by BSI. Indeed, there was an unannounced audit at the facility in about September or October 2015.
105 Mr Henry said that from the time the clean room was set up, most of his time was spent dealing with the Joint Research products, ensuring supply from manufacturers, investigating issues with the products and managing the quality system. He also received frequent queries from Amplitude regarding product supply and the prioritisation of products to be processed through the clean room. At least 80 per cent of his time was spent on processing Joint Research products through the clean room.
106 Mr Henry’s evidence as to the services provided by Fixations under the Services Agreement was largely unchallenged. I make findings in terms of the summary of that evidence that I have set out.
AMOUNTS CHARGED BY FIXATIONS
The Prepaid Costs of $275,000
107 On 26 June 2014 and 15 July 2014, Mr Andrew caused Amplitude to pay Fixations amounts of $100,000 and $175,000 respectively, on the purported basis that Fixations was entitled to recover those amounts under the Services Agreement. More particularly, the payments were said to be in respect of the entitlement of Fixations under the Services Agreement to be paid 50 per cent of the price of the (deemed) first order for 1,000 units of each product on the Certification Date.[19]
[19] SA, Schedule 2, para 2(a).
108 I have earlier concluded that the relevant certification was not obtained until 7 August 2014. It follows that the payments of $100,000 and $175,000 were both made before Fixations became contractually entitled to those amounts under the Services Agreement; that is, before Fixations became entitled to recover 50 per cent of the price of the first order of products from Amplitude.
109 I shall return later in these reasons to the legal implications of these sums being paid prematurely. However, it is convenient at this point to address the circumstances surrounding the calculation and payment of the Prepaid Costs of $275,000.
110 In his oral evidence, Mr Andrew said that by late June 2014 he believed that the relevant certification for the purposes of the Services Agreement had been achieved. He said he was informed by Mr Henry that certification had been received. It would appear that this information was based upon the positive outcome of the 19 and 20 June 2014 audit of the new clean room by BSI. Mr Andrew said that it was only later that he appreciated the difference between the BSI audit approval or certification, and BSI certification for the purposes of the Services Agreement.
111 Mr Andrew said that he therefore believed that by late June 2014 Fixations had become entitled under paragraph 2(a) of Schedule 2 of the Services Agreement to payment of 50 per cent of the price of the first order.
112 Mr Andrew said that he discussed his view with Mr Balnaves. He told Mr Balnaves that Mr Henry had informed him that certification of the new clean room had been achieved. Mr Balnaves appeared to Mr Andrew to be of the same view as Mr Andrew in relation to Fixations’ entitlement to charge 50 per cent of the price of the first order.
113 Mr Andrew explained how he calculated the figure he believed Fixations was entitled to. He considered that the cost of the raw materials or products supplied to Fixations for the purposes of the first order was to be paid in advance by Amplitude under the Procurement Deed, and so was to be put to one side. He considered that Fixations was entitled to recover 50 per cent of the remaining cost of the first order.
114 Even though budgets were not finalised at that time, Mr Andrew had estimated that the 12 month cost of supplying the Joint Research products, being the cost of both the first and second orders, would be approximately $1.1 million. He calculated that the first order of products would be for approximately 5,000 parts, and that the second order of products would be for a similar quantity. For the purposes of his calculations he assumed that the supply of the first order of products would take six months to complete. The calculation of Fixations’ costs in respect of the first order was thus $1.1 million divided by two (to confine the costs to a six month period), giving a sum of $550,000. Taking 50 per cent of this meant that the amount recoverable by Fixations was $275,000. This figure represented Mr Andrew’s interpretation of Fixations’ entitlement under the Services Agreement.
115 Mr Andrew said that during a phone conversation at some point prior to the end of the 2014 financial year, Mr Garcia of Amplitude SAS instructed Mr Balnaves and Mr Andrew, in their capacities as managing director and chief financial officer of Amplitude, to try and maximise the cash position of Amplitude as at 30 June 2014. Following this phone conversation, and in response to Mr Garcia’s instruction, Mr Andrew and Mr Balnaves discussed splitting the $275,000 into two payments of $100,000 and $175,000. This is ultimately what Mr Andrew did, charging Amplitude $100,000 prior to the end of the financial year (26 June 2014), and charging the remaining $175,000 early in the next financial year (15 July 2014).
116 Mr Andrew denied having any subsequent conversation with Mr Balnaves on the topic of the $275,000 prior to Mr Garcia raising a complaint about the payments in July 2014. Mr Andrew said that there was no further discussion between him and Mr Balnaves immediately prior to the payment of $175,000 being made, and that there was no conversation with Mr Balnaves in which it was suggested that the relevant certification had not in fact been obtained.
117 I accept the evidence of Mr Andrew in relation to the events surrounding the payments of $100,000 and $175,000, and so make findings in terms of the summary of that evidence that I have set out.
Communications in relation to Fixations’ charges
118 At a meeting in France on 17 July 2014, Mr Balnaves informed Amplitude SAS management that monies had been paid by Amplitude to Fixations in respect of the first order under the Services Agreement.
