Memorex Telex Pty Ltd v National Databank Ltd - [2002] NSWSC 1111

No judgment structure available for this case.

CITATION: Memorex Telex Pty Ltd v National Databank Ltd [2002] NSWSC 1111

CURRENT JURISDICTION: Equity Division

FILE NUMBER(S): SC 4654/98

HEARING DATE(S): 28, 29, 30 and 31 October 2002
1 and 21 November 2002

JUDGMENT DATE: 2 December 2002

PARTIES :

Memorex Telex Pty Ltd (Plaintiff)
National Databank Ltd (Defendant)

JUDGMENT OF: Bergin J

COUNSEL : CRC Newlinds (Plaintiff)
S Bell (Defendant)

SOLICITORS: Baker & McKenzie (Plaintiff)
Ian B Mitchell (Defendant)

CATCHWORDS: [CONTRACT] - Claim by plaintiff for amounts owing in outstanding invoices for computer goods and services (the System) - Cross-Claim by defendant for liquidated damages for late and incomplete delivery of the System and additional claims for expenses incurred in rectifying the System and for loss of revenue or loss of opportunity - No claim made under warranty - Completion of delivery of the System made by defendant's employees (who had previously been employed with plaintiff) without any claim upon or notification to the plaintiff until delivery complete. [DAMAGES] - Measure of damages to which the defendant/cross-claimant is entitled - Whether inference as to quantum of damages is able to be drawn from evidence of problems with the System and low revenue without any evidence from users of the System that they experienced problems and terminated their subscription with the defendant because of problems with the System.

CASES CITED: Hadley v Baxendale (1854) 9 Ex 341
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

DECISION: See paragraph [156].

- 51 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BERGIN J

2 DECEMBER 2002

4654/98 MEMOREX TELEX PTY LTD v NATIONAL DATABANK LTD

JUDGMENT

1 This litigation arises out of a dispute in relation to the provision of computer goods and professional services (the System) by the plaintiff, Memorex Telex Pty Ltd, to the defendant, National Databank Ltd, pursuant to agreements entered into by the parties in July 1997.

2 The plaintiff claims that the defendant is indebted to it in the amount of $336,444.44 being an outstanding amount of a total of $1,724,814 for the provision of the System. The defendant denies that indebtedness and cross-claims against the plaintiff for damages in the amount of $2,376,620 for alleged breaches of the Systems Integration Agreement (the SI Agreement). The major part of the claim for damages is $2,200,000 for loss suffered due to alleged inadequacies or deficiencies in the System.

3 This case was heard on 28, 29, 30 and 31 October and 1 and 21 November 2002 when Mr CRC Newlinds, of counsel, appeared for the plaintiff, and Mr S Bell, of counsel, appeared for the defendant.

4 On the first day of the trial Mr Bell admitted on behalf of the defendant that the plaintiff had rendered invoices to the defendant in respect of the delivery of the System in the amount claimed, $336,444.44, and that the plaintiff had supplied the goods and services referred to in those invoices. After those admissions the plaintiff closed its case and the defendant’s case on the Cross-Claim commenced.

The Agreements

5 The parties entered into a Consultancy Agreement dated “July 1997” which referred to an SI Agreement and defined it as the agreement between the defendant and the plaintiff dated the same date as the Consultancy Agreement, concerning the acquisition by the defendant of computer equipment, ancillary items and services from the plaintiff.

6 The plaintiff was appointed as consultant from the date of the Consultancy Agreement for a period of twelve months unless terminated earlier pursuant to clauses 13 and 14 of the Agreement (cl. 2.1 and 3). The plaintiff agreed to provide Services defined as (a) Computer Consulting and (b) Project Scoping Report (the Report). In respect of the Computer Consulting Services the plaintiff agreed to provide “general analysis and design of software, network and hardware requirements” for the defendant’s “Business Information Service and Internet Connection Service Report”. There was a regime and timetable for the production of the Report about which there does not seem to be any issue between the parties. The parties agreed that after the Report was issued they were required to agree on:

(Sch. 2 Pt. 2, par (b)(vi))

7 Annexure A to the Consultancy Agreement, “Details of Project Scoping Report”, relevantly provided:

What the Scoping Report Will Achieve

...

Key Components of the Scoping Report

A Functional Specification –

Technical Specification –

Project Plan –

Systems Integration Agreement Matters –

8 Clause 4 of the Consultancy Agreement included the following:

4. SERVICES

4.1 Provision of Services

(a) provide the Services in a proper, efficient, skilful, diligent and competent manner and to the satisfaction of NDL;

…

(d) in performing the Services, comply with all resolutions, regulations and directions made or given by NDL from time to time in respect of the nature and scope of the Services

4.2 Skill and Judgment

Notwithstanding clause 4.1, Memorex must exercise its own skill and judgment and utilise its skills as it considers most appropriate to achieve compliance with any resolutions, regulations and directions made or given by NDL and to otherwise comply with all such resolutions, regulations and directions made or given by NDL.

4.3 Materials and Equipment

Memorex must, at its own cost, supply all materials and equipment and engage all employees and agents as are necessary and appropriate to enable Memorex to effectively provide the Services in accordance with this agreement.

4.4 Warranties by Memorex

9 The SI Agreement recited that the plaintiff had represented to the defendant that the plaintiff:

10 The plaintiff agreed to supply “the Hardware and Licensed Software, develop or cause the development of, and supply the Customised Software, install and maintain the System and provide additional services” to the defendant subject to the SI Agreement. The SI Agreement defined the following:

“Acceptance Testing”

“Acceptance Testing Certificate”

“Hardware”

“Licensed Software”

“Customised Software”

“System”

“Documentation”

11 The commencement date of the SI Agreement was the date specified by the defendant in a notice to the plaintiff (cl. 2.1(e)). The “system acceptance date” was defined as the date upon which the defendant “accepts the System in accordance with clause 29”. Clause 29 provided as follows:

29. ACCEPTANCE TESTING

29.1 Time of Testing

Memorex will perform, within the time specified in the Project Scoping Report, Acceptance Testing on:

29.2 Acceptance Testing Measure

All Acceptance Testing will be measured against details and specifications contained within the Project Scoping Report. For Acceptance Testing to be successful the expectations of the Project Scoping Report must be met or exceeded.

29.3 Certification

NDL must, after satisfactory demonstration of satisfactory completion of all Acceptance Testing without any error or malfunction being found or suspected by Memorex required in accordance with clause 29, issue an Acceptance Testing Certificate stating that the System has been tested as required by this agreement and has satisfied all Acceptance Testing.

29.4 Failure of Acceptance Testing

If NDL notifies Memorex that the System has failed to satisfy the Acceptance Testing, in accordance with clause 29, or the System fails the Acceptance Testing within the period specified in the Project Scoping Report, Memorex must immediately remedy the System or any part of the System at its own expense to enable the parties to conduct further Acceptance Testing. If the System fails to pass Acceptance Testing within 90 days of the System delivery Date, and the failure has a material effect on the operation of the System, then the failure will be deemed to be a total failure to perform by Memorex. If the failure is agreed to be minor and not critical to commercial, technical or operational requirements as described in the project Scoping Report, then Acceptance Testing may be accepted with qualifications as and if agreed by both Memorex and NDL and NDL must then issue the Acceptance Testing Certificate. If agreement is unable to be reached, it is to be resolved in accordance with clause 38.

29.5 Total Failure

12 The “System Delivery Date” was defined as the “due date for the delivery of the System” to the defendant, as specified in the Report. Clause 3 of the SI Agreement provided as follows:

3. SCOPE OF AGREEMENT
Memorex must from the Commencement Date:

(a) perform the Customised Software Development and deliver and install the Software in accordance with the Specifications;

(b) license the licensed Software to NDL;

(c) transfer all Memorex’s right, title and interest in, and cause all third parties to transfer all of their right, title and interest in, the Intellectual Property in and associated with the Customised Software in the Territory and all media embodying the Customised Software to NDL;
(d) supply and install the Hardware in accordance with the Specifications;
(e) install the System in accordance with the Specifications; and

(f) provide the Training;

in accordance with this agreement and by the relevant Milestone Dates.

13 “Project” was defined as the development, supply and installation of the Software, Hardware and the System and the performance of the other obligations of the plaintiff as specified in clause 3. “Project Timetable” was defined as the timetable specified in the Report as approved by the defendant.

