P M Sulcs v Daihatsu Australia - [2001] NSWSC 636

No judgment structure available for this case.

CITATION: P M Sulcs v Daihatsu Australia [2001] NSWSC 636

CURRENT JURISDICTION: Common Law

FILE NUMBER(S): SC 11489/93

HEARING DATE(S): 01-05/11/99, 08-12/11/99, 15/11/99, 17/11/99, 15/12/99, 17/12/99,
22/02/00, 16/03/00, 14-18/08/00, 21-24/08/00, 28-31/08/00, 01/09/00, 04-08/09/00, 14/11/00, 04-07/12/00, 11-15/12/00, 18-10/12/00,
24/04/01, 26/04/01, 30/04/01

JUDGMENT DATE:
1 August 2001

PARTIES :

P M Sulcs & Associates Pty Limited (Plaintiff)
Daihatsu Australia Pty Limited (Defendant)

JUDGMENT OF: Kirby J

COUNSEL : J J Garnsey QC/C Stevens QC/T J Hancock (Pl)
S Rares SC/D Studdy (Def)

SOLICITORS: Oliveri Attorneys (Pl)
Clayton Utz (Def)

CATCHWORDS: Loss of a chance - breach of contract - repudiation - factual matrix to assist construction - ready willing and able - recovery of money payable under contract but unpaid at date of termination - damages - reasonable contemplation of parties

LEGISLATION CITED: Copyright Act, 1968. (Cth)
Trade Practices Act, 1974 (Cth)

CASES CITED: Allied Pastoral Holdings P/L v Commissioner of Taxation [1983] 1 NSWLR 1
Australian Knitting Mills P/L v The Commonwealth (1954) 92 CLR 424
Autodesk Inc v Dyason (1992) 173 CLR 330
B P Refinery (Westernport) P/L v The Shire of Hastings (1977) 180 CLR 266
Baltic Shipping Co v Dillon (1993) 176 CLR 344
Burger King Corp v Hungry Jack's P/L [2001] NSWCA 187
Carr v J A Berriman P/L (1953) 89 CLR 327
Codelfa Construction P/L v SRA of NSW (1982) 149 CLR 337
Commonwealth of Aust v Amann Aviation P/L (1991) 174 CLR 64
G v H (1994) 181 CLR 387
Ghazal v GIO (1992) 29 NSWLR 336
Hadley v Baxendale (1854) 9 EX 341
Laurinda P/L v Capalaba Park Shopping Centre P/L (1989) 166 CLR 623
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
Maks v Maks (1986) 6 NSWLR 34
Malec v J C Hutton (1990) 169 CLR 638
Maynard v Goode (1925-26) 37 CLR 529
Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989
Roadshow Entertainment P/L v ACN.053006269 P/L (1997) 42 NSWLR 462
Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912
Sellars v Adelaide Petroleum (1994) 179 CLR 332
The Film Investment Corp of NZ v Golden Editions P/L (1994) AIPC 91-052
Watson v Foxman (2000) 49 NSWLR 315

DECISION: Refer para 915.

I N D E X

Para No.

1. ISSUES ON LIABILITY

The Action 1

Background Concepts 3

The Claim by P M Sulcs 13

The Response of Daihatsu 15

The Factual Matrix 17

Authorities on the Relevance of Surrounding

Circumstances 20

2. THE ASSOCIATION BETWEEN P M SULCS &
DAIHATSU

The Fragility of Recollection 28

The Computer System of Daihatsu 30

Early Contact Between P M Sulcs and Daihatsu 32

P M Sulcs and Fujitsu 59

Approach by P M Sulcs to Fujitsu 65

The Evidence of Fujitsu Personnel 70

Discussions Between Mr Hooper and Mr Kratsas 89

Investigation of Conversion 96

3. THE PROPOSAL

Presentation of the Proposal 104

The Terms of the Proposal 110

The Fujitsu Proposal 125

4. THE REFERENCE SITE AGREEMENT

Meeting 30 December 1988 129

The Response of Daihatsu 135

Was there a Binding Contract? 146

5. NEGOTIATIONS AND PREPARATION

Resolution of Differences with ICL 153

Discussion Between P M Sulcs and Daihatsu 156

The Plaintiff’s Original Submission 173

Payment of P M Sulcs by Fujitsu 178

6. AGREEMENTS BETWEEN DAIHATSU AND FUJITSU

Agreements Executed 14 March 1989 206

The Prime Contract Agreement 212

7. THE ANALYSIS REPORT

Work on the Analysis Report 227

The Visit by Rapitech 228

Installation of the Fujitsu Computer 238

Presentation of the Analysis Report 241

Conversation About Payment 250

8. THE AGREEMENTS BETWEEN P M SULCS AND
DAIHATSU

The Submissions 255

The Proposal 259

The Analysis Report 268

The Programme Licence Agreement 277

The Software Maintenance Agreement 287

The Terms and Conditions of Sale 300

9. CONSTRUCTION OF THE AGREEMENTS

The Condition Precedent Issue 316

Submissions by the Parties 318

The Letter of 18 April 1989 325

Findings Already Made 328

Should a Term be Implied? 342

The Agreement of 18 April 1989 344

The Objections of Daihatsu 349

The Requirement of Presently Existing Software 352

10. THE BREAKDOWN OF RELATIONS

Issues 357

Payment of P M Sulcs 360

Did P M Sulcs Demand Payment from Daihatsu? 377

What Was Said in Opposition to Such a Finding? 382

Modifications to the Software 388

Conversion of Software 406

Meeting on 23 May at Fujitsu 420

Other Documents Dealing with the Fujitsu Meeting 427

Daihatsu’s Submissions 438

Was There a Shift in Fujitsu’s Position? 442

The Availability of Paradyne 451

11. TERMINATION OF THE CONTRACT

Calling a Meeting 461

The Submissions of Daihatsu on the Letter

of 2 June 1989 472

The Contents of the Letter of 2 June 1989 473

The Meeting on 5 June 1989 490

The Different Cases 501

Events Immediately Following the Meeting 504

Correspondence with Pyramid 520

Work Relevant to the Contract 531

Termination of P M Sulcs 533

Lunch with Pyramid in November 1989 562

Daihatsu Dealings with ICL 575

The Two Competing Hypotheses 581

Ready, Willing and Able 594

The Task 596

The Conversion of Computer Languages 598

Problems in the Conversion which was

Contemplated 603

The Conversion Process 608

Differing Views from Experts 610

Could the Conversion be Achieved? 624

The Time Required to Convert the Software 643

13. THE LICENCE ISSUE

The Presentation of the Licence Issue 672

The Evidence of Mr Hooper 679

Was there a Head Licence? 701

The Daihatsu Submissions 715

The Federal Court Proceedings 719

14. THE FINANCE ISSUE

The Issue Restated 741

The Evidence Concerning Finance 742

The Canadian Evidence 754

The Course of Events if Daihatsu had Paid 757

Termination by the Defendant 766

The Plaintiff’s Claim 770

Money Payable Under the Agreement 772

The Argument of Daihatsu 777

The Debate on Principle 781

Are the Fees Recoverable? 783

The Modifications 790

The Loss of the Chance 797

The Authorities on Valuing the Chance 802

The Issues Relevant to the Loss 807

Expert Joint Report 814

How Good was the Plaintiff’s Product? 821

The Unix Market 834

The Likely Sale Price 840

The Likely Number of Sales 853

The ICL List 854

The Wholesale Market 862

The Manufacturing Market 864

The Submissions of Daihatsu 867

Payment of Royalties 881

Maintenance Profits 883

Research and Development 887

Conversion Costs on Later Sales 895

Mr Lonergan’s Alternative Scenario 899

Calculations made by Mr Weeks (TABLE 1) 902

Calculations made by Mr Lonergan (TABLE 2)

Modification of Mr Lonergan’s Calculations (TABLE 3)

The Discount Rate 903

Submissions on the Discount Rate 909

Orders 915

*******

1. ISSUES ON LIABILITY

The Action

1 P M Sulcs and Associates Pty Limited (“P M Sulcs”) (the plaintiff) claims damages against Daihatsu Australia Pty Limited (“Daihatsu”) (the defendant) for breach of contract. In the alternative, a claim is made for work performed on a quantum meruit.

2 P M Sulcs was registered as a company in New South Wales in 1984. It was established by its Canadian shareholders (P M Sulcs Limited (“P M Sulcs Canada”) and Cullen Detroit Diesel Allison Limited (“Cullen Detroit”)) to promote the sale of computer software developed in Canada. One such package was the Material and Customer Control System. The action concerns the sale of that software (together with an appropriate licence) to Daihatsu.

Background Concepts

3 Before going to the issues, I should explain certain concepts which relate to computers. They are, no doubt, commonplace to some. They may be unfamiliar to others.

4 A computer system, typically, consists of three elements:

· The computer (“the hardware”).

· The operating system.

· The software.

5 The function of the operating system was explained by Professor Rosenberg (the Dean of the Faculty of Information Technology at Monash University) in these terms: (report 26.11.00, p11 para 5.4.1)

operating system

6 Professor Rosenberg added: (para 5.4.2)

“The facilities provided by the operating systems include:

The file system, allowing documents and files to be stored and retrieved.

Access to input and output devices (eg the keyboard and printer).

Support for multiple users to access the computer at once.”

7 Microsoft Windows, UNIX and Wang VS are examples of operating systems.

8 The operating system and the software provide the instructions to the hardware, given in “machine language”. Machine language uses only two values, zero and one. They are arranged in sequence to represent numbers, characters and data. Obviously, it is difficult for humans to read machine language. Accordingly, to assist programmers in the formulation of instructions, computers were designed which employed words and symbols in place of machine language. A computer programme (a translator or compiler) then transformed such words or symbols into machine language.

9 Now, the words and symbols so used together form a computer language. There are a number of such languages. Some are specific to particular applications. Fortran, for instance, is a computer language especially suited to the reproduction of scientific formulae.

10 The software of P M Sulcs Limited Canada (“P M Sulcs Canada”) was written for use on a Wang computer. The Wang computer had its own operating system (Wang VS), and used the Cobol language, which it adapted, and altered. The language of Wang, therefore, became a dialect of the Cobol language.

11 In 1988 Daihatsu had a computer system which had reached the end of its useful life. It had a number of shortcomings. It did not allow dealers in Daihatsu motor vehicles, scattered throughout Australia, to consult the stock list to determine the availability of Daihatsu parts, and place orders. The company recognised the need for a new system, both a computer and appropriate software. The software of P M Sulcs (with certain modifications) fulfilled its requirements. However, Daihatsu did not want a Wang system. It wanted a computer system which combined a number of features:

· First, a UNIX operating system, which gave it greater flexibility.

· Secondly, a system which employed the C language, thought to be especially suited to UNIX.

· Thirdly, a particular database (known as a Relational Database) to be accessed by what are termed “SQL commands” (Structured Query Language).

12 Ultimately, Daihatsu selected a Fujitsu mainframe computer (M760/4), and the software of P M Sulcs.

The Claim by P M Sulcs

13 By an Amended Statement of Claim, the plaintiff asserted a number of agreements with Daihatsu:

· First, by written agreement (made in April 1989), P M Sulcs agreed to grant, and Daihatsu to accept, a non-exclusive licence to the Material and Customer Control System (para 3), and services for the maintenance of that system (para 5) (“the Software Agreements”).

· Secondly, by oral agreement made on 30 December 1988, Daihatsu agreed to allow P M Sulcs to use its premises as a reference site, to demonstrate its system to prospective customers (para 16) (“the Reference Site Agreement”).

14 The plaintiff says that it was ready, willing and able to perform its promises. By letter of 4 July 1989, the defendant, however, repudiated the agreements, thereby causing loss to P M Sulcs.

