Temwell Proprietary Limited ACN 082 656 157 v DKGR Holdings Pty Ltd (in Liq) ACN 062 778 616 - [2005] FCA 1403

FEDERAL COURT OF AUSTRALIA
Temwell Proprietary Limited ACN 082 656 157 v DKGR Holdings Pty Ltd (In Liq) ACN 062 778 616[2005] FCA 1403
TEMWELL PTY LTD (ACN 082 656 157) v DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616), mCOM SOLUTIONS INC, DRAGON VENTURES. COM INC, mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950), DAVID HAINS, ROBERT VAN ZANTEN, DRAGONVENTURES.COM LTD, RICHARD HAINS and IAN MORRIS KIEFEL
AND
mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (ACN 091 375 950) v TEMWELL PTY LTD (ACN 082 656 157), SLADEMERE PTY LTD (ACN 082 656 139), SHEPRIDGE PTY LTD (ACN 082 696 077), GEOFFREY MICHAEL TAUBER, MORRY FRAID, ROGER ENRIQUEZ
V 663 of 2000
RYAN J
4 OCTOBER 2005
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 663 of 2000

BETWEEN: TEMWELL PTY LTD (ACN 082 656 157)
Applicant

AND: DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616)
First Respondent

mCOM SOLUTIONS INC.
Second Respondent

DRAGON VENTURES.COM INC
Third Respondent

mCOM SOLUTIONS AUSTRALIA PTY LTD (ACN 091 375 950)
Fourth Respondent

DAVID HAINS
Fifth Respondent

ROBERT VAN ZANTEN
Sixth Respondent

DRAGONVENTURES.COM LTD
Seventh Respondent

RICHARD HAINS
Eighth Respondent

IAN MORRIS KIEFEL
Ninth Respondent

AND BETWEEN:

mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950)
Cross-Claimants

AND:

TEMWELL PTY LTD (ACN 082 656 157)

SLADEMERE PTY LTD (ACN 082 656 139)

SHEPRIDGE PTY LTD (ACN 082 696 077)

GEOFFREY MICHAEL TAUBER

MORRY FRAID

ROGER ENRIQUEZ

Cross-Respondents

JUDGE:

RYAN J

DATE OF ORDER:

4 OCTOBER 2005

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:
1.The application be dismissed.
2.The cross-claim be dismissed.
3.The proceedings stand over to a date to be fixed for receiving submissions as to the orders for costs which should be made in light of the reasons published this day.
4.There be liberty to any party to apply on not less than 48 hours notice in writing to the other parties.

Note:   Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 663 of 2000

BETWEEN: TEMWELL PTY LTD (ACN 082 656 157)
Applicant

AND: DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616)
First Respondent

mCOM SOLUTIONS INC.
Second Respondent

DRAGON VENTURES. COM INC
Third Respondent

mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950)
Fourth Respondent

DAVID HAINS
Fifth Respondent

ROBERT VAN ZANTEN
Sixth Respondent

DRAGONVENTURES.COM LTD
Seventh Respondent

RICHARD HAINS
Eighth Respondent

IAN MORRIS KIEFEL
Ninth Respondent

AND BETWEEN:

mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950)
Cross-Claimants

AND:

TEMWELL PTY LTD (ACN 082 656 157)

SLADEMERE PTY LTD (ACN 082 656 139)

SHEPRIDGE PTY LTD (ACN 082 696 077)

GEOFFREY MICHAEL TAUBER

MORRY FRAID

ROGER ENRIQUEZ

Cross-Respondents

JUDGE:

RYAN J

DATE:

4 OCTOBER 2005

PLACE:

MELBOURNE

REASONS FOR JUDGMENT
Table of Contents
Part I: The Facts.
(i)     The development by DDS of the MTD
(ii)       The Tauber and Fraid interests become lenders to DDS
(iii)      Temwell becomes an investor in the Application Software
(iv)      The Transaction Documents
(v)       The Deloittes Report
(vi)      DDS seeks to alleviate its financial difficulties
(vii)     The heads of agreement of 31 January 2000
(viii)        The events of February 2000
(ix)      The Sale of Business agreement of 1 March 2000
(x)       Richard Hains’ letter of 7 March 2000
(xi)      The meeting of 9 March 2000 between David Hains, Tauber and Enriquez
(xii)     Events between 20 and 24 March 2000
(xiii)        Elbaum’s report to shareholders and noteholders of DDS
(xiv)     The letter before action on behalf of Temwell
(xv)     Deed of release from Elbaum and DDS
(xvi)     The institution of the present proceedings and interlocutory applications
(xvii)       The “open offer” of 27 August 2001

