Dialog Pty Ltd v Addease Pty Ltd
[2003] FCA 1359
•26 NOVEMBER 2003
FEDERAL COURT OF AUSTRALIA
Dialog Pty Ltd v Addease Pty Ltd
[2003] FCA 1359TRADE PRACTICES - misleading and deceptive conduct - sale of business - licences - value of information technology products and intellectual property transferred during sale - Trade Practices Act 1974 (Cth) s 52, s 87
CONTRACT - sale of business - whether liabilities transferred with business - obligation to perform labour hire contracts - cross-claim - restitution - unjust enrichment
Global Sportsman Pty Ltd v Mirror NewspapersLtd (1984) 2 FCR 82
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
Pitman v Pantzer (2001) 115 FCR 361
Riches v Hogben [1985] 2 QdR 292; affirmed on appeal (1986) 1 QdR 315
Giumelli v Giumelli (1999) 196 CLR 101
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353DIALOG PTY LTD ACN 010 089 175 v ADDEASE PTY LTD ACN 007 212 768, AND GEORGE MICHAEL MIHAILIDES
Q235 OF 2001COOPER J
BRISBANE (HEARD IN BRISBANE AND MELBOURNE)
26 NOVEMBER 2003
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q235 OF 2001
BETWEEN:
DIALOG PTY LTD ACN 010 089 175
APPLICANTAND:
ADDEASE PTY LTD ACN 007 212 768
FIRST RESPONDENTGEORGE MICHAEL MIHAILIDES
SECOND RESPONDENTADDEASE PTY LTD ACN 007 212 768
FIRST CROSS CLAIMANTGEORGE MICHAEL MIHAILIDES
SECOND CROSS CLAIMANTDIAGLOG PTY LTD ACN 010 089 175
CROSS RESPONDENTJUDGE:
COOPER J
DATE OF ORDER:
26 NOVEMBER 2003
WHERE MADE:
BRISBANE (VIA VIDEO LINK TO MELBOURNE)
ON THE APPLICANT’S CLAIM THE COURT ORDERS THAT:
1.The claim against the respondents be dismissed and judgment be entered in favour of the respondents.
2.The applicant pay the respondents their costs of and incidental to the claim, including reserved costs if any, to be taxed if not agreed.
ON THE CROSS-CLAIM THE COURT DECLARES THAT:
3.The cross-respondent is indebted to the first cross-claimant in the sum of $279 816.36 in respect of the claims made in paras 22, 23 and 26 of the Cross-claim.
4.The cross-respondent is entitled to set off against such indebtedness credits due to it by the first cross-claimant in the sum of $98 813.35.
5.The first cross-claimant is entitled to payment of commission by the cross-respondent under cl 2 of the Commission Agreement of 22 December 1999.
6.The second cross-claimant is presently entitled to be paid the sum of $300 000 under a Contract of Employment of 22 December 1999 between the second cross-claimant and the cross-respondent and is entitled to payment of a further sum of $150 000 under the said Contract of Employment which further sum falls due for payment to the second cross-respondent on 1 December 2003.
ON THE CROSS-CLAIM THE COURT ORDERS THAT:
7.Judgment be entered in favour of the first cross-claimant against the cross-respondent in the sum of $181 003.01 being the balance due in favour of the first cross-claimant after set off of credits due.
8.All necessary enquiries and accounts be taken by the Queensland District Registrar as to the commission due under cl 2 of the Commission Agreement of 22 December 1999 in respect of licence and maintenance fees as defined by cl 1(d) at the rates provided in cl 1(b) of that agreement; and that upon the striking of such an account, judgment be entered in favour the first cross-claimant against the cross-respondent in such amount as is found due and owing.
9.Judgment be entered in favour of the second cross-claimant in an amount of $300 000 as money due and owing under the Contract of Employment of 22 December 1999 between the second cross-claimant and the cross-respondent.
10.In default of payment on 1 December 2003 of the sum of $150 000 then falling due and owing by the cross-respondent to the second cross-claimant, judgment be entered in favour of the second cross-claimant against the cross-respondent in the sum of $150 000, proof of such default being made by affidavit of the second cross-claimant’s solicitor.
11.The cross-respondent pay the first and second cross-claimants costs of and incidental to the cross-claim, including reserved costs if any, to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q235 OF 2001
BETWEEN:
DIALOG PTY LTD ACN 010 089 175
APPLICANTAND:
ADDEASE PTY LTD ACN 007 212 768
FIRST RESPONDENTGEORGE MICHAEL MIHAILIDES
SECOND RESPONDENTADDEASE PTY LTD ACN 007 212 768
FIRST CROSS CLAIMANTGEORGE MICHAEL MIHAILIDES
SECOND CROSS CLAIMANTDIALOG PTY LTD ACN 010 089 175
THIRD CROSS CLAIMANT
JUDGE:
COOPER J
DATE:
26 NOVEMBER 2003
PLACE:
BRISBANE (VIA VIDEO LINK TO MELBOURNE)
REASONS FOR JUDGMENT
background to proceedings and pleadings
On 22 December 1999, the applicant Dialog Pty Ltd (‘Dialog’) entered into two written agreements with the first respondent Addease Pty Ltd (‘Addease’). The first was a Business Sale Agreement whereby Dialog purchased the business (as specified in the Business Sale Agreement) of Addease. The second was a Commission Agreement to pay Addease commissions on sales of licences and maintenance agreements of intellectual property known as AXiOM HR and TemPak products.
On 22 December 1999, Dialog as employer, entered into a Contract of Employment with the second respondent, George Mihailides (‘Mihailides’) as employee.
On 16 November 2001, Dialog filed an Application and Statement of Claim alleging conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (‘the TPA’) against both respondents. Dialog sought damages pursuant to s 52 of the TPA. It also sought orders pursuant to s 87 of the TPA, seeking to avoid, or have rendered unenforceable, the Commission Agreement and the Contract of Employment. By an amendment during the trial of the proceedings, Dialog also sought a declaration that the employment of Mihailides had been validly terminated by Dialog and that it was not thereafter indebted to him under the Contract of Employment.
By its Second Further Amended Statement of Claim dated 10 December 2002 (‘the Final Statement of Claim’), Dialog alleged:
‘6. Between in or about August 1999 and December 1999 and prior to entering into the Business Sale Agreement, the Commission Agreement and the Contract of Employment, the Applicant sought information from the First and Second Respondents concerning the financial state of the Business, the First Respondent’s expectations of revenue forecasts and profit projections and the respective stages of development of the Products, in respect of which the Second Respondent (for and on behalf of himself and the First Respondent) provided information and documents to the Applicant including documents being “Basis of Valuation”, “AXIOM Valuation for Dialog mk2.xls” on 11 November 1999 and a further 8 page document by way of financial projections on 12 November 1999.
7. Prior to the Applicant entering into the Business Sale Agreement, the Commission Agreement and the Contract of Employment, the Second Respondent (for and on behalf of himself and the First Respondent) represented to the Applicant as follows:
(a)that gross revenue from licence and maintenance fees for the first year of operation would be of the order of $870,936.00 increasing thereafter in year 2 to $1,029,937.00 and increasing thereafter in year 3 to $1,204,837.00;
(b)alternatively, that the Business would receive gross revenue by way of maintenance fees from Major Projects of the order of $220,937.00 in the first year of operation increasing thereafter;
(c)alternatively, maintenance fees from Major Projects equalled $117,812.00 from and at commencement and would increase in the first year of operation by of the order of $75,000.00;
(d)further, that gross revenue generated from Product sales to the Corporation HR market alone would be of the order $115,000.00 for the first year of operation increasing thereafter;
(e)further, that net profit excluding interest, drawings and tax generated by the Business would be of the order of $440,269.45 within the first year of operation increasing thereafter;
(f)Further, that revenue forecasts were extremely conservative;
(g)further, that the development of Axiom HR and Axiom Payroll software products were largely complete and the Axiom HR software stable;
(h)further, that the First Respondent’s existing clients were committed to its products and a significant number were ready to upgrade to and implement the Axiom Payroll software in the short term;
(i)alternatively, (implied from (a) to (f) (inclusive above) that the Business was worth the $550,000.00 (comprising some $469,400.00 for goodwill) price paid pursuant to the Business Sale Agreement.
Particulars
The representations in (a), (b), (c), (d), (e) and (f) were made orally by the Second Respondent to Mr Key and Mr Doessel of the Applicant by telephone on 12 November 1999 and at the Applicant’s Melbourne office on or about 1 and 2 December 1999 and by written projections as to sales revenue and profit in terms of a document headed “Basis of Valuation” together with a document “AXIOM Valuation for Dialog mk2.xls” supplied to the Applicant by the Second Respondent by email on 11 November 1999 and confirmed in terms of a further 8 page document by way of financial projections supplied to the Applicant by the Second Respondent by email on 12 November 1999. The representations in (g) and (h) were made orally by the First and Second Respondent to Mr Key and Mr Doessel of the Applicant by telephone on 12 November 1999 and by the First Respondent (by one Brian Maunder) and the Second Respondent to Mr Key and Mr Doessel of the Applicant at the First Respondent’s Melbourne office on or about 1 and 2 December 1999 and in terms of documents headed “proposed Strategy for Replacement of Tempak Only Clients” and “Current Assignments - Addease Pty Ltd” supplied to the Applicant by the First and Second Respondents on or about 1 and 2 December 1999. The representation in (i) is to be implied from (a) to (f) inclusive.
8. In reliance upon the truth of the representations referred to in paragraph 7 above and each of them and induced thereby, the Applicant (by its officers or agents):
(a)purchased the Business and executed the Business Sale Agreement;
(b)executed a Lease of the premises dated 1 August 2000;
(c)employed staff utilized by the Second Respondent in the Business prior to 1 December 1999;
(d)executed the Commission Agreement in favour of the First Respondent;
(e)entered into the Contract of Employment with the Second Respondent and paid a salary and other benefits as pleaded in paragraph 4 above.
9. But for the representations referred to in paragraph 7 herein, the Applicant would not have entered into any of the transactions referred to in paragraph 8 above.
10. The representations referred to in paragraph 7 herein were misleading, deceptive or likely to mislead or deceive in trade or commerce in breach of s.52 of the TPA.
Particulars
(a)gross revenue for the first year ended 30 November 2000 was $329,480.00 being 62% below the projected $870,937.00;
(b)gross revenue for the second year ended 30 November 2001 was $241,724.00 being more than 76% below the projected $1,029,937.00;
(c)gross revenue by way of Maintenance Fees for Major Projects for the first year ended 30 November 2000 was $107,825.00 being of the order of 51% below the projected $220,937.00, and in the alternative, o[f] the order of 44% below the projected $192,812.00 (being the sum of $117,812.00 and $75,000.000;
(d)the Business did not and was incapable of achieving a net profit before interest, drawings and tax anywhere near the sum of $440,269.45 in the first year of operation or at all;
(e)the Business ran at a loss from the date of purchase despite efficient operation;
(f)gross revenue from Product sales to the Corporate HR market was and remains nil;
(g)sales revenue forecasts were grossly overstated;
(h)insofar as the representations in 7(a) to (f) inclusive were as to “future matters” within the meaning of s.51A of the TPA, the First and Second Respondents had no reasonable basis for the making thereof;
(i)the Business having run at a loss is unsaleable and worth substantially less than the $500,000.00 paid and not worth anything more than the residual value of the plant and equipment.’
(Original emphasis)
The case against Mihailides in respect of the representation was that he was a person concerned in, or party to, Addease’s contravention within the meaning of s 75B of the TPA.
In respect of the termination of Mihailides’ employment, the second Final Statement of Claim pleaded:
‘4. By further agreement made on or about 22 December 1999 (effective from 1 December 1999) between the Applicant and the Second Respondent (“Contract of Employment”), the Applicant agreed to employ the Second Respondent:
(a) to continue as Manager of the Business;
(b)for a term commencing on 1 December 1999 and continuing until 30 November 2004;
(c)at a salary of $150,000.00 per annum including superannuation;
(d)with a minimum of twenty (20) days paid annual leave;
(e)sick leave entitlement of up to sixty-five (65) consecutive days in any twelve (12) month period.
Particulars
Contract of Employment between the Applicant and the Second Respondent made in Brisbane on or about 22 December 1999.
5. Pursuant to the Contract of Employment, the Second Respondent commenced as Manager of the Business on 1 December 1999 and continues to be employed by the Applicant.