14 The defendant was entitled to withhold any remuneration otherwise payable to the plaintiff if the plaintiff was in breach of any warranties specified in clause 4.3 or failed to perform any of its duties or obligations under the SI Agreement.

15 Clause 4.4 provided:

4.4 Withholding of Payment

reach a Milestone by the relevant Milestone Date, at any time before any of instalments in the Project Scoping Report would otherwise fall due, NDL may withhold payment of the instalment or instalments until the work necessary to reach the Milestone is completed.

16 Clause 5 provided relevantly:

5. PERFORMANCE AND LIQUIDATED DAMAGES

5.1 Performance

Memorex must commence performance of its obligations immediately upon receiving notice in writing from NDL under clause 2.1(d) and perform its obligations within the time period detailed in the Project Timetable.

5.2 Time of the Essence

The parties acknowledge that time is of the essence in relation to the completion of the Project and that NDL will suffer loss and damage in the event that Memorex fails to complete the project on time.

5.3 Liquidated Damages

Subject to clause 35.2, if Memorex fails to complete the Project in accordance with clause 5.1, NDL shall be entitled to deduct 0.05% of the Price for each Business Day after the day on which it was due. If Memorex does not complete the Project within 20 Business Days after the due date, NDL may, in addition to any other right, immediately terminate this agreement.

5.4 Genuine Pre-Estimate

The parties acknowledge that the deductions referred to in clause 5.3 represent a genuine pre-estimate of the cost to NDL of such a breach by Memorex and are no more than is reasonably necessary to compensate NDL for such a breach.

5.5 Payment dependent on Acceptance Testing Certificate

Payment of the last instalment of the Price for completion of the Project will only be made on the issuing of the Acceptance Testing Certificate by NDL, and Memorex shall be entitled to no fee whatsoever, unless and until NDL issues an Acceptance Testing Certificate.

17 The warranties were contained in clause 10 as follows:

10. WARRANTIES

10.1 Warranties by Memorex

10.2 Rectification and Replacement

If the Customised Software is found to be defective and if NDL notifies Memorex of the defect during the Warranty Period, Memorex must immediately rectify or, if necessary to remedy to the defect, modify the Customised Software at its own expense.

10.3 Warranty of Replacement Software

Memorex warrants that any replacement software supplied to NDL, will be properly installed and will perform in accordance with the Specifications.

18 The plaintiff agreed that from the commencement date of the SI Agreement it was required to undertake the “Customised Software Development” in accordance with the Specifications and continue the Development so as to comply with the relevant Milestone Dates (cl. 6.1). The plaintiff also agreed to deliver the Customised Software and “associated Documentation” in a form to the defendant’s reasonable satisfaction on the Customised Software Delivery Date as specified in the Report. It agreed to install the Customised Software in accordance with clause 29 of the SI Agreement and the Report (cl. 7.1-7.2).

19 In October 1997 the plaintiff provided to the defendant a document entitled “Proposal to National Databank Ltd for Prime Contracting Network Services and Software Development” (the Proposal) together with a document produced by Electronic Dimensions (Edime) entitled “Documentation for the Scope of Works for National Databank Ltd” (the Scope of Works). These two documents were produced in compliance with the requirement upon the plaintiff under the Consultancy Agreement to produce the Report.

20 The Proposal noted that the plaintiff understood that the primary objective of the Project was to implement the defendant’s communications and technology infrastructure and to provide a fully integrated corporate Wide Area and Local Area Network. It was noted that this was to be done alongside the implementation of the Netscape Publishing System to enable the defendant to implement a commercial service to link consumers with multiple information warehouses.

21 The Proposal also noted that the plaintiff had entered into an agreement with Edime for the establishment of electronic commerce. It noted that Edime was a Web Presence Provider, particularly focused on the establishment and maintenance of web sites. The Proposal referred to the feeds planned in the first phase including with the ASX, the Australian Bureau of Statistics (ABS), ASIC, LTO, NSW Government Information Service, Australian Government Publishing Service, RWE Australian Business News and Dun & Bradstreet Information Services.

22 The Scope of Works indicated the size, nature and development effort involved in the implementation of the System together with a risk analysis (cl. 9). Clause 14 of Annexure C provided:

14 Stage Three – Testing/Acceptance

The goal of the acceptance test phase is to prove to the user that the project team has delivered what was promised. An acceptance test plan will be developed by Memorex and approved by the user before testing the system. The process is merely to run through the tests in a formal ordered session to demonstrate the promised system functions.

Was there a breach of the SI Agreement?

23 The defendant was established to create and operate a Business Information System whereby the defendant’s clients would dial into the defendant’s computer site via the Internet and access information from a variety of State and Commonwealth government departments and private companies who supplied information. The System would request information from information sources, obtain it, reformat it, and show it to the customers on their screens. The clients would be charged a fee over and above the costs of obtaining the information from the sources.

24 Brenton Edward Avery was the Managing Director of the defendant from February 1997 to November 1998. He gave evidence that he had worked with computers prior to joining the defendant but that such experience was limited to small computer systems. He claimed he did not consider that he had the experience, expertise or knowledge to develop a large-scale computer system such as was needed by the defendant to operate the Business Information Service. In about June 1997 the defendant called for tenders to develop the System and Mr Avery was of the view that the plaintiff had the required experience, knowledge and expertise to undertake the development of the System for the defendant.

25 In September 1997 the defendant issued a Prospectus to raise funds to pay for the cost of developing the System and to provide working capital. The Prospectus referred to the defendant’s objective to become a one-stop-shop for business information products providing access to corporate, financial and social activity information from the government sector and commercial organisations.

26 The Prospectus stated that the defendant offered “one data connection to obtain access to a range of business information products”. Those products were referred to as including the Australian Securities Commission (ASC, but referred to in this judgment as ASIC), the Australian Bureau of Statistics (ABS), the Australian Stock Exchange (ASX), the Australian Government Publishing Service, Dun & Bradstreet Information Services, RWE Australian Business News, NSW Land Titles Office (LTO), NSW Government Information Service and the NSW Department of Fair Trading.

27 In the Forecast Financial Information section of the Prospectus the following appeared:

The Directors’ forecasts for the financial periods ending 30 June 2000 are based on their assumptions relating to anticipated developments, market growth and share which in turn are based on independent advice obtained where considered necessary.

28 The assumptions were stated to be:

Assumptions

29 The Prospectus also referred to risk factors including increased competition in the online information environment resulting in significant pricing pressure and thus, significant reductions in the average selling price of the company’s services. There was also reference to computer viruses and the prospect of delay or cessation in service to the company’s customers. Another relevant risk factor was stated as follows:

There can be no guarantee that the assumptions on which the financial forecasts and market strategies of National Databank are based will ultimately prove to be valid or accurate. The forecasts and market strategies depend on various factors many which are outside the control of National Databank.

30 In November 1997 the plaintiff commenced work on building the System. The plaintiff provided the services of Stephen Deadman as Project Manager and Anthony Firth, Brett Lane and Robyn Bermanseder. Mr Avery understood that Messrs Firth, Lane and Bermanseder were either employees or sub-contractors to Edime and recalled that Marcus Dawe, the principal of Edime, and others attended the defendant’s premises from time to time during the development of the System.

31 There is no issue that according to the timelines and Milestones the System was due to be completed in February 1998 but that the “sign-off” did not occur until 29 May 1998. A meeting was held on 20 May 1998 during which Mr Avery was handed a number of documents including a document entitled “Integration Testing Document” dated 20 May 1998 endorsed as having been “developed” by Edime. That document was 140 pages in length and recorded the results of various searches made in relation to various products including ASIC company extracts and business name searches, LTO dealings, plans, historical and title searches, ABS and ASX searches, and Ralph Wragg Enterprises Business News searches. It also included what was referred to as “Quest testing” and “ASX Stock Profiler Performance testing”.

32 The Integration Testing document records the dates upon which the searches were performed. The ASIC searches were performed on 27 and 28 April 1998 and 4 May 1998. The LTO searches were performed on 15, 16 and 17 April 1998 and 4 May 1998. The ASX searches were performed on 6 May 1998 and the Quest testing was performed on 27 April 1998. The document does not contain any overview or narrative report as to the status of the results in respect of the various products as at 20 May 1998.

