Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd

[2023] NSWCA 102

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2023] NSWCA 102

Hearing dates:

1 May 2023

Date of orders:

18 May 2023

Decision date:

18 May 2023

Before:

Bell CJ; Hammerschlag CJ in Eq; Adamson JA

Decision:

(1) Appeal allowed.

(2) Set aside the orders made on 23 February 2022 by Ward CJ in Eq.

(3) In lieu thereof, make the following orders:

(a) Judgment for the plaintiff in an amount to be the subject of short minutes of order to be brought in by the plaintiff within seven (7) days reflecting a calculation in accordance with the judgment of the Court of Appeal.

(b) The defendant is to pay the plaintiff’s costs at first instance.

(4) The respondent is to pay the appellant’s costs of the appeal.

Catchwords:

CONTRACTS – intention to create binding relations – written agreement between the parties in the form of a letter in which they mutually acknowledge and agree in relation to future supply contracts under which they might supply to third parties patient entertainment systems that they will honour the intent of previous discussions in specifically identified ways including by each contributing 50% of costs and by splitting gross profits 50/50 – where the agreement includes an undertaking to commence negotiations in good faith, to draft an agreement that suits both parties for a long-term relationship – whether their agreement with respect to future contracts is binding – HELD – it is binding

EQUITY – fiduciary duties – whether the parties’ relationship was fiduciary in nature – whether their relationship was one of mutual confidence – whether one party undertook and agreed to exercise a discretion which would affect the interests of the other party, both in a legal and practical sense – HELD – agreement binding and the parties’ relationship was fiduciary

DAMAGES – quantification – discounted cash flow method – where calculation adopted by primary judge included a deduction for future costs of particular items based on a model not agreed between the parties’ experts and based entirely on a party’s guesswork – where respondent was in a better position than the appellant to provide evidence supporting the deduction – HELD – deduction should not be included

Cases Cited:

Allen v Carbone (1975) 132 CLR 528; [1975] HCA 14

Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540

B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9,147

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622

Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61

Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424; [2001] FCA 1833

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8

Feldmanv GNM Australia [2017] NSWCA 107

Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd [1995] NSWCA 166; (1995) 7 BPR 14,551

Hampton Court Ltd v Crookes (1957) 97 CLR 367; [1957] HCA 28

Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2016] NSWCA 123

Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235; (2005) 12 BPR 23,021

Hospital Products v United States Surgical Corp (1984) 156 CLR 41; [1984] HCA 64

Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68; [1907] HCA 38

John Alexander’s Clubs Pty Limited v White City Tennis Club Limited (2010) 241 CLR 1; [2010] HCA 19

Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72

Mount Bruce Mining v Wright Prospecting Pty Ltd (2015) 25 CLR 104; [2015] HCA 37

Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149

Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2022] NSWSC 144

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52

United Dominions Corporations Ltd v Brian (1985) 157 CLR 1; [1985] HCA 49

Category:

Principal judgment

Parties:

Stellar Vision Operations Pty Ltd (ACN 156 151 245) (Appellant)
Hills Health Solutions Pty Ltd (ACN 100 173 715) (Respondent)

Representation:

Counsel:
C N Bova SC with S J Murray (Appellant)
C R C Newlinds SC with T Epstein (Respondent)

Solicitors:
Corrs Chambers Westgarth (Appellant)
King & Wood Mallesons (Respondent)

File Number(s):

2022/00075969

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity Division

Citation:

Stellar Vision Operations Pty Ltd v Hills Health Solutions Pty Ltd [2022] NSWSC 144

Date of Decision:

23 February 2022

Before:

Ward CJ in Eq

File Number(s):

2016/00284725

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant (Stellar) and a company called Questek Australia Pty Ltd (Questek) collaborated in tendering together to supply Patient Entertainment Systems (PES) to hospitals. Amongst others, they tendered to supply such a system to the Western Sydney Local Health District (WSLHD). The tender was joint, but Questek was formally named as the tenderer. It was contemplated that Stellar would provide the software. In February 2014, Questek was named as the preferred supplier of PES to WSLHD.

The respondent (Hills), a publicly listed company, proposed to acquire Questek’s business.

On 13 March 2014, Hills addressed a letter to Stellar which Stellar accepted and countersigned on 24 March 2014 (the Undertaking). By the Undertaking, they acknowledged and agreed, in relation to certain future contracts, including the WSLHD contract, that the intent of previous discussions between Questek and Stellar would be honoured, amongst others, in that they would each contribute 50% of all contract implementation costs including labour, materials and ongoing operation costs for each project, and would split the gross profit 50/50 from all projects and ongoing services. They agreed that both parties would have open access to all projects and financial information as required.

The Undertaking recorded an acknowledgement that specified tenders, including to WSLHD, had been submitted as joint tenders between Questek and Stellar. It also provided that Hills would commence negotiations in good faith with Stellar to draft an agreement that suited both parties for a long-term relationship.

Stellar worked to develop the software architecture, system design, services architecture and on customising Stellar’s core software for use on the WSLHD contract.

Subsequently, Hills executed a written contract with WSLHD for the supply of a PES, but excluded Stellar from any participation in the project. Instead, it made arrangements for another entity, Lincor, to provide the services which Stellar would have provided.

Stellar sued Hills in the Equity Division for damages for breach of the contract constituted by the Undertaking and for breach of fiduciary duties.

At first instance, the primary judge dismissed Stellar’s claims.

As to the claim in contract, the primary judge held that the part of the Undertaking concerning WSLHD was not binding because how the parties would share 50/50 in the gross profits of the project remained to be agreed and, absent the entry into of a formal joint venture agreement, the parties did not intend to be bound.

As to the claim of breach of fiduciary duties, the primary judge held that the parties were not in a fiduciary relationship because they never really progressed beyond mere negotiation and the necessary mutual confidence in their relationship, and an undertaking or agreement by Hills to act for or on behalf of or in the interests of Stellar in the exercise of a power or discretion which would affect the interests of Stellar in a legal or practical sense, were not present.

The key issues before the Court of Appeal were:

1. whether the Undertaking with respect to the WSLHD project was a binding contract; and

2. whether Stellar and Hills were in a fiduciary relationship with respect to the WSLHD project.

On appeal, the parties were largely agreed on the method to be adopted for quantifying damages. The only integer in the calculation left in dispute was whether there should be a deduction for future replacement of patient monitors. In allowing a deduction, the primary judge relied on a document which had been described by the parties as the September Model. As to damages, the only issue on appeal was whether the figures in the September Model should be adopted.

The Court (Bell CJ, Hammerschlag CJ in Eq and Adamson JA), allowing the appeal, held:

As to contract

The primary judge erred in finding that the Undertaking was not binding with respect to the WSLHD project. The entry into of an agreement for a long-term relationship was not a condition of the parties being bound to their expressed agreement with respect to the WSLHD contract. Their agreement uses the language of contract and Hills required Stellar formally to sign it. It contains an effective acknowledgement that the WSLHD tender was joint, and stipulates for the contributions to be made, the things to be done and profits to be shared, in relation to projects where there had already been joint tenders: at [71]-[83].

As to fiduciary relationship

The primary judge erred in finding that the parties were not in a fiduciary relationship on the basis that their relationship was not one of mutual trust and confidence and Hills had not undertaken or agreed to act for or on behalf of or in the interests of Stellar in the exercise of a power or discretion which would affect the interests of Stellar in a legal or practical sense.

Both such requirements were present: the joint tender to WSLHD had been made using their combined resources; the Undertaking embodied a binding agreement with elements analogous to a partnership; as the party dealing with WSLHD, and ultimately the only contracting party, Hills was in a position where it could (and in fact did) exercise a discretion which would affect the interests of Stellar, both in a legal and practical sense by excluding Stellar; Stellar was vulnerable to Hills’ breach in this regard. Even if the Undertaking was not a binding contract, the nature of the parties’ dealings was such that mutual confidence was readily apparent: at [94]-[99].

As to damages

The primary judge erred in relying on the figures in the September Model because they did not constitute admissible evidence: at [109]-[112].