...13. Further or in the alternative:
(a)The Contract of Employment referred to in paragraph 4 herein, provided:
(i)(by clause 3(1)) the second Respondent agreed that during the continuance of his employment he shall devote the whole of his time, attention and ability to his duties as an employee ... and shall endeavour to promote, develop and extend the business of Dialog to the best of his ability;
(ii)(by clause 4(1)(ii)) that the employment of the Second Respondent could be terminated forthwith without any notice or payment in lieu of notice, if at any time during the employee’s employment hereunder, the employee:
a.is guilty of any serious misconduct;
(iii)(by clause 3(c)) where the Second Respondent’s employment is terminated for reasons under clause 4(a)(ii), then the Applicant is not obliged to make any of the payments referred to in clause 3(c), 3(d) or 3(e);
(b)By reason of the Business Sale Agreement referred to in paragraph 2(a) herein:
(i)(by clauses 1.1, 2.1 and Schedule 1) the Applicant on and from 1 December 2002 was the owner and proprietor of the whole of the “Business” including the “Assets” and including the “Intellectual Property” and “IP rights” as defined therein including the AXiOM HR Software and AXiOM source code licence software;
(c)on 14 June 2000, the First Respondent:
(i)did receive the sum of $80,473.50 in respect of the sale of AXiOM HR Software, alternatively AXiOM source code licence software to Business Trends Pte Ltd.
Particulars
14.06.00Addease General Ledger Journal disclosing receipt of $80,473.50;
14.06.00Addease ANZ Bank Statement page 478 credit $80,473.50;
(d)the Second Respondent failed to cause the First Respondent to account to Dialog for that sum pursuant to the Business Sale Agreement;
(e)The facts referred to in paragraph (d) immediately above constituted on the part of the Second Respondent:
(i)a breach of the Contract of Employment as at 14.06.00 and thereafter;
(ii)“serious misconduct” within the meaning of clause 4(a)(ii) of the Contract of Employment;
(f)By reason of the matters pleaded in paragraph 13 hereof:
(i)the Applicant has suffered loss and damage;
(ii)the Applicant is not liable to the Second Respondent in respect of the $450,000 claimed by the Second Respondent in the Crossclaim as alleged or at all;
(g)The Applicant seeks a declaration that its termination of the Second Respondent’s employment was valid and according to law.’
(Original emphasis)
By their Defence and Cross-claim, Addease and Mihailides pleaded:
‘6. As to paragraph 6 of the statement of claim, the respondents say:
(a)in August 1999 the applicant purchased a company, Intrinsic Solutions Pty Ltd, having prior to the purchase conducted a due diligence inquiry of Intrinsic;
(b)prior to such purchase (as the applicant knew from its due diligence inquiry) and thereafter the first respondent provided software and other services for performance of Intrinsic’s obligation sunder contracts with various labour hire or human resources companies for monetary reward (hereinafter the labour hire projects);
(c)after the applicant’s purchase of Intrinsic it took over and performed the said labour hire contracts including accepting provision of the software and other services required by it to so perform from the first respondent and on-charging clients of Intrinsic for the provision of the first respondent’s software, associated services and annual maintenance services;
(d)at or about the time of purchase the applicant promised Intrinsic that it would pay Intrinsic’s debts to creditors including the first respondent (the first respondent being a beneficiary of such a promise and thereby capable of enforcing such a promise by action in its own name);
(e)subsequent to the purchase of Intrinsic, the applicant requested a meeting with the first respondent in Melbourne to which it sent its officers Mr Ian Gordon, Mr Ian Nolan and Mr Graeme Darley to review the labour hire projects (such that it knew the state of each such project, and seek such information about each project as they required);
(f)subsequent to (d), the said Gordon requested the first respondent allow the applicant to send a representative to conduct a technical review of the computer software known as AXiOM used in the labor hire projects;
(g)on 25 September 1999 the applicant dispatched a Mr Gary Young to conduct such a technical review (such that thereafter it knew the technical parameters of the software as compared to other comparable software);
(h)subsequent to the technical review conducted by Mr Young, Mr Hills-Johns, of the applicant, (who had previously been the controller of Intrinsic and who was, in that position, aware of the sale and prospect of sale of the first respondent’s computer software and services) attended upon the second respondent at his office in Melbourne to discuss distribution arrangements for the first respondent’s software programs for the applicant;
(i)subsequent to (g), on 3 November 1999, Gordon of the applicant asked the second respondent if the first respondent was interested in selling the AXiOM software to the applicant and what price the first respondent wished for such a sale (in substitution for the then existing arrangement between applicant and first respondent whereby the applicant paid the first respondent to provide software licences and maintenance services to its customers);
(j)on 11 November 1999 the second respondent, by the first respondent, sent by e-mail to Mr A Key of the applicant, an offer to sell the software licensing and maintenance service outlining two alternative purchase options for the applicant to consider. The documents e-mailed were entitled “ OPTIONS FOR AKEY.DOC” and “AXiOM VALUATION FOR DIALOG MK2.XLS” (the second containing the first respondent’s calculation supporting its asking price);
(k)on 11 November 1999 the applicant, by its officer Key, indicated the applicant would agree on option 2 as set out in the said document but wanted to modify the commission structure there sought so that a sliding scale applied rather than the fixed scale offered.
(l)on 12 November 1999 the first respondent by the second respondent sent a further offer to purchase to the applicant by its controller Doessel in accordance with Keys’ advice referred to in (k) above. The document e-mailed was entitled “AXiOM VALUATION FOR DIALOG MK2.XLS”;
(m)on 12 November 1999 the applicant’s officer Doessel e-mailed a “heads of agreement” which “heads of agreement” was executed by the first respondent on 24 November 1999;
(n)draft contracts in terms of that referred to at subparagraphs 2(a) - (c) above were sent by the applicant’s officer Doessel to the second respondent on 26 and 27 November 1999 generally in accordance with the heads of agreement;
(o)on 29 November 1999 the applicant announced (but this was not in fact the case) that it had purchased the first respondent’s business notwithstanding the contracts had not then been executed;
(p)the documents containing the two offers to sell are those referred to at paragraph 3(b)(i) - (iii) of the particulars delivered of paragraph 6 of the statement of claim.
7. As to the facts alleged at paragraph 7, the respondents say:
(a)that neither represented by the sending of the e-mails or otherwise the gross revenue from licence and maintenance fees subsequent to a proposed purchase but rather represented the first respondent’s method of calculation of the asking price for sale of the first respondent’s computer software business to the applicant and the terms upon which such a sale would be considered on the basis of the expectation of income receivable by them in following years;
(b)the offers to purchase were sent to the applicant which was:
(i)a company well experienced in the sale of computer software;
(ii)itself engage din selling the software under licence from the first respondent;
(iii)familiar with the operation of the first respondent’s business (which was largely a business of supplying software and services to or on behalf of the applicant) by reason of the facts above pleaded;
(iv)had as its officer Hills-Johns the former managing director of Intrinsic who was well acquainted with the sales history of the first respondent’s software and Young who was well acquainted with the technical performance of the software;
(v)in the position (by purchase of Intrinsic) of being required to perform the labour hire projects without having an enforceable right to obtain (or obtain at a fixed price) the services of the second respondent or its software (absent which the labour hire projects could not be performed);
(vi)knew that the business of Intrinsic had failed because it could not pay the first respondent for the software and services provided to Intrinsic’s clients.
(c)the document entitled “Options for Akey.doc” (being one of the documents particularised by the applicant as giving rise to the representations alleged) provided expressly:
(i)for two options for purchase:
A.Option 1
· $750,000 cash
· $150,000 salary per annum (i.e. over 5 years)
· Incentive paid at 15% over and above 50% of the projected revenue line.
B.Option 2
· $500,000 cash
· $150,000 salary (i.e. over 5 years)
· Incentive paid at 20% over and above 50% of a projected revenue line.
(The revenue line in each case being $870,937 - 50% being $435,468.50.)
(ii)provision for assignment of the benefit of existing contracts under which maintenance services were provided;
(d)the document entitled “AXiOM Valuation for Dialog Mk2.xls” (being the second of the documents particularised as giving rise to the representations) provided expressly (as were the true facts):
(i)there were 7 major project clients which it was expected would (or had been invoiced) $789,999.50 in licence and maintenance fees including $693,750 in major project licence fees and $96,249.50 in major project maintenance fees (which as the applicant knew included the 4 major projects Intrinsic (and subsequently it) was then performing);
(ii)that major project clients were forecast for the next year to be $500,000 and maintenance fees $75,000 (a reduction in the then present level of income);
(iii)that minor project clients had present maintenance fees of $35,000 but no licence fees;
(iv)that minor project revenue was budgeted at $115,000 (licence and maintenance in the next year);
(v)should a revenue line of $870,937 be achieved there would be a met negative cash flow to the applicant as purchaser in the year after purchase of $525,023.83 (and therefore a net negative cash flow at base line revenue of $960,472.33 under option 1) and a net negative cash flow of $383,890.95 to the applicant in year 1 (and therefore a net negative cash flow at base line revenue of $819,359.45 under option 2);
(e)the first respondent, by the second respondent, told the applicant by Key that:
(i)the year 2 - 5 sales figures contained in the said documents were calculated by application of a fixed percentage increase year on year;
(ii)the licence fees of minor sales were calculated on 4 sales at $25,000 each,
and Key agreed that those forecasts were reasonable;
(f)the document entitled “AXiOM Valuation for Dialog Mk2.x/s” similarly projected cash flows based on a revised option 2 as there set out but with the same base line revenue;
(g)in preparing the documents aforesaid the first respondent, by the second respondent, relied upon the fact that:
(i)the first respondent had entered into a further contract for AXiOM in early December 1999 (classified as a minor contract) for $50,000 for licencing of the AXiOM software;
(ii)the first respondent expected to shortly sell such software to Macquarie Bank (classified as a major contract);’
(iii)there were other prospective sales in the market;
(iv)the AXiOM software was an improvement on comparative existing software and had been well received in the market;
(v)the applicant was an apparently proficient marketer of computer software with offices (or projected offices) in Townsville, Brisbane, Darwin, Gold Coast, Sydney, Canberra and Melbourne;
(vi)the applicant apparently had the necessary capital and experience to continue to develop and market the software and provide services to the existing clients of Intrinsic and the first respondent;
(h)further, the applicant knew at the time it received the documents and thereafter that:
(i)the second respondent professed no qualifications as a valuer either of a business or of intellectual property;
(ii)that the business of the first respondent was speculative in that it depended upon the exploitation of innovative software in a competitive market place largely in conjunction with the applicant’s own business in that regard;
(iii)that the projected growth rate of such a business could not be accurately assessed but to the extent it could be assessed it could be assessed by the applicant without assistance from the respondents;
(iv)that the figures for sale of licences of software and for maintenance were based upon the projected supply of software in “year 1” which was itself a projection from current figures;
(i)the applicant provided in the business sale agreement drawn by it (cl 14.4) that all representations in relation to the subject matter of the agreement were merged in and superceded by the agreement; that agreement (by clauses 10.1 and 10.3) specifically providing an indemnity of a maximum sum of $400,000 for breach of a warranty as to financial forecasts (such as the applicant now pleads) but only where such a claim was notified on or before 30 June 2001 (no such claim having been made or notified by such date);
(j)in the premises:
(i)no such representations as pleaded in 7(1) - (e) were made; and
(ii)to the extent representations were made (as set out above) concerning the financial performance and expectations of the first respondent;
A.same were true in fact insofar as same represented the current receipt or expected receipt of expected further receipt of income; and
B.based upon reasonable grounds insofar as it may be found (which is denied) that same were representations as to future matters;
(iii)in any event, the representations pleaded were not relied upon by the applicant in deciding to purchase or to purchase at the price contracted the applicant relying upon their own assessment of the requirements of the business being purchased and their rights under the business sale agreement proposed by and executed by them in respect of that purchase;
(iv)absent purchase of the first respondent’s business, the applicant would have been required in performance of the labour hire projects to expend the amount of the purchase price or more in obtaining the services and software of the first and second respondents;
(k)the representations pleaded at subparagraphs (f) - (h) were not made.’
(Original emphasis)
Addease and Mihailides denied the allegations in pars 8 and 9, and took objection to par 10. In respect of the allegation of serious misconduct, they pleaded:
‘12AAs to the facts alleged at paragraph 13 of the statement of claim, the respondents say:
(a)Subject to reference to the full terms of clause 3(a) of the Employment Agreement they admit part (a)(i).