The Response of Daihatsu

15 The defendant answered these claims by an Amended Defence which raised the following issues:

· It did not admit the software agreement (Amended Defence paras 3 and 5), although it acknowledged that Daihatsu had received a number of documents (said by the plaintiff to constitute the agreement), and in some cases (by its Managing Director) signed such documents (the Contract Issue).

· It asserted, moreover, that, were the court to find that either the Software Agreement, or the Reference Site Agreement had been made, they were, in each case, subject to a condition precedent (Amended Defence para 17). The condition precedent was that Fujitsu Australia Limited (“Fujitsu”) would enter into an agreement with P M Sulcs whereby:

“A. (Fujitsu) would take responsibility for the computer systems to be implemented for the Defendant including, but not limited to, the Programs; and

B. The Plaintiff agree that (Fujitsu) and not the Defendant would be liable to pay it for the licences provided pursuant to the (Program Licence Agreement) and for any services provided pursuant to the (Software Maintenance Agreement).”

(Amended Defence para 17; parenthesis added)

the Condition Precent Issue

· Further, Daihatsu denied that the plaintiff was ready, willing and able to perform its various promises. It did so upon a number of bases:

· First, when the agreement was made (if there was an agreement) the software was not capable of being used on the computer purchased by Daihatsu, namely the Fujitsu M760/4. It had to be converted from the Wang VS Cobol language, using the Wang operating system, to the C language, for use on a UNIX system. It required other features besides (the Relational Database and SQL commands). Daihatsu says that, technically, the task could not be done. Alternatively, it says it could not be done on time (the Conversion Issue).

· Secondly, fundamental to the plaintiff’s right to sue is proof that it was authorised to grant the software licence. P M Sulcs, the Australian company, had not written the software. The copyright lay elsewhere. The plaintiff, therefore, was obliged to show that the copyright owners had provided it with authority (the Licence Issue).

· Thirdly, even were it possible to convert the software within a time acceptable to Daihatsu, it was beyond the capacity of P M Sulcs to fund the conversion. P M Sulcs was a small company. It was impecunious. It had accumulated losses. It had survived with the help of its Canadian parent. The conversion was, on any view, a large project. It was likely to be expensive. Whilst P M Sulcs may have thought, at one time, that it could look to Fujitsu as a source of funds, by July 1989, when the contract was terminated, that source was no longer available. Without that source the plaintiff, on the defendant’s case, could not deliver the converted software (the Finance Issue).

16 Moving to the second agreement, the Reference Site Agreement, Daihatsu answered that claim in the following way:

· First, it pointed to the evidence in support of that agreement. Proof of the agreement depended upon an acceptance of the evidence of Mr John Hooper, then the Managing Director of P M Sulcs. Mr Hooper gave evidence of a conversation with Mr Leon Kratsas, the Managing Director of Daihatsu. Mr Kratsas denied having had that conversation. In the course of Mr Hooper’s cross examination, he was accused of lying on a number of issues, and deliberately speaking nonsense. Those accusations have been repeated in written submissions. Indeed, an entire section of Daihatsu’s submissions is devoted to the credit of Mr Hooper. He is said to be a liar. His evidence is described as “slippery”, and generally unreliable. Mr Hooper, the submissions point out, now beneficially owns the shareholding in P M Sulcs. Damages awarded to P M Sulcs therefore are damages awarded to Mr Hooper. Daihatsu urges that his testimony be rejected.

· Secondly, and in any event, Daihatsu said that, even were I to accept that the conversation took place, there was no contract. There was, on the defendant’s case, plainly no intention at that time to be bound. Mr Kratsas, at best, simply gave an indication that, if things were to work out, the parties may do further business.

· Thirdly, as set out above, Daihatsu asserted that any such agreement was subject to a condition precedent, which was never fulfilled.

The Factual Matrix

17 These, in broad outline, are the issues on liability. Some of the documents relied upon by P M Sulcs (said, with other documents, to form the software contract) were standard form contracts. They were used by P M Sulcs in the ordinary course of its business. However, the transaction with Daihatsu was not ordinary. The software was not available for immediate installation. It required conversion. Nonetheless, there was minimal adaptation to the standard forms. There was no reference, in terms, to the conversion. The plaintiff urges nonetheless that, within the factual context in which the parties were operating, the meaning was plain enough.

18 The defendant’s case, on the other hand, asserted that the condition precedent was an express term. It pointed to particular words in a letter written by Mr Hooper on 18 April 1989. It claimed that his words, understood in the factual matrix which then existed, should be construed as an acknowledgment of the condition precedent. Alternatively, such a term should be implied.

19 Both parties, therefore, relied upon the surrounding circumstances to make the terms of their agreement clear, where they would otherwise remain obscure.

Authorities on the Relevance of Surrounding Circumstances

20 Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 identified the broad purpose of the parol evidence rule. He said this: (at 347)

Goss v Lord Nugent

21 In Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, Lord Wilberforce said this: (at 995-996)

“In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”

22 His Lordship added: (at 996)

“It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.”

23 Lord Wilberforce concluded with these words: (at 997)

“… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed.”

24 Mason J, in Codelfa (supra) formulated the rule in these terms: (at 352)

“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.”

25 His Honour then considered the admissibility and relevance of prior negotiations. He said this: (at 352)

“It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.”

26 Mason J added: (at 352)

“Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”

27 Against this background, I will now consider the evidence. There are many conflicts in the evidence, some unimportant. I will address only those differences between the parties which I believe necessary to resolve.

2. THE ASSOCIATION BETWEEN

P M SULCS AND DAIHATSU

The Fragility of Recollection

28 The events which are the subject of this action occurred more than a decade ago. Each party has filed affidavits. The affidavits, and especially those of Mr Hooper, contain the detail of discussions, some lengthy. Daihatsu, as mentioned, is highly critical of Mr Hooper’s evidence. It is especially critical of his ability to recount in detail conversations which took place so long ago. Counsel drew attention to the words of McLelland CJ in Equity in Watson v Foxman (2000) 49 NSWLR 315: (at 319)

“Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.”

29 Memories of distant events are unquestionably fragile. Clues as to the truth are usually scattered. Insight may be provided by documents created some time after the event being described. I have, therefore, in many cases (especially where events are evolving) simply recounted these events chronologically, noting differences between the recollections of witnesses, where they arise. It is sometimes convenient to postpone the resolution of those differences until some later event, which provides insight.

The Computer System of Daihatsu

30 Daihatsu is, of course, the Australian subsidiary of a Japanese motor vehicle manufacturer. It imports motor vehicles and parts from its parent, which are then sold through dealers. In 1988 there were approximately 140 such dealers.

31 Daihatsu’s computer system was installed in 1976 (Exhibit P). It was an ICL System 25 which used a software programme called “Spares”. By 1987 the system was more than a decade old. It had, as mentioned, a number of shortcomings, principally, that the dealers were not “on line”. Dealers could not directly consult Daihatsu’s stock list and place orders. They were obliged to telephone or fax Daihatsu’s office. That took time and added to expense both for the dealers and for Daihatsu.

Early Contact Between P M Sulcs and Daihatsu

32 P M Sulcs made contact with Daihatsu in 1985 hoping to interest the company in its software. Mr Hooper joined P M Sulcs as its General Manager on 1 April 1987. He was made a director soon thereafter. He spoke to Mr Kratsas, the General Manager of Daihatsu, on 5 April 1987 (Hooper: Aff. 2.1.98, para 3). He was encouraged by his conversation. Mr Kratsas told him that he was familiar with the Sulcs MC2 software (the tradename for the Material and Customer Control System), and was impressed by it. Mr Kratsas, according to Mr Hooper, said that he would direct his Electronic Data Processing Manager (the EDP Manager) of Daihatsu, Mr Holubinskyi, to investigate the suitability of the P M Sulcs software as a replacement for Spares.

33 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 19). He acknowledged, however, that by August that year, Daihatsu was interested in replacing the ICL System 25 and Spares (T923). It appears to me likely that a conversation in these terms (which are rather less elaborate that Mr Hooper’s account) took place.

34 On 30 April 1987, Mr Holubinskyi went to the plaintiff’s office in the Wang building at North Sydney. He witnessed a demonstration of the P M Sulcs software on a Wang computer. Mr Hooper provided a written quote for the software the same day. A month or two later, with the co-operation of Wang, a Wang super-mini computer was installed at Daihatsu. Mr Hooper said that he and Mr Santa Maria, the Technical Services Manager of P M Sulcs, loaded the software. Mr Holubinskyi executed a confidentiality agreement, which included these words: (Exhibit A, doc 4)

“The Company acknowledges that the materials provided herewith (the Information) are confidential proprietary information belonging solely to P M Sulcs & Associates Pty Ltd. …”

35 The computer and software remained at Daihatsu for approximately one week (T1642).

36 On 3 July 1987, Mr Hooper again saw Mr Kratsas. He wrote to him the next day. His letter opened with these words: (Exhibit A, doc 5)

“Thank you for your time yesterday to discuss how we might extend our relationship to that of Daihatsu becoming a user of P M Sulcs’ Management Information System and Material Control software.”

37 The letter continued:

“I thought it beneficial to confirm our agreement about the basis on which business will progress between our two companies.

· I have drawn up draft copies of our Sublicence and Service Agreements which I have attached for your comment.

· I will explore further the applicability of sales tax to any software licence purchased by Daihatsu.

· Mr Jocelyn Santa Maria, Technical Services Manager, will be available to assist with user demonstrations during the month of July and he will also be available in my absence should you require any other assistance."

38 The draft Licence Agreement was enclosed. It asserted, in a recital, the following: (Exhibit A, doc 7)

“A. PMS owns or licenses from other parties certain proprietary computer software.”

39 Software usually requires modification or amplification to meet the particular needs of the user (a process known as “customisation”). The standard terms contemplated delay between the execution of the agreement, and the installation of the software. It made the following provision as to payment: (Exhibit A, doc 19)

“1. Payment of the above prices and charges is to be made as follows:

(a) 50% of the total price of each module upon execution of this Agreement;

(b) 30% of the total price of each module immediately upon the Installation Date of the module;

(c) 20% of the total price of each module immediately upon the earlier of the date which is 30 days after the Acceptance Date of that module and the date which is 60 days after the Installation Date of that module; …”

40 On 17 September 1987 Mr Hooper presented Daihatsu with a report comparing the existing Spares system with the P M Sulcs software, function by function (Exhibit A, doc 30). Mr Kratsas said that Daihatsu had not solicited that report. It was a report of the type commonly produced by software vendors (Kratsas: Aff. 31.3.98, para 21). Mr Hooper, on the other hand, said this: (Hooper: Aff. 12.2.99, page 3, para (i))

“Kratsas requested the comparison report and provided (P M Sulcs) with access to (Daihatsu’s) computer system and organised (Daihatsu’s) staff to assist (P M Sulcs) to produce the report. Without such access and assistance, (P M Sulcs) would not have been able to produce the comparison report because (P M Sulcs) had no detailed knowledge of how the SPARES software worked.” (parenthesis added)

41 Looking at the report, the level of detail suggests the co-operation of Daihatsu asserted by Mr Hooper. Daihatsu was about to make a decision on the replacement of its system. I infer from this material, and the correspondence which followed (to which I will shortly refer), that P M Sulcs was regarded as a serious contender. The report of P M Sulcs, incidentally, also included the following: (Exhibit A, doc 30)

PROPRIETARY RIGHTS NOTICE

42 Daihatsu, however, chose to remain with ICL, with whom it had a long standing relationship. In a document produced after September 1988 (but undated), ICL described its relationship with Daihatsu in these terms: (Exhibit P)

“Daihatsu has used ICL equipment since 1976 when a System Ten was installed with the first version of SPARES. This was upgraded to a System 25 in 1982 which has run successfully ever since. There is a very good relationship between Daihatsu and ICL, and a strong personal rapport between the Company Secretary (Leon Kratsas) and our Account Manager (Dennis Rex). There is an equally strong rapport at this personal level with the third party software house (DMF Computing) and its chief executive (Neil McGrath) to both Leon Kratsas and Dennis Rex. All three have worked together since the first System Ten installation.”