Part II: The Pleadings
(i)     The Statement of Claim
(a)    The claim in contract
(b)    The claims for infringement of trade mark and breach of copyright
(c) The claims for contravention of the TPA or passing off
(d)    Misuse of confidential information
(e)    Conversion
(f)    Failure to report and pay royalties
(g)    Temwell’s claim of loss and damage

(ii)       The Defence
(iii)      The Cross-Claim
(a) Misrepresentation in contravention of the TPA
(b)    Collateral abuse of process

Part III: The Expert Witnesses
(i)     The applicant’s expert witnesses
(a)    Zeev Goldstein
(b)    June Wilson
(c)    Peter Rayner
(d)    Dr Leslie Goldschlager

(ii)       Respondents’ Expert witnesses
(a)    Yaron Ivry
(b)    Kenneth John Hansen
(c)    Peter McGregor

Part IV: Resolution of the issues
(a)       The claim
(i)     Did Temwell consent to an assignment by DDS of its interests in the Application Software under the Transaction Documents?
(ii)     Did Temwell effectively withdraw its consent to an assignment by DDS of its interests in the Application Software?
(iii)     Was Temwell’s discretion to withhold consent unfettered or exercisable only in good faith?
(iv)    Are any of the respondents liable for inducing a breach of contract by DDS?
(v)    Application Software
(vi)    Infringement of Copyright
(vii)     Misrepresentation
(viii)     Breach of Confidence
(ix)    Conversion
(x)    Damages

(b)       The Cross Claim
(i)     Abuse of process
(a)    Persistence in the denial of consent to the assignment from DDS to mCom Solutions
(b)    Fluctuating and exaggerated claims as to the value of the Application Software
(c)    Failure to terminate the LRC Agreement for breach by DDS and thereby procure the return to Temwell of the Application Software
(d)    Refusal to accept the open offer of 27 August 2001
(e)    The joinder of the individual respondents
(f)    Litigation as an attempt to compel a “buy out” of Temwell’s interest under the Transaction Documents
(g)    Other matters
(h)    Conclusion on Abuse of Process
(ii)     The cross-claim for misleading and deceptive conduct