(b)Subject to reference to the full terms of clause 4(a)(ii) of the Employment Agreement they admit part (a)(ii).
(c)Subject to reference to the full terms of clause 4(a)(ii) of the Employment Agreement they admit part (a)(ii).
(d)Subject to reference to the full terms of clauses 1.1, 2.1 & schedule 1 of the Business Sale Agreement they admit part (b).
(e)Except that they admit that the first respondent received the sum of $80,437.50 (“the joint venture payment”) from Way2work Pte Ltd on 14/6/00 in consideration of its assignment of its title, rights & interests in the way2work joint venture, the respondents deny part (c).
Particulars
The Assignment is in writing dated 22/4/00.
(f)They deny part (d) and say that the first respondent was entitled to the joint venture payment pursuant to clause 4(d) of the Business Sale Agreement.
(g)They deny each of the allegations in part (e).
(h)They deny each of the allegations in part (f) and say the allegation in part (ii) is embarrassing because serious misconduct does not disentitle the second respondent to the payments due under paragraph 3(c) of the Employment Agreement.
(i)They deny the applicant is entitled to the declaration sought in part (g).’
Addease and Mihailides denied that any loss was caused to Dialog by conduct on their part, and pleaded that if Dialog suffered any loss, it was caused by the conduct of Dialog as pleaded in par 12 of their defence and cross-claim.
By their Cross-claim, Addease claimed:
(a)commission payments payable under cl 2 of the Commission Agreement in respect of licence and maintenance fees as defined by cl 1(d) of the Commission Agreement at the rates provided for in cl 1(b) of that Agreement: pars 15 and 16;
(b)debts due by Intrinsic Solutions Pty Ltd (‘Intrinsic’) to Addease payable by Dialog under an agreement with Intrinsic in the sum of $23,111: pars 17 to 21 inclusive;
(c)the cost of software and services provided to Dialog commencing in October 1999 for its use after its acquisition of the business of Intrinsic in the sum of $43,420.45: par 22;
(d)fees in the sum of $249,375 payable for software, associated services, and annual maintenance services, provided in respect of labour hire contracts taken over by Dialog upon its acquisition of the business of Intrinsic: pars 23 and 24;
(e)under a Reimbursement Agreement between Addease and Dialog, the sum of $26,931.91 paid by Addease on behalf of Dialog: pars 25 to 28 inclusive; and
(f)the sum of $10,000 being the price of a Text Retrieval and OCR Server, the property of Addease, received by Intrinsic and not accounted for to Addease.
By cross-claim, Mihailides claimed:
(a)$450,000 payable under the Contract of Employment: pars 29 and 30 inclusive; and
(b)$2,250 for a Test File Server provided by Mihailides to Dialog in May 2000: pars 31 and 32.
Dialog, by its Amended Reply and Defence to Cross-claim, pleaded an entitlement under cl 8.9 and cl 9.3 of the Business Sale Agreement to set off the sum of $19,791.87, and $50,000 against any sums payable as alleged in pars 16 and 17 of the cross-claim. Dialog otherwise denied the allegations in pars 18 to 20 inclusive, pleaded that it was not liable for the debts of Intrinsic by reason of the matters pleaded in these proceedings, denied the allegations in pars 23 and 24 (and alleged that no necessary notice under cl 8.3 of the Business Sale Agreement to retain ownership of the debts claimed under pars 22 and 23), and, denied the allegations in pars 25 to 29 inclusive and pars 31 to 37 inclusive of the Cross claim.
the evidence and findings
Both parties handed up numerous objections to evidence in respect of the affidavits which were intended to be tendered and stand as evidence-in-chief of the various witnesses. In February 2002, Dialog forwarded further objections to evidence with its final written submissions. I have based my decision on the oral evidence of the witnesses, the documents tendered into evidence on the trial, and any assessment of the credibility of the evidence given by the principal witnesses. Where I have relied upon the affidavit evidence appears in the reasons, and such evidence was, in my view, admissible. I do not intend to deal specifically with each of the objections seriatim.
Addease commenced business in 1989. It is the corporate vehicle by which Mihailides carried on business as an information technology software developer. Addease designed a speciality product for use in the labour recruitment industry. It was called TemPak. The program enabled recruitment agencies to match up candidates to job vacancies (front office functionality) and pay temporary staff for which the client was invoiced (back office functionality). Addease sold a significant number of TemPak licences and maintenance contracts to agencies within the recruitment industry.
In 1996 Addease commenced to develop a new product in a Microsoft Windows environment, which was directed towards larger operators within the labour recruitment industry. The product was called AXiOM and was to include a number of programs. Initially Addease produced AXiOM Win 32, which provided a front office functionality only. AXiOM Win 32 was trialled in the North Sydney office of Alectus Personnel and, in March 1998, Alectus Personnel entered into an agreement with Addease for the supply of AXiOM Win 32 for use in its offices around Australia.
In 1998, Mihailides was approached by Barry Keown, a salesman employed by Intrinsic. At that time, Intrinsic was negotiating to sell Skilled Engineering Ltd (‘Skilled Engineering’), a general ledger/financial management software program called Infinium. Keown put a proposal to Mihailides for the development for Skilled Engineering of an integrated system which included Infinium and a payroll system called Opus One as the back office systems, and AXiOM Win 32 as the front office system (‘the integrated suite’). Ultimately, it was agreed between Neill Hills-Johnes, the Managing Director of Intrinsic, and Mihailides on behalf of Addease, that a proposal for the integrated suite would be put to Skilled Engineering. Under that proposal, Intrinsic would supply to Skilled Engineering as the contractor with it, the integrated suite and would be responsible for implementation of the suite and the provision thereafter of annual maintenance; Addease would act as subcontractor to Intrinsic in respect of the supply of the AXiOM Win 32 program.
On 27 August 1998, Intrinsic signed an agreement with Skilled Engineering to supply to it the integrated suite.
Subsequently, Intrinsic sold the integrated suite to other recruitment companies. On 11 September 1998, Intrinsic and Speakman Stillwell Pty Ltd (‘Speakman Stillwell’) signed an agreement for the supply of the integrated suite. On 17 March 1999, Intrinsic signed an agreement with Westaff to provide the suite. Intrinsic also contracted to supply the suite to The Ready Group in June 1999. These four contracts are referred to in these reasons as the ‘Labour Hire Contracts’.
In August 1999, Dialog acquired the business of Intrinsic as at 1 July 1999. The business acquired included the benefit of the Labour Hire Contracts. Dialog also employed a number of persons previously employed by Intrinsic. These included Hills-Johnes, the Managing Director of Intrinsic.
At the time Dialog acquired the business of Intrinsic, the implementation of the integrated suite as required by the Labour Hire Contracts had been substantially delayed. Further, there existed no contractual arrangements between Intrinsic and Addease for the supply to Intrinsic of AXiOM Win 32 ported to an Oracle database to enable Intrinsic to make future sales of the integrated suite.
In September 1999, Ian Gordon, a manager employed by Dialog, contacted Mihailides and asked that he provide a technical presentation of the payroll module that Addease was developing to a representative of Dialog. The presentation was made to Gary Young on 25 September 1999. Young was an IT consultant with Business and General Computer Systems Pty Ltd. Young prepared his written report on 27 September 1999.
The report of Young, so far as presently relevant, stated:
‘1.1 PURPOSE OF THIS DOCUMENT
This document is a review of the current system and how it integrates with other applications. It was reviewed on the basis of its suitability as a standard payroll and/or the possibility of a more comprehensive payroll forming part of the Recruitment Placement front end.
The investigation of the system was based on a demonstration and overview of the systems by George Mihailides (Managing Director of Addease Pty Ltd) on 25th September 1999.
...
1.4OVERVIEW
The payroll section of Axiom HR forms part of the billing/costing section of the recruitment placing software catering for temporary staff. I.e. This software is ONLY really applicable for this simplistic payroll situation of temporary staff being paid at the rate applicable to the job being performed.
The system revolves around the recording of clients, staff availability and their attributes. The approach taken seems very good, in that the system has been written within HTML pages using Cold Fusion Server to link between the DB Server and the User. I.e. LAN, WAN, WEB. CFQuery has been used to access the Database.
The whole demonstration was run from Internet Explorer V4. This allows the ability for users to enter the timesheets/job requests over the Web and update one common database. This would appear to be very attractive to multiple branch employment agencies.
The payroll is more of a by-product of the recruitment placement requirements, rather than a serious payroll.
...
2.CURRENT SITUATION
2.1INTRODUCTION
The system is still being developed and there appears to be several areas that are yet to be written. George Mihailides implied that the productivity of his people had vastly improved within this new development environment. This, of course could be due to the more simplistic design to some of the software. I.e. Lack of integration within back office applications, such as costing, general ledger, creditors etc.
The payroll section could not easily be removed from the package without major changes to the concept. The system would appear to cater for the functions of this particular environment. I.e. Payment of temporary staff with no real entitlements, such as Leave entitlements, multiple deductions, multiple superannuation funds etc.
...
2.1.2Current Development Schedule
The schedule provided by Addease for the current system is as follows:
• Tidy Up - October 30
Creation of EFT File for transfer to bank
Basic Reporting
Remittance advice slip
Invoice format• Time Sheet Work Flow - November 30
• Leave Module - November 30
• Year End Processing (Group Certificates) - December 30
• Advanced Reporting Module
This is to include reporting by job i.e. gross margin of each placement.
• Selection of back end system
Period end journal creation. I.e. Link to a Ledger system• Monthly EFT group Tax Submission
NB The last 3 options have no scheduled dates.
There were no reports shown during the demonstration and were promised this week. I am not convinced that they are all available at this stage.
2.2 PROBLEMS WITH THE SYSTEM
2.2.1 System DesignThe system has been designed for a specific market and when complete, may be quite suitable for the functions it has to perform, but cannot be used for any other pay functions.
One major drawback would appear to be, that a large Employment Agency could not pay it’s own permanent employees with this payroll system.
The design has been kept quite simply and very specific for the requirements of a temporary staff within the recruitment placement market. (Payroll tax has been catered for within the system based on a percentage of the invoices raised rather than the actual pay remitted to the employees.) This is the Victorian requirement for the industry apparently.
The system allows for only one method of superannuation calculation based on the Superannuation Guarantee, as defined by the Government, for temporary employees. I.e. There is no employee deductions catered for and no other method of Employer contribution other than a percentage of the actual pay.
There is no real allowance for multiple deductions for employees as this is normally not required for temporary staff.
There are still a few minor errors within the system with the pay calculations.
The leave calculations being implemented are based on an individual users requirements. I.e. This would not be flexible enough to cater for multiple users/awards. The basic leave method will generate a fixed accrual each pay period and allow for a payment to be entered up to the hours/days accrued.
2.2.2Integration
The recruitment placement and invoice generation is dependent on the details being held for all temporary staff, hence the two requirements are closely linked, but other than that there is no other integration.
There is no Costing / Ledger / Creditors etc. Nor did there seem to be any link between the front end and any other systems. The system has not been set up to extract/import details from other systems.
I would imagine that there would be a need to flow each job request through to a costing system so that all costs could be recorded against that job (or at least some broad category of jobs). There would be no other costs that could apply other that [sic] the actual labour costs.
The transfer of Group Tax via EFT should be handled within the Creditors as there are likely to be other details that have to be transmitted.’
(Original emphasis)
As indicated in his report, Young did not see the module under development as a serious payroll, but rather ‘a by-product of the recruitment placement requirements’.
Importantly, it is clear from Young’s report that the system Young saw being developed was not one which would be suitable as a replacement for Opus One, which provided the payroll functions (part of the back office functionality) in the integrated suite. The simplistic design of the system which Addease was developing had no integration with back office applications. The design problems and limitations of the system under development are, and were, self-evident from the terms of s 2.2 of Young’s report set out above.
The report of Young is also important as it links the development schedule to the particular system which he saw under development which was a simplistic system with limited functionality for a particular environment. The report acknowledges that not all modules of the system awaiting development were then scheduled. That is, that the schedule he saw was incomplete. Any utility Young saw in the system lay in its possible use as a front end to a standard accounting package eg Navision (including payroll) provided it was integrated into such a system. Navision was an accounting package marketed by Dialog.