43 On 29 September 1987, Mr Kratsas signed the purchase order for the ICL System 39. Both Mr Hooper and Wang were surprised and disappointed by Daihatsu’s decision. They plainly believed that they had the sale. On 27 October 1987, the Senior Sales Representative from Wang wrote to Mr Kratsas in these terms: (Exhibit A, doc 96)

“Obviously the decision not to procede (sic) with the Wang solution was a great disappointment and in light of the encouragement and commitments made to Wang by Mr Kratsas came as a complete surprise. In consideration of the resources and money Wang has spent over the past eighteen months in tendering Daihatsu, Wang would appreciate the opportunity to discuss this matter further.”

44 Mr Hooper claimed that Mr Kratsas spoke to him in October 1987 in the following terms: (Hooper: Aff. 2.1.98, para 9)

“(Daihatsu) is not satisfied with WANG. Can (P M Sulcs) create a version of your MCS software to run on another brand of computer, as I prefer to buy our computer from ICL Australia Pty Limited … running the UNIX operating system.” (parenthesis added)

45 Mr Kratsas denied that conversation. I believe, however, that a conversation in these terms probably took place. P M Sulcs had lost its bid. Its lack of success had come about, not through shortcomings in its system, but through its association with Wang. Amongst other things, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 22(e))

“(e) I was not interested in purchasing a Wang computer as it would have been incompatible with Daihatsu’s other computer systems namely its vehicle and warranty systems.”

46 By October 1987, Mr Kratsas was, I believe, well familiar with the P M Sulcs software. It had been investigated at his request by Mr Holubinskyi. It had been available for viewing at the Daihatsu premises (on the Wang system) a few months earlier. Its functions had been analysed and compared with the existing Daihatsu system, Spares, in the report prepared by Mr Hooper of 17 September 1987. It was the system which Daihatsu ultimately selected once it had unsuccessfully gone down the ICL path, as I will shortly describe.

47 I have been dealing with a conversation which Mr Hooper attributed to Mr Kratsas in October 1987. I have accepted as probable that Mr Kratsas raised with Mr Hooper whether P M Sulcs could create a version of its software compatible with the ICL computer and the UNIX operating system. Mr Hooper alleges that he responded to that suggestion by referring to his existing relationship with Wang. He claims to have said, amongst other things, the following: (Hooper: Aff. 2.1.98, para 9)

“PMS is a Co-operative Software Vendor (‘CSV’) to WANG and we have a long standing relationship where WANG provides PMS with free computer resources, sales leads and a sales commission on computer equipment sold to run PMS’s software.”

48 Mr Hooper said that if P M Sulcs were to move from Wang, it would need a similar relationship with another supplier.

49 The defendant, in its submissions, identified Mr Hooper’s statements about Wang as an illustration of his unreliability (submissions Daihatsu, Mr Hooper’s credit, p 9ff). Mr Hooper, it claims, gave conflicting accounts of the breakdown of his relationship with Wang. However, the picture which emerges from Mr Hooper’s evidence is reasonably clear. At the time relevant to the present discussion (October 1987), there was plainly collaboration between Wang and P M Sulcs. P M Sulcs still occupied an office in the Wang building at North Sydney. It had inherited an association with Wang from its Canadian parent. The association with Wang had benefits, as Mr Hooper said. Nonetheless, Mr Hooper plainly saw that Wang represented the past. He identified, accurately as it happens, UNIX (and the C language) as the future. He felt a degree of frustration in “having to carry Wang around on our backs” (T.1698), and the burden of “Wang’s poor perception in the market place” (T.1698).

50 So, as Mr Hooper explained, he was anxious to cut the Wang umbilical cord, but hesitant to do so until he had an alternative. I think it likely, therefore, that he spoke to Mr Kratsas in the terms that he deposed.

51 Daihatsu, having rejected Wang, and the P M Sulcs software, determined that it would use a new version of the Spares software, which was to be known as Vanguard. The task of rewriting that software was to be undertaken by a company, DMF. Mr Richard Womack was a consultant to that company. Within less than six months, however, it was evident that neither the ICL computer, nor the proposed software, was satisfactory (Kratsas: T.936). On 16 January 1988, Mr Hooper again met with Mr Kratsas. Mr Kratsas asked him to speak with Mr Womack, who had since been appointed a consultant to Daihatsu. Mr Hooper did so. Mr Womack later conducted a review of software packages suitable for Daihatsu. His review included the P M Sulcs Material and Customer Control System, MC2. Mr Womack executed a Confidentiality Agreement to enable him to view that system (Exhibit A, doc 107.1).

52 ICL, in the meantime, endeavoured to reassure Daihatsu. Its General Manager wrote to Mr Kratsas on 15 March 1988, in these terms: (Exhibit 11)

“We understand your expression of concern regarding the Vanguard system following the decision by Auto Holdings in Perth not to continue with the implementation of Vanguard into their company.

As you requested, we can confirm that ICL is indeed proceeding with the marketing of DMF ’s Vanguard in Australia. We regard the product to be a logical successor to SPARES , and we are confident that it will continue the success that SPARES generated for both ICL and many of our customers.”

53 ICL repeated its commitment to the successful implementation of the Vanguard software at Daihatsu. By May 1988, however, ICL acknowledged failure. The modified Spares software “would never get off the ground” (Kratsas: T.937). Daihatsu, nonetheless, remained committed, for the time being, to ICL. A tender document was prepared on 18 May 1988, which opened with these words: (Exhibit A, doc 110)

“It is envisaged that Daihatsu systems will have to be developed by an established ‘Software House’; as professional quality and on-going support are both required.

However, it is still desired that I.C.L. shall assist and monitor performance.”

54 The selection method was described as follows:

“The selection of the software supplier shall be from a short list of companies agreed by both Daihatsu and I.C.L.

Each supplier shall be asked to tender for development of the Vehicle system, on the basis of the preliminary ‘user’ design and number of programs, created for the previous system plan.

Also, for a ‘standard’ accounting system.”

55 A Vehicle System, it should be explained, is not an inventory control system (such as MC2). The dealers are not on-line. Rather, it is concerned with keeping track of vehicles which have been sold, recording their serial numbers, warranty details, and other such matters (Kratsas: T.1162).

56 The selection criteria included, inter alia, experience with the use of relational database (INGRES), which P M Sulcs could not satisfy, being a Wang system.

57 ICL had worked with a software company, Lingua 10. Lingua 10 was selected to write a software package in respect of “the new vehicle distribution and accounting systems for Daihatsu” (Exhibit A, doc 112). On 6 June 1988, Lingua 10 wrote to Daihatsu defining the work it would undertake. Its letter included the following proposal: (Exhibit A, doc 112)

“Prior to the commencement of any work Daihatsu Australia will need to finalise their decision on marketing the end product as a package. Should Daihatsu Australia wish to pursue the option of developing this as a package then all development costs would be as stated above plus sales tax at the applicable rate.

Profits from sale of the package (not including the value of any customisation) will be divided equally between the two companies.”

58 Daihatsu was asked to acknowledge acceptance of Lingua 10’s work proposal. Mr Kratsas did so on 20 June 1988.

P M Sulcs and Fujitsu

59 An issue arises which is one of some importance. Did P M Sulcs introduce Fujitsu to Daihatsu, as Mr Hooper claimed, or did P M Sulcs come to the defendant through Fujitsu? Mr Kratsas said this, referring to mid 1988: (Kratsas: Aff. 31.3.98, para 24)

“Shortly after Daihatsu experienced problems with the ICL hardware, Daihatsu’s parent company suggested that Daihatsu obtain computer hardware manufactured by Fujitsu as Daihatsu’s parent company used Fujitsu hardware. Accordingly, Daihatsu contacted Fujitsu Australia Limited … at the request of its parent company and made enquiries of Fujitsu as to what it could provide. The decision to contact Fujitsu was made solely on that basis.”

60 Mr Kratsas added: (at para 28)

“(a) … Fujitsu re-introduced Sulcs to Daihatsu. In particular, at some time in 1988, Mr Ross McLean of Fujitsu said words to me to the following effect:

‘We have the hardware and we have found a software vendor that might be appropriate, P M Sulcs & Associates.’”

61 Mr Womack supported Mr Kratsas’ evidence. Mr Kratsas told him that Daihatsu’s parent wanted the Australian company to use Fujitsu hardware. As a consequence he spoke with Mr Hooper in these terms: (Womack: Aff. 30.3.98, para 23(b))

“Fujitsu will be supplying the computer hardware and will be responsible for this project.”

62 The issue is important in the context of the condition precedent asserted by Daihatsu (cf Kratsas: Aff. 31.3.98, para 30(a)). Daihatsu says that it dealt with Fujitsu. It had no interest in dealing directly with a small software house. P M Sulcs was a sub-contractor to Fujitsu. According to Daihatsu, all parties understood that P M Sulcs would look to Fujitsu for payment. Fujitsu was to be responsible for the system, both hardware and software.

63 P M Sulcs rejected all but the last of these assertions. It said that it had its own relationship with Daihatsu. Daihatsu was attracted to its product. It was P M Sulcs which brought Fujitsu to the project. P M Sulcs, maintained its independent contractual relationship with Daihatsu. Fujitsu, for its own purposes, had agreed to underwrite the system, both software and hardware. It presumably did so because that was the price of its inclusion in the sale, which it saw as strategic.

64 I will now address that issue.

Approach by P M Sulcs to Fujitsu

65 Mr Hooper was aware that the ICL System 25 and the Spares software were obsolete. Companies using that system, or that software, were potential targets for a new system, both hardware and software. With that in mind, he approached Fujitsu. He spoke to Mr Docherty, the Sales Manager of Fujitsu. In substance he told Mr Docherty that P M Sulcs was acceptable to Daihatsu. If its software could be made to run on Fujitsu hardware (by its conversion to C and the UNIX operating system), Fujitsu could also be made acceptable to Daihatsu. Mr Hooper, according to his testimony, enquired whether, in these circumstances, Fujitsu was prepared to establish a CSV relationship (a Co-Operative Software Vendor relationship) with P M Sulcs, targeting not only Daihatsu, but others using the ICL system and/or Spares (Hooper: Aff. 2.1.98, para 12). Mr Hooper alleged that Mr Docherty responded in the following terms:

“Yes, we would be very pleased to have (P M Sulcs) as a (Fujitsu) CSV. Fujitsu has had a long relationship with Daihatsu in Japan but (Fujitsu) has not been able to interest (Daihatsu) because (Fujitsu) has not had any software that (Daihatsu) wanted. I will arrange a further meeting to be held regarding (Fujitsu’s) CSV support of (P M Sulcs) and to explore whether we organise the porting of (P M Sulcs’) MCS software to (Fujitsu) as part of a sale of computer equipment to (Daihatsu) or as part of a wider marketing agreement. If we decide on the wider marketing agreement approach, we will have to have a study done by (Fujitsu’s) marketing department and that could take some time. I would rather organise it through the sale of computer equipment to (Daihatsu) as this way it will be under my direct control and a much quicker process. This way we can quickly pursue the ICL customer base and all the other customers that would be interested in a combination of (P M Sulcs’) software and (Fujitsu) computers.” (parenthesis added)

66 “Porting” refers to the conversion of computer software so that it will operate on different hardware.

