Generate Group Pty Limited v Sea-Tech Automation Pty Limited - [2007] NSWSC 226

No judgment structure available for this case.

Reported Decision:
71 IPR 640

New South Wales

Supreme Court

CITATION: Generate Group Pty Limited v Sea-Tech Automation Pty Limited [2007] NSWSC 226

HEARING DATE(S): 12/03/07

JUDGMENT DATE :
15 March 2007

JURISDICTION: Equity Division

JUDGMENT OF: Einstein J

DECISION: Upon the giving of appropriate undertakings to the Court orders to be made for the delivery of the defendant to the plaintiff of copies of the source code for the identified computer programs

CATCHWORDS: Equity - Mandatory interlocutory injunctions - Serious case - Balance of convenience - Software Development and Support Agreement - Construction of contract - Copyright - Litigation concerning ownership of copyright in source code versions of computer programs - Estoppel - Claim to exclusive non-revocable licence to copyright covering every code version of subject computer programs including each source code version - Consideration of what is source code as compared to compiled versions or object code - Definition of "software" utilised by parties is general in its terms failing to distinguish between any language or form of code in which the computer program might be recorded

LEGISLATION CITED: Copyright Act 1968

CASES CITED: American Cyanamid Co v Ethicon Ltd [1975] AC 396
Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191
Appleton Papers Inc v Tomasetti Paper [1983] 3 NSWLR 208
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Autodesk Inc v Dyason (No1) (1992) 173 CLR 330
Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130
Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Computer Edge Pty Ltd v Apple Computer Inc (1986) 161 CLR 171
Data Access Corporation v Powerflex Services Pty Limited (1999) 202 CLR 1
Eng Mee Yong v Letchumanan [1980] AC 331
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Limited (1990) 20 NSWLR 310
Hungry Jacks Pty Ltd v Burger King Corporation, unreported, Supreme Court of New South Wales, Einstein J, 7 December 1998
International Fina Services AG v Katrina Shipping Ltd (“The Fina Samco”) [1995] 2 Lloyd’s Rep 344
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Lakatoi Universal Pty Ltd & Walker [2000] NSWSC 113
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246
Meehan v Jones (1982) 149 CLR 571
Ni-Tech Pty Ltd v Parker [1998] 484 FCA, 27 April 1998
Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61
Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114
Prenn v Simmonds [1971] WLR 1381
Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15

PARTIES: Generate Group Pty Limited v Sea-Tech Automation Pty Limited (Plaintiff)
Sea-Tech Automation Pty Limited (Defendant)

FILE NUMBER(S): SC 1687/2007

COUNSEL: Mr TJ Brennan (Plaintiff)
Ms CL Cochrane (Defendant)

SOLICITORS: SBA Lawyers (Plaintiff)
Diamond Conway Lawyers (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Einstein J

Thursday 15 March 2007

1687/07 Generate Group Pty Limited v Sea-Tech Automation Pty Limited

JUDGMENT

The proceedings

1 These proceedings are brought by Generate Group Pty Ltd [formerly Bevlink Pty Ltd] to establish its alleged ownership of the copyright in computer programs developed under a Software Development and Support Agreement identifying the plaintiff as "the customer" which had been entered into in 1998. The defendant is Sea–Tech Automation Pty Ltd [termed “the supplier”], it having been the software development house party to the agreement.

The plaintiff’s business

2 Since the mid 1990’s, the plaintiff has carried on business as a supplier of management products to the hospitality industry. The products include sophisticated computer software programs that capture data from liquid measuring devices and integrate it with point of sale, stock control and accounting systems.

3 The plaintiff’s product was initially known in the hospitality industry as Bevlink. Since approximately 2005, the product has been rebranded under the Generate name.

The defendant's prospective termination

4 As will appear from what follows the agreement provided for an initial term of three years following which term it was to continue in force for successive periods of 12 months unless either party provided written notice to the contrary not later than one month prior to the expiration of the initial term or any subsequent period. It was in that environment that the defendant on 21 November 2006 gave notice terminating the agreement as at 31 January 2007, in which respect the plaintiff has accepted the validity of that notice.

The final relief sought

5 The plaintiff’s route to establishing its copyright is through its claims to final relief by way of declarations and injunctive relief. The precise orders sought in the summons are as follows:

and including without limiting generality the source code and object code forms of such computer programs.

6 At this point in time no statement of claim or points of claim have been served.

The notice of motion

7 There is before the court a notice of motion in which the plaintiff seeks interlocutory orders requiring the defendant to provide to the plaintiff a copy of the source code versions of three computer programs (or three groups of computer programs):

(a) Bevlink version 5

(b) Bevlink version 6

8 The defendant has opposed the granting of any relief.

9 The case of each party has been that it will suffer dire consequences should the other succeed on the interlocutory application. It is certainly common ground that determination of the interlocutory proceeding will be a matter of special significance regardless of which party succeeds.

10 Naturally there is no issue but that the Court does not determine disputed issues of fact on an interlocutory hearing.

The background

11 Bevlink products are used in the hospitality industry for measuring beverages when served, integrating beverage (and other bar service) and gaming machine functions with point of sale stock control and accounting systems, and operating membership loyalty points programs (where points are earned and may be redeemed by purchase of beverages and operation of gaming machines).

12 Bevlink version 5 is the Bevlink version currently used by the plaintiff’s customers. There are at least 150 customers throughout Australia ranging from very large providers of hospitality to small licensed clubs.

13 Bevlink gaming interfaces are the interfaces between Bevlink version 5 and the various types of gaming machines found in licensed premises.