Part V: Disposition of the Proceedings

Part I: The Facts.
(i) The development by DDS of the MTD

In 1993, Hector Daniel Elbaum (“Elbaum”) founded the first respondent DKGR Holdings Pty Ltd, formerly known as Dynamic Data Systems Pty Ltd (“DDS”). At all relevant times until some date after March 2000, Elbaum was the Managing Director and Chief Executive Officer of DDS. From 1994, DDS was engaged in the development of a mobile transaction device which it named the “MTD” and which later became a registered trademark. That registration subsequently lapsed. The MTD evolved from an analogue version through an MTD1000, then an MTD2000 to an MTD3000 which became developed to a point where European sales might have commenced early in 2000. The development included design of computer hardware and the writing of software including a source code. It occurred in consultation with representatives of the ANZ Bank. The MTD1000 utilised what Elbaum has called “a proprietary assembler driven operating system which ran together with the MTD1000 application software.” That operating system, as I understand it, was not capable of adaptation for use in conjunction with the MTD2000 or the MTD3000. The MTD2000 was the first version to use digital technology.
For the purposes of the MTD2000, DDS wrote an operating system known as “PIMPOS” (“Pre-emptive Interactive Mobile Payment Operating System”) which was subsequently used in conjunction with the application software as it developed for the MTD2000 and, later, the MTD3000. PIMPOS was custom-written to enable stable and secure electronic transmission of funds between merchants and co-operating financial institutions. To facilitate the certification of the MTD units to meet the requirements of various banks, a software development kit (“SDK”) was created to permit distributors of the product to write software adapting it for use within their own markets.
(ii) The Tauber and Fraid interests become lenders to DDS
On 11 June 1996, George Tauber Management Pty Ltd (“GTM”), a company controlled by George Tauber (“Tauber”) had advanced to DDS by way of loan $500,000 which, by a variation made on 31 July 1996, was repayable on 11 October 1996. On 5 September 1996, GTM assigned a half interest under the loan deed in equal shares to Monit Nominees Pty Ltd (“Monit”) and Zacmore Pty Ltd (“Zacmore”), two companies controlled by Morry Fraid (“Fraid”). GTM, Monit and Zacmore (collectively called “the Lenders”) had earlier advanced to DDS $460,000 and, on the date of a deed of variation also dated 5 September 2003, agreed to advance to DDS a further sum of $600,000, making the total funds advanced by that date $1,560,000. The deed of variation also contained provisions as to interest and effectively made the loan repayable upon 60 days notice by the Lenders, such notice not to be given to expire before 31 December 1996. As well, the same deed of variation inserted into the Loan Deed the following special covenant 5;
‘APPOINTMENT OF FINANCIAL ADVISOR BY THE BORROWER COMPANY
The Borrower Company agrees that for the term of this Agreement it shall appoint the financial director of Spotlight Stores Pty Ltd as its financial advisor who shall have access to and be provided with copies of monthly financial and management reports of the Borrower Company.’
(iii) Temwell becomes an investor in the Application Software
At some time in 1998, an arrangement was proposed whereby $1.6 million clear could be made available to DDS and the exposure of the Lenders to DDS would be eliminated by 16 October 1998. That involved the Lenders’ providing $3 million towards a purchase and licence back transaction in respect of certain DDS software of which $1.1 million would be applied in reduction of the pre-existing loan to DDS. On the assumption that the software value were set at $15 million, depreciation for tax purposes could be claimed at 40% in each of the first and second years and 20% in the third, giving the resultant tax benefit a present value of at least $4.4 million. The “exposure gap” for the Lenders between the amount of that tax benefit and their total exposure of $4.6 million (existing loans of $1.6 million and $3 million being the purchase price for the software) was $200,000. That “exposure gap,” it was proposed, would be eliminated on 16 October 1998 by DDS reducing its loan account by $200,000 less any allowance for royalties paid. It was further contemplated that royalties, proposed at 3% of all sales products containing “the software components”, would be applied, first, to repaying the Lenders’ capital of $3 million then a 25% Internal Rate of Return and then in repayment of the loan funds advanced to the acquiring vehicle (which, it ultimately turned out, was the present applicant, Temwell Pty Ltd (“Temwell”)). It was further contemplated that, as those loan funds were repaid from royalties, DDS would repay the remaining $1.4 million “with capital freed as a result of loan repayments (less tax allowance 36%)”. The arrangement also contemplated that it could be wholly “collapsed” to ensure payment of $3 million plus an Internal Rate of Return to the Lenders together with repayment through DDS of the $1.4 million loan less payments already made. Throughout the implementation of this arrangement it was proposed that the loan agreement under which the current interest rate was 8.5% per annum should remain in force and should provide for interest to be paid at the same rate.
The proposal outlined above was prompted by Babcock & Brown, a merchant or investment bank, in August 1998 bringing to the attention of the ninth respondent, Mr van Zanten (“van Zanten”) and Mr Wingrove of DDS a press release by the Federal Treasurer announcing the withdrawal of Taxation Ruling IT26. That Ruling had related to depreciation and investment allowances for computers and included these paragraphs;
‘4. The costs of “software” or “programs” would normally be allowed as deductions to a purchaser in the year in which the costs are incurred. Such costs are accepted as revenue expenses deductible under s 51(1) of the Act. Further, items of computer software or programs would not qualify for investment allowance.
5. Where, however, the software is sold as an integral part of the computer system itself, for example, because of the technical nature of the computer system, the total computer system would be subject to depreciation and the investment allowance.’
The press release contained these paragraphs;
‘Government Response to the Withdrawal of IT26 and Announcement
The Government will legislate with effect from 10am AEST, 11 May 1998 (the time of withdrawal of IT26) to provide for systems and application software to be amortised at 40 per cent per year (that is, over 2 ½ years).
