R J King v Stelmag Pty Ltd

[2006] ACTCA 14

R J KING & ANOR v STELMAG PTY LTD [2006]
ACTCA 14 (10 August 2006)

CONTRACT – construction of contract – whether there had been a repudiation of an obligation to pay royalties pursuant to a contract – whether trial judge erred in finding that a shareholder of a company was personally liable for the company’s failure to pay royalties pursuant to a contract – appeal allowed.

ON APPEAL FROM A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

No. ACTCA 20-2005
No. SC 25 of 1997

Judges:         Crispin P, Gray and Lander JJ
Court of Appeal of the Australian Capital Territory
Date:            10 August 2006

IN THE SUPREME COURT OF THE       )          No. ACTCA 20-2005
  )          No. SC 25 of 1997
AUSTRALIAN CAPITAL TERRITORY    )
  )

COURT OF APPEAL  )

ON APPEAL FROM A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

BETWEEN:ROBERT JOHN KING

First Appellant

AND:LONG PADDOCK PTY LTD

Second Appellant

AND:STELMAG PTY LTD

Respondent

ORDER

Judges:  Crispin P, Gray and Lander JJ
Date:  10 August 2006
Place:  Canberra

THE COURT ORDERS THAT:

1. The appeal be allowed.

1. The judgment entered in favour of Stelmag Pty Ltd against Robert John King in the sum of $223,838.51 as varied by order made on 1 April 2005 be set aside.

1. The matter be remitted for trial on the issues raised between Stelmag Pty Ltd and Robert John King.

1. The parties be heard on the order for costs made at trial in favour of Stelmag Pty Ltd against Robert John King.

1. The parties be heard on the costs of the appeal.

IN THE SUPREME COURT OF THE       )          No. ACTCA 20-2005
  )          No. SC 25 of 1997
AUSTRALIAN CAPITAL TERRITORY    )
  )

COURT OF APPEAL  )

ON APPEAL FROM A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

BETWEEN:ROBERT JOHN KING

First Appellant

AND:LONG PADDOCK PTY LTD

Second Appellant

AND:STELMAG PTY LTD

Respondent

Judges:  Crispin P, Gray and Lander JJ
Date:  10 August 2006
Place:  Canberra

REASONS FOR JUDGMENT

THE COURT:

1. The first and second appellants appeal from two orders made by the trial judge whereby on 1 April 2005:

‘Subject to submissions as to the accuracy of calculations, judgment will be entered in favour of the plaintiff [Stelmag Pty Ltd] against the first and second defendants [Long Paddock Pty Ltd and Mr King] in the sum of $223,838.51 plus interest’;

and on 19 July 2005 he ordered:

‘A sum of $295,000.00 be added to the judgment sum as at, and from, 1 April 2005.’

1. In the proceedings before the trial judge, the respondent, Stelmag Pty Ltd, was plaintiff, and the first and second appellants were defendants together with Susan Rosalie King.  The proceedings were abandoned against Mrs King and judgment entered in her favour.  There is no appeal against that order.

1. For consistency sake, we will refer to the first appellant as ‘Mr King’, the second appellant Long Paddock Pty Ltd as ‘Tifferly’ and the respondent as ‘Stelmag’.  Long Paddock Pty Ltd was formerly known as Tifferly Pty Ltd.  Because the documents all refer to the company by its former name, it is less confusing so to describe it on this appeal.  Mr and Mrs King are the shareholders and, we think, the directors of Tifferly.  John Robert Pollard has always controlled Stelmag.

1. In July 1987 Stelmag and Mr and Mrs King, as joint venturers, purchased 70 per cent of the issued shares in Torrens Industries Pty Ltd (Torrens).  Whilst there was no formal joint venture agreement, they agreed to Stelmag taking 60 per cent of that 70 per cent shareholding (42 per cent) and Mr and Mrs King taking 40 per cent of that 70 per cent shareholding (28 per cent).

1. The remaining 30 per cent of the shareholding in Torrens was owned by Dale Godkin (25 per cent) and Sue Rout (5 per cent).