67 Mr Docherty acknowledged that he met Mr Hooper in mid 1988. He denied, however, having had the conversation alleged by Mr Hooper. Mr Hooper, thereafter, filed a further affidavit (12.10.99). It elaborated upon his dealings with Mr Docherty. Mr Hooper said that he met Mr Docherty on 13 May 1988. Through Mr Docherty he learned that Daihatsu was likely to spend approximately $1 million on computer hardware. According to Mr Hooper, having introduced the sale to Fujitsu, P M Sulcs would then be entitled to a 25% commission ($250,000), applying the standard which operated in the industry. That sum, according to his discussion with Mr Docherty, was to be used in the conversion of the P M Sulcs software so it would run on the Fujitsu system. P M Sulcs would make up any shortfall in conversion costs. Mr Hooper attributed to Mr Docherty these words: (Hooper: Aff. 12.10.99, para 4)

“Hooper: ‘How did your sales people go during their visit to DAP?’

Docherty: ‘It went well, I’m convinced with your support we will be able to sell at least a 1 million dollars of FAL computer equipment to DAP. What I would now like you to do is for you to accompany my sales people on a visit to DAP to show DAP a united PMS/FAL front.’

Hooper: ‘So it’s confirmed, we can count on receiving at least a $250,000 CSV commission from FAL to put towards our porting costs?

Docherty: ‘Yes.’”

68 Again, Mr Docherty denied a conversation in these terms. However, Mr Docherty acknowledged that he said the following: (Docherty: Aff. 7.4.98, para 10(a))

“However, I did say words to the following effect:

‘If:

(i) a sale can be made to Daihatsu by Fujitsu; and

(ii) $1,000,000 worth of hardware is sold by Fujitsu to Daihatsu as part of that sale; and

(iii) all of that hardware is manufactured by Fujitsu and not a third party.

Fujitsu will contribute $250,000 to assist with the conversion of the Sulcs software so that the Sulcs software can run on Fujitsu hardware. If any of those conditions are not met, the amount that Fujitsu will contribute to assist with the conversion of the Sulcs software will also change. However, that amount will only be paid by Fujitsu after the software is successfully converted so that it can run on Fujitsu hardware.’”

69 In the concluding sentence Mr Docherty deals with the timing of the payment of $250,000. There is some tension between that assertion and Mr Docherty’s acknowledgment that Fujitsu agreed “to contribute $250,000 to assist with the conversion”. I will return to this issue. In the months that followed, Fujitsu and P M Sulcs continued to discuss the conversion, and the terms upon which Fujitsu would assist the plaintiff. It is enough, in this context, to note that Fujitsu, on whatever terms, was prepared to contribute $250,000 to the conversion of P M Sulcs’ software.

The Evidence of Fujitsu Personnel

70 Mr Hooper’s account finds support in the evidence given by witnesses from Fujitsu. Mr Docherty gave the following evidence: (T.436)

“A. Fujitsu had been talking to Daihatsu prior to Mr Hooper and I meeting, and had been attempting to be permitted to bid to Daihatsu and had made an unsolicited offer to Daihatsu in the past so …”

71 Mr Docherty added (T.437):

“A. My understanding is that that proposal had been rejected by Daihatsu.”

72 Mr Hooper, therefore, offered Fujitsu a way back to Daihatsu. It was in that context that Mr Docherty agreed (upon whatever terms) that Fujitsu would assist in the funding of the conversion to the extent of $250,000.

73 Mr McInerney, the Sales Manager for the Commercial Group of Fujitsu, gave the following evidence: (T.1476)

74 Mr McLean, the person who arranged for Mr Docherty to see Mr Hooper, said this: (T.1507)

75 Mr McLean added: (T.1507/8)

76 In my view it is probable that Mr Hooper approached Daihatsu directly. I believe he reintroduced Daihatsu to the possibility of using a Fujitsu computer, as he claimed. On this aspect, I prefer the evidence of Mr Hooper, Mr McLean and, so far as it goes, Mr Docherty, to that of Mr Kratsas and Mr Womack.

77 First, and most tellingly, Fujitsu agreed to pay P M Sulcs a commission of $250,000 (on whatever terms) to assist in the conversion. That is a substantial amount. An agreement to pay that sum is consistent with P M Sulcs having introduced Fujitsu to the deal.

78 Secondly, it is also consistent with the sequence described by Mr Docherty. At the time Mr Hooper came to him, Fujitsu had put its proposal to Daihatsu, and had been rejected. Mr Hooper was the pretext for a fresh approach (infra: para 542).

79 Thirdly, the software of P M Sulcs was plainly attractive to Daihatsu (provided it could be converted to run on a UNIX system). Mr Womack, as Daihatsu’s consultant, made a review in 1988 of available software. He thereafter made a recommendation in these terms: (Womack: Aff. 30.3.98, para 17)

“I recommended that the Sulcs’ Material Customer Control System Software (the ‘Sulcs Software’) be further considered as the computer application software for the new parts system as the functionality of that software most closely reflected Daihatsu’s requirements.”

80 Mr Womack saw the software as “a good fit” (T.1291), and certainly superior, in some areas, to Spares. There was no other software which was “as good a fit” (T.1291). Mr Kratsas likewise believed that the P M Sulcs package “could deliver the goods” (T.1151). The hardware, on the other hand, was, to some degree, interchangeable. A number of the hardware vendors offered the features which were being sought by Daihatsu.

81 There was evidence that P M Sulcs was regarded by Daihatsu as more important than Fujitsu. Mr Hooper recounted a conversation with Mr Kratsas in July 1988. The conversation took place after Mr Hooper had seen Mr Docherty and discussed the provision of $250,000 funding for the conversion. The conversation with Mr Kratsas, according to Mr Hooper, was in these terms: (Hooper: Aff.2.1.98, para 14)

“Kratsas: ‘Is there any hope of PMS establishing a CSV relationship with ICL?’

Hooper: ‘No, I much prefer FAL to ICL. I have met with Neil Docherty and we have agreed on a CSV relationship between PMS and FAL where the costs of conversion of our software to run on FAL'’ computers can be covered out of the sale of a FAL UNIX computer to DAP.’

Kratsas: ‘If you prefer FAL then it’s OK with DAP that DAP buys its computer from FAL instead of ICL. …’”

82 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 25).

83 However,Mr Hooper’s account was consistent with the attitude adopted by Daihatsu somewhat later, when the context had slightly changed. Daihatsu, it will be remembered, had a longstanding relationship with ICL (supra, para 42). The ICL computer, Lingua 10, and a replacement package for Spares (using DMF) had been chosen by Daihatsu in mid 1988. However, as I will describe shortly, the replacement system experienced significant difficulties and delays. Indeed, it was these difficulties and that delay which prompted Daihatsu to reconsider P M Sulcs, and Fujitsu. A meeting was held on 18 January 1989. The Minutes were prepared by Daihatsu (Mr Holubinskyi). Messrs Kratsas, Womack and Holubinskyi, attended the meeting, as well as ICL personnel. Neither Mr Kratsas nor Mr Womack could recall the meeting. Mr Holubinskyi did not give evidence. The Minutes, however, identified Daihatsu’s concern with ICL’s performance. There had been a cost overrun of $600,000 to December 1988. The project was a year behind schedule. The network proposed by ICL was overdue and not functioning. Daihatsu, according to the Minutes, made the following proposal: (Exhibit A, doc 352)

“Daihatsu propose removal of all ICL equipment and replacing it with a UNIX based Fujitsu running Sulcs software. This would have the Dealer network in place within 3-6 months.”

84 ICL responded (according to the Minutes) with its own proposal. It would provide a more powerful computer, a Clan, and investigate the following:

· “Cost associated with Clan/network upgrade and sizing (re Lingua 10/Fujitsu sizing) …

· The portability and compatibility of Sulcs software.

· Network design.”

85 After the meeting, ICL composed an internal memorandum which included the following: (Exhibit H)

“I know Daihatsu want to switch to Fujitsu (UNIX) with Schultz software. Daihatsu have said:

a. ICL to take back all equipment and refund the money Daihatsu have paid or,

b. Daihatsu would accept a Clan 7 running Schultz software if ICL took prime contractorship (as Fujitsu have offered) - however there does not appear to be a working UNIX version of the Schultz software (according to Daihatsu), so this is unacceptable to me.”

86 “Schultz” is the phonetic equivalent of (P M) Sulcs.

87 The issue was put to Mr Kratsas in cross examination. He was asked the following: (T.969)

88 However, I accept that the Minutes are a more reliable guide, ten years on, than Mr Kratsas’ recollection. I believe the statement was made. Indeed, I think it probable that Mr Kratsas had the conversation with Mr Hooper in July 1988, to which Mr Hooper deposed (supra, para 81). The evidence strongly suggests that Daihatsu was prepared to continue with ICL (rather than Fujitsu), using converted P M Sulcs software.

Discussions Between Mr Hooper and Mr Kratsas

89 Mr Hooper gave evidence that he met Mr Kratsas at Daihatsu’s premises, accompanied by Mr McLean of Fujitsu, in July 1988. Mr Kratsas made the following statement: (Hooper: Aff. 2.1.98, para 15)

“The combination of MCS software, Lingua 10 software and FAL hardware is preferred by DAP over other suppliers. What I want is for FAL to prepare and submit a proposal for a complete FAL system based on porting the selected MCS software modules to FAL equipment running the UNIX operating system.”

90 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 26). He said that no combination of software and hardware was preferred by Daihatsu at that time.

91 Mr McLean, the Sales Representative of Fujitsu, however, recollected such a conversation, although he attributed it to a time later than July. Mr McLean said this: (T.1507)

“A. My view was that after a meeting in discussion with Leon Kratsas, he had specified that his ideal solution was to use the P M Sulcs software in a UNIX environment on a mainframe computer with an Ingres database. That’s the solution that then John Hooper, representing P M Sulcs, and I, representing Fujitsu, configured. The appropriateness of the P M Sulcs software to Daihatsu was between P M Sulcs and Daihatsu, in my view.”

92 It seems likely that something along the lines deposed by Mr Hooper was said by Mr Kratsas.

93 However, Mr Hooper went further. He alleged that he and Mr Kratsas negotiated the price of the P M Sulcs software. They also discussed the feasibility of marketing the Daihatsu system, once installed. Mr Hooper alleged that he quoted $350,000 as the price for the MC2 package, once ported to UNIX. Mr Kratsas, however, persuaded him to accept $150,000, holding out the prospect of further shared profits as a result of Daihatsu becoming a demonstration site. Mr Hooper attributed to Mr Kratsas these words: (Hooper: Aff. 2.1.98, para 17)

“Don’t worry about that, the combination of PMS software with FAL’s computers and DAPs Lingua 10 financial software will be unbeatable in the market, particularly to Japanese companies and to ICL SPARES users. I want you to agree to only charging DAP $150,000 as a licensing fee and that the 15% annual maintenance should be based on this lesser figure, not the minimum price of $350,000. FAL is paying you a CSV commission and my calculation is that you can do it for that.”

94 Mr Kratsas denied having discussed price with anyone other than Fujitsu. That denial was linked to his assertion (which I have rejected) that P M Sulcs came to Daihatsu through Fujitsu, rather than independently. I think it likely that there were discussions between Mr Hooper and Mr Kratsas on price. There were negotiations before agreement was reached at $150,000. That is the figure that appears in various documents thereafter (to which I will later refer).

95 I also believe it likely that there were discussions, at some point, about Daihatsu becoming a reference site. I will return to this aspect later when I deal with the alleged agreement to provide a reference site. Mr Hooper, in October 1988, had been handed a document by a Sales Representative of Fujitsu, Mr Warren Blood. The document listed almost one hundred companies which had the ICL System 25. Daihatsu was on the list (Exhibit A, doc 118). That system was now obsolete, and those companies, like Daihatsu, were potential targets for both hardware and software. I have no doubt that Mr Hooper was excited by that prospect, and sought to transmit his optimism to Mr Kratsas to secure his co-operation, to their mutual advantage.