The new arrangements apply to expenditure incurred in relation to contracts entered into to acquire software after the withdrawal of IT26. It will also apply to expenditures on specifically commissioned and in-house development of software commenced after that time. Expenditures on in-house development, or commissioned software commenced or contracts entered into up to that time will continue to receive the previous treatment until 30 June 1999. Thereafter any such expenditure will be treated under the new provisions that are described below:
·all software purchases will be eligible for taxation amortisation over 2 ½ years at 40 per cent per year. However, the following exemptions will apply:
-     if the (non-renewable) license period is shorter than 2 ½ years then taxpayers will be allowed to amortise their expenditure over this shorter period;
-     taxpayers who stop using software within 2 ½ years of acquisition will be allowed an immediate deduction of the unrecouped expenditure at that time;
-     software purchases up to $300 will be immediately expensed. Bulk purchases of software packages summing to more than $300, but individually valued at up to $300, will be covered by the new amortisation provisions;
·     the cost of commissioning software or developing it in-house for own use will be capitalised until the project is completed. At that point, it may be amortised in line with the new provisions. This will ensure neutrality with purchased software. Should the commissioned or developed software be disbanded, capitalised costs will be deductible at that time; and
·     the treatment of upgrades and maintenance will be in line with the existing application of the law for determining capital and revenue expenses. Broadly, expenditure on enhancing or upgrading the functional capacity of computer software should be treated on capital account. Expenditure that does not enhance functionality, such as maintenance, testing, code reviews, minor alterations/modifications and remedying defects should continue to be treated on revenue account.
Moreover, systems software that had previously been written off as part of the computer hardware (over 3.7 years under accelerated depreciation) will now be amortised over 2 ½ years.
The taxation treatment of software that attracts concessions under other parts of the law will remain unchanged.
The write-off rate of 2 ½ years strikes an appropriate balance between considerations that software is a capital asset expenditure on which should be amortised for taxation purposes - and the relatively short expected effective life of software arising from rapid developments in the information technology industry.
The proposed arrangements for software are broadly more generous than those applying in comparable overseas taxation jurisdictions. For example, New Zealand allows software purchases to be depreciated at 30 per cent straight line or 40 per cent diminishing value (equivalent to 3.3 years), the United Kingdom provides depreciation of 25 per cent diminishing value (equivalent to a 6-year write off). In Canada systems software receives either a 5 or 8 write off period (depending on the industry it is used in) while application software is depreciated at 100 per cent (which effectively results in a 2-year write off period due to Canada’s “half year rule”). The United States provides a 3-year write off for newly purchased software unless the taxpayer can show a shorter write off is appropriate.’
Mr Roger Enriquez (“Enriquez”) had previously been the Chief Financial Officer for the Spotlight group of companies. By September 1998 he was carrying on business as a financial adviser under the name “WealthMax Financial Services” through a company, Berd Investments Pty Ltd (“WealthMax”). At all material times since then, WealthMax, through Enriquez, acted as financial adviser to, and otherwise on behalf of, Temwell and the Spotlight group of companies which were controlled by, or associated with Morry Fraid. It will be recalled that by special covenant 5 of the Loan Deed quoted at [3] of these reasons, DDS had covenanted to appoint the financial director of Spotlight Stores Pty ltd as its financial adviser for the term of the loan agreement. That financial director was Enriquez.
(iv) The Transaction Documents
On 27 October 1998 Temwell entered into a series of agreements with DDS. Those agreements were embodied in what are hereafter collectively called “the Transaction Documents”. One of the Transaction Documents was a Sale of Application Software Agreement whereby Temwell agreed to purchase from DDS “the Application Software” as defined in another of the Transaction Documents, the Governing Terms Agreement (“the GTA”) for a purchase price which was also defined in the GTA. The relevant definitions were;
‘“Application Software” means all of the technology and information including (without limitation) all Intellectual Property Rights, processes, formulae, reports, software, blueprints, know-how and research data of DDS (including without limitation each of the items described in the First Schedule) as at the Settlement Date in connection with the application software and related programs for use on the MTD 2000 series mobile transaction device developed by DDS together' with all modifications thereto or enhancements thereof from time to time and whether created or generated by DDS from or as a consequence of the Development Program or otherwise;’
‘“Development Program” means the scope and timetable for the research, maintenance, development and commercialisation of the Application Software outlined in the First Schedule of the LRC Agreement as amended from time to time in accordance with the LRC Agreement;’
‘“Intellectual Property Rights” means any rights in respect of or in connection with any confidential information, copyright, trademarks, design rights, drawings, specifications, technical information, know-how, discoveries, operating procedures, technical, financial and commercial data and information and all other intellectual and industrial property rights whatsoever (whether or not registered or registrable) and includes any right to apply for the registration of such rights;’
‘“Purchase Price” means the amount determined by the Investors and notified in writing to DDS on the Purchase Price Determination Date PROVIDED THAT in making such determination the Investors shall take due account of the determination contained in the Valuation PROVIDED FURTHER THAT in any event the Purchase Price shall not be less than A$3,000,000 nor more than A$15,000,000;’