14 There is evidence before the Court that the parties agreed in early 2004 that there would be no further major updates to Bevlink version 5, that the next release of the Bevlink software would be Bevlink version 6, that agreement being that Bevlink version 6 would be based on a database product known in the computer software industry as SQL, which had been under development since 2004 or 2005 by the plaintiff and defendant [but which was not yet ready to be supplied to customers of the plaintiff]. Parameters of this evidence are apparently in issue but as earlier observed, it is inappropriate for the Court to determine disputed questions of fact on an application such as the present.

The development of the computer programs

15 There is evidence that the plaintiff had early versions of its Bevlink computer programs developed by software developers other than the defendant and commenced distributing and licensing them in the mid 1990s.

16 The plaintiff’s case is that:

i. by 1998 Bevlink version 3, which was based on the Microsoft operating system, DOS, was being used by the plaintiff’s customers;

ii. the plaintiff then engaged the defendant to develop the next version of Bevlink, known as Bevlink 95 (also known as Bevlink version 4). Bevlink 95 had the same functionality as Bevlink version 3, but was based on the Windows operating system instead of DOS. The defendant also undertook some minor modifications of Bevlink version 3;

iv. in about 2002 Bevlink 95 was replaced by Bevlink version 5. Bevlink version 5 continued to use the Windows operating system but utilised a Microsoft database program known as Access;

v. the Bevlink Gaming interfaces have been provided and regularly modified from some time before Bevlink version 5 was put in the market;

vi. throughout the period from 1998 to 2004 maintenance of Bevlink was conducted by the defendant. That maintenance included error correction, bug fixing within customer environments, customisation for particular customer environments and requirements and enhancements;

vii. in early 2004 the defendant commenced development of Bevlink version 6. The difference between Bevlink version 5 and Bevlink version 6 is that Bevlink version 5 is written in a computer program known as Visual Basic+ and using an Access database, and Bevlink version 6 is written in a computer language known as C++ and with a database program SQL. The database program SQL does not operate with the limitation on the size of the database which applies to the program Access. As a result, larger customers and potential customers expect a program based on the SQL database or a similar database program;

17 The evidence appears to clearly establish that the defendant has provided numerous versions of the compiled (or object code) version of Bevlink version 6 to the plaintiff to evaluate. Through an iterative development process in 2005 and 2006, or throughout 2006, the defendant provided numerous versions of Bevlink version 6 and the plaintiff evaluated the program and reported the outcomes of the evaluation to the defendant. The defendant took the evaluation reports into account in producing each successive version for evaluation.

18 It is common ground that the compiled version of Bevlink version 6 which was most recently supplied by the defendant to the plaintiff demonstrates that the program is not yet in a state suitable to be rolled out to customers. There is evidence that Bevlink version 6 is only 85% complete.

Identification of the issues for trial

19 The plaintiff has identified four sets of issues for trial [pursued in the alternative to one another] in the following terms:

[The suggested substance of this claim includes the following integers:

1 Each program was developed under the Software Development and Support Agreement (Agreement);

2 Properly interpreted the Agreement assigned copyright (including future copyright) in all programs developed under it to the plaintiff;

1 That Bevlink version 5 and the gaming interfaces were developed under the Software Development and Support Agreement;

iv. A claim that the plaintiff is entitled, by reason of clause 24(5) of the Agreement to custody of the physical media on which every code version of any of the programs developed under the Agreement are recorded.

Source code and compiled versions or object code

20 Both parties have relied upon a number of authorities which are extremely useful in terms of the underlying analysis of the mechanisms for the writing of computer code. One of the real difficulties which faced the parties on the interlocutory hearing and which will face the parties on the final hearing, concerns the simple fact that the Software Development and Support Agreement to which they signed, did not descend into the detail of defining [or seeking to define], which parts, if any, of the source code was to be made available to the plaintiff. As will appear from what follows the definition of "software" utilised by the parties was general in its terms and did not distinguish between any language or form of code in which the computer program might be recorded.

21 In other circumstances, solicitors negotiating the terms of contracts dealing with source code may [where there is a concern of the customer to obtain access to the source code and a correlative concern in the software supplier to closely monitor the security attached to the source code], make provision for the appointment of an escrow agent. The material conditions upon which the customer may obtain access to the document from the escrow agent can then be carefully defined. Other attempts to treat with the detail are not uncommon.

22 In Data Access Corporation v Powerflex Services Pty Limited (1999) 202 CLR 1 (at 10 -11) Gleeson CJ, McHugh, Gummow and Hayne JJ quoted Gibbs CJ in Computer Edge Pty Ltd v Apple Computer Inc (1986) 161 CLR 171 at 178-179 who had addressed the mechanisms for writing of computer code:

23 Later in their judgment their Honours addressed the same issue from the other end – how computer code works in a computer (at 202 CLR 20–22 [36] – [41]). The context of this passage was their Honour’s considering the phrase “set of instructions” in the Copyright Act 1968 definition of computer program.

[36] It is impossible to overemphasise the importance of the fact that a computer has no "intelligence" to execute instructions over and beyond the simple logical functions which are hard wired into its circuits. In order for the simple logical functions of a computer to translate into a useful result, it is necessary to express complex problems in terms of a sequence of a large number of these simple operations. A "set of instructions" will not cause a computer to execute a particular function unless that set of instructions can be ultimately expressed in terms of a sequence of the logical operations which are hard wired into the computer. No doubt it is very rare to express a complex computer program in terms of the simple logical operations which are hard wired into a computer. That is because the process of writing programs becomes practically unmanageable unless the "set of instructions" is perceived at a high level of abstraction. Such a level of abstraction is required in order to express what are millions of simple logical operations in terms of a manageable number of more complex instructions which themselves are reducible to these simple logical operations.