1. Between 1987 and 1990, Torrens was under the control of Stelmag and Mr and Mrs King.  It carried on three separate businesses.  First, under the direction of Mr Pollard, it created and sold a software system to Mednetwork Systems Pty Ltd.  Secondly, it designed and manufactured fire transponders mainly under the direction of Mr King and, to a lesser extent, Mrs King.  Thirdly, it created and sold software packages SAMAIS and BAMC.

1. Differences of opinion arose between Mr Pollard on the one hand and Mr and Mrs King on the other in relation to the way in which Torrens should be managed, the amount Mr and Mrs King should be paid and the manner in which the profits of Torrens were distributed.

1. Those differences became more acute and came to a head in December 1990 when Mr Pollard and Mr and Mrs King agreed upon a division of the businesses conducted by Torrens and the future control and management of Torrens.

1. Mr Pollard, Stelmag, Mr and Mrs King, Tifferly and Torrens entered into a written agreement called Heads of Agreement (the agreement) which was executed by all of the parties on 16 January 1991.

1. It is not clear on the evidence who was responsible for the drafting of the agreement.  It might be observed immediately that it is an inelegantly drawn document and unfortunately, where necessary, imprecise.

1. In addition to the agreement operating to settle the differences between Mr Pollard and Mr and Mr and Mrs King, the agreement assumed that Mr Godkin would sell his shares to Mr King and that Stelmag would have an option ‘in preference to Tifferly or King’ of ‘first right of refusal on shares held by Sue Rout’.

1. In any event, Mr Godkin’s and Ms Rout’s shareholding and their membership of the company became, for the purposes of this litigation, irrelevant.

1. The agreement contained recitals setting out the reasons why the parties were entering into the agreement.  It is recited:

‘C.Substantial differences of opinion occurred between King, SKing and Pollard over several issues including:-

C.1the terms and conditions of a contract between Torrens and Stelmag for development of a medical system and the rights to income derived from a third party, Mednetwork Systems Pty Ltd

C.2the contributions being made by Pollard and SKing to a major Torrens project

C.3the differing management attitudes, behaviour and performance of King, SKing and Pollard.

D.These differences of opinion between King, SKing and Pollard continued for in excess of six months without a resolution satisfactory to all parties being reached.

E.The differences of opinion were having a serious affect (sic) on Torrens and were endangering the future of the company to the detriment of all concerned, including shareholders, staff, creditors and clients.

F.Litigation was being threatened by both King, SKing and Pollard to resolve these differences.  The litigation would also have involved Torrens and other third parties.

G.The litigation would have been very protracted and would have had a very detrimental affect (sic) on all parties and would probably have led to the eventual winding up of Torrens.

H.Agreement has now been reached in the interests of all parties in the terms set out herein.’

1. The agreement dealt with Torrens’ existing businesses which were, by force of the agreement, transferred to the other parties to the agreement.  By force of paragraph 1 of the agreement the parties recognised that Stelmag would be entitled to the income in relation to the existing contract between Torrens and Mednetwork Systems Pty Ltd and any future income.  The agreement provided that Torrens held the total income from the sale of run time licence fees for the Mednetwork Systems Pty Ltd on trust for Stelmag.

1. However, the agreement also provided that Tifferly was entitled to receive 20 per cent of that net income from Stelmag.  Clause 1.2 provided:

‘Tifferly is entitled to receive from Stelmag, 20.0% of net income from the sale of these run time licenses (sic), payable monthly.  Net income is defined as gross sale value less the direct cost of the run time licences.’

1. Moreover, the agreement also provided that in the event that Stelmag disposed of that business, Tifferly was to receive 20 per cent of the net capital return.  The agreement provided:

‘Should Stelmag dispose of in any way the business of the sale of run time licences relating to the medical system, Tifferly is to receive 20% of the net capital return to Stelmag.  Net capital return is defined as the gross sale price less any direct costs incurred in arranging that sale.’

1. The agreement then provided:

‘Stelmag and Pollard undertake not to do anything, either directly or indirectly, which would have the effect of reducing or avoiding the obligation of Stelmag to pay to Tifferly its share of the income or capital return from the sale of run licences as set out above.’