The “Purchase Price Determination Date”, in turn, was defined in the GTA as;
‘“Purchase Price Determination Date” means a date which is not more than seven (7) days after delivery of the final Valuation to Subco;’
It is accepted that whenever used in the Transaction Documents “Subco” refers to Temwell.
Clause 15 of the GTA required the written consent of each other party to any novation assignment transfer or other creation of any interest in the rights and obligations embodied in the Transaction Documents. It provided;
‘Unless otherwise expressly provided in any Transaction Document, no Party shall novate assign transfer or otherwise create any other interest or right in all or any of its rights and obligations under any Transaction Document without the prior written consent of each other Party.’
The Sale of Application Software Agreement included the following provisions;
‘2.1DDS shall sell transfer and assign to Subco and Subco shall purchase and take from DDS on the Settlement Date all of DDS’ right title and interest in and to the Application Software free from all Encumbrances and upon and subject to the terms and conditions contained in this Agreement.
2.2To the extent that the Application Software comprises or is the subject of any rights under the Copyright Act 1958 (Cth) DDS shall assign all its right title and interest in and to the same to Subco on the Settlement Date.
2.3      Purchase Price
2.3.1The consideration for the sale and transfer of the Application Software by DDS to Subco as aforesaid shall be the Purchase Price.
2.3.2The Purchase Price shall be payable to DDS:
2.3.2.1as to three million dollars (A$3,000,000) on the Settlement Date; and
2.3.2.2as to the balance of the Purchase Price within seven (7) days of the Purchase Price Determination Date or such later date as each Advance is provided under each Loan Agreement
2.4      Delivery
On the Settlement Date DDS shall deliver to Subco all such deeds, assignments or other instruments of transfer as may be necessary or reasonably required by Subco to vest in Subco title in and to the Application Software including (without limitation) title in and to all copyright subsisting in the Application Software and such evidence of authority to make such assignment or transfer as Subco may reasonably request.
… … … … …
4.        REGISTRABLE INTEREST
Subject to any express written agreement to the contrary between DDS and Subco, DDS shall maintain for the maximum period permitted at law, at its own expense and in DDS’s own name, registrations of Patents and any other registrable Intellectual Property Right relating to its proprietary Mobile Transaction Device (the "MTD"). DDS shall continue to use all reasonable endeavours at its own expense to progress all applications by it for Patents or any other registrable Intellectual Property Right relating to the MTD. DDS shall use all reasonable endeavours to apply for and obtain registration of any Patents and any other registrable Intellectual Property Right which shall be obtainable in relation to any development relating to the MTD. DDS shall use all reasonable endeavours to defend any challenge to the grant, renewal or validity of any Patent or other registrable Intellectual Property Right of DDS relating to the MTD. DDS shall use all reasonable endeavours to obtain relief from or against any entity which infringes in a material way any Patent or other registrable Intellectual Property Right of DDS relating to the MTD.’
Another of the Transaction Documents was a Licence Research and Commercialisation Agreement (“LRC Agreement”) whereby Temwell licensed DDS to maintain, develop and commercialise the Application Software. Among the terms of the LRC Agreement were the following;
‘2        LICENCE
2.1      Grant of Licence
Subject to the terms of this Agreement Subco grants a licence to DDS of the Application Software for the Licence Period.
2.2(Exclusive) The Licence is given exclusively to DDS and Subco shall not licence any part of the Application Software to any other party during the term of the Licence.
2.3(Assignment) DDS shall have the right at any time after the DDS Loan has been repaid in full to assign the Licence to a Related Body Corporate with the prior written consent of Subco which consent shall not be unreasonably withheld PROVIDED THAT DDS and its assignee enter into such documentation as may be reasonably required by Subco in connection with such assignment.
2.4      Royalties
2.4.1(Royalties) In consideration of the grant of the Licence, DDS shall pay to Subco the following amounts :
2.4.1.1four per cent (4%) of the first one hundred million dollars (USD$100,000,000) of LRC Proceeds earned by DDS during the term of the Licence; and
2.4.1.2three per cent (3%) of all LRC Proceeds earned by DDS during the term of the Licence after the first one hundred million dollars (USD$100,000,000).
2.4.2(Timing) The Royalties shall be calculated and paid on the last day of every calendar month by DDS to Subco in respect of the LRC Proceeds received by DDS in the month being two (2) months immediately prior to that month.
2.5      Further Term