119 Amplitude SAS management, through an email from Mr Garcia to Mr Balnaves dated 18 July 2014, objected to the payment made to Fixations, pointing out that under the Services Agreement the first order only occurred upon Certification Date. Mr Balnaves responded by email dated 24 July 2014, suggesting that the “prepayment” to Fixations was consistent with what had been discussed at the meeting in France.
120 By email dated 25 July 2014 from Mr Garcia to Mr Balnaves, Mr Garcia explained that Amplitude SAS management did not think that the prepayment was in line with their expressed wish, in the earlier phone call with Mr Balnaves and Mr Andrew, to optimise the Amplitude cash position at the end of June 2014. Mr Garcia asked that Mr Balnaves “refund immediately” the $100,000 to Amplitude. It would appear that Mr Garcia did not appreciate, or at least had overlooked, that there had been a further payment of $175,000 on 15 July 2014.
121 By email dated 25 July 2014 from Mr Balnaves to Mr Garcia, Mr Balnaves suggested that Austofix pay interest at 5 per cent per annum on the prepayments until certification was received. Mr Garcia rejected this suggestion, reiterating Amplitude SAS’s request for a refund by email dated 1 August 2014.
122 On 4 August 2014, Mr Balnaves responded by email, explaining that the Austofix board had resolved to write to Amplitude SAS in relation to the prepayments under the Services Agreement. He referred back to the meeting in France and their discussions on that occasion about the payment of $275,000; explaining that it comprised $100,000 paid in June 2014 and $175,000 paid in July 2014, and was half of the $550,000 incurred by Fixations.
123 On 8 August 2014, Mr Garcia sought confirmation that the $275,000 paid by Amplitude to Fixations “in contradiction” of the Services Agreement had been refunded.
124 By letter dated 12 August 2014 from Mr Balnaves to Mr Jallabert, Mr Balnaves informed him that Fixations had received certification from BSI for the new clean room (attaching the certificate dated 7 August 2014) and explained Austofix’s and Fixations’ position in relation to the prepayments. He also made reference to Fixations having incurred approximately $600,000 in fixed costs in setting up the new clean room. The letter relevantly included:
AOF has incurred approximately $600,000 in fixed costs setting up the clean room, up to 7 August 2014, over and above the non-refundable amount for Certification. We agreed that AOF should recover this $600,000 of fixed costs from Amplitude in the first order of the Services (i.e. at $600,000 divided by 5,000 products, or $120 per Product) and then to go back to just “operating overheads” for all subsequent orders.
AOF has received $275,000 from Amplitude Australia, approximately 46% of the $600,000 of fixed costs. Amplitude’s view is that this payment was made “early” and so it has sought a refund. AOF’s view is that the timing of this payment was fair given the majority of the costs have been paid by AOF to third parties, the huge amount of AOF resources dedicated to this project, the risk taken by AOF that Certification would not be received and the very small margin AOF is making on the whole arrangement.
In any event, now that Certification has been achieved, AOF will shortly issue to Amplitude invoices relating to the first order (taking into account the $275,000 and other prepayments which AOF has already received). Further, another prepayment for one third of the second order, is payable, as per Schedule 2 of the Services Agreement.
125 This letter was sent as an attachment to an email from Mr Balnaves to Mr Jallabert (copied to Mr Vial and Mr Garcia) dated 13 August 2014. The covering email referred to the attached letter and certificate of approval from BSI, and suggested a phone call in the next two days.
126 By a separate email also sent on 13 August 2014, Mr Balnaves responded to Mr Garcia’s email of 8 August 2014, confirming that the $275,000 had not been refunded.
127 By email dated 13 August 2014, Mr Jallabert responded to Mr Balnaves’ email attaching the letter of 12 August 2014. He wrote:
Congratulations for this great news! You will now have the possibility to answer to the surgeons’ demands for the hip.
I will study the documents and will call you tomorrow morning French time to discuss with you about it.
Once again bravo!
128 Mr Garcia responded by email on 15 August 2014 to Mr Henry (copied to Mr Balnaves and others). He wrote:
Congratulations for this very good news. It is the result of a great work you did, and a very close and efficient management of BSI.
129 Neither Mr Jallabert nor Mr Garcia responded to Mr Balnaves’ explanation for the prepayments of $275,000. Nor did they respond to Mr Balnaves’ suggestion in that letter that the $275,000 prepayment be deducted from the amounts otherwise payable in the invoices that were soon to be issued. They also did not respond to the suggestion that Fixations had incurred, and was entitled to charge, approximately $600,000 in setting up the new clean room.
130 As explained below, in the absence of any response from Amplitude SAS, Fixations proceeded as Mr Balnaves’ letter suggested in relation to the $275,000 in Prepaid Costs. It did not refund the $275,000, but progressively deducted it from the amounts payable under the invoices subsequently rendered by Fixations to Amplitude for services rendered under the Services Agreement.
Requirement of Amplitude SAS approval of payments
131 Through the above series of communications with Mr Balnaves in the second half of July 2014, Mr Garcia also directed that any action or commitment by Amplitude involving an expense of greater than $20,000 be approved by him, Mr Jallabert or Mr Vial, and that no payment at all be made to the Austofix group unless approved in the same way.