1. As we have already said, the agreement is inelegantly worded.  It speaks of Tifferly being entitled to receive from Stelmag 20 per cent of net income or 20 per cent of net capital return but does not in terms impose upon Stelmag the obligation to pay that percentage of the net income or net capital return to Tifferly.

1. The agreement then addressed that part of Torrens’ business which was under the direction of Mr King and, as we have said, to a lesser extent, Mrs King.  That part of the business was the design and manufacture of fire transponders.

1. Clause 1.5 of the agreement provided:

‘Torrens will sell to Tifferly, for nominal value, the total fire business of Torrens, including hardware and software, all hardware designs and the current stock of finished goods and components.  This also includes plant and equipment used in production.

Tifferly to bear the full cost of upgrading the fire system should this course of action be pursued by Tifferly.

Torrens is to enter into a formal contract of sale with Tifferly to this effect.

Tifferly will pay to Torrens the cost of any Torrens facilities or staff time used in the maintenance and running of the fire business.’

1. That part of the business sold fire transponders.

1. Accordingly, paragraph 1.6 provided:

‘Tifferly will pay to Stelmag a royalty of 20.0% of the gross value of any fire transponders sold, payable monthly.

Should Tifferly in any way dispose of the current fire business, including design and patent rights etc, Stelmag is to receive 20% of the net capital return to Tifferly.  Net capital return is defined as the gross sale value less any direct costs incurred in arranging that sale.

Fifty percent (50%) of any expenditure made by Tifferely (sic) in updating the current fire system to the latest technology which has not been recouped from any contract with a fire brigade or other party is also to be deducted from the gross sale value in determining the royalty payable to Stelmag by Tifferely (sic).

Tifferly and King undertake not to do anything either directly or indirectly, which would have the effect of reducing or avoiding the obligation of Tifferly to pay to Stelmag its share of the income or capital return from the sale of transponders or the fire business as set out above.

Tifferly and Torrens agrees to allow Stelmag reasonable access to any accounting records and documents to verify any amounts due under this clause.’

1. Paragraph 1.6 is in similar terms to paragraph 1.2.  However, unlike paragraph 1.2, paragraph 1.6 imposes upon Tifferly the obligation to pay to Stelmag a royalty of 20 per cent of the gross value of any fire transponders sold and an obligation to pay that royalty monthly.

1. It can be seen that the intention of the parties was that the Pollard interests through Stelmag, and the King interests through Tifferly, would each take one of the three businesses conducted by Torrens.

1. Stelmag would receive all of the proceeds of the Mednetwork Systems business but Tifferly would be entitled to receive 20 per cent of the net income from the sales generated by that business.  Tifferly would also be entitled to 20 per cent of any net capital return on the sale by Stelmag of that business.

1. On the other hand, Tifferly (on Torrens selling the business to it (clause 1.5)) became entitled to the proceeds of the sale of fire transponders subject to Stelmag being entitled to 20 per cent of the gross value of the sales of those fire transponders and/or 20 per cent of the net capital return to Tifferly of the sale of the business generating those sales.

1. The agreement also addressed the third business conducted by Torrens, being the software package business of SAMAIS and BMAC.  The parties agreed that that business would remain the property of Torrens.

1. The agreement dealt with other matters relating to the entitlements of the directors and the future management of Torrens, none of which are relevant.

1. The agreement was implemented and the parties thereafter separately conducted the two businesses to which the different interests became entitled by force of the agreement.  The business assumed by Stelmag was relatively unsuccessful.  However, Tifferly’s fire transponder business was quite successful and it generated substantial income.

1. Notwithstanding the first paragraph of clause 1.6, which obliged Tifferly to pay Stelmag a royalty of 20 per cent of the gross value of any fire transponders sold on a monthly basis, Tifferly failed to account to Stelmag at any time.  That failure is the subject of these proceedings.

1. It is not necessary to go to the extensive correspondence which ensued after 1991 and before these proceedings were commenced, but it is enough to say that Mr Pollard and Stelmag called upon Mr King and Tifferly to account for the royalties received in relation to Tifferly’s sales of fire transponders.  Up until trial and, indeed, up until judgment, Tifferly denied, through Mr King, that any monies were payable by it to Stelmag in respect of that royalty clause.