JUDGMENT

INTRODUCTION

1. THE COURT: The appellant (Stellar) appeals from a judgment (the primary judgment or PJ) of Ward CJ in Eq (primary judge), as the President then was, sitting in the Equity Division, dismissing proceedings brought by Stellar against the respondent (Hills) in which Stellar claimed:

1. Declarations that:

1. Hills holds a half interest in a contract entered into between Hills and the Western Sydney Local Health District for the supply by Hills to WSLHD of a patient entertainment and nurse call system;

2. Hills holds half a share of all profits from the WSLHD Contract on trust for Stellar;

3. upon entry into the WSLHD Contract, Hills became a joint venture partner with Stellar in respect of it; and

4. Hills has acted in breach of trust and/or fiduciary duty in respect of the WSLHD Contract;

5. in the alternative, Hills has breached a contract with Stellar arising from signed acceptance by Stellar of a letter from Hills bearing date 13 March 2014; and

2. Equitable damages or equitable compensation for breach of trust and/or fiduciary duty, or alternatively damages for breach of contract.

2. For the reasons which follow, the appeal must be allowed, the orders of the primary judge set aside and a judgment for damages entered in favour of Stellar.

FACTUAL BACKGROUND

3. The primary judgment is extensive. It is not necessary to recount in full the primary factual findings made by the primary judge. Her Honour’s factual findings are not challenged. What is challenged are her Honour’s characterisations of, and the legal conclusions drawn by her Honour from, those findings.

4. The facts below are those which the Court considers material to the disposition of the appeal.

Stellar and Questek Commence Collaboration

5. Stellar was formed in 2012 to market an in-flight entertainment system for “fly-in-fly-out” mine workers. However, in 2013, Stellar started developing bedside hospital entertainment systems, commonly referred to as Patient Entertainment Systems (or PES). Stellar is associated with a group which supplies in-flight entertainment systems.

6. Questek Australia Pty Ltd (Questek) was a company which specialised in providing nurse call systems for hospitals and aged care homes. Questek was part of a group called the Brighton Technology Group. From 2012, it too moved into the area of supplying PES to hospitals.

7. In their mutual dealings, Stellar was principally represented by Mr Brendan McCarthy (McCarthy), its Chief Executive Officer, and Questek was principally represented by Mr Daniel Linderman (Linderman), a technical and sales representative whose designation at some point was National Infotainment Manager. In technical matters, McCarthy was assisted by Dr Abul Rahman (Rahman), an engineer and Stellar’s Chief Technical Officer. Mr Bryan Curtin (Curtin) was a consultant to Stellar.

8. In February 2013, Linderman approached McCarthy with a view to Stellar and Questek working together to provide PES to hospitals.

9. The first enterprise in which they became associated was the possible supply of PES to a Brisbane hospital operated by Queensland Children’s Health (QCH). Questek successfully tendered for the supply of PES to QCH but Questek did not have its own PES. Linderman asked Stellar to provide a working model of PES for a demonstration at QCH. At or about this time, Stellar and Questek started discussing the possibility of entering into a joint venture. Questek had experience and a reputation working on government contracts and doing installation of hardware in hospitals. It would provide the hardware and Stellar would provide PES content and software.

Outline of Agreement

10. Following negotiations between them, the detail of which is not necessary to recount, on 23 May 2013, Stellar and Questek entered into a written agreement entitled “Outline of Agreement”, under which Stellar agreed to provide the software for the PES to be provided to QCH. It is appropriate to set it out in full:

Issue

Details

Parties

• Stellar Vision Operations Pty Limited, (SV)

• Questek Australia Pty Ltd (QT)

Background

• Questek has contracted to provide an entertainment system for Queensland Children's Hospital.

Object of Agreement

• StellarVision agrees to provide the software for this entertainment system including all Client user interfaces and Server Software as per specifications outlined in Schedule A - Software Specification.

Consent and Authority

Questek promises to give StellarVision the authority and consent it needs in order to enter the premises for initial installation testing and ongoing support of the system.

StellarVision’s Obligations

StellarVision will provide:

• Software for the server and Client terminals including all Client software to enable the functionality of specifications in Schedule B – Functionality Brief;

• Unlimited use of the initial software for the life of the terminals;

• Remote monitoring of the entertainment system;

• Initial installation testing and ongoing support of the software for the Defect and Liability Period (DLP) of 2 years;

• Onsite installation and commissioning of software as required until DLP expires;

• Supply Questek with service faults via email to Questek support.

Questek’s Warranties

Questek warrants that:

• it has the capacity to support the warranties;

• StellarVision will have continued remote access to the system subject to the Hospital Networks Security requirements;

• it will not attempt to reverse engineer StellarVision's software systems or processes;

• it is StellarVision's fiduciary with respect to the technical know-how and intellectual property which StellarVision is allowing Questek to use;

• it will supply StellarVision with a SLA if the hospital takes up the opportunity; otherwise all service after the 2 year DLP will be a chargeable item;

• the system will, when used, not breach the intellectual property rights of any other party;

• the system will not be used to commit a criminal offence;

• the system will not be used to breach any defamation laws

Questek’s Indemnities

Questek indemnifies StellarVision against:

• any criminal offence which has been caused by use of the system provided by StellarVision;

• any infringement of intellectual property rights of the third parly [sic] caused by used of the system;

• defamation of any person caused by use of the system;

• any liability due to failure of any component of the system which was not provided by StellarVision;

• failure of the system due to the system not meeting the specifications which StellarVision provided to Questek;

• any liability resulting from failure of Questek to obtain the necessary consent and authority for StellarVision to perform its promises under the Agreement.

Term

• This Agreement is from the date of the signing of this Agreement to the completion of the DLP indicatively.

Price

• The initial price is for the supply of this Agreement $240,000 including GST;

Payment

• Payment of the initial price will be made by Progress Claims invoiced monthly in arrears commencing between on June 30 2013 and completing December 31

• 1st payment due on 30 July 2013.

Scope of Agreement

• The Agreement does not create a partnership.

Exclusivity

StellarVision will grant exclusivity to Questek for use of its software for Aged Care and Hospitals until both parties have met to identify future cooperation or up to 12 months from the date of signing this Agreement.

Future Cooperation

Between the signing of the agreement and 31 Dec 2013 both parties agree to enter into bona fide discussions to develop the concept of working exclusively with each other on a project-by-project Joint venture arrangement for mutual benefit. This clause is not intended to create any legal obligation between the parties.

11. Notable features of the Outline of Agreement include that Stellar would provide the software and Questek acknowledged that it was Stellar’s fiduciary with respect to the technical know-how and intellectual property which Stellar was allowing Questek to use. Stellar granted exclusivity to Questek for use of its software until both parties had met to identify future cooperation or up to 12 months from the date of signing the Outline of Agreement and the parties agreed (but in non-binding fashion) to enter into bona fide discussions to develop the concept of working exclusively with each other on a project-by-project Joint venture arrangement for mutual benefit.

12. On 11 June 2013, McCarthy, Linderman and Rahman conducted an onsite demonstration of Stellar’s PES for QCH. Thereafter, Stellar and Questek continued to work together on that project.

13. For most of the remainder of 2013, Stellar and Questek had discussions about other requests for tender and possibly entering into a joint venture. These included a meeting on 27 June 2013 where they discussed the work required to submit joint tenders and where each potential project was referred to as a “bucket” to which each party would contribute. They also included discussions about the possibility of Stellar acquiring an equity stake in Questek.

The WSLHD Request for Proposal and Response

14. On 25 September 2013, HealthShare NSW (NSW) (a State Government instrumentality) issued a written Request for Proposal (RFP) for the supply of PES to the Western Sydney Local Health District (referred to throughout this judgment as WSLHD) for use in its hospitals at Auburn, Westmead, Blacktown and Mount Druitt. An addendum to the RFP was issued on 18 October 2013. Linderman sent both documents to McCarthy. The RFP is a substantial document requiring a tenderer to provide a significant amount of information.