On 30 September 1999, Young attended a demonstration of the Opus One payroll system. He prepared a written report on 2 October 1999. That report, so far as is relevant, stated:
‘1.1 PURPOSE OF THIS DOCUMENT
This document is a review of the current payroll system and how it integrates with other applications. It was reviewed on the basis of its suitability as a standard payroll forming part of the total package for the Labour Hire package. Ie. An integration of Axiom HR front end, interfaced to Opus Payroll and Infinium NT Accounting package.
...
1.3OVERVIEW
The investigation of the system was at a level that could not guarantee that the system performed all the functions displayed. Ie. There was no check that the data entered generated the correct results throughout the system.
Nor does it take into account the ownership or costs of future development/modifications to the individual modules within the proposed package. Ie. It may be more beneficial in the long term to have overall control of all the systems being proposed.
The payroll system Opus 1 was converted from a payroll designed for New Zealand to cater for Australian conditions. According to the documentation provided, all of the conversions have been achieved except for the calculation of Long Service Leave entitlements. This functionality does not seem to be fully specified at this stage but based on Steve’s comments I would suggest that they take a simpler approach than envisaged so that the majority of clients would be satisfied. This would then allow that stage to be completed.
The major conversions required to cater for the conversion have already been implemented. Ie.
•Australian Taxation Calculations.
•Group Certificate Preparation and production of file for Electronic Transfer. (I did not enquire if this has been approved by the ATO at this stage. This MUST be done to [sic] for a Payroll package)
•Same applies for electronic transfer of the Employment Declarations.
•Allowance for employer superannuation contributions based no actual earnings. Ie. Superannuation Guarantee Contributions.
•Leave entitlements. There is a very general specification for Long Service Leave to be implemented that should possibly be simplified. I am also not sure if “annual leave” and “leave loading” is handled with all the possibilities at this stage. There are some awards that may not be handled correctly with the current set up.
•Payment of employees via EFT, as based on the Australian Payments Clearing Association.
•Payment of PAYE tax to the ATO via electronic transfer. My only concern with this section is that it is handled by the actual Payroll system rather than a transfer to the Accounts Payable system to allow the payment to be processed with other payments. NB There may be more than one payroll linked to the payment to the ATO. Ie Should only be one or two transfers per week depending on the days when the employees are paid.
The system is running in Australia and should be capable of handling a normal payroll situation so the only issues appear to be the ability to handle this particular industry’s requirements with the integrated packages proposed. Ie. Labour Hire.’
(Original emphasis)After dealing with the current situation, noting that the interface between AXiOM and Opus One to generate the base details for the employee and time sheet details was still at the beta test stage, and setting out the current development schedule of Opus One for a standard payroll, Young dealt with what he considered were problems with the system. In part, he said:
‘2.2.2. Integration
The interface between Axiom and Opus is a little cumbersome and probably should be more automated. Ie. Currently, the Axiom system exports a file (nominated by the user) and then Opus imports the file (again nominating the file name to be imported).
One area of concern with this interface is the lack of control over the Axiom system. Ie. All development within Axiom is performed by Addease staff and any changes required to the interface cannot be easily changed without agreement by this company. They will be promoting their own solution to other clients, specifically their own payroll, which may be awkward in some situations. Although, their solution for payroll is far too simplistic to be used by any reasonably [sic] size company.
The transfer from the Opus payroll to the Job Management and General ledger is performed with one option and is satisfactory as a procedure.
I feel that there should be another interface between the deductions generated and the actual payment of these accounts. Ie. Rather than allow for the payment of the group tax within the payroll (generation of file for transfer of funds via EFT), this should have been transferred to the Accounts Payable system, together with all other deductions generated by the payroll system.
The actual payment of these accounts can then be performed by the Accounts Payable system by either cheque or electronic funds depending on the creditors status. This must currently be handled by manual entry of the details into the Accounts Payable system.’
(Original emphasis)
Young delivered the second report to Alan Key, the Managing Director of Dialog, but did not discuss the contents of the report with him at that time. Nevertheless, the real interest in Dialog acquiring control over all the systems in the integrated suite, and in particular, control of the AXiOM system for the reasons outlined by Young, was self-evident from a reading of the report.
On 11 October 1999, Hills-Johnes sent an e-mail to Key headed ‘Sept Billings & Outlook to December’. The e-mail stated that the ‘90 day forecast attached ignored backlog software revenues for Labour Hire Companies’. The Outlook, so far as is relevant to sales of the integrated suite, provided:
‘ Oct Nov Dec 2000 Services
Julia Ross Labour hire 125 125
Bensons Labour hire 75 75
Forstaff Labour hire 100 100’The figures were stated in multiples of $1,000.
On 12 October 1999, Mihailides had a meeting in Melbourne with Gordon and other employees of Dialog to discuss the Labour Hire Contracts.
On 25 October 1999, Hills-Johnes and Key met with Mihailides in Melbourne to discuss distribution models for the future distribution of the AXiOM Win 32 programs developed by Addease.
On 29 October 1999, Hills-Johnes e-mailed to Key a proposed business structure for Dialog. It is not possible on the evidence to find when the model was first conceived and whether it was responsive to the discussions with Mihailides on 25 October 1999. The e-mail stated:
‘Alan,
Attached is the proposed structure, together with people & responsibilities. The structure accomodates [sic] immediate needs and looks to the midground, say 12 months out.
Some people will assume temporary roles until suitable replacements are found or current developments/implementations are completed.
I have gone for 4 groups, FM/MM; HR/Payroll/AM; Services & Labour Hire.
To maintain the AS/400 focus, I have allocated reps within each group to be platform-specific. This ends ups [sic] with 6 reps as follows:
Steve Hague Infinium FM-NT to Business Services
TBA Navision
TBA Infinium AS/400 FM
Ross Infinium AS/400 HR & Hardware
TBA HR-NT & Opus
Elvis Labour Hire (Infinium FM-NT, Opus & Axiom)The product groups will be credited [sic] with maintenance revenues, product sales, product implementations & product related [sic] services. Reps will get credit for all product sales, and maintenance & implementation services to new clients only.
The Services Group will focus on existing customers and new customers for services, with the exception of production-related modifications, which will be retained within the product groups.
There are several items that “end up without a home”. Examples include central support, internal systems, contract management, software procurement, release level control and distribution. This is particularly relevant with customers who have purchased both Infinium FM/MM and HR/PY, examples being Star City, APN, Sky City. In these cases ordering and control via Infinium crosses two product groups.
To facilitate the transition, and to get Fiona (Finance & Admin Mgr) up to speed, I have allocated Dave Rapley to retain his current role for the [sic] next 3 months, and then move into A/c Management in Services.
I would like to finalise this by the end of next week, please review and can we discuss on Tuesday?’
The groups were:
FM/MM: Financial Management and Materials Management
HR/Payroll/AM: Human Resources and Payroll Services
Services
Labour HireIt was the intention of Hills-Johnes that the Labour Hire group would be a separate selling unit under his management which dealt with the Infinium, Opus One and AXiOM product or products.
On 3 November 1999, Gordon met with Mihailides in Melbourne to ascertain whether or not Mihailides was interested in Addease selling its business to Dialog.
Gordon was the General Manager, Business Development, of Dialog. He was responsible for, among other things, considering acquisitions to expand the business of Dialog beyond Queensland. He gave the following evidence, which I accept, as to the expansion policy of Dialog and his being instructed by Key to contact Addease:
‘And when you started with Dialog, where did Dialog have offices in Australia?--- I think it only had an office in Brisbane and it may have had a smaller one up north Queensland somewhere.
And during - were you involved in the acquisition of a Dialog office in Canberra? --- It wasn’t an acquisition in Canberra. It was a set-up after we won a major job.
I see. So you established a new office there? --- Yes.
And during your time did you move into Sydney? --- During my time there, yes, I was indirectly involved in the acquisition of the Sydney office, very much on the periphery.
Was the acquisition of the Sydney office by set-up or by acquisition of Intrinsic? --- By acquisition.
Of Intrinsic? --- Of Intrinsic.
And so the purpose of buying Intrinsic, apart from buying the business, was so that Dialog would have a presence in Sydney? --- Correct.
And was it on a policy of expanding into the capital cities around Australia? --- More and more of the clients that Dialog had were - had their offices across Australia, Brisbane being very much a branch office city. We needed - Dialog needed to have presence in those other capital cities where the head offices were. It’s where the decision making was and where a lot of their IT services were centred.
And so it was 1999 when they made the decision to acquire Intrinsic? --- I believe so.
And then later on that year were you instructed by Mr Key to make inquiry about the prospect of acquiring a presence in Melbourne? --- I was.
And what possible - was that - did Mr Key suggest to you the possibility of setting up from scratch in Melbourne? --- There were already a number of people based in Melbourne that were part of the Intrinsic organisation. They had serviced offices in Melbourne and the idea was to expand on that but also develop a particular relationship with one major client down there as a starting point. At the time Intrinsic was involved with Addease and that’s how the arrangement came to be that we went to have a look at Addease.
And did Mr Key suggest to you that you have a look at Addease? --- Yes.
And was the principal purpose for that to - for the purpose of establishing a place as a Melbourne office for Dialog? --- Two considerations: that was one of them; the other consideration was developing the product that Addease had into the labour hire suite, to develop that and make that into a major market segment that would be able to be sold by Dialog.
Did Mr Key tell you about this labour hire suite, as you described it? ---- I was aware of it through the acquisition of Intrinsic; what they were doing and what market segments they were looking at. And we had discussed that as a policy matter, I guess, or strategy - developing a strategy to not only go into other locations, but into other market segments.
And did you understand that the suite, which was being offered for sale by Intrinsic, now Dialog, had a component part which was supplied by Addease?--- Yes.
And did Mr Key suggest to you that you have discussions about the possible acquisition of Addease?--- I was asked to go and sound out Addease to see whether they may be interested in either in forming a closer relationship which could either become an acquisition, or a much closer partnership relationship.
And for that purpose did you travel to Melbourne and meet with Mr Mihailides?--- I did.’
He also gave the following evidence of his negotiations in Melbourne, which I also accept:
‘MR RIORDAN: In terms of your negotiation, you would have had in yourself an expectation that Mr Mihailides would have been expecting or may well have been expecting that some approach would be made about formalising this arrangement?--- At the time that I talked to Addease I was not aware there was no formal arrangement in place between any of the parties.
You weren’t aware of no formal arrangement?--- Absolutely. That would have sent off a warning bell to me very early.
Yes. In any event, your job was to find out whether or not there was a prospect of acquiring this business at a reasonable price and make some assessment of money one was talking about. That was your purpose?--- Correct.
And you had a discussion with Mr Mihailides about that?--- Yes, and the other side of that is whether it was worthwhile acquiring.
Yes. And as a result of that, did you eventually get to the stage where Mr Mihailides was indicating that he might be prepared to consider an offer for the business?--- I did.
And did you suggest to him if it was to go forward what might need to occur?--- I did.
What did you suggest to him that should occur?--- What I - and perhaps tell me if I’m going off the beam here but in looking to acquire the business we had to look at what was there now, what products and services the organisation had and also what vision it had for the future. So the organisation clearly had a base of clients and in my discussions with Addease, with Mr Mihailides, none of the financial components were discussed. It wasn’t my forte. It wasn’t something that I was going to look at. We needed to make sure that - however, having said that, we need to make sure that the business was viable and sustainable and we needed to understand what George’s vision was for the future because his was a market niche that was here and where Dialog was looking to go was there plus over here. And what I was trying to establish was whether the direction and the vision that Mr Mihailides had was in tune with what Dialog was thinking about.
Ultimately, did you form a view about whether the vision that Mr Mihailides had was in tune with what Dialog wanted?--- I did. I thought that the vision that Dialog had and George’s were different but not incompatible and I believed that some of the ideas that Mr Mihailides had were good and could be incorporated and indeed form part - a major part of what Dialog could do, going forward.
Is it fair to say that an important part of what you’re assessing in these discussions is whether Mr Mihailides has got something to offer Dialog as an individual, apart from the business?--- That’s part of it, yes.
And in this discussion, did you get to know more about the business?- I got to know more about the business and the various components of it, including Mr Mihailides and his team.
How long did you spend in these discussions with Mr Mihailides?--- My recollection is there were either two or perhaps three sessions, the first one being at Addease’s office, the second one being in my hotel, and I think the third one also took place in the hotel. The first one was very much understanding where the business was, where it was going to, understanding Mr Mihailides and what his vision was. That also included a whiteboard session about where we saw Dialog, where we saw Addease going. I think it would be fair to say that Mr Mihailides and I were able to cut to the chase reasonably quickly about where the companies were sitting.