1. There are two particular letters which were written by Tifferly/King which were relied upon by Stelmag at trial as constituting a repudiation by Tifferly and Mr King of Tifferly’s obligations to pay royalties to Stelmag and of Mr King having ‘taken steps to cause the obligation of Tifferly to pay Stelmag its share of the income from the sale of transponders to be reduced or avoided’.  Those letters were written on 6 December 1993 and 26 May 1994.  We set out the contents of those letters:

‘6 December 1993

John

Further to our conversation of 4 December and my notes of 25 August & 26 November, the following information is provided:-

1.         Transponder Income

I repeat my position that I do not believe we are liable to pay any amount re transponder royalty, given all the circumstances re ZIM royalties.  However the following is provided for information as discussed:-

transponder sales 1/12/90 to 30/6/91  168,373.50

transponder sales to 30/6/92  348,966.80

transponder sales to 30/6/93  268,235.53

transponder sales to 30/11/93  128,575.00

Total  914,150.83

20% of total  182,830.16

2.         Costs paid by RK re Torrens Industries

This is not an exhaustive list – I spent ten minutes only compiling this list and I know I have ommitted (sic) a lot of payments.  You can easily see the extent of what I have had to do.

2.1cash from fire income input to Torrens Industries from 1/12/90 to 30/6/91 – this was done to ensure that AMP & other TI matters were finished off as best as possible.  1/12/90 was the date of split.  Total amount - $114,226.82.

2.2lease payments made by RK on your Capri – early 1991 - $2,167.86

2.3CBFC – lease payout on XT computers (boat anchor material): 16/8/91. $4,732.17

2.4Contra re owing to NT Security for maintenance work pre 1/12/90 - $5,780.20

2.5Amount paid re termination of factoring agreement with Scottish Pacific - $5,787.50

2.6Loss on disposal of Astra cars - $10,424.17

2.7Esanda – payout of Saxon 80286 computers incl Epson Laser (boat anchors again) - $16,476.78

2.8Lease payments made on Astras and computers until they were paid out.  This ignores lease costs on Commodore and one Astra (being used by King) - $15,297.03

2.9Legal cost re Shatzman and liquidation matters - $7,771.00

2.10Termination and unused holiday pay for Torrens Industries employees either paid directly by King or assumption of liability - $15,000 estimate only but likely to be more

2.11Accomodation (sic) costs from Olims re AMP project - $5,099.10

2.12Defects liability period for AMP.  This extended from December 1990 to approx Feb March 1992.  From approx May 1991 onwards, all costs associated with AMP were borne by King.  Any time spent by SK/IP/RK and others, plus travel and some other costs, were paid directly by King.  A very conservative estimate of $25,000 is given of these costs.

2.13RK received no remuneration from Torrens Industries from approx April 1991 onwards.  Since then an absolute minimum of 6 months time has been spent on various matters associated with the winding down of Torrens matters (including AMP defects liability, ANG defect liability, Shatzman matter, action by Tax Dept re group tax & ACT Revenue re payroll tax (all paid), liquidation of company, etc etc.  A very conservative estimate of $25,000 is given of these costs.

2.14Godkin – I have paid all the amounts for Godkin payout.  You were a joint signatory on that.  Total paid - $95,000 plus $7/8,000 to go.  Include 50% - say $50,000

TOTAL TO HERE - $302,762.63

I have not bothered at this stage to go through all of the trade creditors to see what was paid directly by King – but there would be at least another $25,000 there.

I think you can get the gist of what we have had to do from the above.

What contribution are you going to make?

3.Paradox work – I am certain it was in Monday Canberra Times on 29 November.  We have thrown the paper out.  It was through an agency whose name I didn’t know.

4.Tax losses in TI, capital loss and liquidation.  Not sure what we can do but we should in some way be able to make use of the tax losses and to realise, at some time after tax losses absorbed, to crystallize on the capital loss.