Investigation of Conversion

96 With the prospect of securing a sale to Daihatsu, P M Sulcs began investigating the conversion of its software from Wang VS Cobol to the C language. I will later deal with the technical feasibility of undertaking that conversion. I should, at this stage, explain that it involved two steps, although it was conceivable that they could both be taken at the same time. The two steps were:

· First, the conversion of the Wang VS code (the Wang dialect of the Cobol language) to standard Cobol (sometimes referred to as ANSI standard Cobol or MicroFocus Cobol).

· Secondly, the conversion of ANSI Standard Cobol to the C language.

97 On 1 November 1988, Maris Sulcs in Canada (one of the founders of the company) drew attention to an Australian company, Sticky Software, which had a conversion tool for the first stage (Exhibit A, doc 126.1). The plaintiff’s written submissions helpfully describe what was involved: (p 10, para 24)

“24. Wang VS COBOL contains a number of statements that are not found in standard COBOL . These statements are shorthand routines for various system functions such as input/output routines to printers, hard disks and so forth. PMS contacted a company called Sticky Software Pty Ltd (‘Sticky’) which owned a program which could ‘strip out’ these statements from the Wang program, and thereby produce standard COBOL that in turn would be capable of being automatically converted to C by another program called a ‘conversion tool’. The standard COBOL referred to in the evidence is sometimes called ‘MicroFocus COBOL ’.”

98 On 17 November 1988, P M Sulcs met with Sticky Software. Sticky Software furnished a quote for the entire project (including the second stage) of $350,000. The time estimate was sixteen weeks (Exhibit A, doc 128A.1).

99 In addition, P M Sulcs explored the use of a conversion tool (known as Coblix-C) which would address the second stage. The tool (which was a computer programme) was owned by the US corporation, Rapitech Systems Inc (“Rapitech”). It was marketed in Australia by Paradyne Australia Limited (“Paradyne”). On 2 September 1988 Mr Santa Maria (the Technical Services Manager of P M Sulcs) spoke to Paradyne. On 26 October 1988 Rapitech wrote to Paradyne identifying what had to be done to convert Wang VS Cobol to the C language. Rapitech needed a sample of the code. It would then strip away (“comment out”) features specific to Wang, thereby generating standard Cobol, which could be converted (Exhibit A, doc 125). On 11 November 1988 Paradyne quoted A$35,000 for the Coblix-C conversion tool.

100 P M Sulcs provided Rapitech with a sample of its code (20,000 lines). The sample converted well. Rapitech wrote to Mr Hooper on 2 December 1988 in these terms: (Exhibit A, doc 128B.2)

“In the present project, P M Sulcs has Cobol applications written specifically for the Wang VS environment. You wish to convert and migrate those applications to the Fujitsu UTS target. Based upon the sample provided us of Wang VS Cobol previously converted to MicroFocus Cobol, we have demonstrated our unique capability to a 99% + automatic conversion.”

101 It was suggested that P M Sulcs retain Rapitech to undertake further analysis in Australia. No guarantee could be given until that was done. The letter concluded with these words: (Exhibit A, doc 128B.3)

“John, I hope this offer allows you to proceed to the next level of approval for this project with some degree of confidence and comfort.”

102 On 13 October 1988 Mr Hooper met Mr McInerney of Fujitsu. Mr McInerney asked for a corporate profile of P M Sulcs (Hooper: Aff. 18.2.98, para 5). On the letterhead of Cullen Detroit Diesel Allison Ltd (“Cullen Detroit”) (a shareholder of P M Sulcs Limited), Mr Hooper was sent the following message for Mr Maris Sulcs: (Exhibit A, doc 128.1)

“Enclosed please find the Company Profile for P M S Enterprises, as supplied by Maris.”

103 The documents enclosed related to both P M Sulcs Enterprises, and Cullen Detroit. I will return to this aspect in the context of the licence issue.

3. THE PROPOSAL

Presentation of the Proposal

104 P M Sulcs prepared a document headed:

“A Software Proposal to

DAIHATSU AUSTRALIA

15/12/88”

105 The document is voluminous. With annexures it runs to 167 pages (Hooper: Aff. 2.1.98, annexure G). It is one of the documents said by the plaintiff to constitute the agreement which is the subject of this action. I will examine its terms shortly.

106 Mr Hooper said that he delivered the proposal personally to Mr Kratsas at Daihatsu’s premises. Mr Kratsas claims that he received the document under cover of a letter from Fujitsu dated 16 December 1988 (to which I will shortly refer). Mr Hooper further alleges that, upon the occasion of his delivering the proposal, he spoke to Mr Kratsas. He was told that Fujitsu had accepted responsibility for the efficient running of the system, both hardware and software, which was the normal Japanese way of doing business. Mr Hooper’s account of his conversation with Mr Kratsas included the following: (Hooper: Aff. 2.1.98, para 21)

“That seems a good offer, it sometimes is very hard to co-ordinate a lot of different suppliers in the one project, it’s good that FAL are going to fulfil this role. You understand that PMS is an independent supplier and we always deal directly with our customers.”

107 Mr Kratsas, according to Mr Hooper, acknowledged that he had that understanding. Mr Kratsas denied that conversation. In his affidavit in response, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 30)

“(a) At the time referred to in that paragraph (that is December 1988) Daihatsu was dealing with Fujitsu.” (parenthesis added)

108 I have rejected that assertion. I believe it probable that Mr Kratsas was dealing directly with Mr Hooper. I also think it probable that the proposal was hand delivered by Mr Hooper, and that he spoke to Mr Kratsas. Although the proposal documents had been compiled using a word processor (and reappear in other tenders made in 1989), it was the product of considerable work. It also represented a substantial opportunity for Mr Hooper.

109 The text of the conversation with Mr Kratsas is less certain. I accept that Mr Kratsas said that Fujitsu was to take responsibility for the system, both software and hardware. That is consistent with the defendant’s case. I shall defer, for the moment, making a judgment as to whether Mr Hooper also said that P M Sulcs was an independent supplier who always dealt directly with its customers (which Mr Kratsas was said to have acknowledged). I will return to that issue once I have assembled all the evidence relating to the condition precedent issue.

The Terms of the Proposal

110 The proposal put by P M Sulcs described in some detail the Material and Customer Control System. It identified the modules included in that system (Exhibit A, doc 204). The system could be varied by adding or subtracting modules. The modules ultimately selected in April 1989 (the subject of the analysis report, which I will come to), in fact, included modules additional to those set out in the proposal (Exhibit A, doc 475, Items 41, 42 and 43).

111 The proposal included a client list, information concerning P M Sulcs, as well as a pamphlet describing the MC2 software. The pamphlet referred to the Wang computer, and was obviously prepared with that system in mind (Exhibit A, doc 259).

112 Two phases were described; the identification phase, and the implementation phase. The proposal said this: (Exhibit A, doc 206)

“The first is the identification phase, whereby staff from P M Sulcs and Daihatsu Australia review the existing procedures to understand the flow of information and data through your business and to determine those features which must be carried forward in your new implementation.

This information is documented in an analysis study that assures both parties that all details have been covered and provides an acceptance plan indicating the milestones for project completion. A detailed design specification that describes all the modifications required for the packaged software to reflect the special needs of your organization is then produced. It is signed off by Daihatsu Australia before we commence the actual programming work.”

113 The proposal continued: (Exhibit A, doc 208)

“At the completion of this phase, P M Sulcs will confirm the viability of the implementation within the time frame, budget and hardware recommendations. The conclusions and recommendations will be presented in the form of an analysis report to Daihatsu Australia.”

114 The function of the analysis report was then defined in these terms: (Exhibit A, doc 208)

“The analysis report becomes the project definition document and is used to control what work is to be done. In effect, becomes the acceptance document, together with an appropriate DPAR s, defining the completion of the project.”

115 The second phase was defined as follows: (Exhibit A, doc 206)

“The implementation is next. In this phase, the software modules are modified, documented and installed with any other additional activities necessary to ensure that the system meets your requirements and can go into full production.”

116 The proposal also dealt with the software installation, although in terms which were clearly appropriate for a client who had a Wang computer. It said this: (Exhibit A, doc 210)

“The software will be delivered from our Sydney office to the machine location designated by Daihatsu Australia. Software will be installed and pretested before being turned over for your use. Any modules which do not require customization can be installed as soon as the hardware has been installed. …”

117 No modules could be installed upon the Fujitsu computer until the software had been converted to the C language, running on a UNIX operating system.

118 The proposal included a project schedule which was as follows: (Exhibit A, doc 215)

Project Schedule
The following project plan is presented for review by Daihatsu Australia. Modifications to this schedule may be required subject to client priorities.

No. Date Activity Responsibility

1 2 weeks Analysis Study & Report P M Sulcs

2 2 weeks Analysis Report Approval Daihatsu Aust

3 1 week Systems Design P M Sulcs

4 1 week Installation of P M Sulcs unmodified software & training P M Sulcs

5 1 month Parallel Testing with Financial System Software Daihatsu Aust

6 1 week Systems Design Approval Daihatsu Aust

7 3 weeks Software Modifications P M Sulcs

8 3 days Data Conversion P M Sulcs

9 2 weeks Installation of Software Modifications P M Sulcs

10 1 week Start up Daihatsu Aust

11 2 weeks Operational Training P M Sulcs

12 1 month Parallel Run Daihatsu Aust

119 The schedule, in total, presupposed that the job could be completed in approximately 24 weeks. The reference to conversion in the project schedule, incidentally, is not a reference to conversion of the P M Sulcs software to the C language. It is reference to data conversion, which would enable the system to interface with existing systems, and “data formats” (cf Exhibit A, doc 211).

120 The quote was valid for a period of thirty days. A summary was provided in these terms: (Exhibit A, doc 221)

SUMMARY OF SOFTWARE AND SERVICES - FUJITSU M760-4 UTSM

Description	One off Charges $	Annual Charge $
Analysis Report	15,000	nil
Software Material & Customer Control System (under UNIX, C, Ingres Database)	150,000	22,500
Implementation Services Training (3 weeks)	12,000	______
System Total	177,000	22,500
OPTIONAL SERVICES Data Conversion (re Analysis Rpt) Project Management	TBA 7,500

121 The summary is the only reference to the conversion of the software to C language, and even then the reference is oblique. The heading referred to the Fujitsu M760-4 computer. That system plainly was not a Wang system. It did not use Wang VS Cobol. It used C language and was to be adapted to have a UNIX operating system. A description of the software, however, stated that it was “under UNIX, C, Ingres database”.

122 Nonetheless, one fact unquestionably part of the factual matrix, well known to both parties, was that the plaintiff’s software required conversion. Indeed, Mr Kratsas said this (referring to 16 December 1988): (Kratsas: Aff. 31.3.98, para 28(f))

“By the time I received the Fujitsu Proposal, I understood that:

(i) the Sulcs’ software was written in a version of the computer language known as ‘ COBOL ’ to run on Wang hardware (‘ COBOL ’) and it was not written to run with a RDBMS ;

(ii) as a result, that software could not be run on Fujitsu hardware with an RDBMS ;

(iii) Mr Hooper proposed to rewrite or convert the Sulcs software into another computer language known as ‘C’ in order for the Sulcs’ software to run on the Fujitsu hardware and with the Ingres RDBMS (which was to be the RDBMS that was to be used in the new computer system);

(iv) it was a highly technical and complex process to change software written in ‘ COBOL ’ to run on Wang hardware to ‘C’ code to run on Fujitsu hardware with an Ingres RDBMS .”