132 Mr Balnaves acceded to this direction in his email to Mr Garcia of 22 July 2014. Mr Andrew’s evidence was that he and Mr Balnaves also discussed that, as they both had positions with Amplitude and Fixations, they needed to provide as much information as possible to Mr Garcia and Amplitude SAS, and needed to be transparent.
133 As explained below, Mr Garcia’s direction was subsequently adhered to. Following Mr Garcia’s direction, Mr Andrew did not make any payment to Austofix or Fixations without first obtaining the approval of Mr Garcia. Each subsequent payment to Fixations the subject of these proceedings was in fact approved by Mr Garcia.
Costs of establishing the new clean room
134 Mr Andrew explained that it was not until about August 2014, and hence once the new clean room had been established, that he had a chance to gather together and quantify all of the costs incurred in setting it up. He prepared a spreadsheet showing all of the costs incurred, and kept invoices from suppliers in a separate folder.
135 The largest cost was for consultancy fees paid to Sabre Medical for assistance in obtaining certification and in setting up the clean room. The $145,000 payable by Amplitude to Fixations under the Services Agreement for obtaining certification was used by Fixations to pay some of Sabre Medical’s fees. The balance payable to Sabre Medical was $98,341.16, not including amounts that were attributable to the supply of larger equipment and direct packaging costs.
136 The following additional costs were also incurred:
· $120,274.71 in purchasing the required equipment and undertaking necessary building work;
· $43,040.13 in purchasing the consumables and packaging materials used in verifying the processes in the new clean room;
· $35,646.38 in rental and outgoings in the period to 1 August 2014 while the new clean room was being set up;
· $124,564.81 in labour costs. This related to four employees who worked on the clean room and trained for its use on a full time basis from 1 March 2014 to 1 August 2014. It also included an allocation of 75 per cent of Mr Henry’s salary during the period from February to August 2014; and
· $165,268.95 in respect of a variety of other costs, such as fees paid to BSI, travel costs for Mr Henry to meet with suppliers and confirm their accreditation, other costs incurred in sterilisation, bioburden and endotoxin testing, water quality testing and other costs for fixtures and fittings.
137 This gave a total cost for obtaining certification and setting up the new clean room of $587,136.14, in addition to the $145,000 that had already been paid by Amplitude. I will return later in these reasons to Fixations’ inclusion of these setup costs in the invoices subsequently rendered to Amplitude, and in particular the inclusion of amounts in excess of the $200,000 setup fee expressly provided for in the Services Agreement.
Fixations’ method of charging under the Services Agreement
138 The Services Agreement provided for Fixations to charge for the services that it rendered by reference to a price for each order of products, based on “cost recovery plus a 10% margin”. It envisaged an allocation of the costs that Fixations was entitled to recover across the individual parts ordered.
139 Mr Andrew’s approach to the costs that he invoiced on behalf of Fixations involved him working out what the total costs would be over a certain period of time, and then dividing the total cost figure by the number of parts to be supplied. This involved an estimation by him of the time to complete the first two orders, and the budgeted costs of doing so.
140 Mr Andrew explained that in calculating the costs he drew on his knowledge of, and experience in, cost accounting and in product costing methods such as activity based costing and full absorption costing. He explained that these methods provided a basis to allocate all of the costs incurred by a business, whether direct or indirect, manufacturing or overhead, across the activities of the business, so that the cost of a particular activity could be determined. The Services Agreement was silent as to how Fixations’ costs were to be calculated, and it was Mr Andrew’s view that by applying these methods he would ensure that all costs incurred would be classified by reference to the ultimate purpose for which they were incurred, including in providing services for the Joint Research products.
141 To calculate these costs, Mr Andrew started by breaking down the Austofix and Fixations businesses into various business lines, allocating staff to where they fitted within the business, and then working out a budget of how much the work would cost. The five business lines he used for this purpose were the Joint Research products, the trauma products, research and development, corporate and administration, and sales.
142 Mr Andrew spoke with Mr Henry regarding the length of time that he thought it would take to supply the first and second orders of the Joint Research products. They estimated that it would take about a year, or to 30 June 2015, for Fixations to supply the anticipated Joint Research products to Amplitude. Mr Andrew prepared a budget for the entire 2015 financial year and then allocated those costs to the five business lines. Mr Henry assisted him in preparing the budgeted costs.
143 By way of illustration of Mr Andrew’s approach, in relation to the staff who were directly involved in working on the Joint Research products at the Thebarton clean room, Mr Andrew allocated them to that business line. And in relation to the staff who were directly involved with the trauma products, Mr Andrew allocated them to that business line. Some employees, however, were involved with both business lines. In those instances, Mr Andrew discussed with Mr Henry the allocation of their time between those business lines, allocating them on the basis of the expected workload of each such employee. Mr Andrew said that the estimates inherent in the allocations were undertaken in good faith, and represented his best estimate of the work to be done.