33 Mr Avery signed a document entitled “Conditional Acceptance Certificate Software Developement” on 20 May 1998. It was in the following terms:

This certificate certifies that National Databank Ltd (NDB) accepts all further responsibility for Software development (Customisation) portion of the project in accordance with clause 29.1 of the Systems Integration Agreement with the following exceptions (These exceptions to be resolved no later than May 29th 1998).

· Final Documentation relating to the Development Project.

· SIG-q (Issues associated with Comm’s to be resolved before this portion of the project is totally accepted).

· Escape client data (Minor bug relating to user input).

· Organisation Purchase Privileges (Command line entries to be modified so that CGI can handle this requirement).

· Addition of Bankcard credit facilities to the site.

· User individual credit limits.

· CRR/DOCIMAGE yet to be approved by LTO (Minor modifications may be required).

34 Mr Avery recalled that at the time of this meeting on 20 May 1998 there were at least two distinct computer systems. One system was a development system that the programmers used to develop and test the system. It used either test data or a test data feed from information providers. The second system was the production system which was to be available to clients of the defendant. This system used data feeds from information providers. When Mr Avery looked at the system as it was being developed he claimed he did not always know if he was looking at test data or production data. He gave evidence that he was more concerned with the “look and feel” of the system and its functionality rather than checking to see if the data was correct or not.

35 Another meeting was held on 29 May 1998 attended by Mr Avery on behalf of the defendant, Mr Deadman, David Harris-MacBride and Kevin Regan from the plaintiff and Marcus Dawe, the Managing Director of Edime. This meeting lasted approximately three hours and Mr Avery gave evidence that during this meeting he had a conversation with Mr Deadman and Mr Dawe in the following terms:

Mr Avery: You want me to sign-off. I have seven hundred shareholders to answer to. Does the system work?

Mr Deadman: Yes, it works.

Mr Dawe: It works.

36 On this occasion Mr Dawe showed a document entitled “Acceptance Testing Document” to Mr Avery. That document was 32 pages in length and was endorsed as having been “developed” by Anthony Firth. It was dated 5 May 1998 on the front sheet and 7 May 1998 on each of the other 31 pages. The document was divided into sections dealing separately with (1) Registration, (2) Product Purchasing with sections for the various “products” ASIC, LTO, ABS, ASX, and Ralph Wragg, (3) PublishingXpert Administration and (4) the Arrow Accounting system. Each of sections (1), (3) and (4) contained four columns entitled “Action”, “Description”, “Accepted” and “Notes”. The first two columns contained the relevant information and the last two columns were blank.

37 Section (3) contained an additional column entitled “check billing” which was either ticked or not as the case required. This indicated whether the billing in respect of the particular aspect of the product needed to be checked. There were also additional columns under the “Accepted” heading for the purpose of recording the results of specific tests to be performed in respect of each of the products. All the columns were blank.

38 At the time of showing the Acceptance Testing Document to Mr Avery, Mr Dawe said, “we have gone through and tested the system.” Mr Avery said, “aren’t all the columns in the document supposed to be ticked?” to which Mr Deadman responded, “it is for you to go through the qualifications and test.” Mr Avery recalled that either Mr Dawe or Mr Deadman said, “we have done integration testing, which is our acceptance testing, which tests the same thing.”

39 Shortly after the conversation with Mr Dawe, Mr Avery looked at the System. He said he did not test the System but rather looked at some screens. He did not know if he was looking at the test/development system or if he was connected to live information feeds, being the production system. He did not consider that he had to test the whole System because he had been told that the System worked and he believed what he had been told. He was of the view that as the plaintiff’s representatives had performed the testing there was no need for him to do any testing.

40 At the meeting on 29 May 1998 Mr Avery signed a document entitled “Project Completion Certificate”. He noticed that attached to the document was a document on Edime letterhead signed by Mr Dawe and dated 20 May 1998:

41 Mr Avery’s evidence was that he would not have signed the Project Completion Certificate unless he had been assured by Messrs Deadman and Dawe that the defendant’s System was working properly. Mr Deadman accepted in his evidence that Mr Avery was informed at the meeting that the System worked (tr.191-193). Mr Dawe did not give evidence in the proceedings.

42 The Certificate signed by Mr Avery on 29 May 1998 was entitled “Project Completion Certificate” and was in the following terms:

This certificate certifies that as at Friday 29th May 1998 the Systems Integration Agreement managed by Memorex-Telex Pty Ltd has been fully completed and National Databank Limited accepts all further responsibility for the equipment, software and customisation that has been installed in NDB’s site(s).

This project comprises the following major components:

· The installation and commissioning of a backbone infrastructure and data feeds between Sydney, Melbourne and Canberra using CISCO communication equipment.

· The installation and commissioning of a computer room facility in the Canberra offices.

· The Installation and commissioning of the LAN infrastructure in the Canberra and Sydney offices.

· The installation and commissioning of a complete Internet infrastructure, including all necessary servers to permit NDB to operate a competent Internet site.

· The conversion and Customisation of the Netscape Publishing Expert Base code to cater for NDB’s specific requirements.

43 Subsequently the defendant, through Mr Avery and others, noticed a number of problems with the System. The first of these problems was with the use of the Microsoft Internet Explorer 4.0. Users were receiving messages on their screens asking them if the system could be re-directed. This was referred to in the evidence as a “re-direct message”. This message required the user to either accept or reject the message. If the user accepted the message, they would be sent to a blank page. Mr Avery referred to this as the user “bombing out”. There were no other options available to the user for obtaining the information.

44 The next problem identified by Mr Avery related to multiple subscribers. Where there was a corporate subscriber, for instance the law firm Deacons, the individual employees or partners of the firm were unable to perform particular searches under the umbrella of the corporate subscriber’s account.

45 The third problem identified by Mr Avery was that when users wished to cancel their subscription or, as he put it, “unsubscribe” from the System, the user would receive information that the subscription had been terminated but would apparently be billed for further transactions.

46 A further problem was that the System was not year 2000 compliant. This created difficulties both in respect of the ASX requirements of the defendant to produce information to the shareholders and also created problems for its users who had a credit card expiring after 1999. In this latter regard the System would not accept the card or appropriately bill that client.

47 The next problem was in relation to the use of a proxy server. When a proxy server was utilised for the purpose of making an inquiry of the ASX or ASIC the first inquiry would provide information as requested but the second and subsequent inquiries would not update the information. In other words, the inquirer received only the old information which was on the first search result.

48 A further problem was that there were multiple errors in the reports produced. Some information was scrambled, some information was omitted. The LTO documents were not in the required form which created problems for the clients when they sought to rely on these documents in Court. Another problem was with the credit card payments. The first transaction of the day was defective and the line through to the bank had to be re-established each morning.

49 The next problem was the ASX feed. For a time the defendant was only able to access half of the alphabetical list of companies on the ASX and was thus only able to obtain information on half of the corporate community listed on the ASX. Mr Avery was asked about problems with the ASIC feed but was unable to recall what they were.

50 There was also a problem with the billing system as it related to the accounting system in the Arrow software. The detail on the billing software was exported into accounting software. This enabled the defendant to have a full accounting of all the bills that had been rendered or charged during the course of the day/week/month. Although the billing software listed all the amounts that had been billed, it did not export or transport that information correctly or accurately to the accounting software. The transportation or exportation contained incomplete transfers of some of the items billed.

51 Mr Avery accepted during his cross-examination that if problems had arisen in the warranty period, a six month period from 29 May 1998, the defendant could have made a claim under the warranty. Mr Avery gave oral evidence, led in chief with leave, of a conversation that he said he had with Mr Regan of the plaintiff. This conversation took place after the plaintiff had been attempting to obtain payment from the defendant for the outstanding amounts owed to the plaintiff. After this conversation Mr Avery wrote to Mr Regan by letter dated 17 September 1998. That letter included the following:

Our Company placed a considerable reliance on the professional ability of Memorex Telex and its sub contractors to be able to build a real time online information system. Our reliance seems to have been let down. The result of the development was National Databank being left with a system that was riddled with bugs, unstable and was unable to perform many critical business functions.

The problems that Memorex and its sub contractors left National Databank with, have been huge, and has resulted in National Databank being months behind our schedule, and incurring large amounts of overhead expenses resulting from being 83 days late and months of clean up work to rectify the mess and have a saleable product.

Some of the main business errors and problems are:

· Users that use IE 4.0 get “redirect” messages.

· Users under an organisation are unable to buy a subscription.

· Users unable to unsubscribe.

· Users can not select a particular page range on ASIC doc images per the API.