123 The proposal was accompanied by a number of appendices, including:

· The P M Sulcs standard Terms and Conditions (Exhibit A, doc 224).

· The standard Programme Licence Agreement (Exhibit A, doc 233).

· The standard Software Maintenance Agreement (Exhibit A, doc 246).

124 In the Terms and Conditions, clause 14, Wang is crossed out (Exhibit A, doc 231). Nothing was substituted in its place. The other documents refer to Wang, and had not been adapted or completed to reflect the specific proposed terms.

The Fujitsu Proposal

125 As mentioned, Fujitsu wrote a separate letter to Daihatsu the next day, 16 December 1988. The letter opened with these words: (Exhibit A, doc 345)

“ FUJITSU is pleased to have the opportunity to present our proposed solution to the computing requirements of DAIHATSU, as we understand them from our recent discussions with yourself and your technical staff.”

126 The letter continued, defining the proposal:

“In keeping with the FUJITSU concept of providing a total solution, this proposal incorporates the following:

127 Fujitsu’s letter concluded as follows:

“We feel that the combination of the above components provides an ideal solution to DAIHATSU’S computing requirements as well as providing a compatible environment for the existing application suite. Conversion of current applications would be minimal and current development could continue virtually uninterrupted.

We recommend acceptance of the enclosed proposal and those attached from P M SULCS for the application software and RELATIONAL TECHNOLOGY PTY LTD for the Relational Database INGRES and we look forward to your early decision.”

128 The letter was accompanied by a copy of the P M Sulcs proposal of 15 December 1988, and that of Relational Technology Pty Ltd, who marketed the Ingres database. I think it probable that the proposal of P M Sulcs did not include the various appendices (cf Womack: Aff. 30.3.98, Exhibit RHW1 (Exhibit A, doc 129) with Mr Hooper’s affidavit (Exhibit A, doc 177). I have concluded already that, by the time Mr Kratsas received the Fujitsu proposal, he already had a copy of the P M Sulcs proposal delivered by Mr Hooper.

4. THE REFERENCE SITE AGREEMENT

Meeting 30 December 1988

129 Having submitted the proposal, Mr Hooper met Mr Kratsas at his office on 30 December 1988. He stated that he discussed the possibility of Daihatsu becoming a reference site.

130 There can be no doubt that the meeting took place. Mr Hooper wrote a letter the same day, which began with these words: (Exhibit A, doc 346)

“Thank you for your time today to discuss our MC2 software solution running under Fujitsu’s UTSM environment.

As you are aware there are (sic) been a large number of ICL/Spares installations in Australia which are now exceeding their system life. It is P M Sulcs’ intention to convert these ICL/Spares users to Fujitsu/MC2 users as these systems come up for renewal.

We need Daihatsu’s help to achieve this goal.

This help is in the form of Daihatsu’s being the first ICL/Spares user to instal a Fujitsu/MC2 replacement system and in your being a demonstrations and reference site for MC2 to other ICL/Spares users.”

131 The consideration was then set out. The letter continued:

“In recognition of this, P M Sulcs will reduce the annual software maintenance to Daihatsu by 25% for each sale of MC2 systems to ICL/Spares users, (where Daihatsu has acted as a demonstration centre during the pre-sales effort).

Therefore, Daihatsu’s then current software maintenance fee will be totally refundable after four sales.

This discount will accumulate to a maximum of 100% over 30 months from the date of order of your Fujitsu/MC2 system.

Also, should Daihatsu be required to upgrade the initial Fujitsu M series computer during the same 30 month period P M Sulcs will provide, free of charge, a MC2 licence for the enlarged Fujitsu M series UTSM system.

Leon, I hope that this proposal meets with your approval as I am looking forward to working with you and Richard on this project. …”

132 Mr Hooper says that he later spoke to Mr Kratsas. The conversation was in these terms: (Hooper: Aff. 2.1.98, para 23)

“Hooper: ‘Did you receive my fax and do you accept our incentive proposal?’

Kratsas: ‘Yes, I have it and we agree with it.’”

133 Mr Kratsas denied that conversation. He acknowledged, however, that at some point he said to Mr Hooper words to the following effect: (Kratsas: Aff. 31.3.98, para 32)

“Hooper: ‘If you implement the Sulcs’ software, can we use your site as a reference site?’

Kratsas: ‘Yes, if it all goes okay.’”

134 It is this conversation which, in the context of the letter of 30 December 1988, is the foundation for the plaintiff’s claim that it had an agreement with Daihatsu in respect of a reference site (supra: paras 13, 16).

The Response of Daihatsu

135 Two issues arise:

· First, is it probable that a conversation in the terms alleged by Mr Hooper took place?

· Secondly, if so, did that conversation, in the context of the letter of 30 December 1988, amount to an agreement?

136 Addressing the first question, it will be remembered that Mr Hooper alleged (and I have found) that the subject of co-operation between Daihatsu and P M Sulcs had been discussed in the latter part of 1988 (supra: para 95). In the context of those discussions, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 22(c))

“… any computer system used by Daihatsu was to be for its own internal purposes. At no time was there any intention for Daihatsu to sell, market or promote any goods other than motor vehicles and parts for those vehicles. At all material times neither Daihatsu nor its parent company participated in any business other than the manufacture and distribution of motor vehicles and parts (apart from the provision of finance in relation to the purchase of motor vehicles and parts, which business is carried on by Daihatsu’s parent company).”

137 Board approval for an agreement to market software would be required.

138 However, it is plain that Mr Kratsas was alive to the potential advantages to Daihatsu of the company becoming a reference site. He accepted such a proposal in the context of Lingua 10 in June 1988 (supra: para 57). Indeed, Mr Hooper wrote to Mr Kratsas on 23 March 1989 in order to prevent a collision between Daihatsu’s interests (as the sponsors of Lingua 10), and those of P M Sulcs. The letter referred to discussions concerning these issues. It was in these terms: (Exhibit A, doc 407)

“Further to our discussion last month regarding Daihatsu’s desire to sell your financial software now being developed by Lingua 10.

I confirm that P M Sulcs would be happy to promote your financial software to the exclusion of our own financial software to existing ICL SPARES Users if Daihatsu’s General Ledger, Account’s Payable, Account’s Receivable and Vehicle System are completed and of marketable quality by July 31.

In addition to your having the software completed in time to capitalise on the existing prospects now available to us we would require that Lingua 10 (as your agents) agree to promote the P M Sulcs Material and Customer Control system to the exclusion of any inventory management or purchase order software they may develop.

This requirement ensures that both parties are bound to work together in the mutual promotion of each others products and to present a professional image to the existing ICL SPARES users.

In addition P M Sulcs also offer to work with Lingua 10 (as your agents) on prospective accounts, other than the existing ICL SPARES users, on a prospect by prospect basis where it is mutually agreed at the time to do so.”

139 Further, Mr Kratsas discussed with Fujitsu a similar marketing arrangement involving the Fujitsu computer and the Sulcs software. On 16 March 1989 Fujitsu wrote to Mr Kratsas in these terms: (Exhibit A, doc 403)

“ FUJITSU is pleased to confirm our agreement with you as follows:

1. For each new sale of the minimum hardware and software configuration listed in item 3 below where DAIHATSU AUSTRALIA PTY LTD has provided a positive reference to the prospective client thereby contributing to the success of the sales effort FUJITSU AUSTRALIA LTD agrees to credit DAIHATSU AUSTRALIA PTY LTD the sum of $30,000.

2. This offer is limited to a maximum of 5 sales, (ie a total of $150,000), or 3 years whichever occurs first.

3. The minimum configuration of hardware and software applicable to this agreement is:

We look forward to working with you in further developing a close and mutually profitable business relationship.”

140 Mr McLean, the Sales Representative from Fujitsu, was aware that Daihatsu was under consideration as a demonstration site (T.1517). Mr Womack, the EDP Manager of Daihatsu, wrote to P M Sulcs on 1 June 1989 (attempting to agree upon modifications to the system) in these terms: (Exhibit A, doc 1042)

891 Having reflected further on this issue, I am now persuaded that the better approach, in assessing the loss to the plaintiff caused by the defendant's breach, is to omit Research and Development as an overhead. In broad terms, Research and Development has two objectives. The first is a recognition that the company’s product has a limited life. It must be replaced if the company is to remain in business. Research and Development, therefore, is a prudent earmarking of present day profits to secure future earnings.

892 The second objective is the maintenance of the product which is presently being marketed. To secure the years of life potentially available (in this case seven years), the product cannot remain static. It requires revision, fine tuning and enhancement, lest its life be cut short.

893 Here, each sale, and the modifications associated with each sale, provided an opportunity for refinement and improvement. The overheads assumed in respect of each sale, and the undertaking of modifications, would, in my view, meet the second objective.

894 As to the first objective, in determining the value of the chance the plaintiff lost, I believe it better to concentrate upon the product which, on the assumptions made, was about to be converted and already existed, and had a probable life of seven years. Research and Development aimed at creating future earnings is more problematical. It is, in my view, more remote from the defendant’s breach. On reflection, I believe it should be excluded because its inclusion, without also including future earnings (which it is designed to secure), seems to me unfair.

Conversion Costs on Later Sales

895 Daihatsu, in its submissions, criticised Mr Weeks for having made no allowance for the conversion costs associated with each later sale. It said this: (Daihatsu subs: para 8.157)

“For every sale, Sulcs proposed first to make the modifications in the Wang VS Cobol version of the software into ‘C’. This would mean that for every sale it was necessary to undertake the conversion using the Paradyne tool. As that would only result in a 90% conversion, the balance of the conversion would have to be undertaken at a cost of at least $200,000 and would take 30 person months. Even if less time were involved after some experience were obtained, there necessarily would be substantial work and cost involved with risks of latest bugs and yet further work and costs.”

896 This aspect was not adequately explored during the hearings. Although there was certainly reference to the difficulties in modifying software, and the language in which modifications could be made, no witness gave evidence, in terms, which suggested that the work required in respect of each sale would be similar to that necessary in the first conversion for the Daihatsu sale. The plaintiff, in its submissions in reply, said this: (Plaintiff’s Subs in Reply on Damages 23.4.01: para 23.8)

“Mr Hooper’s evidence at T.97 and T.208 is to the effect that the additional work to complete the DAP conversion would have cost up to $200,000 in PMS personnel time. In other words, that would have been the cost to achieve the initial conversion. Later customers would have had the benefit of that initial conversion, and consequently the additional costs would have mostly be(en) concerned with modifications for the new customers.”

897 The need for manual conversion was created by the inability of the tool to carry out the entire job. The reference to 90% was simply a reference to the guarantee provided by Dr Lamberton in respect of the tool he was required to develop. Having developed the tool, and with fine tuning and experience, no doubt it could be adjusted to improve upon that figure. There are references in the evidence to a conversion rate of 93%, and even 99% in respect of some modules. Whatever the tool accomplished, I infer that the specific tasks required to complete the job manually would have been identified after the first conversion, and documented, such that the conversion could more readily be undertaken.

898 Nonetheless, I believe it is reasonable to assume some cost to P M Sulcs associated with the need for manual conversion in respect of each sale. I believe a reasonable allowance (doing the best I can) is $50,000 per sale, including all additional costs associated with the carrying out of such work. I will assume that sum as a fixed amount throughout the life of the software.