Any suggestions?

5.I want to get TI out of liquidation so that there is never any “black mark” against my name, and also for the reasons in 4 above.

Rob King’

‘16 Buzacott Place

McKellar  ACT  2617

26 May 1994

Mr J Pollard

30 Brunswick Circuit

Kaleen  ACT  2617

John,

1.Your invoice of 24 May 1994 number CC253 is totally rejected.  I have previously considered and had advice on this possibility.  You are at perfect liberty to commence proceedings on this in the Supreme Court if you wish, but I can assure you that it will be most vigorously (and expensively) defended, and that numerous and substantial cross claims will be made against you.

2.What I want by way of settlement is quite simple and is set out on the following two pages.

It is not an ambit claim – it is a take it or leave it position.  If this is agreed it effectively ends all ties between Pollard/King.  I confidently speak for both of us when I predict that this would result in collective sights of relief.

3.This offer is open until 15 June 1994.  The extended period is to give you time to obtain advice on the various matters, and also to provide a “cooling off” period for both parties.

I, and/or my legal advisers, are quite prepared to have a “sane and unemotional” discussion with your solicitor on a “without prejudice” basis in the intervening period.  However as I will be away intermittently until the 15^th, I suggest any arrangements for a suitable date be made sooner rather than later.

4.In the period until the 15^th June, I undertake to not progress or commence any matters in either the Small Claims, Magistrates or Supreme Courts.  This is on the basis that you give a similar undertaking.  If this item is agreed, please advise immediately as there is one matter due to come up in a matter of days, and I will take action to defer it.

5.If an agreement is not reached by the 15^th June, my position is – “let the battles commence and may the lawyers grow sleeker and fatter”.

Rob King’

1. Stelmag pleaded this aspect of its case against Tifferly and Mr King.

‘7.Further, in clause 1.6 of the Agreement provided relevantly as follows:

“Tifferly and King undertake not to do anything, either directly or indirectly, which would have the effect of reducing or avoiding the obligation of Tifferly to pay to Stelmag its share of the income or capital return from the sales of transponders or the fire business as set out above.”

8.In breach of clause 1.6 all three defendants the first and second defendants have taken steps to cause the obligation ofTifferly the first defendant to pay Stelmag the plaintiff its share of the income from the sale of transponders (particulars of which are pleaded above) to be reduced or avoided.

Particulars as against the first defendant:

The first defendant has failed to make payment; by its offer and agent, the second defendant has informed the plaintiff in writing by letters dated 6 December 1993 and 26 May 1994, that it has no obligation to pay the plaintiff as the plaintiff claims and that it will not pay.

Particulars as against the second defendant:

The second defendant as an officer and agent of the first defendant has informed the plaintiff in writing by his letters dated 6 December 1993 and 26 May 1994 that he rejects that the first defendant has an obligation to pay the plaintiff as the plaintiff claims and that the first defendant will not pay.

Particulars as against the third defendant:

The third defendant has made no offer of any payment.

8A.Further or in the alternative, on or about 6 December 1993 or alternatively 26 May 1994 the first and second defendants repudiated their obligations under the Agreement.

Particulars

Letter from Mr King to Mr Pollard dated 6 December 1993

Letter from Mr King to Mr Pollard dated 26 May 1994’

1. Stelmag claimed at trial that Tifferly’s/Mr King’s repudiation had caused it loss or damage of $333,139.16 which was the amount of the unpaid royalties.  That loss was particularised as being the amount payable by Tifferly to Pollard ($335,307.16) less the amount paid ($2,168).  It also claimed interest.  In the alternative, Stelmag argued that Mr Pollard, Stelmag and Mr and Mrs King were joint venturers and, as a result, Mr King (the claim against Mrs King having been abandoned), owed a fiduciary duty to Stelmag which he breached as a result of which Stelmag was entitled to damages.  The trial judge did not address the second aspect of Stelmag’s claim.  As a result, no findings were made by the trial judge as to whether a fiduciary duty was owed by Mr King or Tifferly, the content of the duty if so owed or whether the duty was breached.