[37]

[38]

[39]

[40]

[41]

24 Prior to the insertion of the definition of “computer program” in the Copyright Act, Computer Edge Pty Ltd v Apple Computer Inc established that copyright could subsist in source code as a literary work.

25 With the inclusion of that definition, Autodesk Inc v Dyason (No1) (1992) 173 CLR 330 made clear that copyright could subsist in both object code and source code.

The terms of the Software Development and Support Agreement

26 The agreement included the following definitions in clause 1:

“Associated documentation” or “manual specifications” means the documentation which forms part of the software which contains technical information relating to the software;

“development fees” means the fees for software development, support and maintenance (as detailed in this agreement) to be calculated and paid in accordance with this agreement;

“maintenance services” means the maintenance services to be provided by the supplier as specified in this agreement;

“software” means the computer program to be developed, supported and maintained pursuant to this agreement and related documentation;

27 The agreement included the following operative terms:

Development and support fees 2. The customer shall pay the supplier development fees in an amount equivalent to 50% of all licence fees paid to the customer by each licensee for the licence of the software during the currency of this agreement. The customer will be solely entitled to market and license the software to third parties (“licensees”) and will bear all costs in that regard. In consideration of this payment the supplier shall be responsible and bear all the development fees and associated expenses of the software together with the ongoing development, modification and support of the software.

[The plaintiff emphasises that clause 2 of the agreement sets out some of the commercial terms:

· the [plaintiff] was to be solely entitled to market and license the software to third parties and was to bear all costs in that regard;

· the [defendant] was to be responsible for and to bear all the development fees and associated expenses of the software together with the ongoing development, modification and support of the software;

· the [plaintiff] was to pay the [defendant] development fees in an amount equivalent to 50% of all licence fees paid to the [plaintiff] while the agreement was on foot.]

Acceptance testing

Title

7. Title in the partially completed and completed software shall vest in the customer as at the date hereof.

Copyright indemnity

9(1) The supplier warrants that it has the right to grant title of the software to the customer.

Duration

Maintenance services

11. The supplier agrees to provide the maintenance services to the customer (and the licensees) at the licence site on the terms and conditions contained in this agreement.

Manual of specifications

12. The parties acknowledge that maintenance services to be rendered to the software include the amendment or correction, as required, of the manual specifications.

Maintenance fees

13. An additional charge will be payable if the customer requests the supplier to provide services which are not specified or which are excluded by this agreement, or if services are requested which are found to be unnecessary, or if the supplier is requested to provide information or documentation other than the contents of the manual of specifications.

Maintenance services

14(1) The supplier shall use all reasonable endeavours to maintain and enhance the software in substantial conformity with the descriptions and specifications contained in the manual of specifications or as reasonably required by the customer.

Exclusions

15 (d) Maintenance services required of the supplier under clause 14 (1) do not include the following:…. any modification of the software which represents a departure from the descriptions and specifications contained in the manual of specifications or in the schedule.

Termination

Whether "software" and "program" includes source code?

28 The submissions advanced by the plaintiff in this respect which are accepted as having a respectable prospect of ultimate success included the following:

For these purposes “software” has its defined meaning: “the computer program to be developed, supported and maintained pursuant to this agreement and related documentation.” [emphasis added]

That definition is general in its terms. It does not distinguish between any language or form of code in which the computer program might be recorded. On the ordinary meaning of the words it includes everything meeting the description of “computer program developed pursuant to the agreement.” In that regard clause 1 includes provision that words importing the singular (“program”) include the plural.

As is made clear from the quotes extracted above from Computer Edge Pty Ltd v Apple Computer Inc source code and object code versions of a computer program have generally been understood to both be within the meaning of “computer program” at least since 1986 .

There is nothing in the clauses of this agreement or its context to strip the word “software” of any of the content of “computer program” as it was understood in 1998.

Data Access Corporation v Powerflex Services Pty Limited,

Obligation to develop Bevlink over time

29 Likewise the submissions advanced by the plaintiff in this respect which are accepted as having a respectable prospect of success were as follows:

The obligation imposed on the defendant by clause 2 to engage in ongoing development of Bevlink is consistent with the more specific obligations imposed by clauses 11, 12, 14(1) and 15(d).

Read together those clauses imposed on the defendant the obligation, during the currency of the agreement, to use all reasonable endeavours to maintain and enhance the software in substantial conformity with the descriptions and specifications contained in the manual of specifications or as reasonably required by the plaintiff ; that obligation extends to amending and enhancing the manual of specifications itself as reasonably required by the plaintiff.

In that context the limitation contained in clause 15(d) provided no more than a mechanism by which the defendant could insist on proper documentation of modifications or enhancements which the plaintiff reasonably required in accordance with clause 14(1).

Thus the agreement imposed on the defendant the obligation to use all reasonable endeavours to enhance Bevlink in accordance with the reasonable requirements of the plaintiff.

Some general observations

30 In approaching the strength of the case propounded by the plaintiff the following matters become apparent:

i. there are a number of very close questions to be litigated concerning the proper construction of the subject agreement;

ii. there are a number of close questions of fact to be litigated concerning what were the precise payment obligations of the plaintiff and whether, and in what respect, those obligations were discharged;

Chronicling a number of the construction issues and the approaches taken by the parties in that regard

The first sentence of clause 2

31 A particularly important issue of construction concerns the first sentence of clause 2 of the agreement which it will be recalled provided as follows:

32 Naturally this sentence requires to be construed in light of the balance of clause 2 as well as in light of the agreement read as a whole.

