BSO Network Inc and Anor v EMClarity Pty Ltd (No 2)
[2021] QSC 192
•9 April 2021 (restricted to the parties) 28 July 2021 (redacted version for publication)
SUPREME COURT OF QUEENSLAND
CITATION:
BSO Network Inc & Anor v EMClarity Pty Ltd (No 2) [2021] QSC 192
PARTIES:
BSO NETWORK INC
(first plaintiff)
&
APSARA NETWORKS INC
(second plaintiff)
v
EMCLARITY PTY LTD
ACN 88 139 128 180
(defendant)
FILE NO:
BS12112 of 2019
DIVISION:
Trial Division
PROCEEDING:
Originating Application, continued as if commenced by way of Claim
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
9 April 2021 (restricted to the parties)
28 July 2021 (redacted version for publication)
DELIVERED AT:
Brisbane
HEARING DATES:
20 – 23 July 2020, 19 August 2020; 21 and 22 October 2020 (further written submissions)
JUDGE:
Ryan J
ORDERS:
The parties having agreed upon a less redacted version for publication of my Reasons delivered on 9 April 2021, I now publish those less redacted Reasons.
CATCHWORDS:
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – PARTICULAR PARTIES – PRINCIPAL AND AGENT – CREATION OF RELATIONSHIP OF AGENCY – FORMATION AND PROOF OF AGENCY – where alleged principal wholly owned subsidiary of alleged agent – where alleged principal undisclosed to other contracting party – whether holding company negotiating “on behalf of” subsidiary created agency relationship
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – whether contract an unconditional contract for supply of goods or a development contract, with supply to follow only if development successful – where, if an unconditional contract for supply, the contract was silent as to when the goods were to be delivered – whether a term requiring delivery within a reasonable time ought to be implied – determination of period of reasonable time – whether there had been failure to supply the goods within a reasonable time
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – REPUDIATION – DELAY AND PROVISIONS AS TO TIME – where defendant agreed to supply goods to second plaintiff – where defendant then unilaterally implemented a “Quality Review” of all its products and a pause on shipping until the review was complete – where defendant informed plaintiffs about Quality Review and pause on shipments but would provide no information to plaintiffs about when the review might be completed – where defendant cancelled orders for components for second plaintiff’s product –– whether conduct of defendant repudiatory
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – where contract between first plaintiff and defendant contained obligation of confidence – where plaintiffs’ competitor acquired defendant – where, prior to acquisition, during due dilignce, defendant provided redacted versions of plaintiffs’ confidential information to plaintiffs’ competitor – where, after acquisition, defendant provided un-redacted copies of plaintiffs’ confidential information to plaintiff’s competitor – whether confidential information provided in breach of contractual obligation of confidence – whether contractual exceptions to obligation of confidence applied
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – whether equitable obligation of confidence co-exists with contractual obligation of confidence – whether, if co-existing, equitable obligation broader in scope than contractual obligation
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – where competitor of plaintiffs acquired defendant – where, during due dilignce, prior to acquisition, defendant provided redacted versions of the plaintiffs’ confidential information to the plaintiffs’ competitor – where, after acquisition, defendant provided un-redacted copies of the plaintiff’s confidential information to the plaintiff’s competitor – whether confidential information provided in breach of equitable obligation of confidence
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – contractual obligation of confidence – contractual exclusivity terms – whether defendant likely to breach contractual obligation of confidence or exclusivity terms of the contract
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – whether defendant likely to breach equitable obligation of confidence
Apotex Pty Ltd v Les Laboratoires Servier (No 2) [2012] FCA 748
Astea (UK) v Time Group [2003] EWHC 725
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Brambles Holdings Ltd v Bathurst City Council(2001) 53 NSWLR 153
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552
Bridlington Relay Ltd v Yorkshire Electricity Board [1965] Ch 436
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Coco v AN Clarke (Engineers) Ltd [1969] RPC 41
Coghlan v Pyoanee Pty Ltd [2003] QCA 146 [2003] 2 Qd R 636
Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Cooperative Assurance Co of Australia Ltd (1931) 46 CLR 41
Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169
Corporate Farming Pty Ltd v Eden Bay Pty Ltd (Unreported, Supreme Court of Western Australia, Murray J 28 January 1992).
Curwen & Ors v Vanbeck Pty Ltd [2009] VSCA 284
Dan v Barclays (1983) 46 ALR 437
Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172
Faccenda Chicken Ltd v Fowler [1985] 1 All ER 724
Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Gold Coast Oil Co Pty Ltd v Lee Properties Pty Ltd [1984] QSCFC 85 [1985] 1 Qd R 416
Gold & Copper Resources Pty Ltd v Newcrest Operations Ltd [2013] NSWSC 281
Global Advanced Metals Pty Ltd v Metallurg Inc [2017] WASCA 188
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd [(1986) 40 NSWLR 631
Hart v MacDonald (1910) 10 CLR 417
Hick v Raymond & Reid [1893] AC 22
Kazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV [2000] CLC 822
King Tide Company Pty Ltd v Arawak Holdings Pty Ltd [2017] QCA 251
Koompahtoo Local Aboriginal Council v Sanpine Pty Ltd (2007) 233 CLR 115
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623
Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1
Maynard v Goode (1926) 37 CLR 529
Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286
Optus Networks Pty Ltd v Telstra Corporation Ltd (2010) 265 ALR 281
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
Questband P/L v Macquarie Bank Limited [2009] QCA 266
Rossiter v Miller (1878) 3 App Cas 1124
Sequel Drill & Blast P/L v Whitsunday Crushers P/L [2009] QCA 218
Saltmann Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413
Shawton Engineering v DGP International [2006] BLR 1
Streeter v Western Areas Exploration Pty Ltd (No 2) 92011) 278 ALR 291
Streetscape Projects (Aust) Pty Ltd v City of Sydney (2013) 85 NSWLR 196
Tate v Freecorns Pty Ltd [1972] WAR 204
Telina Developments Pty Ltd v Stay Enterprises Pty Ltd [1984] QSCFC 43 [1984] 2 Qd R 585
Weemah Park Pty Ltd v Glenlaton Investments Pty Ltd [2011] QCA 150 [2011] 2 Qd R 582
COUNSEL:
D O’Brien QC with F Lubett and L Wick for the plaintiffs
G Beacham QC with G Coveney for the defendant
SOLICITORS:
Johnson Winter & Slattery for the plaintiffs
Ashurst Australia for the defendant
On 9 April 2021 I delivered my Reasons in this matter. Because of the commercial sensitivity of the subject matter, publication at large of my Reasons was limited to a heavily redacted version of them.
Since that time the parties have agreed that a less redacted version of my Reasons may be published at large. They are attached and marked “Annexure A”.
ANNEXURE A
SUPREME COURT OF QUEENSLAND
CITATION:
BSO Network Inc & Anor v EMClarity Pty Ltd (No 2) [2021] QSC 192
PARTIES:
BSO NETWORK INC
(first plaintiff)
&
APSARA NETWORKS INC
(second plaintiff)
v
EMCLARITY PTY LTD
ACN 88 139 128 180
(defendant)
FILE NO:
BS12112 of 2019
DIVISION:
Trial Division
PROCEEDING:
Originating Application, continued as if commenced by way of Claim
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
9 April 2021
DELIVERED AT:
Brisbane
HEARING DATES:
20 – 23 July 2020, 19 August 2020; 21 and 22 October 2020 (further written submissions)
JUDGE:
Ryan J
ORDERS:
The parties are directed to confer about the next steps in this litigation and to contact my associate by no later than 23 April 2021 with agreed draft directions or orders; or a request for a date for a review of the matter.
Until further order, I will restrict publication of these reasons to the parties and to their solicitors and counsel (subject, in the case of the defendant, to the orders made by Brown J on 27 November 2019, and varied by me on 4 August 2020).
CATCHWORDS:
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – PARTICULAR PARTIES – PRINCIPAL AND AGENT – CREATION OF RELATIONSHIP OF AGENCY – FORMATION AND PROOF OF AGENCY – where alleged principal wholly owned subsidiary of alleged agent – where alleged principal undisclosed to other contracting party – whether holding company negotiating “on behalf of” subsidiary created agency relationship
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – whether contract an unconditional contract for supply of goods or a development contract, with supply to follow only if development successful – where, if an unconditional contract for supply, the contract was silent as to when the goods were to be delivered – whether a term requiring delivery within a reasonable time ought to be implied – determination of period of reasonable time – whether there had been failure to supply the goods within a reasonable time
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – REPUDIATION AND NON-PERFORMANCE – REPUDIATION – DELAY AND PROVISIONS AS TO TIME – where defendant agreed to supply goods to second plaintiff – where defendant then unilaterally implemented a “Quality Review” of all its products and a pause on shipping until the review was complete – where defendant informed plaintiffs about Quality Review and pause on shipments but would provide no information to plaintiffs about when the review might be completed – where defendant cancelled orders for components for second plaintiff’s product –– whether conduct of defendant repudiatory
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – where contract between first plaintiff and defendant contained obligation of confidence – where plaintiffs’ competitor acquired defendant – where, prior to acquisition, during due dilignce, defendant provided redacted versions of plaintiffs’ confidential information to plaintiffs’ competitor – where, after acquisition, defendant provided un-redacted copies of plaintiffs’ confidential information to plaintiff’s competitor – whether confidential information provided in breach of contractual obligation of confidence – whether contractual exceptions to obligation of confidence applied
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – whether equitable obligation of confidence co-exists with contractual obligation of confidence – whether, if co-existing, equitable obligation broader in scope than contractual obligation
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – where competitor of plaintiffs acquired defendant – where, during due dilignce, prior to acquisition, defendant provided redacted versions of the plaintiffs’ confidential information to the plaintiffs’ competitor – where, after acquisition, defendant provided un-redacted copies of the plaintiff’s confidential information to the plaintiff’s competitor – whether confidential information provided in breach of equitable obligation of confidence
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH – contractual obligation of confidence – contractual exclusivity terms – whether defendant likely to breach contractual obligation of confidence or exclusivity terms of the contract
EQUITY – GENERAL PRINCIPLES – equitable obligation of confidence – whether defendant likely to breach equitable obligation of confidence
Apotex Pty Ltd v Les Laboratoires Servier (No 2) [2012] FCA 748
Astea (UK) v Time Group [2003] EWHC 725
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Brambles Holdings Ltd v Bathurst City Council(2001) 53 NSWLR 153
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552
Bridlington Relay Ltd v Yorkshire Electricity Board [1965] Ch 436
Byrne v Australian Airlines Ltd (1995) 185 CLR 410
Coco v AN Clarke (Engineers) Ltd [1969] RPC 41
Coghlan v Pyoanee Pty Ltd [2003] QCA 146 [2003] 2 Qd R 636
Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Cooperative Assurance Co of Australia Ltd (1931) 46 CLR 41
Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520
Commonwealth Bank of Australia v Barker (2014) 253 CLR 169
Corporate Farming Pty Ltd v Eden Bay Pty Ltd (Unreported, Supreme Court of Western Australia, Murray J 28 January 1992).