· Major problems with client using a proxy.

· Netscape Public System installed in not Y2k version 2.2 is but we do not have a copy nor is it installed.

· Web design and general HTML pitiful – we have had to redo every single page.

· Lack of easy use in the overall design.

· Multiple errors on customer reports.

· Multiple spelling errors throughout the entire site.

· Major flaws in security – now fixed.

· General overall unprofessional software development.

· Unable to reliably use credit cards for over a month of July.

· Uses GMT time and date.

….

The project completion was signed by Mr D MacBride & Mr K Regan of Memorex Telex and Mr S Deadman and myself of National Databank Limited on 29 May 1998. The agreed completion date was 1 February 1998. In accordance with clause 5.2 Time of the Essence and clause 5.3 Liquidated Damages, National Databank Limited is entitled to deduct 0.05% of the cost of the project for each business day after the day on which it was due.
The 0.05% of $1,583,216 is $791.61 per day for the 83 business days between 1 February 1998 and 29 May 1998 which totals $65,703.47.
As a summary:

Total cost per Scoping report 1,475,263.00
Additional approved invoices 107,953.00
Total 1,583,216.00
Less amount paid 1,348,370.33
Cost of & installing air conditioner 17,566.00
Penalty 656,703.47
Balance 151,576.21

We understand your position, however, we have already paid over $1.3 million for a system which had been unable to be productive and generate significant revenue due to the major problems detailed above. We have signed up and lost many significant clients all because when they began to use the system they had technical difficulties, resulting from MTX implementation.
With all the above being said we do not wish to be involved in legal actions and do not wish to fight this matter but rather work on a solution that is agreeable.

The technical problems and delay have put significant stress on National Databank’s cashflow and we are not prepared to pay any lump sums in the near future, but would be willing to negotiate.

52 Mr Avery gave the following evidence:

(tr. 52-53).

53 It is apparent that during the development of the System regular meetings were held between the representatives of the defendant and the plaintiff, in particular with Mr Avery. It is also clear that from time to time Mr Avery forwarded emails to Mr Deadman referring to specific issues or problems that he saw with the System as it was being developed. After the Certificate was signed on 29 May 1998, the Chairman of the company, Mr Avery’s father, Mr Ted Avery (Mr T Avery), wrote a Memorandum dated 9 June 1998. That Memorandum was written at a time when Mr Avery claims that Mr T Avery well knew that the System was not working because it was a separate issue and was “common knowledge” amongst the directors.

54 The Memorandum of 9 June 1998 makes no mention of any problems with the System. The focus was on a desire to improve sales to potential customers and Mr T Avery wrote, “we still have a good range of products available for sale and we know that there is an established large market for these. In particular we have the advantage that with the ASC and NSW Land Titles Office products we are one of a very small number of authorised suppliers of these products”. It was noted that the “bottom line” was that the defendant had failed to generate sales of any consequence.

55 On 13 July 1998 Mr Avery, as Chief Executive Officer of the defendant, reported to the Board of Directors. That Report included the following:

June has been a month of mixed reactions. The ‘end of financial year’ seems to have taken the shine (off) our young company with many potential customers and new customers simply too busy to either look at NDB or to fully integrate NDB into their daily schedule at the present moment. This is not to say that they do not like our services or do not want to use NDB, but simply require more time than anticipated to make use of NDB and start purchasing products from us. There has been a very positive response to the Company’s products and almost all seem to think that the lack of subscription fees and the use of standard web browser technology are the crucial selling points.

56 Mr Avery accepted that this report does not refer to any of the problems he alleges were in existence at the time that he wrote this Report. He said, “I don’t know why I didn’t put it in the report.” It was suggested to him that the reason he did not put it in the Report was that any of the problems that were being suffered were not significant. Mr Avery rejected that suggestion and said that the problems were dealt with separately and were matters of separate discussion amongst the directors.

57 The 1998 Annual Report of the defendant was signed by Mr Avery and his father on 28 September 1998, just eleven days after Mr Avery had written to Mr Regan with his complaints. That Report included the following:

National Databank engaged Memorex Telex (a Kanamatsu company) to design, supply and install its computer hardware and software, the network system and the establishment of the web site. Many delays were experienced with the installation and the system was not operational until mid-April, 1998 much later than originally contracted and even after that date many problems were experienced with the installation. The web site as initially designed did not meet the professional standards required and was re-designed by the company’s own IT staff over the following five months culminating in unexpected delays in the development of our online information system and causing a complete revision of our original sales forecasts.

Despite these early unforeseen problems the Company now has one of the most advanced E-commerce applications in Australia with its systems capable of delivering information in real-time from disparate data stores around Australia through sophisticated software and communications, simultaneously conducting real-time accounting clearance and payment functions.

58 In cross-examination Mr Avery said that these statements were true but that they dealt only with part of the System. He maintained that there were problems with other parts of the System, as he had complained to Mr Regan. He agreed that he did not inform the shareholders of these alleged problems in the Annual Report.

59 The defendant relied upon statements of evidence of Brett Lane and Anthony Firth, who were not cross-examined. Mr Firth described himself as an “IT professional” holding a Bachelor of Arts degree majoring in computer studies. He is experienced in many computer environments and was employed with Edime as a computer programmer. He worked on the System at the defendant’s premises whilst employed by Edime between December 1997 and May 1998.

60 Mr Firth expressed the opinion that in May 1998 the System created for the defendant by the plaintiff and Edime was not complete and had many software errors. He stated that there were many problems with the software, including but not limited to the base software, NPX, the ASIC feeds, the LTO feeds and numerous bugs both in the screens and the update routines. He recalled that the System did not pass usage data to the accounting system as the third party accounting software, Arrow, was unable to import the data as required. Mr Firth described himself as the de facto Project Manager for Edime on the Project and stated that he managed the tasks of Brett Lane and Robin Bermanseder. Mr Firth stated that as far as he was aware Mr Dawe did not test the System personally.

61 Mr Firth also expressed the opinion that a cause of the bugs was partly due to the use of the NPX software. As far as he was aware the defendant’s site was the first site in Australia to use the software and neither he nor any of the staff who were working on the defendant’s System had used the software previously. He found that the software was not adequate for the task and that he and the other employees had to write many software routines themselves because the NPX system could not produce the required functionality.

62 Mr Firth expressed the opinion that the Project was under resourced. He stated that Edime could not finish the software development in time and did not have the time or resources to properly test the System in the period from December 1997 to May 1998 inclusive. His view was that the Project needed another four people to properly write and test the software.

63 During the development of the System Mr Firth and the other programmers did some unit and integration testing of particular parts of the System that they were working on at the time. He did not perform a full or proper System test, or acceptance test, at any time prior to June 1998 and only tested parts of the System after that date. He was not aware of any other software developer who was working on the Project doing a full, or proper System test. Mr Firth developed an Acceptance Test document for the defendant, however, he was not aware that the tests in the document were ever executed as acceptance of the System.

64 Mr Firth recalled continued problems with the data feeds from the LTO and ASIC. He also recalled problems with a system known as Quest, a credit card authorisation system. As at 29 May 1998 the integration of the Quest credit card system was operational only in test mode and required alterations to process the first transaction of the day.

65 Mr Firth commenced employment with the defendant in about June 1998. His role with the defendant was to complete and repair the System, which he referred to as “bug fixing”. He was employed for approximately six months until the System was sold by the defendant, he thought, in about December 1998 or January 1999. Mr Firth’s evidence was that he was not asked and did not say to anyone, let alone Mr Dawe, Mr Deadman or Mr Avery, that the System was “working properly”. He said that if he had been asked he would have said that it did not. Mr Firth maintained that the System had not been properly tested at the time of “hand over” in May 1998. In a supplementary statement dated 29 October 2002, Mr Firth referred to some tests that were done that were performed internally at the defendant’s premises on computers connected directly to the defendant’s System.

66 During the period June 1998 until December 1998 Mr Firth spent almost 100% of the first ten weeks of his employment with the defendant fixing errors and rectifying the System. After the first ten weeks his work principally involved developing the invoicing system. He estimated that 70% of his time was spent on developing that system and 30% was spent on fixing errors and rectifying the System.