33 The plaintiffs construction of the first sentence is that it is reflective of a revenue sharing agreement where 50% of the licence fees received by the plaintiff were to be paid to the defendant. The plaintiff draws attention to the provision in clause 1 that words importing the singular are to include the plural. It draws attention in that regard to the definition of the word "software" to be found in clause 1, which, when one imports the singular including plural parameter, produces a definition of software as meaning ‘the computer programs to be developed, supported and maintained pursuant to the agreement and related documentation’. The plaintiff’s submission is that the third sentence of clause 2 clearly obliges the supplier, in consideration of the payment of development fees earlier referred to, to be responsible for and to bear all the development fees and associated expenses of the software together with the ongoing development, modification and support of the software.

34 At one and the same time, a further construction issue concerns the meaning of the closing words to clause 7: "as at the date hereof". It will be recalled that clause 7 reads:

35 In this regard the plaintiff's contention is that the closing words qualify the earlier word "vest" and do not qualify the noun or the phrase "partially completed and completed software".

36 The plaintiff further relies upon clause 9(1) whereunder the supplier warranted that it had the right to grant title to the software to the customer, the plaintiff's contention being that there would be no need for a warranty of this type if the narrow construction for which the defendant now contends was correct.

37 The plaintiff further relies upon clause 14(1) of the agreement which imposes an obligation on the supplier to use all reasonable endeavours to maintain and enhance the software in substantial conformity with the descriptions and specifications contained in the manual of specifications or as reasonably required by the customer. In this regard the plaintiff's contention is that a reading of clause 2 together with clause 14(1) gives support to the proposition that the obligation which the defendant undertook was to take version 3 and to upgrade it to version 4 and to then engage in such further enhancements as were reasonably required by the plaintiff.

38 The contention is that standing back from the whole of the agreement, it becomes plain that the plaintiff's obligation was no more and no less than to pay development fees calculated by reference to a percentage of all of the licence fees which it had received for software during the entirety of the currency of the agreement.

39 The contention that the agreement operated as an assignment to the plaintiff of all property rights in the software developed under it was advanced by the plaintiff's counsel as follows:

i. Clause 7 expressly assigns title in “partially completed and completed software”. In interpreting that clause the words “as at the date hereof” need to be considered. In the context of the Agreement as a whole that phrase operates to emphasise that the assignment in that clause is effective from the date of the Agreement.

ii. The words “as at the date hereof” in clause 7 do not constrain the operation of the assignment to software which was completed or partially completed at the date of the agreement.

iii. Grammatically they operate by reference to the words “shall vest”. The clause provides that title shall vest as at the date hereof.

iv. The Macquarie Dictionary defines “to vest something in someone ”: to place or settle something (especially property, rights, powers, etc.) in the possession or control of someone.

v. The natural meaning of the clause is that such title in any software developed under the agreement as could be placed in the control of or settled on the plaintiff at the date of the agreement was assigned to the plaintiff.

vi. So understood the clause picked up and applied the assignment of copyright in future works that (at that time and now) was authorised by s197(1) of the Copyright Act 1968 .

vii. Read in the context of an agreement for ongoing enhancement of software, underpinned by a revenue sharing of licence fees, the words ”as at the date hereof” emphasise that the assignment of present and future copyright effected by the clause took effect immediately the agreement was signed. That assignment operated expressly on software both before and after it was completed and accepted.

viii. That is the only interpretation which can be given consistent with the terms of clause 5(2) set out above. That clause cannot have any business effect unless when the plaintiff tested (the compiled or object code) version of a program developed under the agreement it was lawfully entitled to then copy and use the source and object code versions itself, or to licence some other software developer to use the source and object code versions, to complete the development of the software by modifying the source code.

ix. While it may be the case today that s 47E of the Copyright Act would permit the Plaintiff to make the reproductions and adaptations contemplated by clause 5(2) of the Agreement, that provision must be disregarded in the construction of the Agreement. That provision was not enacted until after execution of the Agreement and applies only to reproductions and adaptations that occurred on or after 23 February 1999.

x. Only the interpretation for which the plaintiff contends of clause 7 is consistent with clause 9(1) of the Agreement by which the Defendant warrants “that it has the right to grant the title of the software to the “plaintiff. The warranty applies to software as defined – extending to all software developed under the agreement and unlimited as to time.

xi. Clause 24(5) is clear in conferring on the plaintiff an entitlement to retain the custody of all materials, documentation and programs in respect of which payment had been made pursuant to the agreement at the date of termination. The plaintiff had paid everything claimed by the defendant at the date of termination.

Copyright Act 1968

"Where, by an agreement made in relation to a future copyright and signed by all on behalf of the person who would, apart from this section, be the owner of the copyright on its coming into existence, that person purports to assign the future copyright (totally or partially) to another person (in this subsection referred to as the assignee), then if, on the coming into existence of the copyright, the assignee or a person claiming under him or her would, apart from this subsection, be entitled as against all other persons to have the copyright vested in him or her (totally or partially, as the case may be), the copyright, on its coming into existence, vests in the assignee or his or her successor in title by force of this subsection"]

Copyright Act 1968.

40 In my view these submissions are of sufficient substance to present a serious case for hearing.

41 In contra-distinction to the plaintiffs submissions, the defendant has contended that clause 2 of the agreement, properly construed, provides that there is no payment required to be made by the plaintiff to the defendant until such time as the particular software is licensed [it being common ground that on the evidence presently before the court, version 6 has not been licensed to any end users up to the present time].