Mr Lonergan’s Alternative Scenario

899 I have referred already to the alternative formulation by Mr Lonergan (Appendix E1), based upon what he termed “more realistic assumptions”. Mr Lonergan, in fact, identified two alternative scenarios (Appendix E1 and E2), although it appears to me that Appendix E2 is extreme. The first scenario (Appendix E1) adopted Mr Weeks’ assumptions, modified as follows: (Lonergan: Aff. 29.11.00, p77, para 291)

“291 In this Scenario I have adopted Mr Weeks’ assumptions except that I have:

(a) included a sales price of $150,000 and no referral fee

(b) reduced the level of sales to two thirds those projected by Mr Weeks. That is, seven sales in 1990 and 1991, and four in all subsequent years. I have reduced operating costs by 25% to account for the reduced level of sales

(c) included a royalty rate of 15% of the sales price

(d) assumed that the hours needed for modification work are double those estimated, with no additional income recoverable from the customer. This reduces the profit on each sale through modifications from $54,400 to $28,800

(e) increased maintenance costs to 50% of maintenance income (as opposed to 10% assumed by Mr Weeks)

(f) reduced the ‘maintenance renewal rate’ to 75%, ie only 75% of maintenance contracts are renewed annually instead of the 95% as assumed by Mr Weeks

(g) inflated maintenance at CPI rather than 10% per annum

(h) included an abnormal item of $350,000 in 1990 instead of $114,000 as included by Mr Weeks. I am asked to assume that the cost of converting the software would have been at least $350,000

(i) included operating costs in the years after 1996 at 50% of the 1996 level forecast by Mr Weeks.”

900 These assumptions appear to me reasonable, subject to the following:

· First, the sale price, in accordance with my findings, should be increased from $150,000 to $250,000, with an average referral fee of $50,000 per sale, making total income per sale of $300,000 (Assumption (a)).

· Secondly, I believe Assumption (i) is not appropriate. If the product is assumed to have a limited life of seven years, it is not, in my view, reasonable to assume no income for the six years remaining (see Appendix E1), and yet a continuation of overheads of 50% of their former level simply to service maintenance contracts. I appreciate that maintenance contracts would continue. However, if the company had no product (because it had, imprudently, not invested in developing a replacement), then one would assume some other arrangement would be made for the contracts which remained. The company would merge, or it would sell the maintenance aspect of its business, or, more likely, obtain some other source of income.

· Thirdly, the conversion costs on each sale are assumed to be $50,000.

901 I reproduce below, the following tables:

· Table 1, being Appendix E from Mr Lonergan’s report of 29 November 2000 (reproducing Mr Week’s tables), which I have modified to include only years 1990 to 1996.

· Table 2, being Appendix E1, which is the Cash Flow Forecast based upon Mr Weeks’ assumptions, as modified by Mr Lonergan (again, only for the years I regard as relevant, 1990 to 1996).

· Table 3, being Appendix E1, which has been modified by me to adjust for the higher revenue which I believe probable (again, for the years 1990 to 1996), adding the costs of conversion on each sale (held constant), and the royalty payments.

902 These calculations must be carefully checked by the parties, and are subject to the Slip Rule.

CALCULATIONS MADE BY MR WEEKS TABLE 1

Year ended 30 June 1990
$'000 1991
$'000 1992
$'000 1993
$'000 1994
$'000 1995
$'000 1996
$'000

Sales Income

Income per sale

License fee 376 388 391 399 406 425 436

Other 282 282 282 282 282 282 282

Modifications 86 89 89 91 93 97 100

____ ____ ____ ____ ____ ____ _____

744 758 763 772 781 805 818

Total Income 3346 7583 7249 4631 4687 4827 4909

Cost per sale

Cost of sale (5) (5) (5) (5) (5) (6) (6)

Modifications (27) (28) (29) (29) (30) (31) (32)

Sales commission and marketing (16) (17) (17) (17) (17) (18) (19)

Royalty cost 0 0 0 0 0 0 0

____ ____ ____ ____ ____ ____ _____

(48) (50) (50) (51) (52) (55) (56)

(218) (500) (480) (309) (314) (329) (338)

Maintenance Income

Per contract 56 58 59 60 61 64 65

Less costs (6) (6) (6) (6) (6) (6) (7)

____ _____ ____ ____ ____ ____ _____

51 52 53 54 55 57 59

Total Maintenance Income 228 747 1219 1502 1783 2117 2417

Total Gross Profit 3356 7830 7988 5824 6155 6615 6988

Operating Costs (668) (884) (973) (984) (1142) (1387) (1729)

Abnormal item (114)

____ ____ ____ ____ ____ ____ _____

Net profit before tax 2574 6946 7015 4840 5013 5228 5259

Tax (1004) (2709) (2736) (1888) (1955) (2039) (2051)

____ ____ ____ ____ ____ ____ _____

Net profit after tax 1570
_____ 4237
____ 4279
_____ 2953
--_____ 3058
_____ 3189
_____ 3208
_____
CALCULATIONS MADE BY MR LONERGAN TABLE 2

Year ended 30 June 1990
$'000 1991
$'000 1992
$'000 1993
$'000 1994
$'000 1995
$'000 1996
$'000

Sales Income

Income per sale

License fee 161 166 168 171 174 182 187

Other 14 14 14 14 14 14 14

Modifications 86 89 89 91 93 97 100

____ _____ _____ _____ _____ ____ _____

261 269 271 276 281 293 301

Total Income 1825 1880 1085 1103 1123 1173 1202

Cost per sale

Cost of sale (5) (5) (5) (5) (5) (6) (6)

Modifications (55) (57) (57) (58) (59) (62) (64)

Sales commission and marketing (16) (17) (17) (17) (17) (18) (19)

Royalty cost (24) (25) (25) (26) (26) (27) (28)

____ _____ _____ _____ _____ ____ _____

(100) (103) (104) (106) (108) (113) (116)

Total Cost (700) (723) (417) (425) (433) (453) (465)

Maintenance Income

Per contract 24 25 25 26 26 27 28

Less costs (12) (12) (13) (13) (13) (14) (14)

_____ ____ ____ ____ ____ ____ ____

12 12 13 13 13 14 14

Total Maintenance Income 84 153 166 178 188 202 212

Total Gross Profit 1209 1310 833 857 879 923 949

Operating Costs (501) (663) (730) (738) (752) (787) (808)

Abnormal item (350)

____ ____ ____ ____ ____ ____ _____

Net profit before tax 358 647 104 119 127 135 142

Tax (140) (252) (40) (46) (49) (53) (55)

____ ____ ____ ____ ____ ____ _____

Net profit after tax 219
____ 395
____ 63
____ 72
_____ 77
_____ 83
_____ 86
_____

MODIFICATION OF MR LONERGAN’S CALCULATIONS- TABLE 3

Year ended 30 June 1990
$’000 1991
$’000 1992
$’000 1993
$’000 1994
$’000 1995
$’000 1996
$’000

Sales Income

Income per sale

License fee Referral 261
50 266
50 268
50 271
50 274
50 282
50 287
50

Other 14 14 14 14 14 14 14

Modifications 86 89 89 91 93 97 100

____ ____ ____ ____ ____ ____ ___

411 419 421 426 431 443 451

Total Income 2877 2933 1684 1704 1724 1772 1804

Cost per sale

Cost of sale (5) (5) (5) (5) (5) (6) (6)

Modifications (55) (57) (57) (58) (59) (62) (64)

Sales commission and marketing (16) (17) (17) (17) (17) (18) (19)

Royalty cost (39) (40) (40) (41) (41) (42) (43)

Conversion (50) (50) (50) (50) (50) (50) (50)

_____ _____ ____ _____ ____ ____ ____

(165) (169) (169) (171) (172) (178) (182)

(1155) (1183) (676) (684) (688) (712) (728)

Maintenance Income

Per contract 24 25 25 26 26 27 28

Less costs (12) (12) (13) (13) (13) (14) (14)

_____ ____ ____ ____ ____ ____ ____

12 12 13 13 13 14 14

Total Maintenance Income 84 153 166 178 188 202 212

Total Gross Profit 1806 1903 1174 1198 1224 1262 1288

Operating Costs (501) (663) (730) (738) (752) (787) (808)

Abnormal item (350)

____ ____ ____ _____ ____ ____ ____

Net profit before tax 955 1240 444 460 472 475 480

Tax (363) (471) (169) (175) (179) (181) (182)

____ ____ ____ ____ ____ ____ ____

Net profit after tax 592
____ 769
____ 275
____ 285
____ 293
____ 294
____ 298
____

The Discount Rate

903 Mr Lonergan provided a detailed and erudite account for the need for discounting, and the appropriate rate (Lonergan: Report. 28.11.00, p56ff). The objective of the discount rate was identified in these words: (Lonergan: Report. 28.11.00, p64, para 242)

“242. In considering what discount rate should be used, the overall objective of the discounting exercise must be borne in mind. The overall aim is to convert a stream of projected (but nevertheless hypothetical) net cash flows, occurring over a long period of time, into a single lump sum at a single date. The act of conversion of the net cash flow stream into a single cash lump sum is therefore to ascribe an equivalent value as at 30 June 1989 to those net cash flows, so that the single lump sum reflected all future net cash flows but allowed for the different time periods of receipt and the risks of receipt.”

904 Mr Lonergan stated that, in determining the value of the project, the cash flow should be discounted at the cost of capital. The method normally used to determine the cost of capital, and hence the discount rate, is the weighted average cost of capital (Lonergan: Report 28.11.00, p65, para 245). Mr Lonergan set out the issues which should be addressed in calculating the appropriate discount rate, namely: (para 268)

(a) the cost of equity,

(b) the cost of debt,

905 The cost of equity rests upon the following fundamental assumptions: (Lonergan: Report 28.11.00, p70, para 269)

“(a) an investor will always be willing to make an investment into risk free securities, such as long term Government bonds

(b) if however the investor is prepared to invest in a riskier investment than the risk free Government bonds, because of the higher potential returns that are expected to be generated from the higher risk investment, the investor will require a higher rate of return than generated by the Government bonds. That is, a premium will be required by the investor in accepting this higher level of risk.

(c) the rate of return required will vary depending upon the extent that the specific investment is riskier (or less risky) than an average investment in the market.”

906 Having dealt with each aspect, Mr Lonergan determined that the appropriate discount rate would be not less than 35% (Lonergan: Report 28.11.00, p74, para 280). Applying that rate to the earnings based upon assumptions which Mr Lonergan regarded as “more realistic”, Mr Lonergan stated that the value of the lost chance to P M Sulcs was nil (Lonergan: Report 28.11.00, p81, para 300).

907 Mr Weeks, as mentioned (supra: para 814), prepared an alternative calculation based upon the same methodology as Mr Lonergan (discounted cash flow) (Exhibit W). The discount rate Mr Weeks thought appropriate was 21%. He said this: (Weeks: Report 19.2.00, p2, Exhibit W)

“Based on your instructions that the level of sales and sales prices to be adopted would have been achieved, then, in effect, the risk of non-achievement of the expected cash flows is virtually nil. On this basis, the appropriate discount rate to apply would, in my opinion, be approximately 21%, comprising the risk free rate of 13.5% plus the general risk premium of 7%.”

908 Mr Lonergan regarded that rate as “far too low” (Exhibit 36, p7, para 20(b)). He said this: (Exhibit 36, p17, para 43)

“43. Mr Weeks states that he has been instructed that the risk of non-achievement of the cash flows is virtually nil; that is the receipt of these cash flows was risk free. If this was really the case and the cash flows were certain, then the appropriate discount rate to use would be the risk free rate and not 21%. This is because a stream of certain cash flows would be essentially risk free, whereas the rate chosen by Mr Weeks is consistent with a fully diversified share portfolio where the cash flows are by no means certain, have a higher degree or risk and therefore a higher discount rate. The argument is in my opinion academic since the cash flows are not risk free (even if sales were certain, which they were not) and therefore the use of the risk free rate would not be appropriate, but the fact that Mr Weeks does not use it when he asserts that the cash flows are risk free, betrays a lack of understanding of the use of such discount rates.”