67 Mr Lane gave evidence in his statement that by June 1998 several aspects of the System did not work properly. The problems included, but were not limited to, that: (a) data feeds from organisations such as ASIC and the LTO did not work correctly or reliably; (b) the online registration of customers did not work correctly; (c) the payments and billing system did not work according to the specifications for the System, produced inaccurate bills and did not record payments correctly; (d) components of the LTO system did not work; (e) invoicing for the use of the System did not work correctly; (f) the Arrow accounting package did not work correctly; (g) there were problems for customers who used the System with certain Internet browsers, in particular Internet Explorer 4.0, which was a commonly used Internet browser; (h) the credit card gateway used for payment by users did not always work; (i) there were errors on the screens that the System sent to users as results for the search requested; and, (j) users were unable to unsubscribe from the System.

68 Mr Lane also gave evidence that he did not test the System himself by going through each of the tests in the document entitled “Acceptance Testing Document”. He was not aware of any other person testing the System using that document as a guide. Mr Lane was employed by the defendant from June 1998 to December 1998. He estimated that he spent 30% of his time “rectifying defects” in the System.

69 The plaintiff relied upon the evidence of Mr Deadman who described himself as an “IT consultant” employed as Managing Director of his own business, DataSource Pty Ltd (DataSource) which has been operating for about fifteen years. Mr Deadman’s services are generally contracted to various companies through DataSource.

70 Between late May 1997 and late May 1998 Mr Deadman was contracted to an IT consultancy firm, Careers Connections, which contracted with the plaintiff for the supply of Mr Deadman’s consulting and project management services to the plaintiff. Between October 1997 and May 1998, excluding a vacation in December/January, Mr Deadman was working full time for the plaintiff in developing the System for supply to the defendant. From June 1998 until August 1998 Mr Deadman was contracted to the defendant as the Manager of its IT Development. He became and remains a shareholder of the defendant which is now known as Global Business Solutions Ltd. He presently holds forty-six hundred shares.

71 Mr Deadman was responsible for all aspects of the installation, including the sub-contracting of services, quality control for the infrastructure of servers, data communications and software development and the sign-off for payment both of invoices rendered by the plaintiff and invoices rendered to the plaintiff by its sub-contractors in completing the development and supply of the System.

72 During the time that he was the Project Manager and also when he was employed as the defendant’s IT Development Manager, Mr Deadman described himself as “good friends” with Mr Avery. During the period October 1997 to August 1998, he and Mr Avery would regularly go out for a drink. During conversations on these occasions they would speak of the “great future” the defendant had and “where we could take it”. They spoke about additional products, services and content and a vast range of topics in respect of the defendant’s business. Mr Deadman gave evidence that during these outings Mr Avery did not complain to him about the problems about which Mr Avery wrote to Mr Regan in September 1998.

73 Mr Deadman exhibited what he referred to as a “curriculum vitae” to his first affidavit. That affidavit was sworn on 13 June 2001. The curriculum vitae included a reference to Mr Deadman’s role as the Project Manager in installing the System for the defendant. It included the following:

As the Project Manager for this large and complex Project, I had responsibility for making the pre-defined Scope happen on time and on budget.

74 Mr Deadman was challenged as to the accuracy of this statement. He initially suggested it was “poetic licence” which he said he allows when he is marketing himself. He said, “however when I am sitting in front of a judge I tend to tell the truth”. Mr Deadman subsequently conceded that he knew that this document was to be placed before a judge and ultimately accepted that the statement was simply false. The falsity was that it was not a project that was delivered “on time”.

75 Mr Deadman also gave the following evidence:

(tr. 263)

76 This evidence establishes that not only was the statement false in respect of bringing the job in on time, but was also false in respect of bringing the job in “on budget.” It was submitted on behalf of the plaintiff that the statement in the curriculum vitae only referred to Mr Deadman’s responsibilities rather than to what actually occurred. That submission may have had more force but for Mr Deadman’s evidence. He was the author of the document and, although he was given ample opportunity to adopt such a position, he did not do so. I am satisfied from his evidence that the statements were intended to convey not merely what Mr Deadman was responsible for, but also what actually happened with the Project. Those statements were false.

77 There is no issue between the parties that instead of being completed in February 1998, the System was “signed off” on 29 May 1998. Mr Deadman claimed that one month of the delay was caused by the defendant by reason of problems experienced with the air conditioning not working effectively or alternatively, not being installed by the due date. The balance of the delay was accepted to be caused by the plaintiff with Edime being under resourced and not meeting the Milestones or deadlines.

78 Mr Deadman claimed that all of the bugs in the System which had been identified by Mr Avery, the defendant and the defendant’s support staff had been fixed by the time of sign-off on 29 May 1998. Based on his experience in the computer industry, Mr Deadman said it is common for a computer system to experience bugs from time to time. Indeed Mr Avery accepted that in his evidence. Mr Deadman described “bugs” as mistakes or malfunctions of the software or hardware component of a computer system. He said that a computer system is an organism and fixing or altering one part of a computer system can cause bugs in other parts of that system. He said the idea of testing a computer system is to identify and fix any bugs in the system.

79 Mr Deadman said a number of times in his affidavit evidence that as far as he recalled, no significant problems were raised with him in respect of the System. He gave evidence that the Internet Explorer 4.0 problem was outside the plaintiff’s control and that “if this had been a problem” the defendant could have raised it either prior to sign-off on 29 May 1998 or under the six month warranty. In respect of the inability to unsubscribe from the System, Mr Deadman said that he was “never” made aware of any problem in this regard. He also said that he was never made aware of any problem in relation to users’ inability to select a particular page range on ASIC searches. Mr Deadman accepted in cross-examination that it was more accurate to say that he could not recall being made aware of these problems rather than saying that communication about these problems did not happen.

80 Mr Deadman was cross-examined at length about his knowledge of the testing of the System prior to the Certificates being signed on 20 May and 29 May 1998. In his affidavit sworn on 13 June 2001 Mr Deadman referred to a meeting on 17 April 1998 at which the protocol for the final testing of the System to confirm that it complied with the Report was discussed. Although in his cross-examination Mr Deadman gave evidence that he asked Mr Wickman of the plaintiff and Mr Dawe of Edime to prepare that protocol, it is apparent from the minutes of the meeting of 17 April 1998 that Mr Firth and Mr Wickman were asked to prepare such a document. Once Mr Deadman was shown those minutes he accepted that his memory may not have been accurate and that it may well have been Mr Firth instead of Mr Dawe. The document that was ultimately produced was endorsed as having been “developed” by Mr Firth and Mr Firth’s unchallenged evidence was that he developed the document.

81 In his affidavit of 13 June 2001 Mr Deadman gave evidence as follows:

46. On 20 May 1998 Edime delivered a written confirmation which stated that it had tested the NDL system in accordance with an Integration Testing Document it had produced. Edime confirmed that the system had met the requirements under the Project Scoping Report. A true copy of the Integration Testing Document and Edime’s letter of 20 May 1998 are exhibited to this affidavit and marked with the letters “SAD 21”.

47. Brenton Avery, Marcus Dawe, Ted Avery, David McBride, Kevin Regan and I all met on 20 May 1998 to review the Computer System, the Integration Testing document and any outstanding issues. The agenda of the meeting is exhibited to this affidavit and marked with the letters “SAD 22”. Marcus Dawe said words to the following effect:

Here is the Integration Testing document and our confirmation that we have tested the system in accordance with this document. We recommend that you test the system against this document as well to ensure you are satisfied.

82 In cross-examination Mr Deadman was referred to paragraph 47 of his affidavit and the statement alleged to have been made by Mr Dawe. He gave the following evidence:

(tr. 177)

…

(tr. 181)

83 Mr Deadman gave evidence that he was told by one of his employees that the acceptance testing was done (tr. 182). He said that he had confidence in Edime that they had done the testing properly (tr. 184). This was an odd statement particularly in the light of Mr Deadman’s evidence that he had “waved a big stick” at Mr Dawe on numerous occasions to try to force Edime to comply with its contractual obligations (tr. 139). In later cross-examination Mr Deadman was shown the “Acceptance Testing Document” and did not recall having seen it (tr. 202). Mr Deadman’s recollection was that the document was delivered on sign-off and that he did not look at it (tr. 203). He also gave the following evidence:

(tr. 260-261)

84 Mr Bell submitted that it is clear on the evidence that the plaintiff breached the terms of the SI Agreement. There is no issue that the Project was not completed on time. The plaintiff’s failure in this regard was in breach of clause 5.1 of the SI Agreement. Mr Bell also submitted that the Court would be satisfied on the evidence that the plaintiff did not perform acceptance testing properly or at all in breach of clause 29 of the SI Agreement and that the plaintiff breached the warranty in clause 10 that the System would perform in accordance with the specifications.