42 Furthermore the defendant contends that the third sentence of clause 2 makes clear that under the agreement, it is the obligation of the supplier to pay all of the costs of the development up to the moment when the customer has received licence fees from one or more licencees.

43 In my view all that can be said presently is that the plaintiff has put forward a serious case for trial. There is clearly room for the court following a fully fledged final hearing, to reject the defendants construction submission concerning the payment obligations to be found in clause 2 upon the basis that the submission is misconceived in its reliance upon a re-interpretation of the phrase "development fees in an amount equivalent to 50% of all licence fees". There is clearly a real possibility that the Court may find that properly construed, clause 2:

i. is concerned with the development fees which are paid;

ii. in treating with the quantum of those development fees, applying an objective test, the parties must be regarded as having intended such fees to be calculated by an equivalence to 50% of all licence fees;

44 This is not to hold that the plaintiff’s construction must succeed. It cannot be gainsaid that the defendant’s construction is also reasonably arguable.

45 The other particularly troublesome issue concerns the proper construction of clause 24(5) [the second such sub-clause] and the resolution of the factual question as to whether or not the defendant has been paid for particular work. It will be recalled that this sub-clause reads as follows:

46 The plaintiff has contended that there was no contest but that all material payments required to be made in terms of this clause had been made to the supplier, hence denying the supplier's entitlement to retain or to repossess any materials, documents or computer programs.

47 In aid of this submission the plaintiff has drawn the Court's attention to a chain of correspondence/e-mails beginning on 21 December 2006 with a letter from the plaintiff's solicitors to the defendant's solicitors and terminating with an e-mail from the defendant's solicitors to the plaintiff's solicitors of 31 January 2007. This last e-mail includes the following:

have been paid

48 The plaintiff contends that on the evidence given by Mr Harris called for the defendant, work upon version 6 has been the only work which the defendant has carried out by way of performance of its obligation to enhance the software since 2005, in which time the plaintiff has paid to the defendant some hundreds of thousands of dollars, likely in the order of $800,000. The consequential submission is that the defendant has indeed been paid for the work that it has carried out in developing version 6 and that in terms of clause 24(5), the defendant has been paid for the work which it has written in the performance of that work.

49 Broadly the plaintiff's contention is that standing back from the particular words of the subject agreement, the agreement is seen to have been one whereby the plaintiff came with some software, furnished it to the defendant and did so upon terms that the parties would share the revenue derived from the software from the point where the plaintiff furnished its existing software to the defendant. In return for that share, the agreement provided that the defendant would perform its obligations under the agreement to enhance that software as reasonably required by the customer. Hence the payment which was made was of development fees as defined, as meaning "the fees for software development, support and maintenance, as detailed in this agreement, to be calculated and paid in accordance with this agreement".

50 The contra-submission put by the defendant is that there is no common ground between the parties to the effect that payment has been made to the defendant in respect of development fees qua version 6 as provided for in clause 2. The proposition is that the agreement provided for there to be no payment whatsoever by the plaintiff to the defendant until such time as the software was licensed. The proposition is that through the whole of the development, the defendant was never paid in respect of any work carried out on version 6. The proposition is that upon the proper construction of the agreement, the defendant is not entitled to any such payment up to and until version 6 is licensed out to end users.

51 The defendant's counsel indicated from the Bar table that her instructions were that the moneys acknowledged [in the letter from the defendant's solicitors to the plaintiff's solicitors of 31 January 2007] as having been paid to the defendant, were paid in respect of licence fees concerning versions 3 through to 5, but never with respect to version 6. This is an unsatisfactory manner in which to leave the evidence on an interlocutory hearing and simply means that there is another factual issue for close examination during a final hearing.

Conclusion on serious/prima facie case qua the construction issues

52 There is at least arguably a key difficulty with the defendants suggested construction of the agreement for the simple reason that the agreement expressly deals in terms, with the question of title to the software but nowhere expressly deals with a licence to use the software. One observation with respect to the defendants submissions is that they contend that the above notwithstanding, the agreement is nevertheless to be interpreted as conferring a licence to use as opposed to dealing with title.

53 There are also other areas of some complexity which arise by reference to the need to construe a number of provisions applying the usual principles of construction.

54 Summarising the usual principles the following observations may be made:

i. The court is presently dealing with a commercial document. In endeavouring to discern the parties intent and in construing the meaning of the words used, the Court will strive to give the document a commercial, reasonable and rational operation: Australian Broadcasting Commission v Australasian Performing Right AssociationLtd (1973) 129 CLR 99 at 109; Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310.

ii. There is abundant authority that "the court should be astute to adopt a construction which will preserve the validity of the contract": per Mason J, Meehan v Jones (1982) 149 CLR 571 at 529; Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 132, per Kirby P. Further the court will strive in dealing with a commercial contract to discern the objective intent of the business relationship or other parameters of a contract in order to give effect to that which the parties may be seen to have bargained for. But always it is to the words of the document [here suggested as amounting to a binding contract] that the court must attend, looking in that regard to the whole of the document to discern the parties’ intent.

Royal Botanic Gardens and Domain Trust v South Sydney City Council

Codelfa

"presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating".

Codelfa

“The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used.””

iv. To similar effect is the observation of Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 at 248 (para 11), quoting with approval Lord Hoffmann in Investors Compensation SchemeLtd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913 to the effect that interpretation of a written contract involves the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting.

Investors Compensation Scheme

“The background knowledge which a reasonable person in the position of the parties will be regarded as having, for the purposes of the construction of contracts, includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man with the proviso that it should have been reasonably available to the parties”.