Submissions on the Discount Rate

909 I have referred already (supra: para 806) to one aspect of the plaintiff’s submissions. The following was said: (Plaintiff’s Subs in Reply on Damages, 23.4.00: pp14/15, paras 29/30)

Sellars v Adelaide Petroleum

Malec

29.1 First, identify the event that might have occurred. Here, it was the making of sales of the converted software.

29.2 Second, value the event as if it had occurred. Mr Weeks values it at about $40 million.

29.3 Third, assess the likelihood that the event would have occurred. This task is for the court alone.

30. Mr Lonergan falters because he does not confine himself to the second task, and undertakes the first (by considering the likelihood of the conversion being achieved) and the third (by factoring that contingency into his discount rate).”

910 The only risk acknowledged by the plaintiff (although in the context of a commentary on the discounted cash flow methodology of Mr Lonergan) was the risk that the conversion of the software would not be successful. That risk was low, and adequately provided for (in the submissions of the plaintiff) by the additional 7% adopted by Mr Weeks (Plaintiff’s subs: p87, para 20). Presumably, the plaintiff would suggest that I should discount the plaintiff’s net earnings by no more than 21%.

911 The defendant, however, urged Mr Lonergan’s “cautious view”. It was, in the defendant’s submission, based upon “vast commercial experience of the capital and stock markets”, and also “a conventional view of the mathematical law of probability” (Daihatsu Subs in Reply on Damages, 26.4.01: para 28) (cf G v H (1994) 181 CLR 387 at 398). The submission made by Daihatsu added this: (para 29)

“29. Here, there were many chances successfully to be realised before commercial success was in prospect. These included:

29.1 finding a conversion tool that got a good result at a price which was acceptable and then completing the production of the tool to specification.

29.2 Sulcs repairing its shattered relationship with Fujitsu and actually doing a deal for the provision of $250,000 or finding from a source, of which there is no evidence, the money to finance the whole process of conversion.

29.3 Sulcs’ board agreeing to go ahead on the basis of the 2 steps above.

29.4 successfully doing the conversion itself and embedding the SQL commands.

29.5 getting the ‘bugs’ out of the MCC System software in both the Wang VS and C versions.

29.6 getting the Converted Software onto the M760, weathering the inherent problems of that machine and then adapting to its replacement.

29.7 Sulcs surviving financially during this process, including any setbacks.

29.8 Daihatsu being happy at the end of this process to be a reference site.

29.9 purchasers agreeing within a time in which Sulcs remained financially solvent to buy the Converted Software and doing so at any particular price or prices."

912 I accept the defendant’s submission, and would add, the inherent uncertainty as to the level of sales which would have been achieved had P M Sulcs been able to take advantage of the chance which it had (supra: para 880).

913 The discount rate, as applied in a valuation based upon a discounted cash flow methodology, provides some guidance in determining the prospects of success had the plaintiff been permitted to exploit the chance which it lost. In my assessment, the appropriate discount, reflecting the plaintiff’s prospects of successfully achieving the earnings set out in Table 3 is 40%. In other words, I assess the plaintiff’s prospects of earning the stream of income in Table 3 as 60%. Applying that rate, the loss of the chance should be valued at $1,683,600.

914 The verdict of the plaintiff, therefore, should be as follows:

· Licence Fee $75,000

· Maintenance Fee $22,500

· Modifications $81,500

· Loss of Chance $1,683,600

$1,862,600

ORDERS

915 For these reasons, I therefore make the following orders:

1. There should be a verdict for the plaintiff in the sum of $1,862,600, plus costs and interest.

2. I will reserve for submission (in the absence of agreement) the precise orders which should be made in respect of costs and interest.

*****

Last Modified: 08/02/2001

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Citations

P M Sulcs v Daihatsu Australia [2001] NSWSC 636

Most Recent Citation

Idoport Pty Limited v National Australia Bank Limited and 8 Ors; Idoport Pty Limited and Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited and Ors. [42] [2001] NSWSC 939

Cases Citing This Decision

3

PM Sulcs and Associates Pty Ltd v Oliveri [2010] NSWCA 16

Chase v Chase [2020] NSWSC 1689

Idoport Pty Limited v National Australia Bank Limited and 8 Ors; Idoport Pty Limited and Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited and Ors. [42] [2001] NSWSC 939

Cases Cited

17

Statutory Material Cited

2

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24

Digi-Tech (Australia) Ltd v Brand [2004] NSWCA 58

CITATION:	P M Sulcs v Daihatsu Australia [2001] NSWSC 636
CURRENT JURISDICTION:	Common Law
FILE NUMBER(S):	SC 11489/93
HEARING DATE(S):	01-05/11/99, 08-12/11/99, 15/11/99, 17/11/99, 15/12/99, 17/12/99, 22/02/00, 16/03/00, 14-18/08/00, 21-24/08/00, 28-31/08/00, 01/09/00, 04-08/09/00, 14/11/00, 04-07/12/00, 11-15/12/00, 18-10/12/00, 24/04/01, 26/04/01, 30/04/01
JUDGMENT DATE:	1 August 2001
PARTIES :	P M Sulcs & Associates Pty Limited (Plaintiff) Daihatsu Australia Pty Limited (Defendant)
JUDGMENT OF:	Kirby J

COUNSEL :	J J Garnsey QC/C Stevens QC/T J Hancock (Pl) S Rares SC/D Studdy (Def)
SOLICITORS:	Oliveri Attorneys (Pl) Clayton Utz (Def)
CATCHWORDS:	Loss of a chance - breach of contract - repudiation - factual matrix to assist construction - ready willing and able - recovery of money payable under contract but unpaid at date of termination - damages - reasonable contemplation of parties
LEGISLATION CITED:	Copyright Act, 1968. (Cth) Trade Practices Act, 1974 (Cth)
CASES CITED:	Allied Pastoral Holdings P/L v Commissioner of Taxation [1983] 1 NSWLR 1 Australian Knitting Mills P/L v The Commonwealth (1954) 92 CLR 424 Autodesk Inc v Dyason (1992) 173 CLR 330 B P Refinery (Westernport) P/L v The Shire of Hastings (1977) 180 CLR 266 Baltic Shipping Co v Dillon (1993) 176 CLR 344 Burger King Corp v Hungry Jack's P/L [2001] NSWCA 187 Carr v J A Berriman P/L (1953) 89 CLR 327 Codelfa Construction P/L v SRA of NSW (1982) 149 CLR 337 Commonwealth of Aust v Amann Aviation P/L (1991) 174 CLR 64 G v H (1994) 181 CLR 387 Ghazal v GIO (1992) 29 NSWLR 336 Hadley v Baxendale (1854) 9 EX 341 Laurinda P/L v Capalaba Park Shopping Centre P/L (1989) 166 CLR 623 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 Maks v Maks (1986) 6 NSWLR 34 Malec v J C Hutton (1990) 169 CLR 638 Maynard v Goode (1925-26) 37 CLR 529 Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 Roadshow Entertainment P/L v ACN.053006269 P/L (1997) 42 NSWLR 462 Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912 Sellars v Adelaide Petroleum (1994) 179 CLR 332 The Film Investment Corp of NZ v Golden Editions P/L (1994) AIPC 91-052 Watson v Foxman (2000) 49 NSWLR 315
DECISION:	Refer para 915.

No.	Date	Activity	Responsibility
1	2 weeks	Analysis Study & Report	P M Sulcs
2	2 weeks	Analysis Report Approval	Daihatsu Aust
3	1 week	Systems Design	P M Sulcs
4	1 week	Installation of P M Sulcs unmodified software & training	P M Sulcs
5	1 month	Parallel Testing with Financial System Software	Daihatsu Aust
6	1 week	Systems Design Approval	Daihatsu Aust
7	3 weeks	Software Modifications	P M Sulcs
8	3 days	Data Conversion	P M Sulcs
9	2 weeks	Installation of Software Modifications	P M Sulcs
10	1 week	Start up	Daihatsu Aust
11	2 weeks	Operational Training	P M Sulcs
12	1 month	Parallel Run	Daihatsu Aust

Year ended 30 June	1990 $'000	1991 $'000	1992 $'000	1993 $'000	1994 $'000	1995 $'000	1996 $'000
Sales Income
Income per sale
License fee	376	388	391	399	406	425	436
Other	282	282	282	282	282	282	282
Modifications	86	89	89	91	93	97	100
____	____	____	____	____	____	_____
744	758	763	772	781	805	818
Total Income	3346	7583	7249	4631	4687	4827	4909
Cost per sale
Cost of sale	(5)	(5)	(5)	(5)	(5)	(6)	(6)
Modifications	(27)	(28)	(29)	(29)	(30)	(31)	(32)
Sales commission and marketing	(16)	(17)	(17)	(17)	(17)	(18)	(19)
Royalty cost	0	0	0	0	0	0	0
____	____	____	____	____	____	_____
(48)	(50)	(50)	(51)	(52)	(55)	(56)
(218)	(500)	(480)	(309)	(314)	(329)	(338)
Maintenance Income
Per contract	56	58	59	60	61	64	65
Less costs	(6)	(6)	(6)	(6)	(6)	(6)	(7)
____	_____	____	____	____	____	_____
51	52	53	54	55	57	59
Total Maintenance Income	228	747	1219	1502	1783	2117	2417
Total Gross Profit	3356	7830	7988	5824	6155	6615	6988
Operating Costs	(668)	(884)	(973)	(984)	(1142)	(1387)	(1729)
Abnormal item	(114)
____	____	____	____	____	____	_____
Net profit before tax	2574	6946	7015	4840	5013	5228	5259
Tax	(1004)	(2709)	(2736)	(1888)	(1955)	(2039)	(2051)
____	____	____	____	____	____	_____
Net profit after tax	1570 _____	4237 ____	4279 _____	2953 --_____	3058 _____	3189 _____	3208 _____ CALCULATIONS MADE BY MR LONERGAN TABLE 2

Year ended 30 June	1990 $’000	1991 $’000	1992 $’000	1993 $’000	1994 $’000	1995 $’000	1996 $’000
Sales Income
Income per sale
License fee Referral	261 50	266 50	268 50	271 50	274 50	282 50	287 50
Other	14	14	14	14	14	14	14
Modifications	86	89	89	91	93	97	100
____	____	____	____	____	____	___
411	419	421	426	431	443	451
Total Income	2877	2933	1684	1704	1724	1772	1804
Cost per sale
Cost of sale	(5)	(5)	(5)	(5)	(5)	(6)	(6)
Modifications	(55)	(57)	(57)	(58)	(59)	(62)	(64)
Sales commission and marketing	(16)	(17)	(17)	(17)	(17)	(18)	(19)
Royalty cost	(39)	(40)	(40)	(41)	(41)	(42)	(43)
Conversion	(50)	(50)	(50)	(50)	(50)	(50)	(50)
_____	_____	____	_____	____	____	____
(165)	(169)	(169)	(171)	(172)	(178)	(182)
(1155)	(1183)	(676)	(684)	(688)	(712)	(728)
Maintenance Income
Per contract	24	25	25	26	26	27	28
Less costs	(12)	(12)	(13)	(13)	(13)	(14)	(14)
_____	____	____	____	____	____	____
12	12	13	13	13	14	14
Total Maintenance Income	84	153	166	178	188	202	212
Total Gross Profit	1806	1903	1174	1198	1224	1262	1288
Operating Costs	(501)	(663)	(730)	(738)	(752)	(787)	(808)
Abnormal item	(350)
____	____	____	_____	____	____	____
Net profit before tax	955	1240	444	460	472	475	480
Tax	(363)	(471)	(169)	(175)	(179)	(181)	(182)
____	____	____	____	____	____	____
Net profit after tax	592 ____	769 ____	275 ____	285 ____	293 ____	294 ____	298 ____