14. Stellar and Questek worked together to respond to the RFP. Linderman was given shared access to technical specifications information being put together by McCarthy and Rahman for the purpose of responding to the RFP.

15. On 9 October 2013, Linderman and McCarthy had a conversation, during which Linderman referred to the fact that a proposal could only be submitted under the banner of one party and in which he said that until such time as they had a joint venture company up and running, they should just list Questek as the nominee party for their joint venture because they had all the proper accreditation and experience with hospitals. He also said that they would brand everything with both Stellar and Questek logos and that he would leave “them” (presumably meaning WSLHD) in no doubt whenever he spoke with them that this was a joint Stellar and Questek bid and should be treated as such. According to McCarthy, he responded to the effect that everyone on the procurement end knew who Stellar was and what they did and knew what their stake was in the bid, which was “ok” with them.

16. On 24 October 2013, Questek responded to the RFP. The response was sent under cover of a letter signed by Linderman on behalf of Questek on a letterhead which had the following header:

18. Under the heading “Executive Summary”, Questek wrote, amongst other things, the following:

Our submission combines the resources of two leading Australian companies from Healthcare and Entertainment.

…

Stellar Entertainment (Stellar) is also an Australian owned company with over 30 year [sic] of experience in Entertainment content, systems, software and solutions. Stellar is one of the world’s largest inflight airline entertainment suppliers, servicing over 30 airlines from six offices around the globe. One of Stella’s [sic] first clients in 1974 was Qantas Airways when it responded to a newspaper advertisement for tailored inflight audio programming and production, a job they still do today, more than 35 years later.

The combined resources offer a truly unique partnership, leaders in Australian healthcare and entertainment technology and solutions, developers not integrators of hardware and software, direct access to the largest Hollywood studios, entertainment programming and knowhow and a shared focus to provide simple, cost effective solutions that deliver the best experience for you and your patients. The combined resources also mean the support of over 60 dedicated staff and over $60 million in revenue per year.

19. The letter included a photograph of a proposed PES terminal (reminiscent of a small television or computer screen). Amongst others, on the screen were the words “Stellar Vision”. The letter included a heading “Tender Documentation”, under which documentation was identified. It is not in issue that some of this was prepared by Stellar.

20. The tender response required provision of information about the tenderer’s capacity to perform and the human resource levels that would be available to perform the services being tendered for. It required the tenderer(s) to state the number of years they had “been in business under their present constituted form” and to state the human resource levels that would be available to do so. It also required the tenderer(s) to state its annual turnover. In answer to these requests, the response said respectively (erroneous spelling of Stellar not corrected):

Questek = 30 years & Stella 33 Years

Questek maintains staffing levels of 30 full time employees in NSW Australia with below industry standards in staff turnover. Stella Entertainment maintains staffing levels of 76 full time employs [sic] with 35 located in NSW Australia.

Questek (Brighton Technologies Group) $26.5 million / Stella Entertainment - $27 million

21. Linderman and McCarthy made a presentation at Westmead Hospital on 11 November 2013 at which Linderman made reference to the fact that it was a joint bid combining the individual strengths of Stellar and Questek. There was a PowerPoint presentation which included slides referring to both Stellar and Questek.

Hills Arrives on the Scene

22. Hills is a public company whose shares are listed on the Australian Stock Exchange (ASX). At the times material to this dispute, Ms Peta Jurd (Jurd) was an executive director. Mr David Starkey (Starkey) was Divisional Commercial Finance Manager.

23. Hills proposed to buy Questek’s business. To that end, from about November 2013, it conducted due diligence on Questek which included due diligence on the tender to WSLHD. This process included a meeting on 21 January 2014 between Stellar, Questek and Hills at which Jurd apparently requested a demonstration of Stellar’s PES. A demonstration was given on 30 January 2014.

The Tender Succeeds

24. On 5 February 2014, NSW notified Linderman on behalf of Questek that Questek had been selected as the preferred supplier for WSLHD, subject to a signed agreement. Questek immediately informed Hills of this.

25. On 26 February 2014, a meeting took place between NSW representatives, McCarthy and Linderman, at which McCarthy referred to the fact that the tender was a joint submission and requested the tender entity to be changed to a joint venture entity when it was formed. The following day, he wrote to Linderman, amongst others about changing the entity. Linderman responded on the same day that he could not ask to change the contract details without having any details to change to but said that “they were all keen to move ahead with the JV but until hills [sic] are in or out we will need to sit tight”.

26. On 13 March 2014, there was another meeting at which Linderman, Jurd, Curtin and Mr Mark White (White) of Hills were present. White asked of Stellar, “What makes you think you have an interest in the Western Sydney tender?” to which Mr Curtin responded that Stellar submitted the tender jointly with Questek under an agreement that the contract would be entered into by the joint venture; that this was in compliance with the Outline of Agreement reached with Questek under which Stellar and Questek agreed to work together in a project-by-project joint venture arrangement; that Stellar in fact wrote the tender response based on Stellar’s software; and that the tender had Stellar’s name all over it. Curtin further said that Questek had simply acted as a facilitator given its existing relationship with the client.

27. Jurd said that instead of a joint venture, they would put in place a structure where Stellar got the same financial outcome, that they were about to finalise the deal with Questek and were completing the final legal documents and needed Stellar to sign a letter.

The Undertaking

28. Between 13 and 24 March 2014, Stellar and Hills negotiated an instrument (the Undertaking), the final form of which was a letter from Hills to Stellar bearing the date 13 March 2014 and which, it is common ground, was countersigned on behalf of Stellar on 24 March 2014. It is necessary to set it out in full.

Stellar Vision Operations Pty Ltd

35 Glebe Street

Glebe NSW 2037

Strictly private and confidential

13 March 2014

Dear Sirs

Thank you for the opportunity to meet and discuss future co-operation opportunities with Stellar Vision Operations Pty Ltd (“Stellar")

As mentioned previously, Hills Health Solutions Australia Pty Ltd (ABN 21 100 173 715) (“Hills") proposes to acquire the nurse call and patient entertainment business of Brighton Technologies Pty Ltd (ABN 23 123 014 040), Questek Australia Pty Limited (ABN 22 001 898 504) (“Questek Australia”) and Questek Infotainment Pty Ltd (ABN 97 901 773) (“Questek Transaction”).

We are now well advanced in negotiating the terms of the Questek Transaction and expect to sign definitive agreements shortly.

In connection with the acquisition, Hills seeks confirmation from you that Stellar will continue to provide the support for the Questek patient entertainment system (including, without limitation, supplying the software, entertainment media and patient entertainment system to support the Questek patient entertainment system) under:

(a)    the Queensland Children Hospital Contract pursuant to and on the same terms as the Outline of Agreement dated 23 May 2013 between Questek Australia and Stellar, and

(b)    any open purchase orders, tenders and/or requests for proposal which have been jointly submitted or pitched by Questek Australia and Stellar (including the tenders or requests for proposal set out in Annexure A) (collectively the “Tenders and Pitches”) on the terms set out in Tenders and Pitches or any additional terms which are necessary to reflect any final awarded contract arising from Tenders and Pitches.

As such, we would be grateful if you would provide, the consent and undertaking set out in this letter to confirm continuity of those Questek patient entertainment software arrangements.