Curwen & Ors v Vanbeck Pty Ltd [2009] VSCA 284
Dan v Barclays (1983) 46 ALR 437
Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172
Faccenda Chicken Ltd v Fowler [1985] 1 All ER 724
Freeman & Lockyer (a firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Gold Coast Oil Co Pty Ltd v Lee Properties Pty Ltd [1984] QSCFC 85 [1985] 1 Qd R 416
Gold & Copper Resources Pty Ltd v Newcrest Operations Ltd [2013] NSWSC 281
Global Advanced Metals Pty Ltd v Metallurg Inc [2017] WASCA 188
GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd [(1986) 40 NSWLR 631
Hart v MacDonald (1910) 10 CLR 417
Hick v Raymond & Reid [1893] AC 22
Kazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV [2000] CLC 822
King Tide Company Pty Ltd v Arawak Holdings Pty Ltd [2017] QCA 251
Koompahtoo Local Aboriginal Council v Sanpine Pty Ltd (2007) 233 CLR 115
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623
Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1
Maynard v Goode (1926) 37 CLR 529
Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104
Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286
Optus Networks Pty Ltd v Telstra Corporation Ltd (2010) 265 ALR 281
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537
Questband P/L v Macquarie Bank Limited [2009] QCA 266
Rossiter v Miller (1878) 3 App Cas 1124
Sequel Drill & Blast P/L v Whitsunday Crushers P/L [2009] QCA 218
Saltmann Engineering Co Ltd v Campbell Engineering Co Ltd [1963] 3 All ER 413
Shawton Engineering v DGP International [2006] BLR 1
Streeter v Western Areas Exploration Pty Ltd (No 2) 92011) 278 ALR 291
Streetscape Projects (Aust) Pty Ltd v City of Sydney (2013) 85 NSWLR 196
Tate v Freecorns Pty Ltd [1972] WAR 204
Telina Developments Pty Ltd v Stay Enterprises Pty Ltd [1984] QSCFC 43 [1984] 2 Qd R 585
Weemah Park Pty Ltd v Glenlaton Investments Pty Ltd [2011] QCA 150 [2011] 2 Qd R 582
COUNSEL:
D O’Brien QC with F Lubett and L Wick for the plaintiffs
G Beacham QC with G Coveney for the defendant
SOLICITORS:
Johnson Winter & Slattery for the plaintiffs
Ashurst Australia for the defendant
Table of Contents
Overview..................................................................................................................................... 16
The parties.................................................................................................................................. 20
The terminology of wireless networks........................................................................................... 21
The provision of wireless network services in the NJ Equity Triangle............................................... 22
Key individuals............................................................................................................................. 22
Agreements between BSO, McKay Brothers and EMClarity............................................................ 24
Events leading up to McKay Brothers’ acquisition of EMClarity....................................................... 24
BSO informed of the takeover and the “Quality Review”................................................................ 26
The parties’ cases........................................................................................................................ 27
The relief claimed by the plaintiffs................................................................................................ 28
Credibility issues.......................................................................................................................... 29
Structure of these reasons........................................................................................................... 29
Relevant background facts........................................................................................................... 30
2017 – 2018: Discussions between Mr McGowan and Dr Baines................................................. 30
The agency issue...................................................................................................................... 31
The W Band Radio Development Agreement – key terms........................................................... 32
Milestone 1: The “kick off”....................................................................................................... 39
Milestone 2: The Preliminary Design Report (August – November 2018)..................................... 40
Milestone 3: Commencement of final design (November 2018 – January 2019).......................... 41
The critical correspondence.......................................................................................................... 42
Late January 2019.................................................................................................................... 42
February/March 2019.............................................................................................................. 45
Observation about the operation of the WBRDAT...................................................................... 51
Late March and April 2019....................................................................................................... 52
BSO’s/Apsara’s “new” (or alternative) strategy.......................................................................... 53
Delivery estimates................................................................................................................... 54
Quotes including statements about delivery times.................................................................... 55
Purchase orders....................................................................................................................... 57
Invoices (May/June 2019)......................................................................................................... 58
Observation about payment terms........................................................................................... 58
Observation about warranty terms........................................................................................... 59
Mr Boyle’s invitation to the W Band Project Meeting..................................................................... 60
Delays from July 2019.................................................................................................................. 60
BSO informed of McKay Brothers’ acquisition of EMClarity............................................................ 63
Status of development and production of a W Band radio.............................................................. 65
Cancellation of orders for components......................................................................................... 66
Progress of the Quality Review..................................................................................................... 66
Issue 1: Did BSO enter into the WBRDAT as agent for Apsara (the undisclosed principal) or in its own capacity? 67
Discussion and conclusion........................................................................................................ 69
Issue 2: Did Apsara and EMClarity enter into agreements in May and June 2019, for the supply of E Band and W Band radios?........................................................................................................................................ 72
Plaintiffs’ submissions.............................................................................................................. 72
Defendant’s submissions.......................................................................................................... 74
Plaintiffs’ submissions in reply.................................................................................................. 75
Discussion............................................................................................................................... 75
Principles............................................................................................................................ 75
What was to happen to the WBRDAT if new agreements were made?.................................... 76
Was a varied WBRDAT the agreement which made good commercial sense?.......................... 78
Inferences to be drawn from the parties’ communication and other conduct.......................... 80
Inferences to be drawn from conduct after the 2019 Agreements.......................................... 86
Conclusion............................................................................................................................... 88
Issue 3: Alternatively to Issue (2), was the W Band development agreement varied?....................... 88
Defendant’s submissions.......................................................................................................... 89
Plaintiffs’ submissions.............................................................................................................. 89
Discussion............................................................................................................................... 90
Conclusion............................................................................................................................... 91
Issue 4: Did the Supply Agreements (or the WBRDAT as varied) contain an implied term that the E Band and W Band radios would be supplied within a reasonable time?...................................................................... 91
Discussion and conclusion........................................................................................................ 91
Issue 5: If there was such an implied term, what was a “reasonable time” for the supply of the radios? 92
Plaintiffs’ submissions.............................................................................................................. 92
Defendant’s submissions.......................................................................................................... 93
Discussion............................................................................................................................... 94
Practical guidance from the authorities................................................................................. 94
Applying that practical guidance........................................................................................... 97
Meaning of delivery of the radios within a reasonable time in the circumstances of this case.. 97
The use of estimates............................................................................................................ 97
Conclusion............................................................................................................................. 101
Issue 6: Did EMClarity breach the implied term by failing to supply the E Band and W Band radios within a “reasonable time” being by October 2019, or alternatively 31 January 2020, 6 May 2020 or at the latest the date of the trial? 101
Issue 7: Was a Quality Review in the terms instituted by EMClarity permitted by the terms of the 2019 Agreements or the WBRDAT?............................................................................................................................ 101
Issue 8: Was the Quality Review a genuine and/or necessary review of the E Band or W Band products? Or was it a “go-slow” in order to prioritise the interest of McKay Brothers/disadvantage the plaintiffs?.......... 102
Plaintiffs’ submissions............................................................................................................ 102
Defendant’s submissions........................................................................................................ 104
Discussion and conclusion...................................................................................................... 104
Issue 9: By subjecting the order of W Band and E Band radios to the Quality Review, and/or delaying the development and shipment of the order, did EMClarity breach the terms of the Supply Agreements or the WBRDAT? 106
Issue 10: Was EMClarity’s conduct, in subjecting the order of W Band and E Band radios to the Quality Review, and/or delaying the development and shipment of the order a repudiation of the 2019 Agreements or the WBRDAT? 106
Plaintiffs’ submissions............................................................................................................ 106
Defendant’s submissions........................................................................................................ 108
Plaintiffs’ reply....................................................................................................................... 108
Discussion and conclusion...................................................................................................... 109
Issues 11 – 16: Breaches of confidence - Overview....................................................................... 110
Issue 11: Were the “W-Band project, the terms of the WBRDAT, the Customer Material under the WBRDAT, the Alternative Strategy, the Quote and the Purchase Orders” (together, the “Material”) confidential? 112
Issue 12: Was the Material disclosed to McKay Brothers?............................................................. 114
Invitation to meeting about the W Band Project and following emails – was confidential information disclosed? 114
The redacted material – was confidential information disclosed?............................................. 115
The redacted copies of the WBRDAT................................................................................... 115
The redacted Quote and Purchase Orders........................................................................... 116
The un-redacted material – was confidential information disclosed?........................................ 117
Issue 13: Was there a contractual obligation under the WBRDAT to keep the Material confidential and not disclose it to McKay Brothers?.................................................................................................................... 117
Issue 14: Was there an equitable duty of confidence to keep the Material confidential and not disclose it to McKay Brothers? What is the scope of any such equitable duty?............................................................ 118
The equitable obligation or duty of confidence........................................................................ 118
Whether contractual and equitable obligations of confidence co-exist?.................................... 118
Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172........................................................ 118
Streetscape Projects (Aust) Pty Ltd v City of Sydney (2013) 85 NSWLR 196................................ 120
Optus Networks Pty Ltd v Telstra Corporation Ltd (2010) 265 ALR 281...................................... 121
Academic text........................................................................................................................ 123
The parties’ arguments........................................................................................................... 123
Discussion and conclusion...................................................................................................... 125
Issue 15: Was the contractual duty breached?............................................................................. 126
Issue 16: Was the equitable duty breached?................................................................................ 128
The equitable duty of confidence............................................................................................ 128
The plaintiffs’ submissions...................................................................................................... 129
The defendant’s submissions.................................................................................................. 129
Discussion and conclusion...................................................................................................... 129
Issue 17: Does BSO/Apsara hold a belief that EMClarity will further delay the development/shipment of the radios? Is that belief reasonable?............................................................................................................... 130
Issue 18: Does BSO/Apsara hold a belief that EMClarity will, in the future, breach the confidentiality provisions of the WBRDAT or the equitable duty of confidence? Is that belief reasonable?..................................... 130
Discussion and conclusion...................................................................................................... 135
Issue 19: Does BSO/Apsara hold a reasonable belief that EMClarity will, in the future, breach the exclusivity provisions of the WBRDAT or the 2019 Agreements?................................................................................... 135
Overview
In broad terms: the plaintiffs claim that the defendant failed to perform its contractual obligations, under four contracts, to supply certain products to Apsara Networks within a reasonable time, or alternatively, repudiated the contracts. The defendant contends that the contracts are contracts for development and supply. Supply is conditional upon successful development. There has not yet been successful development. Therefore, the contractual obligation to supply products has not yet arisen and the contracts have not been breached.
Nineteen issues were presented for my determination. My conclusions as to each are stated briefly in the table below.
Critically, I have concluded that the second plaintiff and the defendant entered into contracts in pursuance of which the defendant agreed unconditionally to supply products to the second plaintiff; which the defendant has repudiated by manifesting an intention to perform the contracts only “if and when” it suited the defendant to do so. Whether the second plaintiff has or will terminate the contracts was not an issue for me.
Issues
Conclusion
W Band Development Agreement
1. Did BSO enter into the W Band Radio Development Agreement as agent for Aspara (the undisclosed principal), or in its own capacity?
BSO entered into the W Band Radio Development Agreement in its own capacity.