And did he give you some financial information about the company?--- No.
Didn’t get - - -?--- I asked him to prepare that.
You asked him to prepare that?--- I did.
And by getting down to the issue reasonably quickly, you were talking about whether or not there was going to be a sale of the business of Dialog?---We may have skirted around those words, but we all understood where we were going to.
And it was you who suggested that he should get together some figures about actual figures and also some projections into the future in accordance with his vision and provide those to Mr Key?--- I made it clear that Dialog was looking to acquire or was always looking to acquire viable businesses that - on their own feet could stand up and be part of the organisation, and that the vision when that was incorporated into that business by means of capital or resources to make some of that vision occur, was that that organisation still had to be viable and still had to be financially secure. Now, that’s putting a framework in place that says, “We’re clearly - we’re not going to buy a dud”. That’s putting everybody on notice that says, “We will have a vision, but I don’t have it so fanciful that it’s unsustainable for the future, and don’t try and put something on the table now that’s not sustainable right now”. Now that’s a standard process - - -
And so the sustainability assessed by your actual performance figures at the moment?--- By a combination of things. Obviously, the financial components of it which was not, as I’ve said, not my - not something that I was looking at.
Yes?---Really I was there to judge where I believed the viability of the business was from a business perspective not from a financial perspective, and whether I believe that Mr Mihailides had the right customer mix, the right way of going about business more than the intimate detail of the business, about whether he was the right - that was the right kind of business to bring into Dialog.
In any event, you asked him to provide figures together with projections to Mr Key. Did you take it further?---Mainly projections about where he was going. ...’
Gordon reported back to Key. He gave the following evidence, which I accept also:
‘And did you report back, after that discussion, to Mr Key about - - - ?--- I gave him my impressions, yes.
And what did you report to Mr Key about the - well, first, about Mr Mihailides himself?--- I believe I would have told Alan that I thought that Mr Mihailides had a vision that I believed could be incorporated into Dialog’s portfolio. Some of those things may have gone into the Labour Hire suite, some of those things were off to the side. I would have told him that I believed that the business was a fairly typical small business, that, on the surface anyway, appeared to be, not hand-to-mouth, but it was - you know, it wasn’t an effluent-looking business and that the people that were involved, although I didn’t get to know them intimately, were probably not people that, from what I could see, and this was very visual, you know, were not probably the type of people that Dialog might have employed from day one. However, there was something there that we could probably utilise, but it had a price.
Did you have a recommendation to Mr Key as to whether or not you thought he should proceed with further negotiations?--- I thought it was worthwhile proceeding, yes.
And you expressed that to Mr Key?---I did.
And you weren’t later involved in, you didn’t see it, the projection that Mr Mihailides came up with as a result of your request?---No, I did not.
And you didn’t consult with Mr Key about whether or not, for the negotiations for the actual purchase?---No, the negotiations that Mr Key had with Mr Mihailides happened pretty quickly. I was either overseas or somewhere else at the time when it happened, and we had acquired, effectively acquired the business, or in the process of acquiring the business when I came back into it.’
I reject the evidence of Key where it is inconsistent with that of Gordon. Gordon no longer works for Dialog; he has no interest in the outcome of the litigation. For reasons that I will give later, I have formed the strong view that Key has no real recollection of the relevant events, and that the version of events which he now gives are reconstructions whereby he seeks to downplay his interest in acquiring the business of Addease in late 1999.
Mihailides, in his affidavit, gave the following evidence of his contact with Gordon:
‘240Within a few days of the October 25, 1999 meeting having taken place, I was contacted by Mr. Ian Gordon, General Manager of Dialog. He requested a meeting with me to which I agreed. The meeting occurred in his hotel room at the Hyatt Hotel in Melbourne on November 3, 1999. Mr Gordon said that Dialog was interested in acquiring, in his words “AXiOM”, and wanted to know whether or not I would be interested in selling it.
241I told him that if the price was right, I would sell. I told him that I thought the right figure was somewhere between $500,000.00 and $1 million.
242During my meeting with Mr. Gordon of November 3, 1999, he advised me that the structure of the sale of AXiOM would need to consist of three components.
(a)The first was a cash component for an amount which had to be agreed upon.
(b)The second was an employment agreement between Dialog and I. Mr. Gordon said that Dialog would not be interested in AXiOM without also having secured my expertise as the architect of AXiOM.
(c)The third was a commission agreement in which I would receive a percentage of future AXiOM revenue.
243Mr. Gordon said that I would need to negotiate all three components with Mr. Alan Key, the Managing Director of Dialog, and that I should put something in writing to him.
244Following this meeting, I did two things:
(a)I commenced to prepare the material as suggested by Mr Gordon and sent it through to Mr Key. ...’
There was little cross-examination of Mihailides of his meeting with Gordon. It was:
‘Mr Mihailides, can I take you to your briefing with Mr Gordon of 3 November. Do you recall that?---Yes, I do.
During that meeting, Mr Gordon told you that Addease had to demonstrate that it had a stand-alone, sustainable business?---I don’t actually recall him saying those words.
With a business model to ensure sustainable growth in the future?---I don’t recall him saying those words.
Did he tell you that you would need to produce actual figures for Addease demonstrating current and sustainable profitability of the business?---Your Honour, he asked me to produce figures - in the words he used, what I’d done with the business and which I took to mean the sales history of Axiom.’
I accept the evidence of Mihailides as to his meeting with Gordon. The differences in recollection are not material.
Gordon spoke at the meeting of 3 November in terms of ‘visions’. Dialog was looking to acquire viable businesses that could stand on their own feet and be incorporated in the business of Dialog. Those businesses were to have a ‘vision’ which capital and resources supplied by Dialog would bring to fruition. But those businesses also had to have a vision which was sustainable both in the present and in the future. The projections which Gordon asked for were where Mihailides was (that is, as Mihailides said in cross-examination, what he had done with the business) and where he thought he was going in the conduct of the business of Addease. That is, what was the present and future ‘vision’ Mihailides had for the operation of the Addease business. Gordon did not instruct Mihailides to prepare figures as to future profitability of the business in the event that it was acquired and operated by Dialog.
I find that Mihailides understood that he was to prepare financial projections of his vision of the Addease business, if it continued to be operated as he then was operating it, to support a sale price for the business of between $500,000 and $1 million as part of an offer to sell which included a cash component, an employment component and a commission on future AXiOM sales revenue components. I find that based on that understanding, Mihailides commenced to prepare material for Key shortly after the meeting with Gordon.
Mihailides gave the following evidence as to the dealings between himself and Key prior to a telephone conversation involving Mihailides, Key and Lucas Doessel, Manager Corporate Services of Dialog, on 12 November 1999:
‘253Following my meeting with Mr Gordon on 3 November, I started preparation of financial material to send through to Mr Key. The first thing that I sent through to Mr Key read as follows:
“Valuation Calculation
Licence Fees - Major $693,000
Licence Fees - Minor $100,000
Total Licence Fees $793000
Annual Maintenance $115950
Total Revenue $911950
Support Costs $150000
R&D Costs$150000
Admin Overhead (15%) $137792.50
Total Costs$423565
Multiplier5 10
Valuation2441625 4563650
254I sent this through to Mr Key in early November. Having received it, Mr. Key called me and told me that this was not the way a valuation would be done and he told me that a valuation should be based on a multiple of a profit based figure. In substance, I said that I didn’t have the information to determine a profit figure in respect of AXiOM, but as best I could, I would extract and present to him the information that related to the AXiOM business.
255Following this initial attempt, I produced a number of spreadsheets and emailed them to Mr Key and Dialog’s financial controller, Lucas Doessol, [sic] and we discussed them. Between 4 November 1999 and 11 November 1999, we had 3 or 4 discussions during which we discussed the spreadsheets and other matters relating to the deal. Ultimately, a spreadsheet almost satisfactory to Mr Key was sent to him on 11 November 1999. I discuss this further below.
256During the conversations between 3 and 11 November 1999, I explained the spreadsheets. Amongst other things I explained:
(a)how each of the licence and maintenance fees for the major projects (including the existing labour hire projects) and minor projects had been calculated;
(b)that the historical licence fees shown on the spreadsheets reflected the value of the purchase orders placed with the First Respondent and contracts between the First Respondent and its customers during the previous 12 to 14 months;
(c)that the projected licence fees for major projects of $500,000 was based on a reduction of a major project sales of the previous year;
(d)that the minor sales were calculated on the basis of 4 sales of $25,000 each;
(e)that sales in years 2-5 were calculated by fixed increases of 10% year on year; and
(f)that I had prepared the forecasts on the basis that Addease would continue to run the business as I did not know what Dialog would do with it after they assumed control.
257Mr Key told me that he thought that the sales forecasts and the 10% per annum forecast increase contained in the spreadsheets were reasonable. He said that, if anything, he thought that the sales forecasts were conservative and said words to the effect “surely we can do better”.
258During these negotiations, I requested Mr. Key pay Addease for the outstanding licence fees and 1st year’s annual maintenance due to Addease in respect of the Labour Hire projects. I went so far to say that I wouldn’t sell AXiOM Win32 unless he agreed. Mr. Key did agree, but requested that Dialog not have to forward the amounts due until Dialog had received the corresponding income from Labor Hire customers. I agreed to this condition.
259During these negotiations we also discussed the position of AXiOM Payroll and the fact that I would make an allowance of $50,000 to Dialog on the Andersen Contracting project to allow them to finish this module. I deal with this further below.
260We also discussed my salary and conditions of employment at this time. I told Mr Key that I wanted a salary of $150,000 a year.
261As noted above, by November 11 1999 Mr Key was almost happy with the spreadsheet that I had faxed him.’
As to the creation of documents forwarded to Key on 11 November 1999, Mihailides said in his affidavit filed on 22 January 2002:
‘27 I assembled the details of Addease’s sales over the previous twelve months or so. I prepared a spreadsheet containing this information and set out alternative valuations of the AXiOM product. I provided an updated version of the spreadsheet to Mr Key on 11 November 1999 by email, along with a document that outlined two alternative purchase options for him to consider. True copies of these documents are now produced and shown to me marked “GMM-4” and “GMM-5”. After Mr Key received these documents we had a discussion. Mr Key said that he could agree to “option 2”, but that he wanted to modify the commission structure. In my proposed “option 2” the commission rate was fixed for five years. Mr Key said that he wanted a sliding scale to apply. I updated the spreadsheet to take account of this and emailed it to Lucas Doessell [sic], who was Dialog’s financial controller, on 12 November 1999. A true copy of the updated spreadsheet is now produced and shown to me and marked “GMM-6”.’
(Original emphasis)Mihailides also gave evidence that during this period he told Key that another party had expressed an interest in acquiring AXiOM, and that he would not pursue negotiations with that party unless the negotiations with Dialog failed. Mihailides was not cross-examined on this evidence.
Key was cross-examined about a document bearing a file name ‘Axiom Valuation for Dialog Mark 2’ dated 11 November 1991. His evidence was:
‘These were projections that were prepared at the request of Mr Gordon; were you aware of that?---Yes.
And in accordance with Mr Gordon's request, Mr Mihailides has prepared them and forwarded them on to you; is that correct?---Yes. Sorry, yes.
And these documents you understood what the documents - what the figures were?---Yes, it was a forecast for Axiom sales.
If I take these sheet by sheet, the one that's headed up Sheet 1 on the copy you have there, it's MS EXCEL document Axiom Valuation for Dialog Mark 2 dated 11/11/91 sheet 1?---Mm.
Do you see that in the handwriting above?---Yes, I do.
If I could ask you: did you understand what that document represented?---Yes. At the time I did, yes.
Do you understand what it is now, as you look at it?---Broadly, yes. Yes.
And that - did you understand it the first table there is a table of licence fees which had been contracted for, contracts for licence fees in the 1998/1999 year; is that correct?---Yes, yes.
And the first four of those are the labour hire contracts that were done in association with Intrinsic; correct?---Yes, yes.
And it set out licence fees, the first year maintenance that was payable, the amount that had been invoiced and not paid of those contracts, the amounts that had been invoiced to be paid and then a balance for your - at the end?---Right.
Does that refresh your memory?---Yes.