We acknowledge that Stellar and Questek Australia entered into negotiations which were summarised in the document entitled “Outline of Agreement” and dated 23 May 2013. Negotiations between the parties were undertaken as envisaged under the heading “Financial Cooperation” which negotiations were suspended at the request of Questek Australia in late 2013

We are aware that the time span envisaged in the document “Outline of Agreement” has in part expired and in part will expire in May of this year

It is our understanding that discussions with Stellar that Stellar is prepared to honour the spirit and intent of the document “Outline of Agreement” in respect to:

(a)    The Queensland Children's Hospital; and

(b)    Its intent outlined In Annexure A hereby for all the tenders that have been issued

We acknowledge that such tenders have been submitted as joint tenders between Questek Australia and Stellar

Stellar undertakes:

(a)    In relation to Queensland Children’s Hospital to provide the service identified in the Outline Agreement

(b)    Hills and Stellar acknowledge and agree that in relation to future contracts detailed in Annexure A the intent of the previous discussions between Questek Australia and Stellar will be honoured, specifically:

1.    both parties, Hills and Stellar, will each contribute 50% of all contract implementation including labour, materials & ongoing operation costs for each project;

2.    Stellar will licence the end user to utilise the software for the Term of the contract; This will not apply to any vendor owned systems e.g. WSLHD / NBMLHD tenders

3.    both parties acknowledge that a core part of the value that the parties are contributing this arrangement is, for [Hills], access to the Questek customer base and for Stellar, access to the Stellar software and related support services;

4    both parties will split the gross profit 50/50 from all projects & any ongoing services (hospital & Sales commissions will be paid from gross revenues unless stated otherwise within tender documentation) (gross profit being gross income less hospital & Sales Commission); and

5.    Both parties will have open access to all project & financial information as required.

Hills undertakes to, within 4 weeks of settlement of the Questek Transaction, commence negotiations in good faith with Stellar to draft an agreement that suits both parties for a long term relationship

Yours sincerely

Hills Health Solutions Australia Pty Ltd

Signed and accepted by:

……………………………………………………

For and on behalf of Stellar Vision Operations Pty Ltd

(Signed)

……………………………………………………

Robert J Lynch

Director

Hills Acquires Questek’s Business

29. On 3 April 2014, Hills, Brighton Technology Group, Questek and others entered into a Business Purchase Agreement (Purchase Agreement) under which Hills purchased, relevantly, all of Questek’s right, title and interest in its assets and business.

30. Under cl 3.1, completion was conditional upon parties to Key Contracts with Questek consenting in writing to the novation of them to Hills. Key Contracts were listed in a schedule and included the Outline of Agreement. The Purchase Agreement made provision for Hills to take over Questek’s employees engaged in the business as at the completion date. It also provided for payments to be made to Key Persons as consideration for them entering into Non-Compete Deeds. Linderman was identified as a Key Person. He became employed by Hills as National Sales Manager – Patient Entertainment.

31. Under cl 19, each seller (including Questek) represented and warranted that each Warranty given was correct and not misleading on the date of the Purchase Agreement. The Warranties included what the Purchase Agreement defines in cl 1.1 to be Business Warranties, which are contained in Part B of schedule 9 to the Purchase Agreement. Paragraph 18 of that schedule included a Warranty that information in the Disclosure Material was complete, correct and not misleading in all respects. Disclosure Material is defined in cl 1.1 to include matters specifically disclosed in the Due Diligence Materials which in turn is defined to include materials listed in Part B of schedule 10. Schedule 10 includes an item described as “Stellar QT current relations.pdf”. That document sets out information as to the status of various tenders. In relation to WSLHD, it says:

Western Area Health – Won – Final details of start dates are being confirmed with health share. Stellar and Questek will be on the contract if a JV agreement is not finalized at this stage.

The ASX Announcement

32. On 2 April 2014, Hills made an ASX announcement via media release. It is appropriate to set it out in full.

Another acquisition boost for Hills health solutions business

Hills Limited (Hills: ASX: HIL) is pleased to announce a further boost to its health solutions operations with the acquisition of another Australian business, Questek.

The acquisition of Questek a successful Australian business at the forefront of providing integrated healthcare solutions - builds on Hills expanding health solutions division which includes the market-leading Merlon Health Communications and HTR (Hospital Television Rentals) businesses, both acquired late last year.

The Questek business, established 20 years ago and now with a presence in all Australian states, is a leader in the design and manufacture of innovative nurse call systems and general healthcare monitoring systems. It has recently emerged with a substantial position in the widening market for patient infotainment systems.

Questek’s state-of-the-art systems are already installed in some 600 aged care facilities throughout Australia and more than 50 hospitals – in addition to Merlon’s 225 sites and HTR’s 80 sites.

Ms Peta Jurd, Head of Hills Health Solutions, said the Questek acquisition was expected to be earnings per share accretive in the first full year (FY15) after completion of the transaction.

“This is another great strategic fit for our health solutions business,” Ms Jurd said.

“It is the market leader in wireless nurse call solutions, has respected, long-term customer relationships, and a new solution in entertainment through partnership with Stellar Entertainment.”

Ms Jurd said the HTR, Merlon and Questek businesses would be integrated under one operating model and structure within Hills Health Solutions.

(emphasis added)

Events Leading Up to Hills Contracting with NSW (Without Participation by Stellar)

33. Hills had an existing relationship with an organisation called Lincor which, according to Hills, had the ability to deliver the services which it had been contemplated would be provided by Stellar for the WSLHD project.

34. By 12 May 2014, it was in contemplation by Hills that Stellar might be replaced by Lincor with respect to WSLHD.

35. Nevertheless, following Hills’ acquisition of Questek’s business, Stellar continued to work on the WSLHD project.

36. To Hills’ knowledge, from April 2014 until at least November 2014, Rahman and others from Stellar worked to develop the software architecture, system design and services architecture for the WSLHD project. McCarthy and Linderman worked together to source hardware. Rahman’s development team spent an estimated 80% of its time on customisation of Stellar’s core software for use on the WSLHD project. Rahman (in fact) continued to work on the project until late February 2015.

37. On 13 May 2014, Curtin met Jurd in the context of the requirement in the Undertaking to commence negotiations to draft an agreement that suited both parties for a long-term relationship. Jurd said to him that there was no rush to formalise the agreement between them while they were waiting for the contract with NSW to be signed.

38. On 27 May 2014, Linderman emailed Jurd and Starkey. He said:

Hi Peta & David

Please find attached the current discussion points I will be reviewing with WSLHD tomorrow. I would like for you to start being knowledgeable around this from now on as its close to signing a deal...

I have planted the seed in Brendan's [McCarthy’s] head that we (HILLS) may be interested in purchasing their share of the contract from them. But as Dave S mentioned do we really need to do that from a legal point?

Peta, I would like you to arrange a meeting with Stellar in the coming weeks regarding a Go To market product where we will review the Stellar product with me on the other side of the table to outline that hill [sic] is not prepared to install an incomplete product. And if they cannot show how the product will work from a maintenance point not just a functional. And we will also outline when we mean maintenance we are not referring to a cisco certified engineer team being required to manage the product on a day to day bases [sic]...

If they are interested in the Buyout I would not want to lock them in to being the software provider for the project unless the product was serviceable and comparable to Lincor and approved by Hills as it's our Name on the line.

I have also started to prepare some product feature documents that I will send to Lincor for review regarding VidCon services and some of the QCH features.

Kind regards,

Daniel Linderman

National Sales Manager – Patient Entertainment

(emphasis added)

39. On 5 June 2014, Hills and Lincor entered into an Exclusive Distribution Agreement.

40. On 3 July 2014, McCarthy emailed Hills requesting that both Questek and Stellar be parties to the proposed contract with NSW. On 15 July 2014, Hills declined the request. Following this, a conversation between McCarthy and Linderman to the following effect took place:

McCarthy:    Dan why did you instruct HealthShare to not include our name along with Questek? You know this was part of our agreement from the start. You did not raise any concerns in conversations with Noone and Burnett.

Linderman:    Once the email arrive from HealthShare I had to have the request cleared internally and was instructed not to add Stellar Vision’s name but to change it to Hills. There was nothing I could do.

McCarthy:    That is bullshit. On the phone you say you’re in agreement if the request comes and then fuck me over.

Linderman:    This is normal for Hills to front the contract and the joint venture to operate behnd it as we have discussed. I think Hills want it in their name to get board approval and so they can book the revenue numbers. You know how these big companies work, as long as they can book the revenue and show the headlines no one sees what they pay out the back-end. We will cover this off when the agreement is done.

McCarthy:    And when are we going to get that done?