Supply Agreements
2. Did Apsara and EMClarity enter into agreements in May and June 2019, for the supply of E Band and W Band radios?
Yes.
3. Alternatively to (2), was the W Band Radio Development Agreement varied?
No – Apsara and EMClarity entered into new agreements and the W Band Radio Development Agreement was terminated.
Implied Terms
4. Did the Supply Agreements (or the W Band Radio Development Agreement as varied) contain an implied term that the E Band and W Band radios would be supplied within a “reasonable time”?
The Supply Agreements (referred to by me as the 2019 Agreements) are unconditional agreements to supply radios, which contained an implied term that the radios would be delivered within a reasonable time.
5. If there was such an implied term, what was a “reasonable time” for the supply of those radios?
On the evidence, it was impossible for me to determine, on a reasoned basis, and without speculating, the date upon which a reasonable time for the supply of E Band or W Band radios would elapse.
6. Did EMClarity breach the implied term by failing to supply the E Band and W Band radios within a “reasonable time”, being by 30 October 2019, or alternatively 31 January 2020, 6 May 2020 or, at the latest, the date of trial?
It was tempting to conclude that there had been a failure to supply by, at the latest, the date of trial. But I was concerned that such a finding would involve speculation. On the evidence I was not able to answer this question.
The Quality Review
7. Was a Quality Review in the terms instituted by EMClarity permitted by the terms of the Supply Agreements or the W Band Radio Development Agreement?
The Supply Agreements did not permit the “Quality Review”.
It was unnecessary for me to answer the question whether the W Band Radio Development Agreement permitted the Quality Review.
8. Was the Quality Review a genuine and/or necessary review of the E Band or W Band products? Or was it a “go-slow” in order to prioritise the interests of McKay Brothers / disadvantage the Plaintiffs?
The plaintiffs acknowledged that it was unnecessary for me to make a finding that the Quality Review was in effect a sham. I was not prepared to make an unnecessary finding.
9. By subjecting the order of W Band and E Band radios to the Quality Review, and/or delaying the development and shipment of the order, did EMClarity breach the terms of the Supply Agreements or the W Band Development Agreement?
Having found that EMClarity breached the Supply Agreements by repudiation, I did not need to reach a finding on this issue.
Repudiation
10. Was EMClarity’s conduct, in subjecting the order of W Band and E Band radios to the Quality Review, and/or delaying the development and shipment of the order a repudiation of:
(a) the Supply Agreements?
(b) the W Band Radio Development Agreement?
EMClarity repudiated the Supply Agreements.
EMClarity and BSO terminated the W Band Radio Development Agreement.
Confidentiality
11. Were the W Band Project, the terms of the W Band Radio Development Agreement, the Customer Material under the W Band Radio Development Agreement, the Alternative Strategy, the Quote, and the Purchase Orders (together the Material) confidential?
The W Band Project, the terms of the W Band Radio Development Agreement and the Customer Material under the agreement were “Confidential Information” as defined in the agreement.
The Alternative Strategy, the Quote and the Purchase Orders were information and documents in relation to which equity would impose obligations of confidence.
12. Was the Material disclosed by EMClarity to McKay Brothers?
There was disclosure of BSO’s information, including “the Material” but not all of the disclosed information was confidential.
13. Was there a contractual obligation under the W Band Radio Development Agreement to keep the Material confidential and not disclose it to McKay Brothers?
Yes – in so far as the W Band Project, the terms of the W Band Radio Development Agreement and the Customer Material was concerned.
14. Was there an equitable duty of confidence to keep the Material confidential and not disclose it to McKay Brothers? What is the scope of any such equitable duty?
Yes – in relation to the Alternative Strategy, the Quote and the Purchase Orders.
As to the balance of the Material, to which a contractual obligation of confidence also applied, the law goes both ways – but regardless, the equitable duty would not operate to convert disclosure which was authorised by the contract into unauthorised disclosure.
15. Was the contractual duty breached?
No.
16. Was the equitable duty breached?
Yes.
Apprehended breach
17. Does BSO/Apsara hold a belief that EMClarity will further delay the development/shipment of the radios? Is that belief reasonable?
Yes.
18. Does BSO/Apsara hold a belief that EMClarity will, in the future, breach the confidentiality provisions of the W Band Radio Development Agreement or the equitable duty of confidence? Is that belief reasonable?
Yes.
19. Does BSO/Apsara hold a belief that EMClarity will, in the future, breach the exclusivity provisions of the W Band Radio Development Agreement/ Supply Agreements? Is that belief reasonable?
I have found that the W Band Radio Development Agreement is at an end – which means exclusivity ends in accordance with clause 2.
EMClarity has repudiated the Supply Agreements. The second plaintiff may choose to terminate the Supply Agreements. The exclusivity provisions do not survive termination. It is preferable to defer the answer to this question until the second plaintiff has indicated whether it will elect to terminate the Supply Agreements.
An outline of the evidence and my reasons for these conclusions follow.
My conclusions do not resolve matters between the parties, but they will inform the next steps of this litigation.
The parties are directed to confer about the next steps and to contact my associate, by no later than 23 April 2021, with agreed draft directions or orders; or a request for a review of the matter.
At this stage, I will restrict publication of these reasons to the parties and to their solicitors and counsel (subject, in the case of the defendant, to the orders made by Brown J on 27 November 2019, and varied by me on 4 August 2020).
The parties
BSO Network Inc (BSO), the first plaintiff, is an American company which provides IT and telecommunications services globally. Since December 2017, Apsara Networks Inc, the second plaintiff, has been one of its wholly owned subsidiaries.
BSO provides wireless network services to the New York Stock Exchange (NYSE), the NASDAQ[1] and the Chicago Board Options Exchange (CBOE). These three exchanges are in a geographical area known as the New Jersey (or NJ) Equity Triangle.[2] Mahwah, Carteret and Secaucus (towns in NJ) are the three “points” of the triangle.
[1] The National Association of Securities Dealers Automated Quotations System Stock Market.
[2] There are other financial markets and trading houses within or near the NJ Equity Triangle.
BSO’s major competitor in the market for wireless services in the NJ Equity Triangle is McKay Brothers.[3]
[3] Although Mr Boyle for the defendant was not prepared to describe BSO as McKay Brothers’ major competitor, Mr McGowan was not challenged on the proposition that they were. Also, as I have indicated below, where there was a conflict in the evidence between Mr Boyle and another witness, I preferred the evidence of the other witness.
EMClarity, the defendant, is a Brisbane-based company with global reach, which designs, develops, produces and supplies microwave and millimetre wave radio technology.
McKay Brothers acquired EMClarity in September 2019. Thus, BSO’s major competitor in the NJ Equity Triangle market acquired the company which was the source of the radios they each needed to provide wireless network services in that market.
The terminology of wireless networks
Some understanding of terminology is necessary to understand these reasons.
Radio waves travel across different frequencies of the radio spectrum – known as bands. Radio wave frequency is measured in hertz. In the USA, the Federal Communications Commission (FCC) is responsible for granting licences to entities to permit them to transmit information using radio waves in certain bands with assigned frequencies.
Bands are enabled through radio technology.
A network is a medium for radio wave communication.
A path is the connection between two points in a network. The word “path” might also be used to describe a shorter segment (a “hop”), which, together with other segments, makes up an overall circuit.
High frequency trading networks are designed to create the most efficient path possible between (for example) the NYSE, NASDAQ and CBOE, to enable financial market participants to automate the collection of pricing information and action (such as to buy or sell securities) in accordance with a participant’s trading strategy.
Two of the most important features of a network are its latency and its bandwidth. Generally, the lower the latency, the faster the data may be sent from one place to another. The higher the bandwidth, the greater the volume of data which may be transmitted over a network.
The use of millimetre wave spectrum bands for the provision of fixed, point to point, wireless services allows for lower latency than a fibre connection. (Before it acquired Apsara, BSO operated a fibre optic network.)
The amount of spectrum available within a particular band also affects network performance. Bands with fewer users are generally better because there is less signal interference.
The provision of wireless network services in the NJ Equity Triangle
Apsara specialises in the provision of wireless networks to financial markets, including those in the NJ Equity Triangle.
BSO’s acquisition of Apsara allowed it to compete in the market for wireless network services in the NJ Equity Triangle and other financial capitals.
The primary spectrum allocations in the NJ Equity Triangle include the E Band and the W Band.[4] The E Band has a large number of users and is highly congested (causing a propensity for greater signal interference). BSO’s current network is the overcrowded E Band. (Upon BSO’s acquisition of Apsara, Apsara’s E Band licence was transferred to BSO.)
[4] There is another primary spectrum allocation known as the V Band which is irrelevant to this matter.
There are few users of the W Band in the NJ Equity Triangle so it does not suffer from the same congestion or interference issues as the E Band. However, there is less spectrum available in the W Band than in the E Band. [redacted]
Key individuals
The table below identifies the key individuals associated with BSO, Apsara and McKay Brothers.
Callum McGowan
Director of Radio Frequency Networks at BSO.
Mr McGowan had been the Director of Network Engineering at Apsara since 2012. He joined BSO when it acquired Apsara in December 2017.
Michael Ourabah
Sole Director of Apsara and the Chief Executive Officer of BSO and Apsara.
Emmanuel Pellé
Chief Operating Officer and Senior Vice President of BSO.
Mr Pellé has held these roles since March 2016.
His responsibilities include reviewing and approving BSO’s entry into major or significant contracts.
Dr Peter Baines
Chief Executive Officer of EMClarity.
Dr Baines has held this role since January 2019. In late February 2019, he was also appointed Managing Director and Company Secretary of EMClarity.
Prior to his appointment as CEO, he had been the General Manager of EMClarity since 1 June 2017.
Notwithstanding changes in his title, Dr Baines agreed that he was (as General Manager) and is (as Managing Director) the “face for [actual or potential] customers” when negotiating a contract.
David White
Head of Operations at EMClarity (with “Operations” comprising production, installation and support).
Dr Ashoka Halappa
Chief Engineer at EMClarity.
Dr Halappa replaced James McDougal as Chief Engineer in March 2019.
Dr John Ness
Chairman and Executive Director of EMClarity.
Barry Dench
Production Quality Manager at EMClarity.
Timothy Boyle
Mr Boyle joined McKay Brothers as a director in December 2016 and holds the title of Director of Operations.
He became a director of EMClarity following McKay Brothers’ acquisition of it on 27 September 2019.
Dr Stephane Tyc; Dr Robert Meade; Paul Kennard
Directors of McKay Brothers who were appointed to the board of EMClarity after McKay Brothers’ acquisition of it.
Agreements between BSO, McKay Brothers and EMClarity
The services provided by BSO and McKay Brothers in the NJ Equity Triangle require the radios which EMClarity is in the business of developing, producing or supplying. These radios are classified by their band and include LMDS, E Band and W Band radios.
LMDS and W Band radios have the potential for better performance in the NJ Equity Triangle (in terms of speed and clarity) than E Band radios.
Obviously, a competitor in the market for the delivery of wireless network services to the NJ Equity Triangle will gain an advantage if they acquire and deploy “better” radio technology than others in the market.