And that's what - you'd had some discussions with Mr Mihailides leading up to the provision of this on 11 November - on the telephone?---Yes.
A number of discussions?---I can't remember the number of discussions, yes.
But do you remember that there was a number?---There would have been at least one, “How are you going”, that sort of thing, but I can’t remember that there was constant discussions, yes.
Certainly a telephone conversation when you did the deal on 12 November wasn’t the first conversation you had with Mr Mihailides, was it?---No. No, we had previous conversations, yes.
Yes. And in fact you’d told him that some of the earlier figures he’d given you weren’t really what you were looking for and made suggestions as to the sorts of further information he might want to give you?---No, I have no recollection of that, no. I was wanting forecasts from him; that was my recollection of what the business was going to deliver.
And he gave you some figures and you’d said, “Well, they’re not really what I’m after”?---No. This is the first spreadsheet that I can recollect seeing.
Is that right?---Yes.
And are you confident about that?---It’s the first spreadsheet I paid any attention to, that’s as far as I can remember at this stage, yes.
All right. Now, on the services analysis below that, that was an estimate, was it not, of services that it was thought may be able to be achieved from those customers on top of the fees, the licence fees and maintenance; is that so?---Yes.
And that was the sort of information that you required, wasn’t it?---What I really required was a forecast of what the business was going to do. This was - this was supplementary - supplementary details. What I was really after was the forecast of what the business was going to do.
Right. The best place - - - ?---But I guess this was supporting - - -
- - -to start - - -?--- - - -material, yes.
And the best place to start is by telling you what it has done, isn’t it?---Yes.
So it is essential?---Well, it is an ingredient, yes.
All right. And then the next page was various chattels; is that so?---Yes.
And the following page were the annual maintenance for the major projects?---Yes.
And also annual maintenance for minor projects? Correct?---Yes.
Did you understand by this point in time that, apart from the Axiom product going into the integrated suite, he was selling the Axiom product to other smaller customers?---Yes. Yes, I did, yes.
And did you understand that he had been selling a product to smaller customers prior to the Axiom product?---Yes.
Where did you learn- - -?---So prior to the Axiom product.
At prior to the development of the Axiom product he had been selling the product to minor customers? Do you understand that?---Yes. Yes.
And who had told you that?---I believe George had told me that, in a fair bit of detail when I met with him in late October.
And so at that point in time he would mention all these sorts of - this sort of information to you?---Yes. Yes.’
Key, in an affidavit filed on 13 November 2002, made no reference to any prior dealing with Mihailides in respect of spreadsheets or projections prior to receipt of a document by e-mail on 11 November 1999, which he forwarded to Doessel for his consideration. In his affidavit, Key deposed that on 12 November 1999 he had discussions with Doessel following which they telephoned Mihailides and asked him to prepare a fresh forecast based on a sliding scale of commission percentages over the projected five year period. Key deposed that Mihailides later e-mailed at 10.04 am the revised forecast with the changed percentages.
The documents exhibited to Mihailides’ affidavit of 22 January 2002 reveal that the unamended version of the document was sent by e-mail to Key at 3.22 am on 11 November 1999, and that this e-mail was forwarded to Doessel at 2.27 pm on 11 November 1999 with a covering request to read and discuss the document with Key. Mihailides sent the amended figures which Key requested to Doessel at 9.45 am on 12 November 1999. Doessel, in his affidavit, only refers to one telephone discussion with Mihailides in which Mihailides stated that the amended figures had been sent earlier in the day to Doessel’s office e-mail address. Doessel had not attended his office prior to the telephone discussion which occurred in the office of Key on 12 November 1999. At Doessel’s request, Mihailides sent a further copy of the amended figures to Key’s e-mail address for use in the telephone conference. Doessel confirmed that when he returned to his office, the earlier e-mail sent to him by Mihailides was waiting for him.
The subject heading on the covering letter e-mailed by Mihailides at 3.22 am on 11 November 1999 was ‘latest calcs’ and the body of the same stated:
‘Alan
I have attached an updated spreadsheet with the valuation calculations. I have also attached a summary document with a couple of options.
I suspect option 2 is going to be more in line with your thinking.
I haven’t yet completed a thorough check of the numbers in the spreadsheet ... I’ll do this while I’m flying back tomorrow.
Speak to you on Friday.
Rgds ... George
BTW ... the revenue line indicated as target 2 is only there as a “what if”. It includes a projection for sales into the corporate HR market and in fairness to you, we will need to make provision for reasonable costs to develop and market the product (ie. its not appropriate for me to expect to receive incentive on that product without considering the entry costs). Having said that, I believe the revenue projection for this product is extremely conservative - year 1 estimate is 100k, we’ll practically get that out of the first sale.’
The contemporary documents satisfy me that there were substantial negotiations between Key and Mihailides prior to the receipt by Key of the documents which he forwarded to Doessel on the afternoon of 11 November 1999. I accept as substantially correct the evidence of Mihailides as to what occurred between 3 November 1999 and 11 November 1999 when he sent his latest calculations with covering letter by e-mail to Key. I also accept that Key told Mihailides on 11 November 1999 to re-work the calculations using a sliding scale of commissions which Mihailides subsequently did do, and forwarded the same to Doessel.
It follows that I reject Key’s version as to how the recalculated commission came to be included in the documentation discussed on 12 November 1999. I am satisfied that there had been previous spreadsheets supplied by Mihailides to Key and discussed with Key. I do not accept the evidence of Key that he did not concern himself with the contents of any spreadsheet produced prior to the one he obtained on 11 November 1999. I find that Key had indicated to Mihailides the basics of an agreement which would be acceptable to him, which included an employment component of $150,000 per annum, a commission component, and the payment of licence and maintenance fees to Addease in respect of the Labour Hire Contracts before the e-mail of 11 November 1999 was sent to him by Mihailides. I also find that Key told Mihailides that he could agree to Option 2 but wanted the commission structure modified.
During the time Key was having discussions with Mihailides concerning the preparation of the terms of an offer of sale of the business with supporting calculations, Key was having discussions with Hills-Johnes concerning Hills-Johnes’ business structure proposal. On 8 November 1999, Key sent Hills-Johnes an e-mail which read:
‘Neill
Following our discussions:
Six business units reporting to yourself. Each business unit would be managed by a Business Unit Manager who would primarily have a marketing sales focus (75% sales and 25% service, administration). As such, there would be no requirement for a second sales person in the business units until sales were at a level that demanded additional resource. Neil H-J would range over all business units with a strong sales focus. In addition, Neill would be actively involved in the Services group to build our presence in this core activity.
The business unit managers and budgets:
Navision Position Vacant $1.00m Peter Bryan as the lead
technical resource
AS400 Infinium Position Vacant $1.00 m Is Steve or Ross up to this
Payroll, HR Steve $0.75 m Can Steve make a fist of this
Labour Hire Elvis, George $2.00 m
Services Position Vacant $2.00 m Is there anyone that can do this job, Before we put Ross here I would like to see his resume and
interview him. This is a
key position.
Maintenance existing sites $1.00 mGraham Darley reports through to me as Victorian Branch Manager - I do not believe he is adding value in supporting current clients - I don’t believe he is focussed on selling the current range of product. If I have it right, he joined the company after the sales at Skilled and Westaff were made. He is effectively a location manager. He may be able to develop into a Services Account Manager.
In what roles can we use Steve Richards, David Rapley and Jim Stillwell.
Administration Group
As per your required structureNavision Group
Core Product: Navision
Strategy: This is now our only NT product, aggressively sell by all normal meansFunctions:Product sales, product related services (inc maintenance and support)
Resources: Sales staff, lead technical staff
AS400 Group
Lead Product: Infinium AS400 solution.
Other Product: As released by Infinium, IBM also have an AS400 BI tool that is selling well, as I understand it (may be an alternative to Cognos tools that could provide us with some IBM profile and support)
Strategy:Aggressively target the AS400 installed base with an AS400 focussed and experienced sales team
Functions:Product sales, product related services (inc maintenance and support)
Resources:Sales staff, lead technical staff
Payroll, HR Group
Lead Product: OPUS, Navision Payroll
Strategy:Highly focussed sales team agressively [sic] promoting Payroll solutions (what’s our differentiator?, what market niche are we going to address, etc?)
Functions:Product sales, product related services (inc maintenance and support)
Resources:Sales staff, lead technical staff
Labour Hire Group
Lead Product: Vr 1 - AXIOM, OPUS, Infinium NT, Vr 2 - as developed
Strategy:Low end - internet product (ASP) - strike agreement with Addeeae [sic] to market
Medium end - Axiom simple product - strike agreement with Addease to market, package product, distribute and sell through advertising, seminars, web etc
High end - Core product as above, Finalise Addease agreement, get out and sell it!
Functions:product sales, product related services (Inc maintenance and support)
Resources:sales staff, lead technical staff
Services Group
Core Product: Provision of a wide range of services - people and projects
Strategy:1. Capitalise on relationships with existing clients to provide a wide range of technology services.
2.Promote our strong capability in groupware (lotus notes) and BI (cognos) to deliver focussed services to new clients
3.AS400 (in sync with point 1 above)
Functions:Account management
Resources:Account manager with market sales focus’
The ‘George’ referred to in the above is Mihailides and the ‘Elvis’ is Elvis Jusic, a former employee of Intrinsic who was employed as a salesman and who had been re-employed by Dialog when it acquired Intrinsic’s business. The budget for the Labour Hire Business Unit was to be $2 million.
The evidence of Hills-Johnes in respect of the proposals contained in Key’s e-mail of 8 November 1999, was that it was proposed that Mihailides and Jusic were to be business unit managers of the labour hire unit, with a budget of $2,000,000. He also agreed that what was contained in the document was what was being proposed at that point in time.
Key admitted in cross-examination that he had had discussions with Hills-Johnes leading up to his e-mailed proposal. He also agreed that, as part of those discussions, the potential of the Labour Hire business was discussed. The proposals, he acknowledged, provided that each of the six business units would be managed by a business unit manager.
In respect of the management of the Labour Hire business, Key gave the following evidence:
‘And then Labour Hire has got both Elvis - is that Elvis Jusic?---Mm.
And George is George Mihailides?--- I presume, yes.
As the business unit managers?--- No, no, no. Not George. He wasn’t on board. I do remember my comment there. The issue with Elvis in that role, because it is a marketing-led group, I saw that Elvis had a lot of experience in - I thought he was a good salesman. He was good cold-calling capability. He had some good payroll knowledge - he knew how to sell those - and payroll is an important part of the whole Labour Hire thing, but I remember talking to Neill about the fact that I didn’t think he knew the Labour Hire industry well, and if we were going to sell the Axiom product, then we would need to team him with George. So that was what that was about.
So it envisaged that George Mihailides would become part of the Dialog organisation?--- No, no. At that stage, it envisaged that if we were going to sell the Axiom product, and the Axiom product was going to be a differentiator in the market, then we needed to have George selling with Elvis via George’s organisation, actively selling, to support our activity in that market place.
I’ll put it to you that you didn’t make it clear in this e-mail. Did you make that clear in discussions with Mr Hills-Johnes or otherwise?--- Yes. Yes, because I do remember my concerns with Elvis. Good salesman, bit young, but - and good payroll knowledge but no knowledge of the labour hire - particularly of the labour hire industry, but very quick on the up-take.’
In respect of the budget allocation of $2 million, Key said:
‘$2 million budget you gave to that area?--- Just a guess, yes.
A guess based on what?--- A guess based on that’s what I’d like to see, for services and for product.
You had discussion with Mr Hills-Johnes about these matters, hadn’t you?--- Elementary discussions, yes.
You were able by those elementary discussions to distinguish between the relevant budgets for the different areas?--- Yes, yes.
And you formed a view about what you considered to be reasonable budgets for each of the business units. Is that right?--- Well, he said that those things were possibly doable, and I said, “Possibly doable,” but it would depend on what’s out in the market place and depend on the mix between services and product and a large proportion of that would be services.
And so to a large extent you say that those figures were based on what Mr Hills-Johnes told you about the different business units?--- Mm.
What was achievable?--- Mm.
Is that correct?--- I believe so, yes.
And you trusted Mr Hills-Johnes as to his estimates in these matters? --- Mm.
Sorry, I’ll get you to say yes again, if you wouldn’t mind?--- Sorry, yes.