Linderman:    As Peta said there is no rush as we have not signed the contract with the government yet. This is the first draft stage and Hills will no doubt pass this around their internal legal. It could take a few months.

41. On about 21 July 2014, Hills ceased work on the QCH project.

42. On 25 July 2014, Linderman forwarded to McCarthy a copy of a draft contract for the WSLHD project. Whereas Questek had been the contracting party in previous drafts, now Hills was the contracting party. Stellar was involved in the review of this draft. Curtin made comments on it in an email dated 2 September 2014.

41. In August and September 2014, Stellar and Hills collaborated on a joint financial value model to value the WSLHD contract. In particular, a model (called the 9 September Model) was brought into existence. It was revised on 16 September 2014 to include an additional item for Stellar’s software licensing fees.

42. Earlier, on 8 September 2014, McCarthy, Starkey and Linderman had attended a meeting organised by WSLHD at which a WSLHD representative expressed some concern that the WSLHD contract had not been finalised. At the meeting, McCarthy and Linderman confirmed that Stellar and Hills were ready and committed to the project.

43. On 7 October 2014, Jurd sent an email to Curtin stating, amongst others, that Hills required a review of the software package being proposed by Stellar. The email said:

Once we have internal approval granted we will then be able to complete our offering to Stellar that David Starkey and yourself have been working on.

46. Curtin’s email response on 9 October 2014 was:

First, however, we need to re-address the legal basis of the relationship between Hills and Stellar Vision.

I refer to the last paragraph of the Undertaking and Consent between our two companies.

In the absence of any agreement, our legal position is that StellarVision remains in a 50/50 Joint Venture with Questek in respect of the WSLDH [sic] contract.

While Hills may have acquired Questek’s interest in the contract, and StellarVision has indicated a readiness to restructure our arrangements given Hill’s [sic] stated position that it does not wish to proceed in a Joint Venture, there is still no agreement in place.

The software package is that jointly proposed by Questek and StellarVision to meet the functional requirements of WSLDH [sic], and is the basis on which the contract was awarded.

We understand that Hills will need to conduct due diligence if it is to restructure the arrangements currently in place and take on the contract obligations as a prime contractor.

However, we need to understand the legal framework Hill’s [sic] is proposing, document the commercial arrangements and understand the obligations to be undertaken by StellarVision.

It would be beneficial if a draft document setting out Hill’s [sic] proposal could be available prior to any meeting.

47. On 27 November 2014, Stellar demonstrated the operation of the then current version of its PES at Hills’ office. Thereafter, there were communications between Stellar and Hills about a further demonstration. It is plain that, by this time, Hills had in contemplation proceeding with Lincor and not Stellar.

48. In an internal document brought into existence on about 10 December 2014, Linderman wrote:

Business Review

Questek entered the WSLHD project in August 2013 with Stellar Vision providing the software. It was the intention that a JV be incorporated to run this project - Questek managing the install and Stellar managing the software.-Due to the acquisition of Questek Australia Pty Ltd this was no longer viable and the intention was to maintain a JV outcome between Hills and Stellar as a profit share model. Hills (formerly Questek Australia Pty Ltd) being the contracting party is required to deliver a proven solution. Despite requests for demonstrations it is clear that Stellar do not have a complete demonstration with the proposed solution and as such we do not feel comfortable installing this solution. As such it is proposed to deliver this project using the Lincor solution.

Lincor has the ability to deliver the “core services” as outlined within the contract and have supplied all documentation to their system along with supporting documentation that they will be able to deliver the required services with minimal development if required.

We are confident that this change can be managed with the customer as their focus has been on functionality which Lincor can deliver.

49. On 16 December 2014, Linderman emailed Jurd: “As they still don’t have the proposed terminal and in light of the ethical issues what would we like to do from a legal point?” and she responded: “Once we align with WSLHD we will terminate our association with Stellar. We can’t risk them going behind our back again.” In an email later that day, Jurd corrected the word “align” to “sign”.

50. A further demonstration by Stellar of the PES took place at its office on 22 December 2014. By all accounts, the demonstration was not successful. Who was at fault was a matter of contention, which it is not necessary to resolve.

Execution of the WSLHD Contract

51. On about 23 December 2014, Hills and WSLHD executed a Deed of Agreement for the supply of a PES for a contract period of 10 years plus an optional extension of 60 months.

52. On 31 December 2014, Jurd sent Curtin a letter stating that there was no contract between Stellar and Hills or conduct “enforceable as such” and that at no time had there been any agreement with Hills. She informed Stellar that Hills would not be proceeding further with considering Stellar to be the software supplier for the project.

THE ISSUES

53. At trial, Stellar framed its case variously (or alternatively) as:

1. breach of fiduciary duty, on the footing that (whether or not the Undertaking was a binding contract) in relation to WSLHD, it and Hills were in a fiduciary relationship which gave rise to an obligation on the part of Hills not to exclude Stellar from the benefit of the contract with WSLHD and take it for itself, which obligation Hills breached.

2. breach of trust, on the footing that Hills held the benefit of the contract with WSLHD on (express) trust for Stellar.

3. unconscionable conduct, on the footing that the representation made by Hills in the Undertaking that Stellar would continue to have a 50% interest in the WSLHD contract, Stellar assumed this to be the case and acted upon it to its detriment with the consequence that Hills should be estopped from departing from the assumption.

4. breach of contract, on the footing that Hills breached the undertakings it gave in the second sub-paragraph (b) of the Undertaking (which is set out immediately below for convenience):

Hills and Stellar acknowledge and agree that in relation to future contracts detailed in Annexure A the intent of the previous discussions between Questek Australia and Stellar will be honoured, specifically:

1.    both parties, Hills and Stellar, will each contribute 50% of all contract implementation including labour, materials & ongoing operation costs for each project;

2.    Stellar will licence the end user to utilise the software for the Term of the contract; This will not apply to any vendor owned systems e.g. WSLHD / NBMLHD tenders

3.    both parties acknowledge that a core part of the value that the parties are contributing to this arrangement is, for Hills, access to the Questek customer base and for Stellar, access to the Stellar software and related support services;

4    both parties will split the gross profit 50/50 from all projects & any ongoing services (hospital & Sales commissions will be paid from gross revenues unless stated otherwise within tender documentation) (gross profit being gross income less hospital & Sales Commission); and

5.    Both parties will have open access to all project & financial information as required

…

Annexure A – Tenders and requests for proposal

Proposal for the supply, installation, maintenance and management of the Patient Entertainment System for Auburn, Westmead, Blacktown and Mt Druitt Hospitals for the Western Sydney Local Health District – RFP # HSP LC13 WS P271

Proposal for the supply, installation, maintenance and management of the Patient Entertainment System Tender HSP LC13 NBM P282

Tender for Northern Beaches Hospital

This part of the Undertaking (including Annexure A) will be referred to as the Acknowledgment and Agreement. References below to paragraphs 1 to 5 are, unless the context indicates differently, references to the paragraphs so numbered in the Acknowledgement and Agreement.

54. On appeal, Stellar ultimately did not press its contentions of trust and estoppel on the basis that neither added to the relief claimed on the bases of contract and fiduciary relationship.

55. The primary judge found that the Acknowledgement and Agreement did not constitute a binding contract between Stellar and Hills and that they were not in a fiduciary relationship.

56. At trial, Hills contended that if the Undertaking was binding, Stellar had repudiated it. This submission did not find favour with the primary judge. Hills did not file any Notice of Contention.

57. It was not put by Hills that if the Acknowledgement and Agreement (or the relevant part of it) was binding, or if Stellar and it were in a fiduciary relationship, it did not breach it.

58. It follows that on the question of liability, only two issues arise for consideration, namely, whether or not the findings of the primary judge were correct that the Acknowledgement and Agreement was not binding and that the parties were not in a fiduciary relationship.

59. With respect to damages, the primary judgment left open the final calculation of the damages suffered by Stellar (assuming liability of Hills). The Notice of Appeal raises three matters, two of which were agreed by the parties during the hearing of the appeal. Only one question with respect to the quantification of damage remains, namely, the timing and costs of future PES terminal replacements.