In 2016, with a view to gaining a competitive edge in the market for wireless network services in the NJ Equity Triangle, McKay Brothers entered into an agreement with EMClarity, in pursuance of which EMClarity agreed to develop and supply LMDS radios to McKay Brothers.
In June 2018, with a view to gaining a competitive edge in the same market, BSO entered into an agreement with EMClarity, in pursuance of which EMClarity agreed to develop and, assuming successful development, supply W Band radios to BSO (the “W Band Radio Development Agreement”).
In 2019, after further negotiations with BSO, EMClarity entered into four agreements to supply W Band and E Band radios to Apsara (the “2019 Agreements”). The characterisation and effect of these four agreements are contentious.
For obvious reasons, each competitor wished to keep confidential the timing of, fact of, and detail of, their agreement with EMClarity for the development of radio technology.
Events leading up to McKay Brothers’ acquisition of EMClarity
In May 2019, Tim Boyle (of McKay Brothers) was sent by EMClarity, by mistake, an invitation to a “W Band Project Meeting”. On 28 May 2019, Mr Boyle contacted Dr Baines and asked him whether EMClarity was pursuing a W Band radio. His email read –
Hi Peter –
Is EM Clarity pursuing a w-band radio? I built these once upon a time in the US, and am quite interested in their possible commercialization.
Then followed a series of emails between them.
Dr Baines told Mr Boyle that EMClarity were “looking into it” –
Hi Tim,
Yes, we are looking into that.
Your previous experience with W-band sounds interesting. How far did you get with that?
Mr Boyle said he “[g]ot a couple [of] links working in the field”. He continued (my emphasis) –
… 10Gbps OOK. Tricky thing was getting band flatness when I was being lazy about modulation schemes because of latency aversion.
Lots of licencing risk in the US which was uncomfortable at the time.
Would love to talk through product interest there. You’re nearly competing with FSOs at 100+GHz from a reliability and beamwidth/tracking perspective.
On 30 May 2019, Dr Baines told Mr Boyle that he could not discuss the details of the Band project (my emphasis) –
Interesting approach you took.
Unfortunately, I can’t discuss the details of our project. It’s under disclosure. In fact I shouldn’t even have acknowledged we were looking at this band but I knew we had made a slip-up with a meeting invite sent to you when it was supposed to be internal only.
On 2 June 2019, Mr Boyle asked Dr Baines whether there was a way they could work together on a W Band radio (my emphasis) –
We’re looking at rebooting my past efforts in this regard, if there’s a way we can work together here instead of my using who I did previously, I would be interested in talking about it.
On 3 June 2019, Dr Baines said that he did not think they could “from our side”.
The next day, 4 June 2019, McKay Brothers approached Dr Baines about acquiring EMClarity. On BSO/Apsara’s case, the timing of McKay Brothers’ interest in the acquisition of EMClarity was not a coincidence: it was triggered by their belief that EMClarity was developing a W Band radio for a competitor.
Relevant to that misdirected invitation is the following evidence from BSO’s Mr McGowan –
On or about 27 July 2019, I met with Timothy Boyle of McKay Brothers in Chicago. We had been working on a separate (unrelated) project together and he had earlier contacted me and asked if I wished to have a coffee catch-up with him, to which I agreed. In the conversation on 27 July 2019 we discussed the industry in general and as part of that I said words to the effect “I know you guys [by which I meant McKay Brothers] are doing a fair bit in 28Ghz.” Mr Boyle said words to the effect “I understand someone’s going to be doing something in W Band”. I was surprised by this statement. It was not clear to me whether Mr Boyle knew that BSO had engaged EMC to develop W Band radios. I suspected at the time that he was “fishing” for confirmation that BSO was looking at W-Band technology. Mr Boyle went on to ask me if I wanted at [sic] job with McKay Brothers in the RF space. I responded with words to the effect “what kind of position do you have in mind”, to which he responded with words to [sic] effect “whatever you want, you can write your own cheque”.
McKay Brothers purchased EMClarity on 27 September 2019.
BSO informed of the takeover and the “Quality Review”
On 8 October 2019, EMClarity informed BSO that it had been taken over by McKay Brothers. EMClarity informed BSO that it had decided to undertake a “Quality Review” of EMClarity’s processes and products and that there would be, therefore, a “pause” on all shipments of radios.
EMClarity did not tell BSO when it expected its Quality Review to conclude or when it expected to supply radios to Apsara.
EMClarity is yet to supply any radios to Apsara. In fact, it cancelled orders for the parts required to build the radios.
BSO/Apsara contend that, having learnt that EMClarity was pursuing a W Band radio for BSO/Apsara, McKay Brothers acquired EMClarity and implemented a sham quality review which was designed to cause EMClarity to prioritise its LMDS radios over the radios ordered by Apsara – thereby assuring McKay Brothers a competitive advantage in the NJ Equity Triangle.
The parties’ cases
At the core of the plaintiffs’ case are allegations of breach and repudiation of supply agreements between EMClarity and Apsara.
In general terms, the plaintiffs’ case is that in May/June 2019, the W Band Radio Development Agreement was replaced by four new agreements between Apsara and EMClarity, in pursuance of which EMClarity agreed to supply to Apsara a mix of E Band and W Band radios (referred to by me as “the 2019 Agreements”; referred to by the plaintiffs as “the Supply Agreements”).[5] The 2019 Agreements did not state the date by which the E Band and W Band radios were to be supplied. BSO/Apsara submit that the law would therefore imply a term that the radios were to be supplied within a reasonable time.
[5] I have chosen a neutral defined term. The plaintiffs’ selection of the term “the Supply Agreements” reflects their contention that the 2019 Agreements required the defendant to supply W and E Band radios, within a reasonable time.
The plaintiffs’ primary case is that the 2019 Agreements are separate from the W Band Radio Development Agreement and ought to be simply construed as contracts to supply. In the alternative, the plaintiffs’ case is that the W Band Radio Development Agreement was varied by the 2019 Agreements between Apsara and EMClarity to “take out the notion of development [and instead] … to actually deliver the radios”.
In its defence, EMClarity notes that –
·there are two stages or phases of the W Band Radio Development Agreement: the development stage and the production and supply stage; and
·its production and supply obligations under the W Band Radio Development Agreement were conditional upon successful development of the W Band radio.
EMClarity submits that –
·the agreements between it and Apsara in May/June 2019 were not “new” agreements to supply radios – rather, they were variations of the W Band Radio Development Agreement;
·the 2019 Agreements varied only the production and supply phase of the W Band Radio Development Agreement;
·the 2019 Agreements had no effect on the development phase of the W Band Radio Development Agreement;
·the 2019 Agreements concerned what EMClarity would deliver to Apsara after, and only if there were, a successful development phase; and
·the development phase has not concluded.
EMClarity says that, although the hope may have been that the variations made to the W Band Radio Development Agreement by the 2019 Agreements would achieve truncated delivery times for the supply of the “product”, supply of the product was always subject to the successful completion of the development stage. Both parties “sign[ed] on to” the risk that development might not be successful. Also, the Quality Review was genuine.
EMClarity argues that the W Band Radio Development Agreement, including as varied, is a contract of a class different from the class of contracts into which reasonable time terms are implied. It is a research/development and supply contract which anticipates uncertainty in the research/development stage.
Further, the implication of a reasonable time term for delivery of the W Band radios is inconsistent with the express terms of the W Band Radio Development Agreement, which included a term that time estimates were non-binding. Even if a “supply within a reasonable time” term were implied, the quantification of that reasonable time had to take into account that the W Band radio is a sophisticated product which is difficult to produce to its required specifications.
The relief claimed by the plaintiffs
By their amended originating application the plaintiffs seek, as final relief, orders –
(i)requiring specific performance by EMClarity of the agreements to supply W Band and E Band radios;
(ii)restraining EMClarity from taking any steps to deliver or supply to McKay Brothers (or any of its related entities) “the Product”, as defined in the 8 June 2018 W Band Radio Development Agreement; that is the W Band 92-95 GHZ low latency radio; and
(iii)permanently restraining EMClarity from disclosing information about the ‘Product’ or the ‘Project’ and other specified related matters to McKay Brothers or its related entities.
In the alternative to orders for specific performance, the plaintiffs seek a declaration that EMClarity has repudiated the W Band Radio Development Agreement; “and further and in the alternative” the W Band Supply Agreement and the E Band Supply Agreement.
The plaintiffs also seek damages for breach of the agreements, equitable compensation for breach of confidence, and any other order the Court sees fit to make.
The trial before me concerned the question of the defendant’s “liability” only.
Credibility issues
Four witnesses were called to give evidence – two for each side. Their examination in chief was by way of affidavits.
The cross-examination of the plaintiffs’ two witnesses, Emmanuel Pellé and Callum McGowan, left me with no concerns about their credibility. Nor was I concerned about any aspect of their affidavit evidence.
The defendant called Peter Baines and Timothy Boyle.
Insofar as his oral testimony was concerned, I found Dr Baines a careful witness who appeared to be replying truthfully, though not expansively, to the questions asked of him. However, as will appear below, I found some of the claims in his affidavit to be inherently incredible.
I found Mr Boyle an unimpressive witness. For example, I found that he deliberately minimised his understanding of McKay Brothers and BSO/Apsara as competitors in the NJ Equity Triangle market. And I found his evidence about his knowledge of Mr McGowan’s employment untruthful. I formed the view that he understood the “line” he had to hold (to benefit the defendant’s case) and that he tailored his evidence to hold that line.
Mr Boyle’s performance in the witness box caused me to have serious reservations about the assertions he made in his affidavit – especially those which were completely in the defendant’s interests.
Overall, I considered the contemporaneous documents, such as emails, notes of conversations or minutes of meeting, to provide the most reliable evidence of relevant matters.
Structure of these reasons
It will be apparent from the above that one of the critical issues for me to decide is whether, in 2019 –
·the parties varied the 2018 W Band Radio Development Agreement, retaining its development stage but altering the products which were to be supplied in pursuance of it, assuming successful development; or
·BSO and Apsara entered into new agreements which required EMClarity to supply W Band and E Band radios to Apsara unconditionally.
The determination of that issue has a significant impact on the “supply within a reasonable time” and repudiation issues. It also bears upon the confidentiality issues.
The parties’ accepted that I was to determine this critical issue having regard to the context in which the parties dealt with each other before and after their 2018 and 2019 agreements.
My identification and analysis of relevant communication and conduct follows. I then deal with each of the 19 issues in turn.
Relevant background facts
2017 – 2018: Discussions between Mr McGowan and Dr Baines
In early 2017, it was rumoured that McKay Brothers was developing a lower-latency network in the NJ Equity Triangle. At that time, Mr McGowan worked for Apsara, which was interested in competitively “refreshing” its network. Mr McGowan was aware that the radios which EMClarity developed and produced could, with some adaptation, be used in the provision of ultra-low latency circuits between stock exchanges. He began to deal with Dr Baines in about June 2017. At the time, EMClarity’s E Band radios were subject to “exclusivity arrangements” which meant that they could not be supplied to Apsara. Accordingly, Dr Baines and Mr McGowan discussed other options, including the development of a new radio in W Band.