Prenn v Simmonds

: Lakatoi Universal Pty Ltd & Walker

Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd

Australian Broadcasting Commission v Australasian Performing Right Association Ltd

L Schuler AG v Wickman Machine Tool Sales Ltd

[70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said “it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.

[71] Gibbs J’s statement in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 that “the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd (“The Fina Samco”) [1995] 2 Lloyd’s Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which “must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis”.

Antaios Compania Naviera SA v Salen Rederierna AB

Maggbury Pty Ltd v Hafele Australia Pty Ltd

Optus Vision Pty Ltd v Australian Rugby Football League Ltd

Royal Botanic Gardens and Domain Trust v South Sydney City Council

“To this I would add the observation of Lord Steyn, writing extra-judicially on “The Intractable Problem of the Interpretation of Legal Texts” (2003) SLR 1 at 7. After pointing to the shift from literal to purposive interpretation, he adds the caveat that it would be an oversimplification to say that there has been a homogenous shift towards a purposive interpretation of all legal texts. Nonetheless he says: “ In a network of contracts governing a construction project, parties ought generally to be able to rely on the obvious meaning of the interlocking texts”.

viii. Hence I take it as axiomatic that:

· the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management supra;

· the proper approach seeks the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract” (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd supra at [66 et seq];

· commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64].

Discharge of the onus resting upon the plaintiff

55 For the above reasons in my view the plaintiff has discharged the onus upon it of demonstrating the requisite degree of likelihood of success: namely “that which the Court thinks sufficient in the particular case to warrant consideration of where the balance of convenience lies": cf McLelland J in the Appleton Papers Inc v Tomasetti Paper [1983] 3 NSWLR 208 at 214 . This passage followed a number of propositions put by McLelland J as to the principles to be applied upon an application for interlocutory relief generally outlined in Hungry Jacks Pty Ltd v Burger King Corporation, (unreported, Supreme Court of New South Wales, Einstein J, 7 December 1998) at [187]-[199]. Those propositions have been followed for the purpose of the present decision.

56 McLelland J quoted from Eng Mee Yong v Letchumanan [1980] AC 331 at 337 where the Privy Council had expressed the relevant principle in terms derived from the American CyanamidCo v Ethicon Ltd [1975] AC 396 case as follows:

57 The proper approach was also put shortly by R P Meagher, W M Gummow & J R F Lehane, Equity Doctrines and Remedies, 2nd ed, 1984 Butterworths, Sydney at para 2168:

58 At the same time it has been necessary to carefully take into account the proper approach to an application for the grant of a mandatory injunction as reflected in the following observations made in Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 at 502-503 per Gummow J:

59 The finding is that the plaintiff has shown a degree of probability of likelihood of success in its construction of the agreement as is sufficient to warrant the interlocutory regime referred to below. It has proven that it has a serious and not speculative case which has a real possibility of ultimate success. Notwithstanding the strictures requiring very great care to be given before the court makes a mandatory order on an interlocutory hearing, the circumstances generally described in these reasons are such that the principled exercise of the Court's discretion is to make the orders sought.

Dealing with the remaining cases pursued by the plaintiff

60 By reason of the reasons already given it becomes strictly unnecessary to deal with the contentions by the plaintiff that:

As to licence

i. the agreement operated to confer on the plaintiff a non-revocable exclusive licence to use and commercialise the software developed under the agreement;

ii. Clause 2 expressly confers an exclusive licence unlimited as to time. That licence operates with respect to all software developed under the agreement. In so far as it licences the use of copyright in programs not then written it is effective under s197(3) of the Copyright Act 1968;

As to estoppel

iii. the parties have conducted their relationship from 1998 until late 2006 in a manner wholly consistent with the interpretation of the agreement for which the plaintiff contends;

iv. after the defendant’s notice of February 2004 in which it stated that it would deliver Bevlink version 6 by late 2004 it was open to the plaintiff to give notice of termination of the agreement with effect either 31 January 2005 or 31 January 2006. Had the plaintiff terminated on the earlier of those dates it would have saved about $830,000 in licence fees paid to the defendant under the belief that the defendant would deliver Bevlink version 6 to the plaintiff; and about $420,000 if it had chosen the later of those dates;

v. the defendant induced that belief and did nothing to dispel it. It asserted that the plaintiff had copyright in each of the programs – and never resiled from that assertion. It sat silently as it received over $800,000;

61 It has to be said however that even these alternative ways of putting the plaintiff's case disclose serious cases. As to the estoppel case, the evidence includes the fact that the defendant produced each successive version of Bevlink and the gaming interfaces branded with the name of the plaintiff, and until sometime in late 2005 or 2006, containing a claim of copyright owned by the plaintiff. The plaintiff did not inform the defendant that it had discontinued placing the copyright claim on the Bevlink products.

62 Mr Harris deposed in his affidavit that when the Back Office, Touch POS and Metering modules of the Bevlink version 5 programs are opened on a computer, a screen flashes on the computer monitor while the program loads that states: "Copyright (C) Bevlink Pty Ltd". The same statement appears in the evaluation copies of version 6. He had caused these statements to appear on these versions of the program.

63 The plaintiff contends that this conduct amounts to an admission that each of the programs listed was developed pursuant to the subject agreement.

64 Whilst it is true that Mr Harris gave an explanation as to his purpose behind causing the statement to appear on the programs, this is a manner which requires to be litigated. Indeed it would likely be argued that such purposes as Mr Harris may have had would not be of any relevance to an admission case. This in itself gives rise to some questions both of law as were those arguably of fact which cannot be determined on an interlocutory hearing.