CONTRACT

60. We deal first with whether the Acknowledgement and Agreement was binding.

61. The primary judge’s dispositive reasoning on Stellar’s claim in contract was:

526   The difficulty facing Stellar Vision is that which it faced in the previous discussions – that while a joint venture was contemplated (in which they would share 50/50 in the gross profits of the project), how they would do so remained to be agreed. I accept there may be a distinction between the last paragraph and the preceding bullet points but ultimately I consider that Stellar Vision’s recognition that, absent a joint venture agreement, it was left with a “50/50 joint venture” with Questek is the nub of the problem. Unfortunately, that proposed joint venture arrangement was never finalised with Questek and certainly not with Hills Health Solutions.

527   I have much sympathy for the position of Stellar Vision, which has obviously worked in good faith in the expectation that an agreement would be concluded within the spirit or intent of the previous discussions, but I consider that this is a risk faced by all parties engaged in commercial negotiations which ultimately may not come to fruition.

528   The contractual claim therefore fails…

62. As well, the primary judge said:

745   I accept that the Undertaking must objectively have been seen as a document that would at least bind the parties’ conscience (since it was formally signed as an undertaking) and that the second paragraph (b) was framed in terms of an “acknowledgement and agreement”. However, it was in essence an agreement to agree – an agreement to honour the “intent” of the previous discussions (indicating in the five numbered points specifically what the intent of those discussions then comprised); which left unresolved the precise form of the parties’ relationship and how it was to operate from a practical perspective…

63. The primary judge’s reference (at PJ [526]) to the “nub of the problem”, being Stellar’s recognition that absent a joint venture agreement, it was left with a 50/50 joint venture (which was never finalised), is evidently a reference to Curtin’s response in his 9 October 2014 email: see [46].

64. Whether parties intend to create binding legal relations is ascertained objectively, that is, by determining whether a reasonable person in the position of the parties would have taken them to have intended to contract. The presence (or absence) of that intention is fact-based, to be found in all the circumstances, including by drawing inferences from their words and their conduct in making their agreement. In ascertaining their intention, whether from a series of communications or from a single document, regard can be had to the commercial circumstances in which the parties exchanged their communications and to the subject matter of the supposed contract: Sagacious Procurement Pty Ltd v Symbion Health Ltd (formerly Mayne Group Ltd) [2008] NSWCA 149 at [69] (“Sagacious”); Allen v Carbone (1975) 132 CLR 528 at 532; [1975] HCA 14; Hospital Products v United States Surgical Corp (1984) 156 CLR 41 at 61 (Gibbs CJ); [1984] HCA 64 (“Hospital Products”); Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-9 (“ABC”); Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424; [2001] FCA 1833 at [369] (Allsop J); Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 at [25]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [38], [40]; Mount Bruce Mining v Wright Prospecting Pty Ltd (2015) 25 CLR 104; [2015] HCA 37 at [110]-[113]; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544; [2017] HCA 12 at [16].

65. There is a type of case illustrative of the requirement for parties to intend to effect legal relations where, whether they are bound, turns on whether they intended to be bound immediately (by an oral agreement or an informal written one) or did not intend to make a concluded bargain unless and until they executed a formal instrument. This category of cases is often referred to as a Masters and Cameron after the leading decision in Masters v Cameron (1954) 91 CLR 353 at 360; [1954] HCA 72 in which the High Court identified the following three categories of such cases: first, where the parties reach finality in arranging all the terms of their bargain and intend immediately to be bound but propose to have the terms restated in a form which would be fuller or more precise but not different in effect; second, where the parties have agreed upon all the terms of their bargain and intend no departure from or addition to their agreed terms but have made performance of one or more of the terms conditional upon the execution of a formal contract; and third, where they do not intend to make a concluded bargain at all unless or until they execute a formal contract.

66. Subsequent cases have spoken of a fourth category, namely, where parties enter into an immediately binding agreement on certain specified terms and on such other terms as are either subsequently agreed by the parties or able to be determined by the Court: Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 627; Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 at [25]; Sagacious at [67]; Harold R Finger & Co Pty Ltd v Karellas Investments Pty Ltd [2016] NSWCA 123 at [69].

67. The existence of matters of importance on which the parties have not reached consensus in their informal agreement will render it less likely that they intended immediately to be bound before the execution of a formal document. That the terms have not been fully or well stated is material to whether a contract has been made. The more important the term, the less likely it is that the parties will have left it over for future decision, but there is no legal obstacle which prevents the parties agreeing to be bound now while deferring important matters: Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd [1995] NSWCA 166; (1995) 7 BPR 14,551 at 14,579; ABC at 548; Sagacious at [73]; Feldmanv GNM Australia [2017] NSWCA 107 at [60]-[61].

68. Regard may be had to the parties’ subsequent communications and other conduct to assess whether it was in their contemplation that they were not to be bound until all the essential preliminaries had been agreed to or until the formal contract had been drawn up embodying all the matters incidental to the transaction: ABC at 547-8 and the authorities cited there; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25]; Howard Smith and Co Ltd v Varawa (1907) 5 CLR 68 at 78; [1907] HCA 38; B Seppelt and Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9,147 at 9,155; Sagacious at [99].

69. The thrust of the primary judge’s reasoning appears to be that the parties did not intend to be bound by any part of the Acknowledgement and Agreement and that they intended to be bound in connection with the WSLHD project (and or for that matter, the other projects in Annexure A and any other future projects) by way only of the contemplated subsequent formal, written agreement for a long-term relationship. The primary judge considered that how the parties would share 50/50 in the gross profits of the project remained to be agreed. Her Honour appears to have equated the reference to a written agreement for a long-term relationship (in the final paragraph of the Undertaking) with a joint venture agreement, although the Undertaking does not in terms refer to a joint venture agreement. It is also to be recalled that on 13 March 2014, Hills had conveyed that it did not want a joint venture but that there would be an arrangement, which from Stellar’s perspective, would have the same financial outcome: see [26]-[27].

70. Her Honour considered the Acknowledgement and Agreement not to have any binding effect of its own and placed it into the third category in Masters v Cameron.

71. Her Honour’s reasoning, and the conclusion to which it leads, are, in our view, at odds with the objective features of the Acknowledgement and Agreement viewed in the context of the Undertaking as a whole, the commercial circumstances in which it was entered into, and the parties’ evident aims and expectations as revealed by the Undertaking and those commercial circumstances.

72. The Acknowledgement and Agreement uses the language of contract. It is an express agreement that Hills and Stellar would honour the intent of previous discussions. Those discussions were those that had occurred less than two weeks earlier on 13 March 2014. The Acknowledgement and Agreement elevated what may previously have been intent, to an undertaking to honour. It was the parties’ evident aim and expectation that that intent would be honoured, not that they could simply choose to dishonour it.

73. Hills required Stellar to formally sign and accept the Undertaking as a whole, which Stellar did, an indication that the Undertaking was intended to be binding.

74. The Undertaking covers three distinct subjects: first, the QCH project; second, tenders which had been submitted jointly by Questek and Stellar and identified in Annexure A; and, third, a formal agreement for a long-term relationship.

75. There is a plain separation, conceptual and practical, between the first and second subjects on the one hand and the third on the other. The QCH project was already on foot and the parties had already jointly tendered for the Annexure A projects (including WSLHD). The long-term relationship contemplated to be embodied in a formal agreement (as referred to in the final paragraph of the Undertaking) was another subject. It was not needed for either the QCH project or the Annexure A ones. They were not dependant on the entry into of a long-term relationship agreement.

76. Importantly, Hills conceded that that part of the Undertaking which deals with the QCH project is binding, which it plainly is. There is no discernible, logical or rational commercial reason why Stellar and Hills would have intended their agreement so far as it dealt with QCH to be binding but not so far as it dealt with WSLHD. This is especially so as the topics were dealt with in one and the same paragraph of the Acknowledgement and Agreement.