After BSO acquired Apsara, Mr McGowan made it clear to BSO’s board that, to remain competitive, it had to develop an ultra-low latency, high capacity, wireless network. With the board’s approval, he continued discussing a W Band network with Dr Baines, having informed Dr Baines that BSO had acquired Apsara. I accept that Mr McGowan made it clear to Dr Baines that his objective was to develop a better network than McKay Brothers’ network and that a W Band product was necessary (from BSO’s point of view)[6] for it to do so.
[6] In his affidavit, Mr Boyle expressed a negative opinion about a W Band product.
On 10 February 2018, Mr McGowan told Dr Baines, in effect, that the success of the new network was vital to BSO and that BSO needed to deploy it within the next six months.
On 14 March 2018, Dr Baines sent a proposal to Mr McGowan describing a certain approach to the development (which would involve a third party) and stating, in effect, that, on that approach, development time would be six months. Dr Baines told Mr McGowan that the work was not considered “high risk” and elaborated on the reasons why that was so. He proposed a “preliminary design phase” which would “quickly” prove the design approach. He said the preliminary design phase “would take one month from the placement of order”.
Mr McGowan continued to negotiate with Dr Baines and, ultimately, Dr Baines sent Mr McGowan a final proposal on 20 April 2018. The proposal (entitled “Information and Pricing for BSO Networks Ultra-Low Latency W Band Equipment in 92-95 GHZ Band”) included the following (my emphasis). I note the optimistic tone of this proposal when it comes to time frames and its description as “low risk” –
[redacted]
The offer also included exclusivity on certain terms.[7]
[7] And technical detail.
BSO’s board determined to proceed with the proposal on 3 May 2018. An agreement reflecting the proposal, entitled the “W Band Radio Development Agreement Terms” was executed by BSO and EMClarity on 14 June 2018 (referred to in these reasons as the “W Band Radio Development Agreement” or the WBRDAT).
The agency issue
It is expedient to mention now that agency is an issue in the plaintiffs’ alternative case.
The plaintiffs contend that BSO acted as Apsara’s agent – Apsara being its undisclosed principal – in the formation of the WBRDAT. The defendant urged me to conclude that the plaintiffs had never discussed agency prior to the formation of the WBRDAT and that BSO contracted with EMClarity on its own behalf.
The plaintiffs evidence about their “agency” discussions included the following in Mr McGowan’s affidavit (my emphasis) –
Given the significant value of the investment that Apsara and BSO were making with EMC and the size of the payments that needed to be made up front, BSO’s management was concerned to manage the cash flow. I had a number of discussions about the staged payments with Mr Ourabah and Mr Pellé, including the tax implications and accounting treatment of the payments. Over a number of conversations with Mr Ourabah and Mr Pellé it was agreed that the W Band project would be paid for and owned by Apsara, although BSO, as Apsara’s parent company, would continue with the negotiations on its behalf.
In his affidavit, Mr Pellé said (my emphasis) –
As BSO’s Director of RF, Mr McGowan was responsible for negotiating the technical requirements and terms of an agreement to develop W Band radios. As COO, my role was to provide direction and support to Mr McGowan in negotiating the agreement and, along with Mr Ourabah, provide high-level approval of the terms and pricing of the agreement. I was also ultimately responsible for signing the contract. In that regard, I discussed with Mr Ourabah and Mr McGowan and the effect of what was said was that Apsara would pay for and own the product developed under the contract but that BSO would execute the contract on behalf of Apsara.
…
I executed the W Band Radio Development Agreement … on behalf of BSO on 8 June 2018 …
The agreement was executed … in the name of BSO but with the intention that Apsara would be the end user of the services (and owner of the assets, being the W Band radio product) and pay for these services accordingly. I had discussions with Mr Ourabah and Mr McGowan in which this was discussed. During the course of the [W Band Radio Development Agreement], Apsara has paid the invoices issued to it under that agreement, and also invoices issued in respect of the supply of certain E Band radios issued in connection with the [W Band Radio Development Agreement]. This expenditure is recorded in Apsara’s accounts.
The W Band Radio Development Agreement – key terms
The following terms of the W Band Radio Development Agreement are the important ones in this case (my emphasis). The “Customer” is the first plaintiff.[8]
[8] The “Customer” was defined in the schedule to the WBRDAT as “BSO Networks LLC”. That is an error – there is no such entity.
[redacted]
…
Agreed Terms
1 Project
…
Research
1.4The parties acknowledge and agree that the outcome of research projects such as the Project cannot be guaranteed. However, individual component technologies required to increase the likelihood of the Project’s successful conclusion have been proven to a large degree … Design activity including simulation modelling and the use of other methods will identify potential critical points of failure which can then be designed out. Prototype manufacture and unit/system testing in a lab environment will provide measurement data to uphold forecast performance indicated by modelling to indicate early in the Project how likely a successful conclusion will be. EMC does warrant that it has the requisite engineering capability to undertake the Project in a competent and professional manner and that it will manage the Project in a way which aims to identify risks and issues that can be mitigated by regular review and decision making by EMC and Customer.
1.5The estimated completion dates in the Project Plan (and any other estimated dates provided to Customer by EMC) are estimates only and are not binding on EMC.
…
2 Exclusivity
[redacted]
If any one of these criteria is false then the Exclusivity does not apply.
2.3EMC agrees not to accept any orders or ship any product, which would contravene the Exclusivity criteria, to other customers while Exclusivity applies.
2.4Exclusivity starts when Customer places its order for the NRE [non-recurring engineering] development and the [redacted], and makes the defined payments according to the Sale Terms.
…
2.6Exclusivity may be extended for periods of 12 months at a time by either: -
(a) Placing an order for a subsequent batch of [redacted] …
(b)Placing one or more orders for EMClarity in-house products where the combined total of said orders is at least [redacted], and with the payment terms of each order being the same as the Sale Terms, and where delivery on all such products ordered must be within the coming 12 months and EMC accepts the order; or
(c) Making a payment of [redacted].
…
3 Acceptance
3.1Unless Customer and EMC mutually agree to modify the Acceptance Criteria for documentation, design information, tests and performance measurements … prior to the commencement of work of each Milestone as described in the Schedule, such Acceptance Criteria shall be the basis upon which Customer shall have no less that fourteen (14) days to conduct Acceptance testing (where applicable) following delivery of such Milestone. Notwithstanding the foregoing, the Customer and EMC shall negotiate and agree in good faith on acceptable variances to the Acceptance Criteria for the documentation, design information, tests and performance measurements that need to be achieved to meet the Milestone, based upon Customer’s stated performance objectives and network specifications. Any such mutually agreed upon changes shall be the basis for Customer’s Acceptance testing once such changes are memorialized in writing executed by EMC and Customer in a relevantly amended Milestone Payment Deliverables in the Schedule.
…
5 Term and termination
…
5.4Termination due to failure of Development Stage of Project (Before Acceptance of Milestone 4)
(a)The parties may terminate this agreement up to the Acceptance of Milestone 4 by mutual written agreement if the parties conclude that the Project cannot be successfully completed.
(b)The parties may mutually agree to delay the project up to the Acceptance of Milestone 4 at any time by written agreement if the parties conclude that a reasonable external cause, such as for example a delay in sourcing input components, warrants a delay to work and Milestones.
(c)Customer may terminate this Agreement up to the end of Milestone 4 for Good Reason.
…
7 Confidential Information
Obligations of confidence
7.1Each party agrees to keep confidential, and not to use or disclose, other than as permitted by this agreement, any Confidential Information of the other party before or after entry into this agreement.
Exclusions
7.2The obligations of confidence in clause 7.1 do not apply to Confidential Information:
(a)that is required or requested to be disclosed by applicable law …
(b)that is in the public domain otherwise than as a result of a breach of this agreement or other obligation of confidence by the receiving party; or
(c)that is already known by, or rightfully received, or independently developed, by the recipient of that Confidential Information free of any obligation of confidence.
Restrictions on disclosure
7.3Each party may use and disclose Confidential Information of the other party only:
(a) with the prior written consent of the other party; or
(b)to that party’s directors, agents, professional advisors, employees, contractors and permitted sub-contractors solely for the exercise of rights or the performance of obligations under this agreement; or
(c)to auditors, lenders (or potential lenders), investors (or potential investors) of such party.
…
9 Amendments to the Project
9.1The parties may agree on changes to the Project, Project Plan and the Fees in writing from time to time.
…
14 Definitions and Interpretation
…
Confidential information means the terms of this agreement, including any pricing information, and in the case of EMC, includes EMC Material and in the case of Customer includes Customer Material.
...
Project means the project described in the Schedule.
Project Plan means the project plan specified in the Schedule.
…
Schedule means the W-BAND RADIO DEVELOPMENT AGREEMENT SCHEDULE, as it (or any portion thereof) may be amended and/or restated in writing by the parties from time to time. For the avoidance of doubt, in the event of any conflict between the terms of this agreement and the terms of the Schedule, the terms of the Schedule shall control and govern.
…
Customer Material means any material provided by or to which access is given by Customer to EMC for the purposes of this agreement, including documents, equipment, reports, algorithms, technical information, know how, studies, plans, charts, drawings, calculations, tables, trademarks, logos, schedules and data stored by any means.
The Schedule described the Project as follows –
The project involves developing and then providing a production batch of a new radio for use by the Customer to provide communications services. This Schedule is subject to the terms and conditions of the W BAND Radio Development Agreement Terms. Any terms used but not defined herein shall have the meanings as set forth therein.
The target specification of the new radio is provided in this Schedule. The concept design for the radio on which the quote for the project works is illustrated in the Sales Quote.
The project will be in 3 stages.
Stage 1: Will be for preliminary design which prototypes digital IF up conversion (to E Band) on a two-hop repeat and proves SNR and jitter expected, with report provided. The parties may mutually agree upon deviations that are necessary to meet agreed requirements.
On completion of the preliminary design the Customer can at their discretion choose to discontinue the project if it believes the project will not fill operational requirements. If the Customer wants to continue to the next stage of detailed design, the Customer will pay Milestone 3.
Stage 2: Will be conducted if the Customer decides to continue with the development after Stage 1. Prior to start the customer must pay Milestone 2. In this stage, EMC will develop and test the modem and W band up and down converters and conduct FCC compliance testing.
On completion of the detailed design the Customer can choose to discontinue the project. If Customer wants to continue to the next Stage, it must order the production radios and pay the production deposit payment.
Stage 3: [redacted]
[redacted]
The Project Plan was as follows –
Milestone
Estimated completion date (Month)
Milestone Payment (excluding GST and any other taxes, customs duties, levies or imposts) (US$)
1. Signing of this agreement for Conduction of Preliminary Design Work
M0
[redacted]
2 Submission of Preliminary Design Report
M0 + 1
[redacted]
3 Commencement of Final Design
M0 + 1
[redacted], in advance on acceptance of Milestone 2
4 Successful Design Review of Final Design
M0 + 6
[redacted]
Total of the development
[redacted]
5 [redacted] Production Order
M0 + 6
[redacted]
6 Factory Acceptance testing of [redacted]
Order
M0 + 9
[redacted]
7 Acceptance on Delivery in USA
M0 + 10
[redacted]
Total of the Production lot
[redacted]
The Schedule also included the “Milestone Payment Deliverables” as follows –
Milestone
Deliverables – Milestone Payment Acceptance
1 Signing of this agreement
Signed contract (this agreement) and approval to conduct preliminary design.