144 The budget included an amount for the quality assurance costs that were expected to be incurred by Fixations in operating and maintaining the Thebarton clean room as critical subcontractor for the Joint Research products. These were allocated to the Joint Research business.
145 In relation to the allocation of corporate overhead for the purposes of the budget, Mr Andrew explained that he made a 50 per cent allocation based upon an estimate by him of the proportion of their time that the administration staff would spend in performing duties pertaining to the Thebarton clean room operation. For that purpose, the management and administration fee of $30,000 per month payable to Austofix under the Asset Purchase Agreement was deducted, so as to arrive at a figure that was net of that charge.
[44] Maguire v Makaronis (1997) 188 CLR 449 at 466-467; Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 at [105]-[108].
462 The allegations of breach of fiduciary obligation relied upon by Amplitude in this case are that Mr Balnaves breached his fiduciary obligations as a director of Amplitude by procuring payment of the Prepaid Costs and Excess Setup Costs; by failing to disclose his position of conflict; by failing to inform Amplitude that it had no contractual obligation to make the payments; or by failing to advise Amplitude not to make the payments until it had obtained independent legal advice (or otherwise satisfied itself) as to its legal obligation to make those payments.
463 In my view, for the reasons which follow, the allegations that Mr Balnaves breached his fiduciary obligations to Amplitude in respect of both the Prepaid Costs and the Excess Setup Costs must fail.
No breach of fiduciary obligations in relation to the Prepaid Costs
464 In relation to the Prepaid Costs, the first difficulty for Amplitude is that it is not clear to me that Mr Balnaves procured the payment of the Prepaid Costs, or otherwise exercised any power as a fiduciary in respect of those payments.
465 It will be recalled from my earlier summary of events in relation to the payments of Prepaid Costs of $100,000 and $175,000 on 26 June 2014 and 15 July 2014 respectively that they were effected by Mr Andrew. In his dual roles for Fixations and Amplitude he in substance both requested the payments on behalf of Fixations, and made the payments on behalf of Amplitude.
466 The evidence of Mr Andrew, which I have accepted, was that prior to paying the $100,000, he discussed with Mr Balnaves his view (based on the information he had received from Mr Henry in relation to certification of the new clean room) that Fixations was entitled to charge the Prepaid Costs, and that Mr Balnaves appeared to him to be of the same view. Mr Andrew also said that following the telephone conversation with Mr Garcia about maximising the cash position of Amplitude as at 30 June 2014, he discussed with Mr Balnaves splitting the Prepaid Costs into two payments of $100,000 and $175,000, with the first to be made before that date, and the second to be made after that date. Mr Andrew said that he thereafter effected the two payments without any further conversation with Mr Balnaves about the Prepaid Costs prior to a complaint being raised by Mr Garcia after the second payment had been made.
467 While this evidence establishes that Mr Balnaves knew that Prepaid Costs were to be charged, I do not consider that it goes as far as establishing that he authorised or approved, or otherwise procured, the payments on behalf of Amplitude.
468 But even if I am wrong about this, and Mr Balnaves did exercise his powers as a fiduciary in authorising payment of the Prepaid Costs on behalf of Amplitude, I am not satisfied that this involved any breach of Mr Balnaves’ proscriptive obligation not to place himself in a position of conflict (that is, a conflict between his duties as a director of Amplitude, and his duties and interest as a director of Fixations, and director and shareholder of its parent, Austofix). While it may be said that, in authorising payments by Amplitude to Fixations, Mr Balnaves owed conflicting duties as directors of those two companies, that does not mean he breached his fiduciary obligations. The reason for this is that Amplitude had given informed consent to Mr Balnaves being, and acting, in that position of conflict. The existence of this conflict was inherent in the arrangements reached between the parties. The Asset Purchase Agreement expressly provided the Austofix group with the right to appoint Mr Balnaves as a director of Amplitude. Mr Balnaves was thus a nominee director on behalf of the Austofix group. Further, from their role in the negotiation of the relevant transactions, the other directors of Amplitude were aware of not only Mr Balnaves’ position and interest in Austofix and Fixations, but also the nature and effect of the Services Agreement entered into between Fixations and Amplitude, and the scope for a divergence in the interests of those two companies under that agreement. Understood in this context, Amplitude must be taken to have been aware of, and to have given its informed consent to, Mr Balnaves being in, and acting in, this position of conflict.
469 This is consistent with, and supported by, the position achieved through the provisions of s 191 of the Corporations Act 2001 (Cth) and Amplitude’s constitution. Under cl 8.3(a) of Amplitude’s constitution, the obligation to disclose a material personal interest did not extend to a case where disclosure was not required under the Corporations Act. Under s 191(2)(b) of that Act, a director of a proprietary company need not disclose a material personal interest in a matter that relates to the affairs of the company if the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company.
470 As it turns out, Amplitude subsequently sought to manage Mr Balnaves’ position of conflict by imposing a requirement upon payments by Amplitude to Fixations that they be approved by Amplitude SAS management. However, that requirement did not exist at the time the Prepaid Costs were paid.