85 Mr Deadman blamed Edime for a failure to comply with the Milestones and it is clear on the evidence that Mr Deadman was utilising various methods to try to pressure Mr Dawe to comply with the deadlines and Milestones. In a facsimile of 5 February 1998 Mr Deadman advised Mr Dawe that he agreed with Mr Avery’s complaints that had apparently been made about the development of the System. The fax continued:

Additionally notwithstanding the fact that we did finally get the site on-line on Wednesday, there are serious deficiencies that at this time essentially make the site unusable. Specifically:

· Issues associated with Internet Explorer. Although you were consistently advised of the requirement for all code to be IE3, IE4, Netscape N4 and Netscape N4 compatible, no qualification of this compatibility was carried out until I again brought the subject up.

· Billing, although, ‘Sort of Works’ has some serious problems.

· ASC results formatting is still incomplete.

· RWE is not yet completed.

Marcus, quite frankly electronic dimensions are not performing to their contracted milestones. Not one milestone has been achieved by the time specified. Additionally I have been awaiting your revised milestones for the balance of the project for more than a week.

It is obvious that this project is undermanned and your milestones are consistently extending.

Additionally the lack of qualified ‘Artistic Input’ into this site coupled with what would appear to be your personal lack of interest in the successful on time completion of this project leaves me no choice but to consider a review of your contracted responsibilities.

86 On 2 March 1998 Mr Deadman wrote again to Mr Dawe and advised that he had reviewed and suitably modified Edime’s proposed Milestone amendments. Mr Deadman then advised that such would be approved on the basis of progress payments being reduced with a balloon payment of the final payment and that if the Milestones were not met, reduced Milestone payments based on $1,000 per day would occur. Mr Deadman advised that 31 March was the final acceptable date for delivery otherwise a penalty clause would be invoked.

87 Notwithstanding the fact that Edime seems to have been a major cause of the delay, it was the plaintiff’s responsibility to comply with its contract with the defendant to install the System on the date promised. Although there was complaint about the air conditioning being installed late and/or ineffectively, I am satisfied the plaintiff was clearly in breach of clause 5.1 of the SI Agreement.

88 The plaintiff submitted that Mr Avery acknowledged that the defendant “had gone through the System prior to sign-off and that it appeared to work”. In reliance upon this evidence it was submitted that such “puts paid” to the allegation that there was reliance on some representation made by the plaintiff to the effect that acceptance testing had been carried out. It is conceded by the plaintiff that the words to the effect that acceptance testing had been carried out were said by Mr Dawe, but it is submitted that “the true state of affairs” (whatever they may be) must have been known to the defendant at the time the words were said, and accordingly the defendant could not possibly have relied upon any such statement.

89 The evidence given by Mr Avery on this topic was as follows:

…

(tr. 59-61).

90 There is no doubt that both Mr Dawe and Mr Deadman informed Mr Avery that the System “worked”. It is also the case that Mr Avery gave evidence in his affidavit that because he was informed by the defendant that the System worked he did not believe that he had to do any further tests.

91 It is clear from the Integration Testing Document that no tests were conducted after 5 May 1998. Even if I were to accept that the integration testing was the same as the acceptance testing (which would seem to be a somewhat dubious conclusion to reach particularly when one compares the two testing documents), then no acceptance testing was done after 5 May 1998. Mr Deadman said he relied on Mr Dawe who claimed that the System had been tested.

92 It is clear that after the Conditional Acceptance Certificate was signed on 20 May 1998 further adjustments and changes to the System occurred. Mr Deadman was cross-examined as follows:

…

(tr. 184-185).

93 There is no doubt that under clause 29.1 the plaintiff was required to perform acceptance testing. It is also clear that for that testing to be successful, the expectations of the Report had to be met or exceeded (cl. 29.2). The defendant was required by clause 29.3 of the SI Agreement to issue an Acceptance Testing Certificate stating that the System had been tested as required by the Agreement and had satisfied all acceptance testing. That Certificate was required to be issued by the defendant “after satisfactory demonstration of satisfactory completion of all acceptance testing without any error or malfunction being found or suspected” by the plaintiff. It was the defendant who had the responsibility to issue the Certificate after such “satisfactory demonstration”. If the System failed to pass the acceptance testing within 90 days of the System’s delivery date and the failure had a material effect on the operation of the System, then the failure was deemed to be a total failure to perform by the plaintiff (cl. 29.4). The defendant had the option of notifying the plaintiff of such a failure. It did not do so.

94 The plaintiff submitted that the defendant must have known the true state of affairs in respect of the acceptance testing because Mr Wickman had been allocated the task of creating the testing document with Mr Dawe. As I have said, Mr Deadman accepted that the minutes of 17 April 1998 demonstrate that the task was not allocated to Mr Dawe but more probably to Messrs Firth and Wickman. Mr Firth gave unchallenged evidence that he prepared the Integration Testing Document. He made no mention of Mr Wickman being involved in that process. The Acceptance Testing Document is endorsed “Developed by Anthony Firth” with the date 5 May 1998. There is no mention of Mr Wickman. Mr Firth also made no mention of Mr Wickman being involved in any discussions in relation to testing. I am not satisfied that the defendant’s failure to call Mr Wickman should result in an adverse finding against the defendant on the issue of acceptance testing.

95 On the evidence of Mr Firth and Mr Lane and in the absence of evidence from Mr Dawe I am satisfied that it is more probable than not that the acceptance testing was not done in accordance with clause 29.1 of the SI Agreement. The defendant was entitled to require the plaintiff to comply with its obligations to satisfactorily demonstrate to it that the expectations of the Report were met or exceeded in the acceptance testing. Mr Avery’s evidence was that Mr Dawe and/or Mr Deadman informed him that the defendant had to go through the Acceptance Testing Document itself to confirm that it was satisfied with the System. There is no evidence that the defendant followed that suggestion.

96 The relationship between the plaintiff and the defendant became somewhat peculiar in May 1998. At that time all of the computer programmers from Edime, formerly the sub-contractor to the plaintiff for the installation of the System, were employed by the defendant. Mr Deadman also was contracted to work for the defendant. That meant that all of the personnel who had knowledge of what is conceded to be a large and complex system, had left the plaintiff’s employment and were working for the defendant. The exception to that is Mr Dawe.

97 The Conditional Acceptance Certificate issued on 20 May 1998 certified that the defendant accepted all further responsibility for the Software development “in accordance with clause 29.1” of the SI Agreement. It was not up to the defendant to accept it “in accordance with 29.1”. The defendant was required to issue a Certificate pursuant to clause 29.3. It was the plaintiff’s obligation to comply with clause 29.1 of the SI Agreement. Although I am satisfied that the testing was not done by the plaintiff in accordance with clause 29.1, I am also satisfied that the defendant failed to exercise its rights under clause 29 in respect of the acceptance testing.

98 The cross-examination of Mr Avery suggested that any problems the defendant experienced with the System after 29 May 1998 were minor. The plaintiff relied upon the lack of disclosure in the Annual Report of 1998 of any of the alleged current problems and the failure to include any complaints in Mr Avery’s Report to the directors of the defendant on 13 July 1998. It was submitted that the defendant has not proved that these problems were such that would amount to a breach of the warranty contained in clause 10 of the SI Agreement and it was submitted that, in any event, no claim was made under the warranty.

99 The defendant sought to rely upon the letter to Mr Regan of 17 September 1998 from Mr Avery as a claim during the warranty period. The letter to Mr Regan of 17 September 1998 does not comply with Clause 10.2 of the SI Agreement. Under that clause, the defendant had an obligation to notify the plaintiff of the defect during the warranty period so that the plaintiff could immediately rectify it or if necessary modify the Software at the plaintiff’s expense. This was not a letter notifying the plaintiff for that purpose. This was a letter seeking to negotiate with the plaintiff in respect of the plaintiff’s claim for payment of its outstanding invoices. Mr Avery’s evidence puts beyond doubt that this was not a claim under warranty.

127 If there were a large number of customers who complained and, more importantly, a large number of customers who left the defendant because of problems with the System, it was a simple step to name them and to call evidence, documentary or otherwise, to prove that fact. Every opportunity was given to Mr Avery in his evidence to point to any document from any client who had departed and he was unable to do so. Nor did he give oral evidence as to the identity or number of any clients who had departed for that reason. I am not satisfied that a “large number” of clients left the defendant because of problems with the System. The defendant lost a “few small users” in July 1998.