65 Curiously enough the evidence given by Mr Harris in relation to this matter is sought to be relied upon by the plaintiff as constituting some evidence that perhaps defendant's resources could be questionable. In short the evidence given by Mr Harris was as follows:

rather than an unknown software developer, who they may perceive as not having the resources to take legal action against them if they copied the program

The balance of convenience

66 In Meagher, Gummow and Lehane, supra, at para 2174 the learned authors say:

67 Subject to the under mentioned undertakings proffered to the Court by the plaintiff, the balance of convenience in my view clearly favours the making of the orders sought by the plaintiff.

Undertakings to protect confidentiality regime

68 The plaintiff's undertaking given to the Court as well as to the defendant, is to implement a regime generally as follows:

i. the plaintiff would undertake that in respect of any person to whom the plaintiff was to disclose the source code, the plaintiff would nominate the name of such person to the defendant;

ii. that each such person would be required to enter into a deed for the benefit of the defendant [as well as to give a like undertaking to the Court] by way of obligations of confidence in terms customarily used in the information technology industry, for the protection of such material;

Undertakings to further support the usual undertaking as to damages

69 The plaintiff has further proffered an undertaking to the Court that its two directors would give directors' guarantees totalling the value of $190,000, [which is otherwise identified in this judgment as at least very arguably, the value which the defendant itself placed upon the product in December 2006].

Particular considerations of significance on the balance of convenience issue

70 Naturally the balance of convenience issue is informed by all of the evidence. Matters of more particular detail [comprising part of that body of evidence] include the following:

i. With access to the source code for Bevlink version 5 and the gaming interfaces, the plaintiff will be able to provide the support that its customers require by recruiting a person or persons with expertise in the computer language Visual Basic and the computer database Access. There is nothing to suggest that the plaintiff would not be able to provide that support to its customers within a very short time after it receives the source code.

ii. The defendant has, in the context of these proceedings offered to undertake error correction on a time and materials basis, while denying that errors exist in Bevlink version 5, asserting that the relationship between the parties has broken down and articulating an intention to, in effect, compete with the plaintiff. The plaintiff sees itself unable to accept the offer. In my view that is a reasonable approach to be taken by the plaintiff which cannot be expected to assume that its competitor will necessarily always act otherwise than in its own interests.

iii. With access to the source code for Bevlink version 6 it is likely that the plaintiff will be able to utilise the benefit of the work undertaken by the defendant since early 2004 in the development of that program to get the program to a point where it is suitable for release to its customers. In order to achieve that, the plaintiff will need to recruit a person or persons with expertise in the computer language C++ and the computer database SQL.

iv. The plaintiff is unable to know how quickly it is likely to get Bevlink version 6 to market having obtained the source code. The defendant’s estimate is 5 months. However on the assumption that the defendant has worked competently and in good faith in the development of the program, the inference should be made that whatever period it takes will be a great deal shorter than if the plaintiff were to develop Bevlink version 6 from scratch. In my view a successful application for the expedition of the final hearing of these proceedings could lead to such a hearing taking place within the next several months and hopefully a judgment declaring the parties respective rights would come forward prior to questions arising of the plaintiff putting Bevlink version 6 to the market.

v. Further, assuming the source code for Bevlink version 6 proves to be useful, provision of the source code to the plaintiff at this time will enable the plaintiff to provide clear advice to its customers as to the development pathway and timetable for Bevlink version 6. That will assist in mitigating the substantial risks of loss of customers and goodwill currently facing the plaintiff.

vi. Because the plaintiff does not seek, through interlocutory proceedings, to restrain the defendant from using or reproducing any of the computer programs the making of the orders would not interfere with the defendant's capacity, if any, to derive commercial advantage from it possession of the source code.

a) In respect of Bevlink version 5 and the gaming interfaces the plaintiff is currently unable to provide support and maintenance to its customers to a level which is commercially expected. For example, the plaintiff has been unable to correct the difficulty which has arisen at the Tuggerah Lakes RSL which results in that club being unable to operate its membership loyalty program on its gaming machines.

b) Similarly at Cabramatta Leagues club the plaintiff is unable to provide the basic service of facilitating the correct printing of loyalty tickets - a function meant to be performed by the Bevlink program.

c) If the plaintiff does not have access to the source code for any extended period it will be unable to provide support and maintenance to its customers in circumstances such as those outlined above. It could be expected that the plaintiff would thereby suffer significant direct losses, the continuing loss of customers and substantial damage to its reputation.

d) In respect of Bevlink version 6 the plaintiff has already lost customers by reason of the failure of the defendant to deliver Bevlink version 6 at an earlier time. Relationships between the plaintiff and its flagship client, Mount Pritchard Community Club are strained by the delay in delivery of Bevlink version 6. The short position in this regard is that the Mount Pritchard Community Club has for some time advised the plaintiff of the promises that version 6 would come forward and have indicated that only when the club would see version 6 installed and operating satisfactorily elsewhere was it prepared to consider installing it at Harbord Diggers. Mount Prichard Community Club is one of the largest clubs in the country. Its gaming turnover is approximately $1,000,000,000 per annum, and the value of membership loyalty points generated each month is approximately $90,000. I accept as correct the proposition put by the plaintiff's counsel that as soon as it is able to inform Mount Prichard, not that it did not know whether it could ever deliver version 6 with the source code but that it had the source code and had software developers actively engaged and a particular program for delivery, in a practical commercial sense there must be a reduction in the risk which the plaintiff presently faces in loss of Mount Prichard as a client.