77. The acknowledgement in the Undertaking that the Annexure A tenders had been submitted as joint tenderers was plainly not dependent on the subsequent execution of a formal, long-term relationship and was self-evidently to be of immediate effect in relation to tenders which were already on foot.

63. This is reflected in the fact that, to Hills’ knowledge, Stellar continued to work on the development of the software for the WSLHD project for many months and that Hills saw fit to disclose to the market by way of ASX release that it had a partnership with Stellar. Whether or not that was accurate as a matter of strict legal technicality or characterisation, and on the assumption that Hills was not intending to mislead the market, the disclosure was confirmatory of Hills’ intent to be bound by those parts of the Undertaking relating to QCH and the projects referred to in Annexure A, including the WSLHD project. Linderman’s reference to “their [Stellar’s] share of the contract” in his email of 27 May 2014 noted at [38] is equally telling in this respect.

64. Paragraphs 1 to 5 of the Acknowledgement and Agreement provide in precise terms for contributions to be made, things to be done and profits to be shared in relation to projects where there had already been joint tenders. Nothing more of substance was required to determine how they would do so. The process of reasoning which led the primary judge to conclude in PJ [525] that the terms of the Acknowledgement and Agreement were “on their own… largely unworkable” is not revealed.

65. The idea that the parties were free to dishonour these agreements unless and until some other agreement for a long-term relationship was negotiated and entered into is inconsistent with, and inimical to, the plain commercial objectives of providing for the respective rights and entitlements of the parties in those projects. The primary judge erred in characterising the Acknowledgement and Agreement as, “in essence an agreement to agree”.

66. The Undertaking was executed in the commercial context of Hills seeking confirmation from Stellar to provide its support to QCH for the Questek PES and any open purchase orders, tenders and/or requests for proposal which had been jointly submitted or pitched by Questek and Stellar, at a time when Hills was about to acquire Questek’s business. It was plainly in Hills’ commercial interest to have Stellar bound. It was plainly in Stellar’s commercial interest to ensure its entitlement to participate in the projects.

67. So far as Curtin’s 9 October 2014 email is concerned, we do not (as her Honour did) read it as conceding that a formal joint venture agreement was necessary to make the Acknowledgement and Agreement binding. To the contrary, Curtin’s position was that, in the absence of a formal agreement, the parties were in a 50/50 joint venture with respect to WSLHD, this no doubt being a reference to paragraphs 1 to 5 of the Acknowledgement and Agreement. Tellingly, Curtin said that “in the absence of any agreement [being a reference to the long-term agreement contemplated in the final paragraph of the Undertaking] our legal position is that Stellar Vision remains in a 50/50 Joint Venture with Questek in respect of the WSLHD contract” (emphasis added).

68. Hills argued that a matter of importance upon which they had not reached consensus, and which made it less likely that they intended immediately to be bound, was how the WSLHD project would be managed. We do not consider that this was any obstacle, legal or practical, to them going forward together on the WSLHD project, particularly given that they were joint tenderers. It is to be observed that the scope of each parties’ participation and entitlements was specified in the Acknowledgement and Agreement and the QCH project had proceeded without any agreement as to management participation between them.

69. The appeal must be allowed.

FIDUCIARY DUTIES

85. Although it is not strictly necessary to do so, it is appropriate to deal with the fiduciary duty grounds of appeal because we consider that the primary judge erred in finding that the parties were not in a fiduciary relationship but more importantly, because as appears below, we consider that even if the Acknowledgement and Agreement was not binding, Hills nevertheless owed Stellar fiduciary obligations not to exclude Stellar from participation in the WSLHD project or take it for itself.

86. At trial (and on appeal), Stellar argued that its relationship with Hills was fiduciary in nature, even if the Acknowledgement and Agreement was not binding. It relied on the following passage in United Dominions Corporations Ltd v Brian (1985) 157 CLR 1 at 12; [1985] HCA 49 (“Brian”):

A fiduciary relationship can arise and fiduciary duties can exist between parties who have not reached, and who may never reach, agreement upon the consensual terms which are to govern the arrangement between them. In particular, a fiduciary relationship with attendant fiduciary obligations may, and ordinarily will, exist between prospective partners who have embarked upon the conduct of the partnership business or venture before the precise terms of any partnership agreement have been settled. Indeed, in such circumstances, the mutual confidence and trust which underlie most consensual fiduciary relationships are likely to be more readily apparent than in the case where mutual rights and obligations have been expressly defined in some formal agreement. Likewise, the relationship between prospective partners or participants in a proposed partnership to carry out a single joint undertaking or endeavour will ordinarily be fiduciary if the prospective partners have reached an informal arrangement to assume such a relationship and have proceeded to take steps involved in its establishment or implementation.

87. The primary judge’s dispositive reasoning in relation to Stellar’s contention that it and Hills were in a fiduciary relationship was:

465   The difficulty I have is that Stellar Vision and Hills Health Solutions never really progressed beyond “mere negotiation”. I accept that the parties had a mutual aim of working together in relation to the WSLHD project and other ventures but it is clear that they were not agreed as to the form that relationship should take. I do not accept that there was the mutual confidence in their relationship necessary to give rise to a fiduciary obligation.

466   In John Alexander’s Clubs at [87] the plurality approved the identification by Mason J in Hospital Products at 96-97 of the critical feature of a fiduciary relationship being that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense (from which power or discretion comes the duty to exercise it in the interests of the person to whom it is owed). That feature is missing in the present case.

467   Hence the fiduciary claim also fails.

88. Hospital Products concerned the relationship between a manufacturer and a distributor of medical products, a relationship which is not an established fiduciary one. In the oft-cited passage at 96-97 (referred to by the primary judge at PJ [466]), Mason J (as his Honour then was) observed that the accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations, that the list of such relationships is not closed and that a critical feature of all such relationships is that the fiduciary undertakes or agrees to act for or on behalf of the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. His Honour observed that it is partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duties are owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise a power or discretion in the interests of the person to whom it is owed. His Honour went on to say:

That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.

The passage in John Alexander’s Clubs Pty Limited v White City Tennis Club Limited (2010) 241 CLR 1; [2010] HCA 19 (“John Alexander’s Clubs”) (cited by her Honour in the same paragraph) refers to what Mason J had said in Hospital Products.

89. We consider that her Honour fell into error both in finding that Stellar and Hills never progressed beyond mere negotiation and that they were not agreed as to the form their relationship should take. For the reasons set out earlier, they bound themselves by way of the Acknowledgement and Agreement which stipulates for the form and terms of their immediate relationship.

90. We consider that her Honour fell into error in finding that the relationship did not involve mutual confidence or an undertaking or agreement on Hills’ behalf to act for or on behalf of the interests of Stellar in the exercise of a power or discretion which would affect the interests of Stellar in a legal or practical sense.

91. Beyond the finding that the parties were not agreed as to “the form that relationship should take” (which we read as referring to the form of the prospective long-term relationship), her Honour’s reasons do not reveal the basis for a finding that mutual confidence or the required undertaking were not present.

92. In a well-known passage in Brian at page 10, Mason, Brennan and Deane JJ (as their Honours then were) observed that the term “joint venture” is not a technical one with a settled common law meaning and that, as a matter of ordinary language, it connotes an association for the purposes of a particular commercial or other financial undertaking or endeavour with the view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture will often be a partnership, however the term is apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership.

93. It was further observed at page 11 that whether or not the relationship between joint venturers is fiduciary will depend on the form which the particular joint venture takes and upon the content of the obligations which the parties to it have undertaken. Any fiduciary duties will be moulded to the character of the particular relationship.