471 Amplitude contended that even if it had given its informed consent to Mr Balnaves being in a position of conflict in a general way, and hence excused Mr Balnaves from being in breach of his fiduciary obligations by authorising transactions between the two companies, nevertheless it did not give its informed consent to Mr Balnaves authorising payments that he knew Amplitude had no contractual obligation to make. In other words, the general informed consent did not excuse breaches of this nature. Even if this submission were conceptually sound, as to which I do not express a concluded view, it lacks a factual foundation. The evidence does not permit me to find, and I do not find, that Mr Balnaves knew, or even believed, at the time the Prepaid Costs were paid that Fixations was not entitled to those payments.
472 Mr Balnaves negotiated the terms of the Services Agreement and can thus be taken to have had a close knowledge of the terms of that agreement. However, just as I have accepted that Mr Andrew believed (based upon the information provided by Mr Henry as to the outcome of the BSI audit on 19 and 20 June 2014) that Fixations became entitled in late June 2014 to invoice Amplitude for 50 per cent of the price of the first order under paragraph 2(a) of Schedule 2 of the Service Agreement, I am not satisfied that it is appropriate to infer that Mr Balnaves knew or believed otherwise. Mr Andrew’s evidence was that he discussed the issue with Mr Balnaves, and there was no suggestion by him that Mr Balnaves said anything in response that indicated any doubts on the part of Mr Balnaves, let alone knowledge or understanding that Fixations was not contractually entitled to the amounts in question. The fact that Mr Balnaves was not called to give evidence does not provide a basis for inferring this knowledge or understanding on the part of Mr Balnaves.
473 For these reasons, even if it were the case that Mr Balnaves authorised, or otherwise procured, the payments of Prepaid Costs by Amplitude, I am not satisfied that he did so in breach of his fiduciary obligations to Amplitude.
474 Further, I am not satisfied that Mr Balnaves owed any prescriptive fiduciary obligation to disclose anything to Amplitude about the payments of the Prepaid Costs, or to otherwise advise Amplitude not to make the payment or to seek legal advice before making the payment. Based on the authorities I have mentioned, the fiduciary obligations of a director are purely proscriptive in nature.
475 Finally, there is the additional obstacle to this aspect of Amplitude’s claim by way of set off or counterclaim that I have held that Fixations, while not entitled to the Prepaid Costs at the time they were paid, did become entitled to those costs from 7 August 2014. I have also held that Fixations did give credit for the Prepaid Costs by deducting the amount in question from the amounts payable under the invoices ultimately issued. Given that Amplitude’s claim for knowing receipt of the Prepaid Costs is confined to one for the personal remedy of equitable compensation, rather than any proprietary claim that monies are held on constructive trust, I am not satisfied that this claim would sound in compensation in the amount of the $275,000 claimed. To the contrary, it seems to me that it would be confined to at most a claim for interest for the premature payment of that amount.
No breach of fiduciary obligations in relation to the Excess Setup Costs
476 Different issues arise in relation to the Excess Setup Costs. The payments of the Paid Invoices including these amounts did not occur until after the implementation of the arrangement that required the authorisation of Amplitude SAS management before payments could be made to Fixations. As explained earlier in these reasons, that arrangement was requested by Amplitude SAS management, and acceded to by Mr Balnaves, in the second half of July 2014. The first of the Paid Invoices was not paid until November 2014, and so several months later. Further, consistently with the arrangement reached back in July 2014, all of the Paid Invoices were approved by Mr Garcia prior to payment. There is no basis for any finding that Mr Balnaves had any role in relation to the authorisation of payments of the Excess Setup Costs on behalf of Amplitude, or that he otherwise procured payment of those amounts. In my view, this is fatal to the allegation that these payments were made in breach of Mr Balnaves’ fiduciary obligations to Amplitude.
477 To the extent it is relevant, I am also not prepared to find that Mr Balnaves knew or believed at the time the Paid Invoices were rendered that Fixations was not entitled to charge the Excess Setup Costs. Again, while he was familiar with the terms of the Services Agreement, the evidence does not establish that he knew or believed that the Setup Costs were to be capped in the amount of $200 for each of the first 1,000 stems, or $200,000 in total. I have held that this is the proper construction of the Services Agreement, but it does not follow that Mr Balnaves understood this to be so.
478 Mr Balnaves’ letter of 12 August 2014, in which he set out Fixations’ intention to charge approximately $600,000 in costs associated with setting up the clean room supports the view that Mr Balnaves considered that Fixations was entitled to charge these amounts. I am not prepared to infer that Mr Balnaves’ letter of 12 August 2014 was anything other than an attempt by him to be transparent as to his understanding and intention (on behalf of Fixations) in relation to the charging of the costs of setting up the new clean room.
479 I do not consider that Mr Balnaves’ role in the negotiations leading to the Services Agreement, and in particular his involvement in the communications in that respect summarised earlier in these reasons, provides a basis for inferring otherwise. While some aspects of those communications might be read as Fixations suggesting an estimate of around $220,000 for the setup costs, and as Amplitude wishing to fix the amount of the setup costs, those communications are of a somewhat equivocal nature and were in any event superseded by the agreed terms of the Services Agreement. Even though I have held that, properly construed, the Services Agreement provided for a cap on the setup costs, and did not entitle Fixations to charge the 10 per cent margin on the $200,000 in setup costs that it in fact charged, it does not follow that this construction must have been known to Mr Balnaves. The construction was not entirely straightforward.