Customer must accept and pay EMC’s Invoice for Milestone 1 prior to work starting on preliminary design.
2 Preliminary Design Review
Delivery of a report describing the successful prototyping of digital IF up conversation (to E-band) on a two-hop repeat and proving SNR and jitter expected.
3 Commencement of Final Design
Customer must Accept Milestone 2 prior to work starting on the Final design. Customer can discontinue further work prior to making such payment and forfeit Milestones 1 and 2 payments.
4 Final Design Review
Successful review of the finished design.
Customer must Accept Milestone 4 prior to work starting on the Production Build. Customer can discontinue further work prior to making such payment and forfeit Milestone 1, 2 and 3 payments.
5 [redacted] Production Order
Kick off payment on approval by Customer to begin [redacted] batch build.
Customer must accept EMC’s Invoice Milestone 5 prior to work starting on manufacture of the Production Units in accordance with the Sale Terms.
6 Factory Acceptance Testing of [redacted] Production Order
Successful testing of the [redacted] order to production specification.
Customer must Accept Milestone 6 prior to shipment in accordance with the Sale Terms.
7 Acceptance on Delivery
Final Acceptance on delivery of production units to Customer Depot in USA.
Acceptance and final payment on invoice will be in accordance with the Terms of Sale.
A document entitled “Exhibit A – to W Band Development Agreement Product Offer Terms” stated that the price (for the product) was [redacted]. The “Payment Terms” were –
60% of batch price on order, 30% of batch price on completion of Factory acceptance testing and packaged ready for shipping and 10% on Acceptance of Delivery. No agreement for supply of follow-on batch orders exists between EMClarity and Customer until (1) EMClarity has received an official purchase order from Customer, (2) EMClarity has returned a purchase order confirmation to customer with an invoice for the kick-off payment, and (3) the customer has paid any product kick-off payment into EMClarity’s bank account in accordance with the invoice where applicable.
These payment terms correspond to the Milestone 5, 6 and 7 payments – which are in the amount of 60 per cent, 30 per cent and 10 per cent of “batch price” respectively.
Milestone 1: The “kick off”
The invoice for Milestone 1 was originally issued by David Watson of EMClarity to BSO. Mr McGowan asked Mr Watson to re-issue the invoice to Apsara – which he did. According to Mr McGowan, the request to re-issue the invoice to Apsara was consistent with BSO’s determination that Apsara would be the corporate entity within the BSO group which would “own” the project and the radios supplied in pursuance of the WBRDAT.
On 19 July 2018, Dr Baines chased Mr McGowan for the “kick-off payment”. He said, “We will do our best to accelerate the development so would appreciate it if BSO could also keep the milestone/payment side moving as well”. In emails to Dr Baines about payment on 30 July and 2 August 2018, Mr McGowan referred to the project coming out of the Apsara books.
Apsara paid the Milestone 1 invoice on 6 August 2018.[9] After the receipt of the Milestone 1 payment, EMClarity began work on the Proof of Concept prototype.
[9] While he communicated his approval to proceed with the agreement, Mr McGowan does not believe that he communicated a formal approval as required by the “Milestone 1 Deliverables” – nor was he requested to.
Milestone 2: The Preliminary Design Report (August – November 2018)
Progress to Milestone 2 involved testing a prototype for “digital IF[10] conversion” for an E Band radio. If digital IF conversion could not be achieved for an E Band radio, then it could not be achieved for a W Band radio.
[10] Intermediate Frequency.
On 19 August 2018, Dr Baines told Mr McGowan that EMClarity expected the “whole development to be finished some time in the first quarter next year”.
On 11 September 2018, Dr Baines told Mr McGowan that if he were to visit EMClarity in October 2018, he would be able to “inspect the modem working on the lab bench showing up conversion to E-Band and simulation of a two hop link (first milestone in the development plan)”. If things went “well”, he might be able to see “a W-Band prototype”.
On 9 October 2018, Mr McGowan went to EMClarity’s premises. A “Proof of Concept Prototype” was tested for him but it was not successful. Based on that test, Mr McGowan was of the view that BSO/Apsara would not see the first production of the W Band radios until “early Q2 of 2019”.
On 1 November 2018, Mr McGowan emailed Dr Baines and asked him whether there was “any news of a graceful recovery from the bench test failure” (of 9 October 2018). He also said, “I really need to see some forward progress here”.
In reply, Dr Baines told him that he believed that the recovery was “virtually done”. He said that the error rates for “data passing over RF” were “better than the spec” and that EMClarity was “only a couple of days away” from sending Mr McGowan the preliminary design report for RF at E Band. Dr Baines expressed positive views about the future progress of project.
The Preliminary Design Test Report – that is, the deliverable for Milestone 2 – was sent by Dr Baines to Mr McGowan on 15 November 2018. Dr Baines informed Mr McGowan that the preliminary design feasibility study had been “useful in determining the design approach for the W Band product, to rule out some approaches that won’t deliver the result and confirm those that support the goals”. He continued –
We’ve shown data being transmitted over RF at 64QAM within the error rate specs, and have justification to believe that continuing with the W-Band product development is feasible.
“QAM” – quadrature amplitude modulation – is a way of representing digital signals as analogue signals so that they can be transmitted through the air. The number before the “QAM” is related to data throughput: the higher the QAM, the higher the radio’s data throughput. “64QAM” was one of the target specifications in the WBRDAT. Before the execution of the WBRDAT, EMClarity had never achieved a digital IF conversion with a 64QAM modulated signal in the E Band or the W Band.
Milestone 3: Commencement of final design (November 2018 – January 2019)
In accordance with the WBRDAT, EMClarity was next to work on the “Final Design” in pursuance of Milestone 3. The Milestone 3 payment was to be paid in advance.
In November 2018, Mr McGowan and Dr Baines discussed the Preliminary Design Test Report and relevant technical matters. Between late November 2018 and March 2019, at Mr McGowan’s request, EMClarity prepared path analyses and latency calculations for BSO.
A “path analysis” involves a prediction of signal strength in certain specified circumstances and the likely interruption of signal transmission due to atmospheric moisture. A “latency calculation” (at its simplest) is a calculation of the time it takes for a signal to travel through the air. These analyses and calculations are relevant to the design of a network. Dr Baines understood that their results would assist BSO in deciding whether to proceed with W Band development.
As I understood things, the plaintiffs relied upon an equitable obligation of confidence to, in effect, override clause 7.3 of the WBRDAT.
The plaintiffs submitted that “the only circumstances in which equitable and contractual obligations cannot co-exist is where the contract ‘covers the topic’ and evinces an intention that ‘equitable principles are excluded’ and the contract provides all of the necessary remedies to deal with the conduct to which a party is exposed”.
The plaintiffs submitted that Optus demonstrated that such a conclusion should not be readily drawn, even where parties have entered into complex and detailed commercial contracts. They continued, “The mere “codification” of certain matters, for example, by defining what is treated as confidential for the purpose of a contract, does not demonstrate an intention to exclude the Court’s equitable jurisdiction”.
The defendant, who wished to rely upon clause 7.3 of the WBRDAT, submitted that only the contractual obligation applied, and even if there were room for an equitable obligation of confidence, it was no broader than the contractual one.
The defendant acknowledged that the cases which suggested that no equitable obligation arose where a contractual obligation of confidence exists (for example, Del Casale) were questioned in Optus. However, it observed that Streetscape was a unanimous decision of the New South Wales Court of Appeal which considered Optus but decided to “follow” Del Casale. It submitted that “Optus expresses doubt about Del Casale but does not decline to follow it in a reasoned way. In Optus, the express terms of the contract contemplated the availability of equitable remedies, which is a feature not present in the [WBRDAT]”.
The defendant submitted that I ought to follow the reasoned position of the Court of Appeal in Del Casale and Streetscape rather than the obiter of the Full Court and conclude that because the WBRDAT included obligations of confidence, no co-existing equitable obligation of confidence arose. And even if there were room for a co-existing obligation of confidence, the defendant submitted that it was no wider than the contractual obligation (which was tempered by clause 7.3), referring to Coco at 590, at which Megarry J said that, in cases of contract, the primary question was no doubt one of construing the contract and its terms.
The defendant elaborated on these submissions further and made the following points –
·The authorities which concluded that contractual and equitable obligations could co-exist did not support the proposition that the equitable obligation could extend further than the contractual one or be inconsistent with it;
·The residual nature of equity was at least consistent with the proposition that any co-existing equitable obligation ought not to be inconsistent with, or broader than, the contractual one;
·A conclusion that any equitable obligation was limited by, and had to conform to, the relevant contract was consistent with the position in the cognate area of fiduciary duties (referring to Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97);
·The WBRDAT exhibited an intention to exclusively define the parties’ rights and obligations on the topic of confidentiality – including by way of its definitions of “Confidential Information” and “Customer Material”. Also, clause 13.6 provided that the WBRDAT embodied “the entire agreement between the parties related to the subject matter hereof”. Such a clause was thought to have supported the application of Del Casale in Gold & Copper Resources Pty Ltd v Newcrest Operations Ltd [2013] NSWSC 281.
The authorities which stated that the equitable obligation ought to go no further than the contractual one included Corporate Farming Pty Ltd v Eden Bay Pty Ltd, an unreported decision of the Supreme Court of Western Australia on 28 January 1992, in which Murray J held as follows –
I think it is the law that in circumstances where there is a contractual relationship between the parties a duty of confidentiality may nonetheless arise in equity and be owed by one party to the other …
But as I understand the law, such an equitable duty may be relied upon where it would result in a position consistent with that provided for by the contract or where the contract is silent on the matter, but not to give a party a remedy in circumstances where the result would be directly inconsistent with the contractual arrangements.
Discussion and conclusion
Streetscape expressed a preference for Del Casale and noted its consistency with Deane J in Moorgate but the issue of the co-existence of contractual and equitable obligations did not arise because of the way in which the parties had proceeded on appeal.
In Optus, the access agreement clearly contemplated remedies for breach of its terms beyond those provided in the contract. Whilst expressing doubt about the approach in Del Casale, the Full Court resolved matters by reference to the terms of the parties’ agreement.
Other authorities to which I was referred go either way.
My preference is for the approach in Del Casale, because of its consistency with Moorgate.
But assuming that the correct approach is one which permits a co-existing equitable obligation of confidence, the more relevant question is whether that equitable obligation supersedes or overrides clause 7.3.
The authorities to which I was referred emphasised the significance of the contract. The parties here were free to agree that certain conduct would not amount to a breach of the obligation of confidence. In my view, the equitable obligation would not operate to convert contractually authorised disclosure into unauthorised disclosure. In other words, in my view, paying due regard to the parties’ agreement, where certain disclosure would not amount to a breach of contract because it is authorised by clause 7.3, equity would not intervene to render that same conduct a breach of a broader equitable obligation.
Issue 15: Was the contractual duty breached?