128 Mr Bell submitted that I would infer from the evidence in relation to the problems that were identified by Messrs Firth, Avery and Lane and in the Customer Service Reports that the System was flawed and as a natural consequence, the subscribers were not using the System. Mr Bell submitted that I could draw that inference from the low revenue identified in the Profit and Loss Statements of the defendant.

129 This claim is in part based upon a premise that the forecasts in the Prospectus were reasonable and that they should have been achieved if the System was working. It is submitted that because the forecasts were not achieved, I would be satisfied that the defendant has established its entitlement to damages in the amount of $2.2 million.

130 The defendant’s accounting expert, Paul Mentzalis, dealt with the forecast results in the Prospectus that were: for the financial year 1998 an operating loss before income tax of $982,000; for the financial year 1999 an operating profit before income tax of $1.529 million; and for the year 2000 an operating profit before income tax of $3.746 million. The actual results compared to forecasts were: for the financial year 1998 a loss of $934,000 instead of $982,000; and for the 1999 financial year an operating loss of $1.804 million instead of a profit $1.529 million.

131 Mr Mentzalis based his conclusions as to loss suffered by the defendant on an assumption that there was a connection between the installation of the System and the reduction in the defendant’s operating activities and resultant profitability. There is a question as to whether that assumption can be justified on the facts in this case. The alleged “reduction” is, of course, only able to be measured against the directors’ forecasts because this was a start-up business without a history of trading against which a “reduction” could be measured.

132 The Prospectus contained a letter dated 3 September 1997 signed by Mr T Avery as Chairman of the defendant. It included the following statement: “This is the era of technology and the Internet. Companies which recognise this and move to the forefront of technology utilisation and creation will be successful, irrespective of fluctuations in the economy”. There is nothing within the Prospectus, or indeed the evidence, to support the proposition that a company that utilises technology and creates technology is cocooned against the fluctuations in the economy. That opinion seems to have been a matter affecting the directors’ forecasts.

133 The forecasts in the Prospectus were based on the directors’ assumptions relating to anticipated developments, market growth and share, which in turn were based on independent advice obtained where considered necessary. Those forecasts were qualified by the statement that there were often “material differences” between the forecasts and the actual results and that no guarantee could be given that the forecasts were achievable because it was not possible to substantiate the assumptions, the details of which are set out earlier in this judgment.

134 BDO Nelson Parkhill’s “Independent Review” of the directors’ profit forecasts was included in the Prospectus. That Review included the following:

This review was limited to enquiries of the Directors as to the process used in preparing the forecast statements, consideration of the assumptions and the underlying data supporting amounts in the forecast statements, and testing of the application of the assumptions in compiling the forecast statements. Further, we have relied in part upon the conclusions reached in the Independent Market Intelligence Report, completed by Greg Baker & Associates, Marketing Consultants.

…

We do not express an opinion as to whether the actual future financial performance of the Company will approximate those forecasts by the Directors, as future assumptions by their nature are uncertain and only capable of substantiation through the use of evidence that is future-oriented and therefore speculative in nature.

135 BDO Parkhill did not comment at all upon the reasonableness of the assumptions and it is clear that its brief was limited to determining whether the directors’ forecasts were consistent with the assumptions.

136 Greg Baker & Associates’ Independent Market Intelligence Report (IMI Report) included in the Prospectus was stated to be for the purpose of providing an independent assessment and evaluation of the market into which the defendant planned to expand and consolidate its business activities and to review the directors’ assumptions as to the market share the defendant expected to achieve. It is clear that the IMI Report did not touch upon any other assumption made by the directors. Indeed no person was called by the defendant to establish the reasonableness or otherwise of those other assumptions.

137 The defendant’s directors made estimates of sales as follows: for the 1998 year $1.486 million, for the 1999 year $8.783 million and for the year 2000 $12.960 million. Mr Baker assessed the reasonableness of the directors’ assumption as to expected market share by “using research regarding the adoption of diffusion of innovations”. That research was used because Mr Baker considered the products to be offered by the defendant and the technology that delivered them to be sufficiently new so as to warrant treatment as an innovation rather than a product extension. The IMI Report stated:

The methodology is based upon the observation that the first group to adopt and trial a new product in any normally distributed statistical population are termed “innovators”. Innovators generally comprise between 2.5% and 5% of any normally distributed distribution. Innovators act as evaluators and it has been found that a positive attitude to a new product or service by this group results in adoption by the next segment who are termed “Early Adopters” and comprise between 12.5% and 15% of a statistical population. Favourable adoption by this group creates peer pressure for product adoption by the “Middle Majority” of between 55% and 65% of the market.

It is the graduated adoption over time by these three key groups which give rise to graphs of market penetration of new products such as VCRs, Personal Computers, Automatic Teller Machines and Microwave Ovens etc. having a classic “S” shape initially displaying increase by increasing amounts and then increase by decreasing amounts.

An estimate of the size and rate of adoption by Innovators, Early Adopters and Middle Majority within the target segments of Solicitors, Accountants and Commercial Decision Makers for National Databank Limited’s Business Information Products was conducted. The number and type of new clients acquired in each phase was accompanied by an estimate of their potential annual revenue contribution.

138 The IMI Report expressed Mr Baker’s view that the products to be offered by the defendant were “unique” and that none of the other information brokers offered services comparable to that planned by the defendant. It also referred to his view that the achievement of the estimated sales revenue was dependent upon “an effective sales campaign to secure subscribers”. The sales strategy was described as follows:

National Databank’s sales strategy will include face to face selling to major government and institutional clients and direct marketing to investors and professionals. The campaigns will be supported by targeted media placements to ensure prior favourable knowledge of the product. Target media will include national and metropolitan press supported by magazines servicing specific professions where required. Direct marketing campaigns have the benefit of targeting prospects in each segment in a measured and systematic way. Information from both pre-launch tests and post roll-out sales will be used to continually evaluate formats and minimise down side risk.

A two step marketing campaign (step 1 contact & qualify followed by step 2 of face to face selling) is expected to be the most appropriate sales vehicle. Results would of course be dependent upon the quality of the offer and the attractiveness and simplicity of the conversion package for the target market.

139 In the segment headed “Conversion of current users to the integrated package” the IMI Report noted that the defendant would “have to convert many” who would be using “single sources of data”. The Report concluded with the opinion that the directors’ revenue forecast appeared to be fair and reasonable.

140 Mr Baker’s report relied upon in the trial was dated 25 September 2000 and claimed to “re-visit” the initial assumptions underlying the market assessment of the defendant’s business proposed in the 1997 Prospectus. In that report Mr Baker referred to subsequent commercial developments and analysed a company, Legalco Ltd (Legalco), incorporated on 29 November 1999 and admitted to the Official List of the ASX on 30 May 2000, commencing official quotation on 1 June 2000. The purpose of referring to Legalco was to suggest, as the report did at page 8, that its progress indicated the level of performance that could have been achieved by the defendant. In submissions emphasis was placed upon the Legalco Annual Report for 2002 in which it was noted that 51% of the operating revenue was earned from the Internet based activity and that the percentage was continuously increasing. It was also noted that the revenue had increased from $15.070 million in 2001 to $28.712 million in 2002.

141 The existence of Legalco has significance for other reasons. In the Legalco Prospectus the Chairman stated:

From 1990, Legalco and its predecessors pursued the objective of servicing growing need by legal firms and other professional institutions for legal support services. The Company has successfully expanded the range of services provided, the market segments targeted and the utilisation of leading edge technology to deliver services on a cost-effective and efficient basis. Most notably, since 1997, Legalco has provided an increasing number of these services via the Internet, and particularly through its main website,

142 Legalco’s principal business activity was referred to as a “business provider of public, legal, business and financial information and ancillary services”. The Prospectus listed its customers as lawyers, financial institutions, valuers, conveyancers, companies, accountants and councils. The services to be provided were listed as settlements and exchanges, property inspections, business names, property titles and images, property inquiries, company searches and credit reports.