480 Nor am I assisted by the evidence to the effect that Mr Balnaves sought legal advice on behalf of Fixations in the lead up to sending his letter of 12 August 2014. Fixations has maintained its legal professional privilege in respect of the relevant legal advice, which it was perfectly entitled to do. It is not appropriate that I speculate as to the content of that advice, let alone draw any adverse inference as a result of the claim of privilege.
481 In summary, I do not consider that the evidence provides a proper basis for me to draw any inference to the effect that Mr Balnaves knew or believed that Fixations was not contractually entitled to charge the Excess Setup Costs. The fact that Mr Balnaves did not give evidence does not enable me to draw an inference to this effect in circumstances where, as I have found, there was not otherwise a proper basis for doing so.
482 From 28 April 2015, Mr Balnaves knew from his communications with Mr Garcia that there was a dispute in relation to Excess Setup Costs. But it can hardly be said that he breached his fiduciary obligations to Amplitude in respect of the Excess Setup Costs after that date in circumstances where the matter in dispute had come to the attention of the other directors of Amplitude, and Amplitude SAS management, and was entirely in their hands so far as Amplitude was concerned.
483 Further, for similar reasons as those that I have given in relation to the Prepaid Costs, I do not consider that Mr Balnaves owed any prescriptive fiduciary obligation to provide information or advice to Amplitude in relation to the charging of the Excess Setup Costs by Fixations.
Outcome of Amplitude’s set off and counterclaim
484 The effect of the above is that Amplitude’s claim by way of set off and counterclaim has failed insofar as it was based upon allegations of breach of contract and the knowing receipt of payments made in breach of fiduciary obligation. Insofar as it was based upon restitutionary relief for mistaken payment, it has partially succeeded. It has succeeded in relation to the Excess Setup Costs to the extent of $325,634.07, being the amount of the Excess Setup Costs paid prior to 28 April 2015, including the margin paid on all setup costs paid prior to this date. It has not succeeded in relation to the Prepaid Costs, except to the extent of any claim for interest that might arise.
485 I propose to hear the parties further in relation to the issue of interest under Amplitude’s set off and counterclaim.
AMPLITUDE’S CLAIM AGAINST AUSTOFIX: BREACHES OF ASSET PURCHASE AGREEMENT
486 There are two broad limbs to Amplitude’s third party claim against Austofix. The first alleges breaches by Austofix of the Asset Purchase Agreement in relation to payment of the Prepaid Costs and Excess Setup Costs. The second alleges a breach by Austofix of the warranty provided by it in the Asset Purchase Agreement in relation to the line of products known as distal centralisers.
Alleged breaches in relation to Prepaid Costs and Excess Setup Costs
487 It will be recalled that under Annexure 7 of the Asset Purchase Agreement, Austofix agreed to supply management and administration services to Amplitude. In particular, clause 3 of that annexure provided:
The Vendor [Austofix] will supply services to the Purchaser [Amplitude] from key personnel including Mark Balnaves, Mark Andrew and Chris Henry, plus provide administrative services, software, warehouse and office space to the Purchaser. The maximum charge by the Vendor in the year ended 30 September 2014 for these services, software, warehouse and office space will be A$360,000.
488 It will also be recalled that it transpired that Amplitude continued to pay a monthly fee of $30,000 throughout the period from October 2014 to June 2015.
489 In its third party claim against Austofix, Amplitude alleges that there were implied terms of the Asset Purchase Agreement to the effect that in providing the management services contemplated under the above clause, Austofix would do so in good faith, and exercising due care and skill.
490 Amplitude further alleges that through Mr Balnaves’ conduct in breach of his fiduciary obligations in connection with the Prepaid Costs and Excess Setup Costs, Austofix breached these implied terms to act in good faith, and with due care and skill.
491 I do not consider it necessary to determine whether the terms alleged are to be implied in the Asset Purchase Agreement. The reason for this is that even if those terms were to be implied, I am not satisfied that Amplitude has established any breach of those terms in respect of either the Prepaid Costs or the Excess Setup Costs.
492 In reaching this conclusion, it is significant that the breaches pleaded by Amplitude are confined to Mr Balnaves’ conduct in respect of the Prepaid Costs and Excess Setup Costs said to have involved a breach of his fiduciary obligations to Amplitude.
493 The first difficulty is that I have held that Amplitude has not established any breach by Mr Balnaves of his fiduciary obligations to Amplitude. On one view of Amplitude’s third party claim against Austofix, that is the end of it. However, taking a broad reading of Amplitude’s claim, it may be read as extending to a breach based upon Mr Balnaves’ conduct said to have involved a breach of his fiduciary obligations, rather than being dependent upon the existence of a breach as such.