At that point in time, I’ll put it to you, that you were proposing that there would have to be some agreement with Addease about what role Addease would play with Dialog in the sale of the labour hire integrated suite?---Yes, there was. I mean, as I understood it, Neil already had an agreement, an oral agreement, to sell the product, and he took a small margin on that; a 20 per cent margin or thereabouts, and that George was happy to have him continue to sell because there had been some success.
But you wanted to finalise the agreement, didn’t you?--- No, I didn’t - it was not a burning issue for me to finalise an agreement. I mean, I wasn’t out there saying, “Let’s finalise an agreement.”’
Key was then taken to his statement as to future strategy in respect of this business unit, and the following evidence was given by him:
‘Do you see “Lead Product, Axiom, Opus and Infinium”?---Yes.
Do you see that?---Yes.
Do you see “Strategy, Low End, Medium End and High End”?---Yes, strike agreement. Yes, well - - -
Strike agreement?--- Yes. But - strike an agreement. But, yes, I mean, it wasn’t a burning - it wasn’t sort of a burning - - -
Medium end was also strike agreement?---Mm.
And the high end was finalise Addease agreement, get out and sell it?--- Mm.
Would you like to review what your evidence has been today about that question?--- Well, I guess that says we were, but, I mean, as I say to you it just wasn’t a burning issue because I knew that we wanted to sell it, and George was happy to sell it, so that’s- - -
George could have changed his mind at any time, couldn’t he?--- Distribution agreements can be cancelled at 30 days notice. What counts are sales and commitment.’
I do not accept Key’s explanation of this document. At the time the document was prepared and sent to Hills-Johnes, Key was involved in direct negotiations with Mihailides in respect of a possible acquisition of the business of Addease. No-one was then discussing an arrangement involving third party distribution of Addease’s AXiOM product range. Key and Mihailides were discussing the employment of Mihailides as an employee of Dialog and the acquisition of the intellectual property in respect of each of the products produced by Addease which were referred to in the strategy. The acquisition of Mihailides and control of the intellectual property of Addease were essential elements of that strategy.
The schedule attached to the letter is Exhibit 77. It records invoices received for services, licence fees and maintenance from 10 September 1998 until 5 March 2000. The Addease invoices are identified by number. The schedule shows that of the sums claimed in pars 17 to 21 of the cross-claim, invoices 100394, 100395 (as to half), 100398 and 100449 were outstanding and had been approved as payable. These invoices totalled $14,600.
The spreadsheet also records the position with respect to invoices 100561 to 100564 inclusive. It stated in respect of invoice 100561 that Labour Ready had been invoiced for $50,000 on account of licence fees but had not then paid and had not then been invoiced for $15,000 in respect of maintenance. It recorded in respect of invoice number 100562 that the licence fee of $58,125 was not yet due from Skilled Engineering, but that the client had paid $25,313 for maintenance. It recorded in respect of invoice 100563 that the licence fee of $37,500 was not due but that maintenance in the sum of $11,250 had been approved. It recorded in respect of invoice number 100564 that the licence fee of $18,750 and the maintenance of $5,625 was not then due.
On 18 December 2000, Doessel sent an e-mail to Mihailides, which stated:
‘Dear George
Here is an account position as discussed with Alan. I have included all the major commissionable sales but have yet to reconcile this to the ledger to pick up the smaller ones. I will do that this week. I am also updating the four labour hire clients as to where they have paid licences to as well. I still have some clearances required with Sydney. In regards the commissionable maintenance there is sometimes not enough info on the invoice to determine whether it is for Axiom product only and so I am following that up too. You will see my comments re those.
If you have any questions please give me a call. Hopefully I will have another more up to date version in a couple of days.
Regards, ...’
The spreadsheet attached to that e-mail forms part of Exhibit 26. It records the position with respect to the invoices 100561 to 100564 inclusive in relation to licence fees and maintenance payments. The information in relation to licence fees remains the same as it was in Exhibit 77. In relation to the claims for maintenance in the invoices, there appears the following note:
‘Note 1 In discussion with ADK regarding maintenance on the 4 labour hire contracts he was surprised that they were in respect of the period since Dialog’s ownership.
These amounts were highlighted in your pre-contractual work papers and transcribed into the contract. The dates of maintenance were not shown at the time. Our understanding at the time of agreeing to them being to Addease’s benefit was that they related to maintenance delivered by Addease mostly for the period before 1 December 1999. It seems illogical to pay Addease for maintenance expenses incurred by Dialog and had that been apparent at contract time we would have argued such. This issue can be discussed with ADK as part of our further negotiations.’
The spreadsheet also includes draft calculations as to Commission Entitlement and records that Commission in the sum of $4,943.75 was paid or payable against some paid invoices and that the other invoices were not then paid.
In respect of the claims in par 22 of the cross-claim, invoices 100491, 100600, 100601, 100602 and 100612 totalling $3,509.45 are recorded in Exhibit 26 as ‘approved’ and recorded as ‘outstanding invoices owing to Addease’.
The claim in respect of ‘Intrinsic Invoices’ under pars 17 to 21 of the cross-claim, are only pressed in the sum of $14,600, being the amount approved for payment in accordance with Exhibit 77. The basis of the claim is that Dialog agreed to pay Intrinsic’s creditors, and that at 1 August 1999, Addease was a creditor of Intrinsic to the extent of $14,600. Addease contends that it is the beneficiary of the promise to pay and entitled to enforce it against Dialog: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; Pitman v Pantzer (2001) 115 FCR 361 at 374. This is the same basis upon which Addease claims in pars 33 to 37 of the cross-claim to be paid $10,000, the sale price of an AXiOM text retrieval and OCR server supplied to Labour Ready by Intrinsic on 30 June 1999, which server was then the property of Addease.
The evidence relied upon by Addease to make out the existence of such a promise is that of Mihailides, and his evidence relies upon a statement of Hills-Johnes to him after the sale of the business to Dialog. The statement of Hills-Johnes to Mihailides which I find that he made, was incorrect insofar as it related to the debts due to Addease other than for accrued licence fees for the AXiOM software to the extent of $107,000. The effect of cl 8.2 of the Dialog/Intrinsic Business Sale Agreement was that the debts, the subject of pars 17 to 21 and pars 33 to 37, remained the liability of Intrinsic and, if recoverable, it is from Intrinsic and not Dialog that recovery must be sought. As no other basis is pleaded as entitling recovery of these claims, they must fail.
The claim of Addease in par 23 of the cross-claim is in respect of the user licence fees and maintenance fees specified in the paragraph. It alleges that it provided the software and maintenance services in the circumstances pleaded in par 6(b), (c) and (d) of its Final Defence and Cross-claim. Those sub-paragraphs allege that:
(i)to the knowledge of Dialog, Addease had provided software and other services for performance of Intrinsic’s obligations under the Labour Hire Contract for reward;
(ii)Dialog took over and performed the Labour Hire Contracts and accepted provision of the software and other services required by it to perform the Labour Hire Contracts from Addease, and on-charged the parties to the Labour Hire Contracts for the provision of Addease’s software, associated services and annual maintenance services; and
(iii)Dialog promised Intrinsic that it would pay Intrinsic’s debts to creditors, including Addease.
These circumstances, Addease contends, gives rise to an obligation in Dialog to pay the licence and annual maintenance fees agreed to be paid by Intrinsic under its contracts with Addease to provide the same.
Dialog denies any liability to pay these amounts on a number of grounds. It contends that:
(a)if there was a liability to pay, then it was a liability of Intrinsic for which it was not liable;
(b)if it was a liability of Intrinsic, it had not been notified under cl 8.3 of the Business Sale Agreement and the debt owed by Intrinsic thereby became an asset of the business which passed to Dialog under the Business Sale Agreement; and
(c)Addease, at 1 December 1999, had not provided the software or maintenance services contracted for and thus had no right to payment for the same, or alternatively remained liable under the terms of the Business Sale Agreement to provide the software and perform the maintenance services, in order to obtain a right to payment, which it failed to do.
The agreement made between Intrinsic and Addease in 1998 was that Addease would supply to Intrinsic 150 AXiOM Win 32 licences, as demonstrated to Skilled Engineering at a price of $1,500, each operating on an Oracle database. It was also agreed that Addease would supply the first year’s maintenance in respect of such licences at a cost of fifteen per cent of the licence fee. Finally, it was agreed that Addease would provide services to Skilled Engineering which included training, supplementary support, physical installation of the software, general consulting, custom reports and enhancements/modifications to the software which were to be invoiced to and paid for by Intrinsic. The supplementary services were to be charged out at the rate of $150 per hour unless a fixed rate for any particular services was agreed. It was also agreed that if a payment was received by Intrinsic from Skilled Engineering which included a component for licence fees, service fees, or maintenance fees relating to the AXiOM software, Intrinsic would advise Addease of receipt of the payment and would remit it to Addease.
Save for differing numbers of user licences and the reduction of the unit price to $1,200, the same terms were agreed between Intrinsic and Addease in respect of the latter Labour Hire Contracts.
The front office software to be supplied in each case was the AXiOM Win 32 software ported to an Oracle database.
I find that Addease delivered the AXiOM Win 32 software ported to an Oracle database in late August 1999, after the acquisition of Intrinsic’s business by Dialog. I find that the software was installed and accepted by Speakman Stillwell on 8 November 1999, and by Westaff on 25 November 1999. Each of those labour hire companies went on to maintenance for one year from the date of acceptance. The AXiOM Win 32 software ported to an Oracle database was also delivered to Labour Ready prior to September 1999. Installation and testing of the entire integrated suite proceeded during September 1999 and thereafter. The integrated system, including the AXiOM component went on to the first year maintenance on 19 June 2000.
I am satisfied that the Addease AXiOM Win 32 software ported to an Oracle database as delivered was within itself a stable product. I am satisfied that upon delivery, Addease became entitled to receive the balance of the user licence fees for the AXiOM software which were then outstanding. Those amounts were:
Skilled Engineering $77,500 (from a total of $225,000)
Speakman Stillwell $18,750 (from a total of $37,500)
Westaff $37,500 (from a total of $75,000)
Labour Ready $50,000 (from a total of $98,100)
The payments made by Intrinsic and Dialog to Addease upon account of user licence fees up to and including 30 November 1999 were remitted from and paid because of payments received by them from the labour hire clients, which payments included a component relating to the AXiOM software user licence.I am satisfied that on 30 November 1999, Addease was entitled to payment of maintenance fees in advance for one year’s maintenance of the AXiOM component of the integrated suite at Speakman Stillwell and Westaff. On 19 June 2000, Dialog invoiced Labour Ready for maintenance for the integrated suite which included a charge of $26,000 on account of maintenance for the AXiOM software.
Dialog received the following sums on the dates indicated for maintenance relating to the AXiOM software:
Westaff Paid 14/12/99 $11,250
Skilled Engineering Paid 14/4/00 $60,000
Labour Ready Paid 18/8/00 $26,000
Speakman Stillwell Paid 15/5/00 $ 3,500On 25 June 2000, by invoice 00100636, Addease invoiced Dialog for $19,375, being the balance of user licence fees claimed in respect of Skilled Engineering. Similarly, it invoiced Dialog for $8,347.50 being the balance of the first year maintenance payable by Skilled Engineering in respect of the AXiOM software supplied. These accounts were rendered in consequence of an agreement between Mihailides and Skilled Engineering entered into in November 1999 that Skilled Engineering would put Dialog in funds to an amount of seventy-five per cent of the licence user fees and first year maintenance fees consequent upon the acceptance by Skilled Engineering of the AXiOM software on 19 November 1999. That agreement is reflected in invoice 100562 dated 30 November 1999 from Addease to Dialog for $83,437. It is also reflected in a Dialog invoice number A9911069 dated 30 November 1999 to Skilled Engineering for ‘Progress claim as agreed with G Hargrave’ for $84,375.
By the hearing of the trial, Dialog had received payments on account of AXiOM user licences and first year maintenance, which equalled or exceeded the sums claimed in invoices particularised in par 23 of the cross-claim totalling $249,375.
I am satisfied, and find, that Key agreed with Mihailides that Dialog would pay Addease licence fees and first year maintenance in respect of the labour hire companies as follows:
Labour Ready $ 65,000
Skilled Engineering $112,250
Westaff $ 48,750
Speakman Stillwell $ 24,375This agreement, I find, was not conditioned upon Addease performing all or any of the relevant maintenance work.