The defendant asserts that none of the Customer Material, which EMClarity received from BSO (including the Site Location Data and the Path Analyses Information), was disclosed to McKay Brothers. The plaintiffs have made no submissions to me about the provision of Customer Material in breach of contract. I will therefore say nothing more about it.
With respect to the provision of the ineffectively redacted, and un-redacted, copies of the WBRDAT, the defendant relies upon clause 7.3 of the WBRDAT. The defendant also observes that, because of clause 7.3, it was under no obligation to redact, or attempt to redact, the WBRDAT before providing it to Mr Boyle during due diligence.
The defendant pleads that McKay Brothers was a potential investor from 15 July 2019 and an investor from September 2019. Therefore, EMClarity was entitled to disclose copies of the WBRDAT[36] to Mr Boyle and to the McKay Brothers affiliated directors. The plaintiffs made no submissions to the contrary in the context of the contractual obligation.
[36] Ineffectively redacted, and un-redacted.
It follows that the disclosure of the WBRDAT during due diligence was authorised by clause 7.3(c) and the disclosure of the WBRDAT to the McKay Brothers affiliated directors was authorised by clause 7.3(b).
In reaching agreement on the terms of the WBRDAT, the parties could have anticipated a potential investor rival – but did not do so. In this context, the defendant referred to Global Advanced Metals Pty Ltd v Metallurg Inc [2017] WASCA 188 at [90], in which the Court of Appeal of Western Australia rejected a submission that a disclosure clause should be read to provide for an unexpressed limit on disclosure to “trade rivals”. I found this authority useful.
Metallurg is a wholly owned subsidiary of “AMG” which is the holding company for a global group of metallurgical and engineering companies (“AMG Group”). Global is a tantalum company. Tantalum is a metal. Global is the holding company for a global group of other tantalum companies (“Tantalum Group”).
Metallurg acquired shares in Global and became a party to a Shareholder Deed which, by clause 7.1, granted “Relevant Shareholders” access to Global’s books and records. Clause 7.2 of the deed required the person accessing/inspecting the books and records to sign a confidentiality agreement. Clause 4.1 of the Shareholders Deed also provided that a Relevant Shareholder agreed not to use Confidential Information in a way which would damage or be likely to damage the Tantalum Group. Clause 16.3 of the Shareholders Deed imposed obligations of confidence upon Relevant Shareholders.
Metallurg made several requests for access to, and inspection of, Global’s books and records – in accordance with clause 7.1 of the Shareholder Deed. Global resisted Metallurg’s requests for access/inspection. It was concerned about allowing access because certain entities in the AMG Group carried on business in competition with entities in the Tantalum Group. Attempts to come up with an arrangement which would impose confidentiality obligations on Metallurg were unsuccessful. Metallurg commenced proceedings seeking orders which would allow it the access it sought; including a declaration that it was entitled to access Global’s books and records under the Shareholders Deed.
Global argued that, if Metallurg’s request for access and inspection were met, then commercially sensitive information belonging to the Tantalum Group would be obtained by a trade rival – thereby destroying the confidence in that information. The information would inevitably be deployed to the commercial disadvantage of the Tantalum Group, even if Metallurg agreed not to use it to Global’s disadvantage, because it would remain in the knowledge of the AMG Group. Metallurg argued that the clause 7.1 should operate in accordance with its terms and not be read down in the manner contended for by Global.
The primary judge preferred Metallurg’s construction of the Shareholders Deed.
On appeal, it was argued that the primary judge erred in finding that the Shareholders Deed conferred, in effect, an unfettered right upon a Relevant Shareholder, being a trade rival, to access and use the Tantalum Group’s commercially confidential information for a permitted purpose. It was argued that it was inherently unlikely that Global contracted to provide commercially sensitive information to a Relevant Shareholder/trade rival, protected only by confidentiality undertakings which were, in the context of trade rivals, practically worthless.
The appeal was dismissed by way of a judgment of the Court. It was held that the primary judge had not erred in his construction of clause 7.1 including because Global’s construction of clause 7.1 sought to incorporate into it concepts such as “trade rivals” and “commercially sensitive information” which had no foundation in the clause read on its own or in the context of the instrument as a whole. Nor did the primary judge’s construction of the clause produce commercial inconvenience. It was plainly in the interests of shareholders to acquire relevant information. The language of the instrument did not treat differently, or make an exception for, a Relevant Shareholder who was also a trade rival. The Court said, at [91] and [93] –
Where there is nothing in the terms of the Shareholders Deed or in the mutually known background circumstances to indicate that the parties contemplated that the Relevant Shareholder may be, or become, a trade rival, the commercial operation of a suite of measures for the provision of relevant information to a Relevant Shareholder, and for the protection of Confidential Information, cannot be assessed by singling out that particular eventuality.
…
As to the objective factual matrix, the fact that cl 7 had its origins in an earlier deed in which none of the Relevant Shareholders was a competitor of the other tends against, rather than in favour, of Global’s construction. That is because it makes it less likely that, objectively, the parties to the Shareholders Deed, prior to the execution of the Assumption Deed by Metallurg, intended that cl 7 be read as subject to the kind of limitation for which Global now contends …
Nothing in the WBRDAT suggests that, when it comes to the disclosure of confidential information, potential investors or directors who are trade rivals are to be treated differently from potential investors or directors who are not trade rivals.
But of course, the situation does not end with clause 7.3. Clause 7.4 applies. It states –
If either party discloses Confidential Information under clause 7.3, that party must ensure that such information is kept confidential by the person to whom it is disclosed and if disclosed under clause 7.3(b), is only used for the purposes of performing the project under this agreement.
In short, EMClarity did not breach clause 7 of the WBRDAT by providing the WBRDAT to Mr Boyle or the McKay Brothers affiliated directors because that disclosure was authorised.[37] But once in the hands of Mr Boyle or the McKay Brothers affiliated directors, they were obliged to keep it confidential and not misuse it.
[37] The plaintiffs also pleaded that two emails, sent in late 2019, involved breaches of confidence. The plaintiff made no submissions about these emails and I will say nothing more about them.
Issue 16: Was the equitable duty breached?
The equitable duty of confidence attaches to the Alternative Strategy, the Quote and the Purchase Orders.
The equitable duty of confidence
A claim that there has been a breach of the equitable duty of confidence has four elements, namely –
·the alleged confidential information must be identified with specificity;
·the information must have the necessary quality of confidence;
·the information must have been received by the defendant in circumstances importing an obligation of confidence; and
·there must be actual or threatened misuse of the information without the plaintiffs’ consent.
The plaintiffs’ submissions
The plaintiffs submitted that the information disclosed in the Quote and Purchase Orders was highly sensitive information about how “Apsara” intended to upgrade its network. It was information which was not otherwise in the public domain. The circumstances in which that information was communicated to EMClarity clearly imported an obligation of confidence. Its disclosure to McKay Brothers amounted to a misuse of that information. EMClarity was aware that McKay Brothers and BSO/Apsara competed in the NJ Equity Triangle. It would have been “abundantly clear” to EMClarity that disclosure of the Alternative Strategy could have “potentially disastrous consequences” for BSO/Apsara.
The defendant’s submissions
The defendant submitted that the allegation of breach fell to be determined “by reference to the obligations and exceptions in the contractual framework”. No other facts pleaded could be argued to broaden the obligation. There was no allegation that the commercially sensitive/valuable information was communicated to EMClarity and no allegation that EMClarity knew this was the case. Nor were these propositions put to Dr Baines in cross-examination.
The defendant also submitted that it would be a wholly surprising result if an equitable obligation imposed upon EMClarity prevented it from disclosing the Alternative Strategy to its own directors. The defendant further submitted –
The Plaintiffs seek to make something of the fact that [EMClarity] was acquired by McKay Brothers. Having regard to the fact that [EMClarity] was working on a LMDS product for McKay Brothers, and had been actively seeking investment in the company since at least July 2017, which Dr Baines had raised with representatives of both McKay Brothers and BSO, this does not have the sinister connotation which is suggested by the Plaintiffs. The provision of agreements to which EMClarity was a potential investor in confidential due diligence and to the New Directors following their appointment was entirely consistent with commercial practice, a practice that is expressly recognised by way of clause 7.3 of the Agreement.
Discussion and conclusion
I find the first three elements of the “breach of the equitable duty of confidence” claim established.
The Alternative Strategy was of commercial significance to BSO/Apsara. Mr McGowan (and EMClarity) had spent some time settling it. It had the necessary quality of confidence. It was the way in which BSO hoped to achieve a competitive advantage in its NJ Equity Triangle market, and after it lost one customer, it was likely to have been concerned about losing more.
The commercial risk to BSO/Apsara in the disclosure of the Alternative Strategy to the McKay Brothers’ affiliated directors is obvious. Indeed, I infer from the fact that EMClarity redacted, or attempted to redact, the documents provided to Mr Boyle during due diligence, it appreciated the need to treat the Alternative Strategy as confidential.
I find that EMClarity breached its equitable obligation of confidence when it disclosed the Alternative Strategy to the McKay Brothers affiliated directors.
I appreciate that EMClarity’s board, post the McKay Brothers’ takeover, may have had a legitimate reason for wishing to understand EMClarity’s contractual obligations. But there were ways in which EMClarity could provide relevant information to its board – including its new members – while at the same time abiding by its equitable duty of confidence insofar as the Alternative Strategy was concerned. Those ways included providing the board with redacted documents, or engaging an independent third party to summarise them in such a way as to protect the confidentiality of the Alternative Strategy.
Issue 17: Does BSO/Apsara hold a belief that EMClarity will further delay the development/shipment of the radios? Is that belief reasonable?
Mr McGowan and Mr Pellé believe that there will be a further delay in the development and shipment of the radios.
It follows from my finding that EMClarity has repudiated the 2019 Agreements that I consider it reasonable to believe that EMClarity will further delay the development and shipment of Apsara’s radios.
Additionally, Dr Baines gave evidence to the effect that it was made clear to him that there was to be no discussion with BSO/Apsara about the supply of their radios. Nor was any pressure placed on EMClarity to accelerate work on the 2019 Agreements.
Issue 18: Does BSO/Apsara hold a belief that EMClarity will, in the future, breach the confidentiality provisions of the WBRDAT or the equitable duty of confidence? Is that belief reasonable?
I am satisfied that BSO/Apsara believes that one or the other of these breaches will occur.
The plaintiffs urged me to find the belief reasonable, in the light of the disclosure which had already taken place and notwithstanding what Dr Baines and Mr Boyle have said will occur especially when there has been no undertaking not to disclose confidential information offered by them.
According to Mr McGowan, during the telephone call informing him that McKay Brothers had acquired EMClarity, when he asked Dr Baines about the confidential information which had been given to McKay Brothers, Mr Meade told him to assume that anything discussed with Dr Baines would be shared “with them as well”.
Dr Baines, who acknowledged during the call that he had supplied BSO’s confidential material to McKay Brothers, said EMClarity would need to consider how “practically” it could return BSO’s confidential material or how it could be deleted or destroyed.
Dr Baines said in evidence that he was aware of EMClarity’s obligations of confidence under the WBRDAT in respect of Confidential Information and Customer Material and that he intended to continue to perform and observe those observations on behalf of EMClarity.