494 However, even reading the claim in this broad manner, and even if there was an implied term that any management or administration services provided by Austofix personnel under clause 3 of Annexure 7 would be provided in good faith, and with due care and skill, I do not consider that this applied or extended to Mr Balnaves’ conduct in his role as a (nominee) director of Amplitude. When acting in this role, Mr Balnaves was not acting as an employee or officer of Austofix providing services to Amplitude. Rather, he was acting solely as an officer of Amplitude, and indeed was obliged in that role to ignore the interests of Austofix. There is some analogy with the law’s reticence to hold a company vicariously liable for the conduct of its employees or officers when acting as nominee directors.[45]
[45] Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 at 221-223.
495 Further, and in any event, I do not consider that a factual basis for the breaches has been made out. The first reason for this is the need to establish some relevant conduct by Mr Balnaves. For the reasons explained in the context of my reasons in relation to the allegations of breaches of fiduciary obligations by Mr Balnaves, it is not clear to me that Mr Balnaves exercised any powers in respect of the impugned payments. In respect of Prepaid Costs, while he was aware of these payments from his discussions with Mr Andrew, I am not satisfied that he procured or authorised the payments by Amplitude. The payments were requested and made by Mr Andrew. In respect of the Excess Setup Costs, the evidence makes it plain that Mr Balnaves did not play any role in procuring or authorising the relevant payments. By reason of the approval arrangements put in place by Amplitude SAS management in late July 2014, those payments were approved by Mr Garcia, to the exclusion of any involvement by Mr Balnaves. In circumstances where Mr Balnaves was not relevantly involved in procuring or making the impugned payments, I do not consider that he can be said to have been in breach of any obligation of good faith, or to act have acted without due care and skill.
496 In relation to the allegation of breaches of an obligation to act in good faith, there is the additional factual obstacle to the claim that this would, at the very least, require a finding that Mr Balnaves knew, when the Prepaid Costs and Excess Setup Costs were charged and paid, that Fixations had no contractual entitlement to require payment of those amounts. For the reasons set out earlier, Amplitude has not established that Mr Balnaves had this knowledge.
497 A further factual obstacle to Amplitude’s claim is that, insofar as the Prepaid Costs are concerned, these amounts became payable on 7 August 2014, and Amplitude received credit for the Prepaid Costs by way of deductions from the amounts subsequently invoiced under the Services Agreement. It follows that even if a breach of the Asset Purchase Agreement had been established in respect of the Prepaid Costs, Amplitude has not established that it suffered any loss by reason of the payment of those costs. Its claim would again be confined to one of interest.
498 For all of the above reasons, I do not consider that Amplitude has established any breach of the Asset Purchase Agreement by reason of Mr Balnaves’ conduct in relation to the Prepaid Costs or Excess Setup Costs.
Alleged breach of warranty in relation to distal centralisers
499 Amplitude alleges that insofar as it is held liable to pay any amount in respect of the distal centralisers (being the amounts charged in invoices 546 and 554, which are two of the Stand Alone invoices included within the Unpaid Invoices), Austofix breached the contractual warranty in clause 12.1 of the Asset Purchase Agreement.
500 The contractual warranty in clause 12.1 of the Asset Purchase Agreement is in the following terms:
The Vendor [Austofix] represents, warrants and covenants to and with the Purchaser that each statement contained in Annexure 1 (each a “Warranty”) it is now and will be true, accurate and not misleading at the date of this Agreement.
501 However, this was qualified by clause 12.4 of the Asset Purchase Agreement, which provides:
Where any statement in the Warranties is qualified by the expression “so far as the Vendor(s) is/are aware” or “to the best of the Vendor(s)’ knowledge and belief” or any similar expression, or any similar expression referring to the Vendor’s awareness or knowledge, that statement will be deemed to include an additional statement that it has been made after due and careful enquiry and includes all matters, events or circumstances of which the Vendor should reasonably be aware or know.
502 The statement or warranty in Annexure 1 relied upon by Amplitude is the statement in paragraph 3.1(c)(ii)(B) of that annexure, namely that “[t]here are no facts or circumstances known to the Vendor which may … impair, prevent, or otherwise interfere with the use of the Implant Assets prior to or after the date of this Agreement on Implant”. As this warranty is one which is qualified by reference to facts or circumstances known to the Vendor at the relevant time, clause 12.4 has application.
503 I have earlier summarised the evidence in relation to the issues that arose in relation to the supply of approximately 2,500 distal centralisers to Amplitude under invoices 546 and 554. In short, Mr Henry’s evidence, which I accept, was to the effect that he was required to reject the raw material initially supplied for 1,000 distal centralisers before ultimately obtaining alternative raw materials for 2,500 from a different supplier in Malaysia. I held that Fixations was entitled to recover the costs incurred by it in relation to both the 1,000 rejected parts and the approximately 2,500 parts ultimately supplied. However, I did reject the component of the cost of both batches referable to the labour charge on the basis of various unexplained difficulties or anomalies in the calculation of those figures.