The existence of this agreement is evidenced by the inclusion of the provision in respect of the payment of them in the Heads of Agreement dated 24 November 1999, the Corrs letter of 1 December 1999, and Note 1 to the spreadsheet accompanying the e-mail of 18 December 2000 (Exhibit 26). These materials are admissible and relevant to prove the existence of a contract and the terms of it: Australian Energy Ltd v Lennard Oil NL [1986] 2 QdR 216 at 235 - 237. They are the sums claimed as outstanding to Addease for licence fees and maintenance under the Labour Hire Contracts in the Valuation Document provided on 11 November 1999 as is acknowledged in the spreadsheet.
For its part, Addease agreed that those sums were to be paid when funds in respect of them were received by Dialog, as was the arrangement with Intrinsic, and as is provided for in the Heads of Agreement.
If I am wrong in my view that the evidence establishes an express agreement to pay then I am satisfied that the circumstances in which Addease provided services to Dialog after its acquisition of the business of Intrinsic, created a liability in Dialog to pay the sums agreed as outstanding user licence fee and the first year’s maintenance to which Addease was then entitled, and that the liability was to be discharged from any monies received by Dialog in respect of those items. These circumstances are set out below.
Dialog, by its conduct, represented to Addease that it had taken over performance of the Labour Hire Contracts as the successors to the business of Intrinsic, and that it wished Addease to continue to provide the user licences of the AXiOM software, the supplementary services, and the first year’s maintenance which it had agreed to supply to Intrinsic in order to enable it to satisfy its obligations under the Labour Hire Contracts. Dialog knew that Addease had not, prior to 1 August 1999, provided its services or the AXiOM software gratuitously, and did not intend after that date to provide either its services or the AXiOM software gratuitously. Such conduct constituted an implied promise to pay to Addease the balance outstanding for AXiOM software user licence fees and first year maintenance, and for such further services as Addease provided to enable Dialog to perform the Labour Hire Contract. That promise was impliedly accepted by the conduct of Addease in supplying further services to Dialog for its benefit in performing the Labour Hire Contracts. The liability of Dialog to pay arises out of this implied contract.
If I am wrong in my view that the obligation to pay arises out of an implied contract, then it is one imposed by law from the circumstances. Dialog, by its conduct, gave rise to an expectation on the part of Addease that if it continued to work and deliver the AXiOM Win 32 software ported to an Oracle database and otherwise provide services to enable Dialog to perform the Labour Hire Contracts, it would be paid for such software and services on the basis agreed by Intrinsic. Dialog encouraged the expectation by itself continuing to perform the Labour Hire Contracts and by requesting Addease to deliver and install the AXiOM Win 32 software ported to an Oracle database, which Addease did. Dialog further encouraged Addease to provide services for the benefit of the Labour Hire Contracts by promising, as I find Key did, to pay the sums pleaded in par 23 of the cross-claim to the extent that Dialog received monies from the labour hire clients in payment of Addease invoicing, by receiving the invoicing from Addease without objection, and by itself thereafter invoicing the labour hire clients in respect of the subject matter of the Addease invoices.
Addease, I find, provided the software in late August 1999 and thereafter performed the further services requested. Dialog, I find, took the benefit of the AXiOM software supplied and the further services supplied in order to enable it to receive the payments from the labour hire companies, which it has received. Dialog created an equity of expectation as to its future conduct, which it encouraged Addease to act upon to its detriment, which it did. Addease is entitled to relief either by way of having the expectation fulfilled, or by way of restitution: see Riches v Hogben [1985] 2 QdR 292 at 300 - 301 (and the cases cited there); affirmed on appeal (1986) 1 QdR 315; Giumelli v Giumelli (1999) 196 CLR 101 at [34] - [36].
The alternative basis for the imposition of the liability lies in the concept of unjust enrichment, which recognises an obligation on a party to make fair and just restitution for a benefit derived at the expense of another party: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 255; 256 - 257; Trident General Insurance Co Ltd v NcNiece Bros Pty Ltd at 145 - 146, 174 - 176; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 375, 389, 401.
Dialog was not relieved of the obligation to pay to Addease the sums specified in par 23 of the cross-claim by the terms of the Business Sale Agreement.
The obligation of Dialog to pay was a personal liability of Dialog. The obligation fell to be satisfied by Dialog when it received monies in the specified amount from Labour Ready, Skilled Engineering, Westaff or Speakman Stillwell in payment of Addease invoicing. These companies were not debtors of Addease. The debtors of Addease which are referred to in the Heads of Agreement, are Andersen Contracting in the sum of $16,370 and Alectus Personnel in the sum of $50,312.50.
The definition of ‘asset’ in cl 1.1 of the Business Sale Agreement excluded vendor’s cash as well as debtor’s, and, vendor’s debts, as defined. A ‘vendor’s debt’ is defined in cl 1.1 as one notified under cl 8.3 of the Business Sale Agreement. A ‘notified debt’ is a debt owing to the business which is to be dealt with in accordance with cll 8.4, 8.5 and 8.6. As a matter of construction, notified debts do not include debts owed by the purchaser, they are limited to third party debts which are due to the vendor, but do not become payable until a future date after completion and which come into the hands of the vendor by receipt from the third party debtor at a time after completion.
Nor do I accept the construction contended for by Dialog that cl 8 of the Business Sale Agreement has the effect of depriving the vendor of any interest in a vendor’s debt, other than one which is notified, if the debt is not notified at completion. Such a conclusion that a vendor would be denied the benefit of its property (a debt) if it was paid to the purchaser simply because it was not notified, would require clear words evidencing such an intent. Those words do not exist. Clause 8.3 is permissive. It imposes an obligation on the purchaser to account within seven days of receipt of a notified debt. As cl 8.4 provides, each notified debt remains the property of the vendor. Further cl 9.3 provides that the right of Dialog to receive a benefit of $50,000 towards work outstanding is to be satisfied by deduction from monies owing to Addease resulting from Dialog collecting Addease’s debtors. It was never intended that Dialog would be limited in its right to the deduction to monies received by the receipt of nominated debts in accordance with cl 8.4.
Dialog also contended that cl 8.9 and Schedule 7 of the Business Sale Agreement entitled Dialog to refuse to pay a sum equal to the first year’s maintenance unless Addease had itself wholly performed the maintenance services, which was not what occurred.
Clause 8.9 deals with maintenance income paid in advance by clients of the business being purchased to the vendor prior to completion where the maintenance period extends beyond the date of completion. The clause excludes the clients listed in Schedule 7. The labour hire clients of Dialog are named in Schedule 7, together with Andersen Contracting and Alectus Personnel. Addease had not then received, nor did it ever receive, prepaid maintenance fees from the labour hire clients of Dialog. Nor had the sums of $16,370 and $50,312.50 been paid by Andersen Contracting and Alectus Personnel respectively to Addease. No occasion for the possible adjustment of the purchase consideration arose.
Dialog submitted that the reference to prepaid liability remaining a liability of the vendor meant that Addease was obliged to perform the maintenance works before it was entitled to be paid. I do not agree. Prepayment of any maintenance fee, whether to the vendor or the purchaser, makes the payer a creditor of the payee and the credit forms a liability in the accounts of the payee until the service is provided, and the recipient of the payment remains liable to repay the money in whole or pro rata if the maintenance is cancelled or not provided. That is the effect of cl 8.9 and Schedule 7.
Clause 8.9 and Schedule 7 of the Business Sale Agreement do not relieve Dialog from its obligation, whether one arising under a contract or imposed by law, to pay to Addease in addition to the balance due for the user licence fees in respect of the AXiOM software, an amount equal to the first year’s maintenance in respect of each such user licence. It was never the intention of either Dialog or Addease that Addease would, after 1 December 1999, provide any maintenance services in respect of the Labour Hire Contracts. That was to be done by Dialog and to that extent Addease received a benefit. The note to the reconciliation spreadsheet Exhibit 26 stands as an admission of such a common intention and agreement.
Addease is entitled to recover the sum of $249,375 as claimed under par 23 of the cross-claim.
The Commission Agreement provided that Dialog would pay commission to Addease based on licence and maintenance revenue as defined in cl 1(d) of that agreement at the rates provided in cl (b). The right to payment of such commission only arose for so long as Mihailides remained employed by Dialog. I find that during the time Mihailides was an employee of Dialog, Dialog received licence and maintenance revenue as defined by cl 1(d) and that Addease became entitled to payment of commission at the rates specified in cl 1(b). Further, I find that Dialog has failed to account to Addease for such income or to pay the same in accordance with cl 6.2 of the Commission Agreement.
I find that Addease is entitled to an inquiry and an account as to what is due to it by Dialog as commission.
I now turn to the cross-claim of Mihailides.
The Contract of Employment relevantly provided:
‘3(c)If the Employee’s employment is terminated by Dialog for reasons other than those detailed in Cl 4(a)(ii) or terminated by mutual agreement between the Employee and Dialog, then Dialog will pay the Employee or his estate, $150,000 (including superannuation if applicable) per year until 30 November 2004. This payment shall be paid annually in advance on the next business day after 1 December each year until 1 December 2003. Such payments shall be secured by bank guarantee.
...
4. DIALOG and the Employee agree that:
(a)Subject to any statutory law in force in the State in which the Employee is employed -
(i)the employee’s employment hereunder may be terminated by either of the parties hereto giving to the other of them at any time written notice of intention to terminate this Agreement and upon the expiry of the period of time set out in paragraph 3 of Schedule A from the date of the service of the written notice the Employee’s employment hereunder shall terminate,
(ii)the Employee’s employment hereunder may be terminated by DIALOG forthwith without any notice or payment in lieu of notice if at any time during the Employee’s employment hereunder the employee -
1.is guilty of any serious misconduct,
2.disobeys any lawful orders or directions of DIALOG, with respect to its objectives or duties under this Agreement
3.breaches or fails to observe any of the terms and conditions contained in this Agreement.’
(Original emphasis)
I find that Mihailides’ contract of employment was not terminated for a reason detailed in cl 4(a)(ii) or by mutual agreement between him and Dialog.
I find that Mihailides’ employment was terminated by Dialog on 22 November 2001 by constructive dismissal. In terms of cl 3(c), Mihailides became entitled to payment of $150,000 on 1 December 2001, $150,000 on 1 December 2002, and will become entitled to $150,000 on 1 December 2003. It follows that he is entitled to judgment now in the sum of $300,000 and a declaration that he will be entitled to a further sum of $150,000, payment of all such sums secured by the bank guarantee specified in cl 3(a).
As to the claim by Mihailides for the sum of $2,250 for the supply by him of a Test File Server to Dialog in or about May 2000 claimed in par 31 of the cross-claim, I have not been able to find any evidence in Mihailides’ affidavit, Exhibit 70, to support this claim. Accordingly, I am not satisfied that Dialog is liable to Mihailides in this amount.
Addease admits that Dialog is entitled to set-off against monies due by it to Addease the sum of $21,l300.85 in respect of credit notes numbers 100611, 100628 and 100623 issued in June 2000 concerning annual leave accruals, prepaid maintenance and post office box rental. Addease also admits that Dialog is entitled to a credit of $27,512.50 in respect of BSA-Workforce on Tap. Further, Dialog is entitled to set-off against the monies recoverable by Addease for outstanding user licence fees and maintenance under the Labour Hire Contracts, the sum of $50,000 in respect of the credit to be granted for further development work required under the Addease contract with Andersen Consulting.
Addease is entitled to declarations as to the liability of Dialog to pay to it the sum of $279,816.36 (being $3,509.45 under par 22, $249,375 under par 23, and $26,931.91 under par 26 of the cross-claim), subject to the right of Dialog to set-off against that sum credits due of $98,813.35.
Addease will be entitled to enter judgment for the sum of $181,003.01 forthwith and for such other sum as is found due for commission under the Commission Agreement on the taking of enquiries and accounts by the District Registrar.
Costs on the cross-claim should follow the event and be paid by Dialog.
ATTACHMENT 1
Counsel for the Applicant/Cross-respondent: J Douglas QC, with IA Erskine
Solicitor for the Applicant/Cross-respondent: Gateway Lawyers
Counsel for the Respondents/Cross-claimants: P Riordan
Solicitor for the Respondents/Cross-claimants: Corrs Chambers Westgarth
Dates of Hearing: Brisbane 2, 3, 4, 5, and 6 December 2002
Melbourne 9, 10, 11 and 12 December 2002Applicant’s Further Written Submissions: 20 February 2003 Date of Judgment: 26 November 2003
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