1. The trial judge found for Stelmag on the first aspect of its claim, namely, that Tifferly and Mr King both owed contractual obligations to Stelmag which they breached.

1. The trial judge accepted Stelmag’s claim that the amount of royalties payable by Tifferly was in the sum of $335,307.16.  He also inferentially accepted that an amount of $2,168 had been paid.

1. He then dealt with other defences raised by Tifferly/Mr King.  He rejected their defence based upon misrepresentations alleged to have been made by Stelmag/Mr Pollard relating to the Mednetwork project.  Except for a small sum of $974.14 he also rejected a defence raised by Tifferly/Mr King that Mr Pollard had failed to administer the Mednetwork project so as to avoid the reduction of royalties which would otherwise have accrued.

1. He found, however, that Tifferly/Mr King were entitled to set-off amounts paid by Mr King in discharge of Torrens’ separate liabilities upon the basis that those payments allowed Tifferly/Mr King to claim ‘within the general right of one contributor to seek contribution from that co-surety or co-contractors’.

1. He found that Tifferly/Mr King had paid to Torrens a sum of $213,635.30 of which Mr King was entitled to set-off $106,812.65.

1. As a result, he entered judgment for Stelmag against Tifferly and Mr King in the sum of $223,838.51.

1. Initially, Stelmag appealed against the judgment of the learned trial judge upon the basis that there should have been no reduction on account of contribution.  However, Stelmag abandoned that cross-appeal.  In those circumstances, this Court does not need to address the question of contribution between co-contributors or the more difficult question whether the contribution should be assessed equally where the shareholding is unequal.

1. What is important to note, however, is that Stelmag did not succeed on its full claim.  Indeed, its claim was reduced by in excess of $100,000 on account of contributions made by Mr King to Torrens.  On his Honour’s findings, Tifferly’s obligation to pay to Stelmag its share of the income was reduced accordingly.

1. It is not disputed by Stelmag that the trial judge was entitled to reduce the amount owing by Tifferly to Stelmag by the amount of the contributions paid by Mr King to Torrens.  It is not clear why Tifferly was entitled to such a reduction.  It is not clear whether Tifferly was a joint venturer with Stelmag and there is apparently no evidence that it was a co-contributor.  None of these matters were addressed in the judgment probably because, as Stelmag claimed in the cross-appeal which has been abandoned, those issues were not pleaded.

1. In any event, those issues can be ignored except for the purpose of noticing, as we have said, that there is no dispute that Tifferly’s indebtedness was found to be less than the amount claimed by in excess of $100,000.

1. In a separate judgment, the trial judge assessed the interest payable by Tifferly/Mr King at $295,000 and ordered that that sum be added to the judgment sum as from 1 April 2005.

1. Tifferly was also ordered to pay Stelmag’s costs.

1. Tifferly appealed against those orders but abandoned the appeal shortly prior to the hearing.  Thus it was that Tifferly did not acknowledge until after judgment, but just before the hearing of this appeal, that it was indebted to Stelmag in the sum found by the trial judge in respect of the royalties unpaid by Tifferly to Stelmag for the sale of the fire transponders.

1. The real dispute at trial and the matter agitated on appeal was Mr King’s separate liability in respect of the same amount.

1. Stelmag contended at trial and on appeal that Mr King was liable to make payment to Stelmag of the same amount owed by Tifferly by reason of the fourth paragraph of clause 1.6 of the agreement.  We set that part of clause 1.6 out again because it really was the subject matter of the appeal:

‘Tifferly and King undertake not to do anything, either directly or indirectly, which would have the effect of reducing or avoiding the obligation of Tifferly to pay to Stelmag its share of the income or capital return from the sale of transponders or the fire business as set out above.’

1. The first aspect of Stelmag’s claim required a consideration of clause 1.6 and, in particular, the true construction of paragraph 4 of that clause.

1. The learned trial judge did not address the question of construction of paragraph 4 of clause 1.6.  In relation to this aspect of Stelmag’s claim, the trial judge said:

‘31.I also note that the claim is not pressed against Mrs King, only against Long Paddock and Mr King.  The latter was clearly the controller of Long Paddock and could have, but did not cause it to pay Stelmag.