It is worth considering Mr Boyle’s affidavit evidence in some detail because of its relevance to this issue and to Issue 19.
In his affidavit, Mr Boyle said that McKay Brothers received its first batch of LMDS Radios from EMClarity in July 2018. McKay Brothers did its own testing to supplement EMClarity’s in-house testing. McKay Brothers found the batch of LMDS radios to have pervasive and severe issues, which varied from radio to radio, which may have been caused by manufacturing variances. In Mr Boyle’s experience, the volume and impact of the issues McKay Brothers was experiencing with the LMDS radios was unusually high. His affidavit elaborates upon this issues.
In January 2019, Mr Boyle sent representatives from McKay Brothers to EMClarity to “oversee trouble shooting” of the LMDS radios.
In around May of 2019, EMClarity informed McKay Brothers that it had identified the root cause of many of failures of the LMDS radios – namely, the digital modem board. After fixing that issue (in October 2019), according to Mr Boyle, the LMDS radios were still not performing to the standard expected. The persisting issues could not be put down to typical “teething”. According to Mr Boyle, the LMDS radios have downtime every day and did not meet the specifications of the agreement between McKay Brothers and EMClarity to develop the LMDS radios.
Mr Boyle is negative about W Band. He says that McKay Brothers has no commercial incentive to prevent BSO from moving into it. However, his opinion of W Band, as expressed in his affidavit, is inconsistent with his interest in W Band as expressed to Dr Baines in their conversations in May and June of 2019.
His explanation for his inquiries of Dr Baines about W Band are not persuasive. He says (in his affidavit) that he had previously looked into the development of a W Band radio but the project did not progress because he was not satisfied of the technical capabilities of a W Band radio. He said he had a “personal curiosity” in someone else trying to develop it. He continued –
… Given my assessment that it was technically inferior to both E-Band and 28GHz Band radios, I was interested in why EMC thought there was a case that made it worth investing in W-Band development. I was also concerned that EMC was spreading itself thin developing a W-Band product when there were ongoing problems with McKay Brothers’ LMDS Radios, and that this might delay McKay Brothers receiving fully functional LMDS Radios.
For those reasons, on 28 May 2019, I emailed Dr Peter Baines … to enquire whether EMC was developing a W-Band radio …
…
Although I was interested in hearing about EMC’s work in W-Band … McKay Brothers was not pursuing a W-Band project at that time and had no intention to do so. Part of my role at McKay Brothers requires me to continually research and evaluate any and all technologies in all bands. My enquiry to Dr Baines was something of a fishing expedition … it was not of interest to McKay Brothers … My only interest in pursuing the topic with Dr Baines was seeking an understanding of what the product map was for EMC, and ensuring that existing resources were not being used up on more complex and costly projects in new bands when the existing radios being delivered to McKay Brothers were experiencing unresolved issues. From Dr Baines’ reply it was apparent to me that he was not going to provide any further information, so I did not pursue the matter of W-Band any further.
Frankly, had Mr Boyle been “only” interested in the deployment of EMClarity’s resources and any diversion from the LMDS radios, then it is reasonable to expect he would have raised that matter directly with Dr Baines. He did not need to know details about the W-Band project to express his concern that EMClarity’s resources were not being deployed for the benefit of McKay Brothers.
Mr Boyle explained the reasons behind McKay Brothers’ acquisition of EMClarity as follows –
·Dr Baines mentioned to him in around August 2018 that he was interested in obtaining further funding for EMClarity;
·They had several conversations about the matter in late 2018/early 2019;
·“In around June 2019” Dr Baines told him that there was a potential buyer for EMClarity’s parent company, E M Solutions (EMS);
·The potential buyer did not have an existing interest in the high frequency trading (HFT) market and might not be interested in maintaining EMClarity’s commercialisation efforts in the HFT market;
·He was concerned that, if the acquisition went ahead, and EMClarity ceased its HFT operations, then it would not be available to fix McKay Brothers LMDS radios (which were significantly underperforming);
·He raised his concerns with Dr Baines, who asked him to “just put in a bid” for EMClarity;
·McKay Brothers was interested in acquiring EMClarity to ensure continuity of supply and support for its LMDS radios; and
·He also “believed that McKay Brothers could help [EMClarity] identify and pursue opportunities to commercialise its products with telecommunications providers.
McKay Brothers moved quickly because it wanted to ensure that its acquisition of EMClarity was completed before EMS was acquired.
Dr Baines’ evidence is to similar effect – Mr Boyle was concerned about what the acquisition of EMS meant for the future of EMClarity and Dr Baines suggested that if he was concerned about that, he should buy EMClarity.
Mr Boyle said that he had no interest in the plaintiffs’ Customer Material nor any use for it. He said that McKay Brothers was not interested in W Band nor would be it a substitute for McKay Brothers LMDS network.
The defendant noted that neither Dr Baines nor Mr Boyle were challenged about their statements. However, in my view, their self-serving evidence is of little weight. Also, as I have said earlier, Mr Boyle was an unimpressive witness. I do not accept his evidence that his interest in W Band was unrelated to his role at McKay Brothers. The content of his emails to Dr Baines about it was to the contrary.
As for Dr Baines, I find that he was aware of confidentiality issues around the WBRDAT and the Alternative Strategy – which is why he provided, or attempted to provide, redacted versions of them during due diligence. And why he was concerned about how EMClarity might delete or destroy or “practically” return BSO/Apsara’s confidential information after its acquisition by McKay Brothers.
But it is clear from the evidence that Dr Baines does as he is told by the McKay Brothers affiliated directors – who are four of the six directors of EMClarity. For example, he had to “clear” any communications with Apsara through the McKay Brothers affiliated directors.
The defendant reminded me of the court’s cautious approach to these matters. It referred me to Apotex Pty Ltd v Les Laboratoires Servier (No 2) [2012] FCA 748 at [42], where Bennett J said (my emphasis) –
A quia timet injunction may be granted if the applicant can show that what the respondent is threatening and intending to do will cause imminent and substantial damage to the applicant. The degree of probability of future injury to the applicant is not an absolute standard. The likelihood of the conduct occurring must be weighed against the degree of seriousness of the injury, the inconvenience to the respondent and the requirements of justice between the parties. However, it must be shown that there is some likelihood that the conduct will occur.
The defendant observed that the onus was on the plaintiffs to establish that the conduct which might occur was such as was likely to amount to an actionable breach of the relevant agreement. Also, the damage had to be “imminent” in the sense that the remedy sought was not premature.
The defendant submitted that the court ought not to conclude that there was a reasonable basis for fearing a breach of EMClarity’s obligations having regard to the evidence that –
·According to Mr Boyle, McKay Brothers has no interest in W Band;
·even though there were McKay Brothers directors on EMClarity’s board, that provided no basis for an inference that EMClarity might breach its obligations of confidence – the court should presume the directors would act in accordance with their duty (to EMClarity);
·no conflict is to be assumed just because directors hold positions on boards of competitor companies (citing Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1 at [562] – [563]; Streeter v Western Areas Exploration Pty Ltd (No 2) 92011) 278 ALR 291 at [69]);
·EMClarity had put in place protective measures to secure the Customer Material, including containing it in password protected computers; and proposing that it not be disclosed to the McKay Brothers directors – who would excuse themselves from board discussions about the material (which is “above and beyond” what is required) – and this evidence was not challenged, nor were these measures suggested to be inadequate;
·EMClarity’s refusal to undertake not to disclose confidential information was not a matter which supports an inference that it intended to breach its obligations of confidence (EMClarity provided other potential explanations for its refusal to give the undertaking).
The defendant also submitted –
The fact that [EMClarity] does not intend to disclose any Confidential Material is an important consideration, because in quia timet proceedings the court will not grant an injunction to compel a defendant to do something which it appears willing and able to do without the imposition of an order of the court (citing Bridlington Relay Ltd v Yorkshire Electricity Board [1965] Ch 436 at 445). The corollary is that “… the Court never grants an injunction on the principle that it will do the defendant no harm if he does not intend to commit the act in question”.
Discussion and conclusion
I note the voluntary measures which EMClarity has put in place to protect the confidentiality of the Customer Material. But, on the evidence, Dr Baines and EMClarity do as they are told by the McKay Brothers affiliated directors, who control the board, including by not following through on the intention to build a W Band prototype for submission to the Quality Review.
On the evidence, McKay Brothers is making no concessions to BSO/Apsara – nor would I expect it to. While it is not necessary for me to make a finding about the sham nature of the Quality Review, I find that McKay Brothers is happy to take whatever advantage it can from it – including the advantage to be gained by requiring EMClarity to prioritise the review of its LMDS radios over anything else.
It is reasonable to assume that McKay Brothers wishes to obtain or maintain dominance in the NJ Equity Triangle market for its network services. If the LMDS radio issues are as significant as claimed, then it is reasonable to assume that McKay Brothers will explore alternatives, including those which involve matters touching upon the Customer Material. While W Band (or a mix of W Band and E Band) might not be something McKay Brothers “intends” to consider now – that may change.
The McKay Brothers affiliated directors will control EMClarity’s response to its exploring alternatives to LMDS for McKay Brothers. EMClarity is thereby at risk of breaching the duty of confidence it owes to BSO/Apsara insofar as information about proposed network paths, layouts and design and know-how generally is concerned.
Issue 19: Does BSO/Apsara hold a reasonable belief that EMClarity will, in the future, breach the exclusivity provisions of the WBRDAT or the 2019 Agreements?
I accept that BSO/Apsara believes that McKay Brothers will use their control of EMClarity to seek to commercially exploit the W Band radio designs in breach of the exclusivity conditions of the WBRDAT and the 2019 Agreements.
The plaintiffs argued that such a belief is reasonable having regard to –
·Mr Boyle’s interest in re-booting McKay Brothers’ efforts with W Band technology;
·Mr Boyle’s emails to Dr Baines regarding the commercialisation of the W Band radio and how to get around the exclusivity provisions of the WBRDAT; and
·the uncertainty around McKay Brothers’ LMDS network.
The defendant submitted that there was no basis for the finding sought. There had been no breach of the exclusivity conditions; there was no W Band product in existence – not even a prototype; Dr Baines gave evidence that EMClarity had no intention of entering into an agreement to supply anyone else with a W Band prototype or radio; according to Mr Boyle, McKay Brothers has no interest in a W Band radio (although Mr Boyle himself, in his personal capacity might have been interested) and has taken relevant steps to secure its right to use the LMDS frequency over at least the medium, if not long, term; the Quality Review is genuine and not a deliberate slowing down of the production of W Band radios – and even if it were a sham, it does not follow that it would lead to a concern that EMClarity would supply W Band radios to someone else.
I have found that the WBRDAT has been terminated under clause 5. Exclusivity under the WBRDAT only applies while it is not terminated.
The operation of the exclusivity provision of the 2019 Agreements is a long way off. They “start” only when the last W Band link ordered is “commissioned in the production network and accepted as functioning according to specification”. That may never happen. The exclusivity provisions of the 2019 Agreements do not survive termination. In my view, it is preferable to defer the answer to this question until the second plaintiff has indicated whether it will elect to terminate the 2019 Agreements.
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