504 As I understand Mr Henry’s evidence, the difficulty that arose in relation to the raw material initially supplied for the batch of 1,000 distal centralisers was at least in part the result of the technical file for the Joint Research products identifying a supplier other than the Malaysian supplier that had previously been used and ultimately supplied the raw materials for the batch of 2,500 distal centralisers.
505 Amplitude’s case is that the technical file for the Joint Research products formed part of the Implant Assets acquired by it under the Asset Purchase Agreement with the result that the “error” in the technical file involved a breach of warranty by Austofix. Amplitude contends that by reason of that breach of warranty it has suffered loss to the extent it is required to pay any sum invoiced in respect of the batch of 1,000 distal centralisers that was rejected by Mr Henry. Understood in this way, Amplitude’s claimed loss would be limited to the portion of invoices 546 and 554 attributable to the $39,906.15 in costs for the 1,000 distal centralisers included by Mr Andrew, which I have earlier in my reasons reduced by the amounts of $13,960 included for labour and $1,396 included by way of a 10 per cent margin. Allowing for the slight adjustment that would be required to reflect the fact that the costs in question related to 2,500 parts whereas Fixations only rendered invoices for 2,430 centralisers, and the inclusion of GST in the invoices, the amount in issue on this aspect of Amplitude’s claim is about $25,000.
506 Even accepting, as I do, that the warranty relied upon by Amplitude extended to the technical file for the Joint Research products, I am not satisfied that a breach of that warranty has been established. Read in light of clause 12.4, in order to establish a breach of the relevant warranty, Amplitude was required to establish that the “error” in the technical file was a fact or circumstance that was known to Austofix, or of which it should reasonably have known after due and careful enquiry.
507 The technical file was, as I have mentioned, many hundreds of pages long, and contained a vast amount of detail. It was approved by BSI. There is no evidence to suggest that anyone from Austofix was aware of the “error” in relation to the supplier of the raw material for distal centralisers prior to it coming to the attention of Mr Henry in the manner I have described in my earlier summary of his evidence. While Mr Henry ultimately identified the error fairly readily, it does not in my view follow that this was a matter that he, or anyone else from Austofix, should reasonably have identified at the time of entry into the Asset Purchase Agreement. In order to reach that conclusion I would require additional evidence as to the nature and detail of the technical file. While the “error” was raised with Mr Henry in his cross-examination, the issues in relation to the distal centralisers and the technical file were not explored in any detail in the evidence.
508 For these reasons, I am not satisfied that Amplitude has established any breach of the warranty provided by Austofix under the Asset Purchase Agreement in relation to the distal centralisers.
Outcome of Amplitude’s claim against Austofix
509 For the reasons set out above, Amplitude has not made out any breach of the Asset Purchase Agreement by Austofix. Its third party claim against Austofix must be dismissed.
FIXATIONS’ & AUSTOFIX’S CLAIMS AGAINST MR BALNAVES: CONTRIBUTION
510 In its third party claim against Mr Balnaves, Fixations seeks contribution in equity from Mr Balnaves to the extent that it is held liable for knowing receipt of any amounts paid in consequence of his breaches of fiduciary obligation. As I have held that Fixations is not liable as a knowing recipient of any of the amounts paid to it by Amplitude, it is not necessary for me to consider Fixations’ claim for contribution. The claim has no work to do, and so should be dismissed for that reason.
511 In its third party claim against Mr Balnaves, Austofix seeks contribution against Mr Balnaves pursuant to the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) to the extent that it is liable under the third party claim against it by Amplitude by reason of Mr Balnaves’ breach of common law duties. As I have held that Austofix is not liable under the third party claim brought against it by Amplitude, it is not necessary for me to consider Austofix’s claim for contribution. Like Fixations’ claim for contribution, Austofix’s claim for contribution has no work to do, and so should be dismissed for that reason.
MR BALNAVES’ CLAIM AGAINST AMPLITUDE: INDEMNITY
512 Mr Balnaves filed a contribution claim against Amplitude. In it he alleges that in the event that he is found liable to either Fixations or Austofix by reason of their claims for contribution from him, then he is entitled to an indemnity from Amplitude pursuant to either the deed of indemnity that he entered into with Amplitude on or about 28 May 2014, or clause 10.1 of Amplitude’s constitution.
513 As I have dismissed Fixations’ and Austofix’s claims for contribution from Mr Balnaves, it is not necessary for me to consider Mr Balnaves’ claim for an indemnity. It should be dismissed for the reason that it has no work to do.
CONCLUSION
514 For the reasons set out, I propose to make orders to the following effect:
1. I allow the Fixations’ claim in respect of the Unpaid Invoices in the amount of $884,122.15.
2. I allow Amplitude’s set off and counterclaim in respect of the Paid Invoices in the amount of $325,634.07.
3. I dismiss Amplitude’s claims against Austofix for breach of the Asset Purchase Agreement.
4. I dismiss Fixations’ and Austofix’s claims for contribution from Mr Balnaves.
5. I dismiss Mr Balnaves’ claim for an indemnity from Austofix.
515 However, I propose giving the parties an opportunity to be heard in relation to the issues of interest and costs, and the terms of the orders to be made.
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