143 Mr Baker expressed the view that the target market and the service profile of Legalco were extremely similar to that of the defendant. The Annual Report of Legalco demonstrates that although its revenue had increased it made an overall loss in both 2001 and 2002. It is apparent from Legalco’s Chairman’s statement in the Prospectus and from the evidence of the plaintiff’s expert Ramin Marzbani, a principal of AC Neilson.Consult, that Legalco and its predecessors were offering the same range of services, but for the ASX, that the defendant planned to offer at the time the defendant’s Prospectus was published in 1997. Mr Baker did not appreciate or analyse this fact either in the IMI Report or the report relied upon dated 25 September 2000.

144 Mr Marzbani was critical of a number of the assumptions made by the defendant in its Prospectus. In respect of assumption 11 – that retail pricing of business information products was consistent with industry pricing and constant over the forecast period - Mr Marzbani opined, and was not successfully challenged, that it was clear by September 1997 that the price of business information products had been declining since 1995.

145 In respect of assumption 13 – that wholesale prices of business information products were constant during the forecast period – Mr Marzbani expressed the opinion that there was a decreasing trend in wholesale services and an increasing trend in retail services. Providers of services such as land titles searches were moving away from wholesaling them to third parties to providing them directly. He gave the examples that in 1995 Reuters were providing Yahoo Internet users with free quotes for stock and that operators such as Dun & Bradstreet were providing direct electronic services. He also referred to the increasing trend for the provision of free services online as Internet portals provided free news and stock quotes online.

146 In respect of assumption 15 - that the advertising budget was sufficient to attract the forecast number of sales and customers - Mr Marzbani noted that only $2,699.73 was spent on advertising in the period ending 30 September 1998 and expressed the view that as the defendant was a start-up company and did not have an established customer base, such amount was not sufficient to achieve the level of business forecast. He expressed the view that a more realistic figure would have been five to ten times that amount.

147 Mr Marzbani also expressed the view that there was no demonstrated relationship between the advertising, marketing and sales budget and the number of customers that the defendant sought to attract. He was of the view that calculation of the budget should have been approached in terms of the cost of acquiring customers, migrating customers from competitors and in later years, retaining customers.

148 In respect of assumption 17 - that the defendant’s market share of the business information market would be 18% by the year 2000 - Mr Marzbani expressed the view that it would be extremely unlikely that the defendant could have achieved such a forecast. This was because such a percentage was an extremely aggressive growth rate and to achieve it, a number of the defendant’s competitors would have had to forego the equivalent revenues and possibly go out of business. The defendant would have had to win a lot of customers from competitors that were already established in the market who were servicing higher volume demand customers.

149 In respect of assumption 19 - that the forecast market sizes had been based on reported sales volumes contained in various 1995/1996 Annual Reports from government and commercial organisations - Mr Marzbani expressed the view that there was no demonstrated connection between the types of products and services provided by those government and commercial organisations and the types of products and services that the defendant was intending to provide. There was no consideration or demonstration of the ability of the defendant to capture the markets for the products and services offered by those organisations. Mr Marzbani expressed the view that in those circumstances the comparison between the sales volumes of those organisations and the defendant’s forecast market size appeared to be unfounded.

150 Other aspects of the way in which the defendant prepared to market itself were the subject of criticism in Mr Marzbani’s report. There is no evidence that the defendant conducted any research as to the level of market demand for the particular services it was intending to offer. Indeed Mr Baker accepted in his evidence that all that he did was what is known as secondary research. That included looking at statistics from the Australian Bureau of Statistics, consulting newspapers and the like. He conducted no primary, or dedicated, research such as putting together a focus group and consulting with the intended market as to what they wanted or assessing how to approach the particular market.

151 Mr Marzbani was critical of the defendant’s assumption that the particular services it was intending to offer would be compelling to the market place. He suggested that it was a big assumption to make in the absence of comprehensive market research on the demand for the specific services the defendant was intending to offer. He also noted that there were gaps within the services offered by the defendant. He expressed the opinion that the Internet service providing market was already very competitive and sophisticated in 1995, and even more so by 1997 and 1998. By the end of April 1998 there were 632 Internet access providers or Internet service providers in the Australian market. It appeared to Mr Marzbani that the defendant had not taken into account the research available in Australia as to the competition within the Internet service provider and business information system markets at the time it established its business.

152 It appears to me that the defendant did not prepare properly for its entrée into the market and from the evidence of Mr Marzbani I am satisfied that its marketing strategy was more probably than not the cause of its failure to thrive. This was recognised in the June 1998 Memorandum written by Mr Avery in which he said that the defendant had “failed to generate sales of any consequence”. There was also the effect on the defendant of what was described as “many potential customers and new customers” being “simply too busy to either look at NDB or to fully integrate NDB into their daily schedule” at the end of the financial year. A further factor which probably had some impact, although Mr Avery said it was not significant, was the alleged inadequate service provided by the Customer Service Manager during the set-up period. That person’s employment was terminated.

153 In the circumstances of the operating losses suffered by Legalco and the findings I have made in respect of the defendant’s failure to properly market itself I do not intend to make the inferences Mr Bell asks me to make that the defendant’s customers failed to use the System because there were problems with the System. In the absence of the evidence to which I have referred above I am unable to reach that conclusion based on the defendant’s Profit and Loss statements.

154 The System was “working” by September 1998 and the evidence does not establish that the problems with the System prior to or after that time caused other than a few small users to either leave the defendant or stop using the defendant’s System once they were subscribers with the defendant. I am not satisfied that the defendant has proved the causal connection necessary for the loss of revenue or loss of opportunity aspect of its damages claim other than an entitlement to loss suffered by the departure of those few small users.

155 The date of the sale of the defendant’s Business Information Service is far from clear. Mr Avery said it was December 1998 or January 1999. The plaintiff’s expert accountant referred to a contract dated February 1999. Assuming that these few small users would have stayed with the defendant until the sale of the business I assess that their revenue would have been a small percentage of the revenue generated from the clients of the defendant. Having regard to the other products available in the market and the income/revenue forecasts for the defendant I am satisfied that in the circumstances of this case an appropriate amount in respect of this loss during the period mid July 1998 to February 1999 is $20,000.

156 Although there was a claim that the plaintiff was estopped from seeking to recover any sums alleged to be owing in the outstanding invoices I am satisfied that the appropriate result in the light of the admissions made that the goods and services referred to in the invoices were delivered, is to enter judgment on the plaintiff’s claim and on the cross claim. The plaintiff is entitled to the entry of judgment on its claim in the amount of $336,444.44. The defendant is entitled to entry of judgment on its Cross-Claim in the amount of $128,487.53. The parties are to bring in Short Minutes for the entry of those judgments including interest and a costs order at 9.30am on 6 December 2002. The parties have not argued that interest should not be allowed, however should the parties be unable to agree on interest and costs and wish to argue either of those matters, they may do so on 6 December 2002.

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Last Modified: 12/03/2002

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Citations

Memorex Telex Pty Ltd v National Databank Ltd [2002] NSWSC 1111

Cases Citing This Decision

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Cases Cited

2

Statutory Material Cited

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Baltic Shipping Co v Dillon [1993] HCA 4

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54

CITATION:	Memorex Telex Pty Ltd v National Databank Ltd [2002] NSWSC 1111
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4654/98
HEARING DATE(S):	28, 29, 30 and 31 October 2002 1 and 21 November 2002
JUDGMENT DATE:	2 December 2002
PARTIES :	Memorex Telex Pty Ltd (Plaintiff) National Databank Ltd (Defendant)
JUDGMENT OF:	Bergin J

COUNSEL :	CRC Newlinds (Plaintiff) S Bell (Defendant)
SOLICITORS:	Baker & McKenzie (Plaintiff) Ian B Mitchell (Defendant)
CATCHWORDS:	[CONTRACT] - Claim by plaintiff for amounts owing in outstanding invoices for computer goods and services (the System) - Cross-Claim by defendant for liquidated damages for late and incomplete delivery of the System and additional claims for expenses incurred in rectifying the System and for loss of revenue or loss of opportunity - No claim made under warranty - Completion of delivery of the System made by defendant's employees (who had previously been employed with plaintiff) without any claim upon or notification to the plaintiff until delivery complete. [DAMAGES] - Measure of damages to which the defendant/cross-claimant is entitled - Whether inference as to quantum of damages is able to be drawn from evidence of problems with the System and low revenue without any evidence from users of the System that they experienced problems and terminated their subscription with the defendant because of problems with the System.
CASES CITED:	Hadley v Baxendale (1854) 9 Ex 341 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
DECISION:	See paragraph [156].