94. At least the following features of the parties’ relationship make it clear that it was necessarily one of mutual trust and confidence:

1. the relationship commenced effectively with respect to the QCH project and was the subject of the Outline of Agreement. One provision of the Outline of Agreement was Questek’s warranty that it was Stellar’s fiduciary with respect to the technical know-how and intellectual property which Stellar was allowing Questek to use;

2. the 24 October 2013 response to the RFP had both Questek and Stellar’s logos and referred to their combined resources offering a “true partnership”. The RFP itself made it clear that Questek and Stellar’s tender was a joint endeavour;

3. the Undertaking acknowledged that the relevant tenders were joint, although Hills as the only named party in the contract with WSLHD would be the party to have the direct dealings with WSLHD;

4. Stellar had contributed to the WSLHD tender by assisting with the technical specifications and providing information about its financial capacity, technical expertise and experience;

5. the Due Diligence material specifically referred to in the Purchase Agreement included a document recording that if a joint venture agreement was not finalised, Stellar’s name would be on the contract;

6. the Undertaking embodied a binding agreement with elements analogous to a partnership, in relation to the Annexure A contracts. Hills and Stellar agreed to each contribute 50% of all contract implementation costs; Stellar agreed to license the end user to use its software; both acknowledged that a core part of the value that they were contributing to the arrangement was Hills giving access to the Questek customer base and Stellar giving access to its software and related support services; they agreed to split the profit 50/50; and both parties were to have open access to all project and financial information as required; and

7. Hills’ ASX announcement referred to a partnership with Stellar.

95. Having regard to these features, it can hardly be suggested that the parties’ relationship accommodated:

1. Hills being entitled to pursue its own interests without regard to Stellar’s;

2. Hills being entitled to use its position or otherwise exclude Stellar from participation in the WSLHD project;

3. Hills being entitled to substitute some other person to provide the services which Stellar was entitled to provide;

4. Hills being entitled to take the benefit of the WSLHD project for itself; or

5. Hills being entitled to use its position to exclude Stellar from participating in the WSLHD project and take the benefit of the whole of it for itself or contract out to someone else for the provision of services which Stellar was entitled to provide.

96. It is self-evident that Stellar reposed trust and confidence in Hills not to act in this fashion.

97. As the party dealing directly with WSLHD and ultimately the only contracting party, Hills was manifestly in a position where it could exercise a discretion which would affect the interests of Stellar, both in a legal and practical sense. Proof of this resides in the mere fact that Hills was able to bring about the exclusion of Stellar from the WSLHD project and bring in Lincor in its place. It can hardly be suggested that Hills was free to act in this way or that it had not undertaken not to act in this way. So much follows from the mere fact that they were joint tenderers.

98. It also reveals the extent to which, in their relationship, Stellar was in a position of vulnerability to Hills’ breach. Such vulnerability may be a characteristic of those to whom fiduciary duties are owed (although on its own it is not sufficient to create a fiduciary relationship): John Alexander’s Clubs at [83].

99. Hills argued that the present case was distinguishable from Brian because there, the prospective parties had reached an informal arrangement to assume such a relationship and had proceeded to take steps involved in its establishment or implementation, whereas here, the parties did not proceed beyond mere negotiation. Even if, contrary to our view, as set out earlier, one could properly characterise the parties’ dealings as not having proceeded beyond mere negotiation, the nature of their dealings was such that the mutual confidence and trust which would underlie the most consensual fiduciary relationship, was readily apparent in this case.

DAMAGES

100. The primary judge did not quantify Stellar’s damages (on the assumption that it had succeeded). Each party called a forensic accountant. They were agreed that the discounted cash flow (or DCF) methodology was appropriate to calculate Stellar’s loss based on the WSLHD contract period being 10 years plus a 5-year extension.

101. The parties differed with respect to various of the inputs for the DCF model which the experts used. Her Honour resolved these disputes on the footing (with which the parties agreed) that the calculation would be carried out reflecting the Court’s rulings.

102. By the time of the appeal, only one input (identified as item 17) was in dispute, being the timing and cost of future PES terminal replacement. The primary judge’s finding on this item was (at PJ [736]):

For item 17, as adverted to above, I would adopt the actual historical CAPEX costs up to 31 January 2021 and then adopt the assumptions in the September Model as to the likely time of terminal replacements (since there does not appear to be anything else that can usefully be relied upon to forecast future terminal replacements) and I do not accept the counterfactual based on Stellar Vision’s performance in other hospitals.

103. At PJ [283], the primary judge said:

There was broad agreement between the experts as to various matters, including that the discounted cash flow methodology (DCF) is appropriate to calculate loss; and both experts relied on the September Model (see above) with adjustments. The experts were also agreed that the September Model represented the best contemporaneous information as to what net profits were expected to be generated from the WSLHD Contract. While the experts noted that their methodologies “did not align” (“based on instructions”) the experts generally agreed that each other’s calculations were “mathematically correct” (see the joint report at [18]).

104. In adopting the September Model, it may thus be that the primary judge relied on paragraph 19 of the Joint Expert Report dated 23 April 2021, which reads:

19. The Experts agree that the DCF model dated 14 September 2014 (the “September Model”) is the best cotemporaneous information regarding what net profits were expected to be generated from the WSLHD Contract:

a. The September Model calculated a post-tax NPV of ($153,818) (with a free cash flow of $1,536,488) for the WSLHD Contract after 10 years and an NPV of $1,322,116 (with a free cash flow of $6,089,596) if the optional extension of 5 years was included. Referred to at paragraph 58 of the Second Jackson Report.

b. On a pre-tax basis, the September Model calculated an NPV of 740,881 (with a free cash flow of $3,091,667) for the WSLHD Contract after 10 years and an NPV of $2,561,786 (with a free cash flow of $8,699,423) if the optional extension of 5 years was included. Referred to at paragraph 38 of the Second Jackson Report.

105. However, on the appeal, it was common ground that the paragraph was not admitted into evidence.

106. Perhaps more importantly, the figures for replacement terminals in the September Model were those of Starkey, who said of them in an affidavit affirmed 10 May 2018:

I do not now recall precisely how I estimated these figures. This was new equipment and a new kind of contract for WSLHD and it is possible that the figures I included were more in the nature of guesswork than evidence based estimate.

107. Stellar argued, correctly, that the primary judge erred in relying on the September Model in her finding with respect to item 17 because there was no satisfactory basis for it in the evidence.

108. Stellar argued that actual terminal replacement costs (which could be used to forecast future terminal replacement costs) were, in any event, included in the experts’ calculations in item 17 of the disputed items, which were “Software Maintenance and Service Costs”, which were in turn based on Income Statements of Hills under the heading “Cost of Sales – Patient Entert” which incorporated a line item “Service Parts”.

109. On the material available to the Court, it is not possible for the Court to determine with any degree of confidence whether the figures for item 17 cover the costs of future replacement of PES terminals. However, by the same token, the Court was not taken to any satisfactory basis for finding otherwise. Nor is the Court in a position to carry out calculations based on the figures in Income Statements which were in evidence as to what future costs would be.

110. Evidence is to be weighed according to the power of the party to produce it: Hampton Court Ltd v Crookes (1957) 97 CLR 367 at 371-372 (Dixon CJ); [1957] HCA 28. Hills entered into and administered the WSLHD contract. Compared to Stellar, it was in a better position to lead evidence on the subject.

107. The disputed item represents a deduction from revenue for which Hills was contending. Although Stellar bore the ultimate onus of establishing its damages, we consider that Hills had an evidentiary onus in respect of this deduction which it did not discharge.

108. It follows that the calculation of damages is to be made without inclusion of the deduction found by the primary judge to have been established from the September Model.

109. The Court requested the parties to produce final figures based on the alternative assumptions of including the September Model figures and disregarding them to enable a final judgment to be given if the appeal succeeded. Regrettably, the parties did not comply with this request.

CONCLUSION

114. The Court makes the following orders:

1. Appeal allowed.

2. Set aside the orders made on 23 February 2022 by Ward CJ in Eq.

3. In lieu thereof, make the following orders:

1. Judgment for the plaintiff in an amount to be the subject of short minutes of order to be brought in by the plaintiff within seven (7) days reflecting a calculation in accordance with the judgment of the Court of Appeal.

2. The defendant is to pay the plaintiff’s costs at first instance.

4. The respondent is to pay the appellant’s costs of the appeal.

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Decision last updated: 18 May 2023