71 Further considerations include the following:

i. The defendant admits that the plaintiff owns the copyright in the object code of the computer programs in question in these interlocutory proceedings.

ii. In those circumstances the defendant is unable to commercially use or reproduce any of those computer programs.

iii. Assuming the defendant owns the copyright in the source code, that code can only have commercial value to the defendant to the extent that the defendant might so modify the source code that any object code version it produces on compilation would not constitute a substantial reproduction of the plaintiff's copyright.

iv. There is no suggestion that that circumstance is technically feasible, let alone actually contemplated by the defendant.

72 Another important consideration on the balance of convenience issue concerns the fact that for all the defendant’s now protestations:

i. of irreparable loss to it should the Court now order that it be required to disclose the source code to the computer programs;

"The software is supplied in its current condition as per the evaluation programs supplied to [the plaintiff]. [The defendant] reserves all rights to develop and market Hospitality Software into the future. For that supply [the defendant] requires a payment of $184,889.00 exclusive of GST".

ii. there is substance in the plaintiff’s submission that this offer constitutes at least some evidence, albeit in qualified terms, that the value attributed by the defendant to the source code in the order of this identified amount;

iii. for that reason the above described undertaking to be given to the Court by its two directors concerning the furnishing of Directors guarantees totalling the value of $190,000 has been proffered;

iv. it also appears that this letter was the first occasion that a claim to ownership of source code had ever been made by the defendant;

v. additionally there is the fact that the evidence of the defendant [in the affidavit of Mr Harris a director of the defendant made on 11 March 2007] that its business model has been in place since around the start of 2007, does not state the defendant's position as it was in December 2006;

after

73 Ultimately the defendant relies upon the contention that its entitlement to retain its secrecy in terms of the subject source code is so high that the balance of convenience is in favour of the Court refusing the relief now sought by the plaintiff. In Ni-Tech v Parker [1998] 484 FCA (27 April 1998) Emmett J had occasion to deal with the particular sensitivity to be attached to disclosure of source code in many situations. So much may immediately be acknowledged. However it is trite to observe that each case must be decided in terms of its own special circumstances.

74 In my view the above described confidentiality regime replete with undertakings to the Court are sufficient, when considered in the light of all of the other evidence, to warrant the principled exercise of the Court’s discretion in terms of both a serious case issues as well as the balance of convenience issue being to make the orders now sought.

Short minutes of order

75 The parties will be required to bring in short minutes of order on which occasion costs may be argued.

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Citations

Generate Group Pty Limited v Sea-Tech Automation Pty Limited [2007] NSWSC 226

Cases Citing This Decision

0

Cases Cited

21

Statutory Material Cited

1

S W Hart & Co Pty Ltd v Edwards Hot Water Systems [1985] HCA 59

Blackie & Sons Ltd v Lothian Book Publishing Co Pty Ltd [1921] HCA 27

S W Hart & Co Pty Ltd v Edwards Hot Water Systems [1985] HCA 59

CITATION:	Generate Group Pty Limited v Sea-Tech Automation Pty Limited [2007] NSWSC 226
HEARING DATE(S):	12/03/07
JUDGMENT DATE :	15 March 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Einstein J
DECISION:	Upon the giving of appropriate undertakings to the Court orders to be made for the delivery of the defendant to the plaintiff of copies of the source code for the identified computer programs
CATCHWORDS:	Equity - Mandatory interlocutory injunctions - Serious case - Balance of convenience - Software Development and Support Agreement - Construction of contract - Copyright - Litigation concerning ownership of copyright in source code versions of computer programs - Estoppel - Claim to exclusive non-revocable licence to copyright covering every code version of subject computer programs including each source code version - Consideration of what is source code as compared to compiled versions or object code - Definition of "software" utilised by parties is general in its terms failing to distinguish between any language or form of code in which the computer program might be recorded
LEGISLATION CITED:	Copyright Act 1968
CASES CITED:	American Cyanamid Co v Ethicon Ltd [1975] AC 396 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 Appleton Papers Inc v Tomasetti Paper [1983] 3 NSWLR 208 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Autodesk Inc v Dyason (No1) (1992) 173 CLR 330 Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 Businessworld Computers Pty Ltd v Australian Telecommunications Commission (1988) 82 ALR 499 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Computer Edge Pty Ltd v Apple Computer Inc (1986) 161 CLR 171 Data Access Corporation v Powerflex Services Pty Limited (1999) 202 CLR 1 Eng Mee Yong v Letchumanan [1980] AC 331 Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Limited (1990) 20 NSWLR 310 Hungry Jacks Pty Ltd v Burger King Corporation, unreported, Supreme Court of New South Wales, Einstein J, 7 December 1998 International Fina Services AG v Katrina Shipping Ltd (“The Fina Samco”) [1995] 2 Lloyd’s Rep 344 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Lakatoi Universal Pty Ltd & Walker [2000] NSWSC 113 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 Meehan v Jones (1982) 149 CLR 571 Ni-Tech Pty Ltd v Parker [1998] 484 FCA, 27 April 1998 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Prenn v Simmonds [1971] WLR 1381 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15
PARTIES:	Generate Group Pty Limited v Sea-Tech Automation Pty Limited (Plaintiff) Sea-Tech Automation Pty Limited (Defendant)
FILE NUMBER(S):	SC 1687/2007
COUNSEL:	Mr TJ Brennan (Plaintiff) Ms CL Cochrane (Defendant)
SOLICITORS:	SBA Lawyers (Plaintiff) Diamond Conway Lawyers (Defendant)