…

48.I take the view that while King, on reflection, considered it unfair that, having made these payments, as I accept he did, through Long Paddock, he still remained obligated to pay the full royalty on transponder sales.’

1. It must have then been the case that the trial judge was of the opinion that, because Tifferly was still obligated to pay Stelmag the royalty payments on the transponder sales, Mr King, therefore, as controller of Tifferly, was thereby personally liable to pay the same amount.

1. Although he did not say so, it follows that the learned trial judge must have construed paragraph 4 of clause 1.6 to mean that Mr King undertook to ensure that Tifferly paid Stelmag its share of the income from the sale of transponders.

1. Paragraph [31] of his Honour’s reasons shows that his Honour must have reasoned that, because Mr King was controller of Tifferly and had not caused Tifferly to pay Stelmag, he thereby incurred a personal liability pursuant to that clause to Stelmag.

1. We do not agree, with respect, with his Honour’s construction of that part of clause 1.6 which we have set out at [51] above. In our opinion, Mr King did not become personally liable to Stelmag because Tifferly did not pay to Stelmag its share of the income from the sale of transponders as required in clause 1.6 of the agreement. Such a construction would be to make Mr King the guarantor of Tifferly’s obligations. In our opinion, that is not a construction which can be put upon that part of clause 1.6.

1. Mr King’s counsel argued that clause 1.6 imposed upon Mr King an obligation to act in good faith and no more than that.

1. We are not sure that that is a construction which we would have placed upon clause 1.6 but it is a concession which is favourable to Stelmag.

1. In our opinion, clause 1.6 obliged Tifferly not to conduct itself so as to reduce or avoid its obligation to pay to Stelmag its share of the income from the sale of transponders.  That obligation meant that Tifferly could not, for example, assign to a third party the right to sell transponders and, in doing so, reduce its income from the sale of transponders so as to reduce or avoid its obligation to pay the royalties to Stelmag.

1. The same clause obliged Mr King not to do anything of the same kind which would achieve the same result.  However, in Mr King’s case, the obligation was only to do or not to do something giving rise to the effect in the clause.  Mr King could not become liable without it being established that he was in a position that something he did or something he did not do had the effect of reducing or avoiding Tifferly’s obligation to Stelmag.

1. There was no evidence in this case that allowed the finding to be made in the second sentence in [31] of his Honour’s reasons. There was no evidence that he was the controller and could have caused Tifferly to pay the royalties to Stelmag. Even if he was the controller, that did not make him personally liable simply because Tifferly failed to pay the royalties. On the construction we would place upon the clause more was necessary. The finding on his Honour’s reasons in [48] is not a necessary consequence of the finding in [31].

1. Moreover, as we have already pointed out, it is now accepted on all sides that Tifferly’s obligation to Stelmag was less than that which was sought by Stelmag both in its letters and in the proceedings, and at trial.  The amount of unpaid royalties was reduced by something like $106,000.  That shows that at least to that extent both Tifferly and Mr King were entitled to dispute the amount claimed by Stelmag against Tifferly.

1. In our opinion, the appeal by Mr King should be allowed and the judgment which has been entered against him should be set aside.  The judgment entered against Tifferly should stand.  As we have said, Tifferly abandoned its appeal.

1. There should be a new trial in relation to Stelmag’s claim against Mr King including that part of Stelmag’s claim which is based on a breach by Mr King of a fiduciary duty owed to Stelmag.  This Court is not in a position, in the absence of any findings on that issue, to determine whether the claim can succeed.  We would hear the parties on the costs of the appeal and the learned trial judge’s order for the costs of the trial.

   We certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of this Honourable Court.

   Associate:
   Date:  10 August 2006

Counsel for the Appellant:  Mr Crowe with Mr Livingston
Solicitor for the Appellant:  Bradley Allen

Counsel for the Respondent:  Mr Purnell with Mr Mossop
Solicitor for the Respondent:  Lander and Co

Date of hearing:  14 February 2006
Written submissions completed:  5 July 2006

Date of judgment:  10 August 2006