Subject to the terms of the Take-Out Option Agreement Subco and DDS may in their absolute discretion agree to extend the Licence Period by any length of time they may agree upon, and such further term will be deemed to be part of the Licence Period.
… … … … …
3.3.1(Report) Not later than 28 days after the first day of January and July of year during the Licence Period, DDS shall give Subco a Report on the progress and work performed in relation to the Development Program during the six months.
… … … … …
5         COMMERCIALISATION
5.1      Appointment
DDS shall undertake (at the cost of DDS) the commercialisation of the Application Software during the Licence Period consistent with the Development Program and on the terms and conditions of this Clause 5.
5.2Without limitation of DDS's rights DDS shall during the term of the Licence have the authority and the sole and exclusive right to:
5.2.1undertake or arrange the distribution, production or marketing of the Application Software;
5.2.2undertake or arrange the distribution, production or marketing of products utilising the Application Software;
5.2.3undertake or arrange field upgrading, error correction, maintenance, development, modification, variation or testing of the Application Software;
5.2.4    sub-licence the Application Software;
5.2.5howsoever and wheresoever use, copy sell, distribute, licence, sub-licence, copy, reproduce, export or otherwise commercialise in all cases on bona fide commercial terms any run-time copies of the Application Software and any modifications or variations of the Application Software in whole or part(s) whether itself or by delegation to any representative, employee, sub-distributor, sub-licensor or other entity in any capacity whatsoever; and
5.2.6authorise and permit any other entity to perform any of the rights, powers and privileges provided for in Clauses 5.2.1 to 5.2.5 in this Agreement (both inclusive) or in this Clause 5.2.6.
… … … … …
7.1Undertakings
DDS undertakes to Subco as follows, except to the extent that Subco otherwise consents in writing.
… … …
7.1.3(Disposal) It will not sell, transfer, assign, lease, sub-license, part with possession of or otherwise dispose of or deal with all or any part of its rights under any Transaction Document or any interest in the foregoing or agree, offer, attempt or purport to do any such thing, other than as provided for by the Transaction Documents.’
Another of the Transaction Documents was a “Call Option Agreement” also dated 27 October 1998 which recited that Temwell had agreed to grant to DDS the right to require Temwell to transfer the Application Software to or at the direction of DDS. Clause 2 of the Call Option Agreement provided under the heading “OPTION”;
‘2.1In consideration of, among other things, the payment of $1.00 by DDS to Subco (the receipt of which Subco hereby acknowledges):
2.1.1Subco offers to DDS to sell the Application Software to or at the direction of DDS for the Sale Price (the “Sale Offer”); and
2.1.2the Sale Offer is not revocable prior to the day following the Termination Date.
2.2The Sale Price on the Purchase Date for the Application Software shall be the amount set out opposite that date in the First Schedule less the amount calculated on that date in accordance with the formula in the Second Schedule.
2.3DDS may inform Subco of its decision to accept the Sale Offer by written notice substantially in the form of Annexure 1 signed by an Authorised Officer of DDS.
2.4A notice given under Clause 2.3 must specify:
2.4.1the Purchase Date which shall not be earlier than fourteen (14) Business Days after the date of such notice; and
2.4.2the party (“Transferee”) to whom the Application Software is to be sold.
2.5 A notice given under Clause 2.3 is irrevocable.’
Clause 3 of the Call Option Agreement provided machinery for the payment of the Sale Price in the event of an exercise of the option. If the Transferee or a purchaser from the Transferee were a publicly listed company in Australia or the United States of America, part of the Sale Price was to be satisfied by the issue to Temwell of fully paid-up shares in that company. By cl 5 of the Call Option Agreement, Temwell gave, amongst others, these undertakings;
‘5.4Subco will not encumber or transfer any of its assets and undertakings except as contemplated under the Transaction Documents.
… … …
5.5Subco shall not during the term of the Licence sell, transfer, assign or otherwise deal with or agree to deal with the Application Software, the Research Results or any Intellectual Property Right in respect of either of the same, save as provided for in this Agreement.’
The following Schedules were annexed to the Call Option Agreement;
‘FIRST SCHEDULE
Purchaser of Application Software from Joint Venture
10% return on $15 million

Year Quarter Total A$Million*

1 1^st 15.38

2^nd 15.76

3^rd 16.15

4^th 16.56

2 1^st 16.97

2^nd 17.4

3^rd 17.83

4^th 18.28

3 1^st 18.73

2^nd 19.2

3^rd 19.68

4^th 20.17

4 1^st 20.68

2^nd 21.19

3^rd 21.72

4^th 22.27

5 1^st 22.82

2^nd 23.39

3^rd 23.98

4^th 24.58

* These amounts shall be reduced by the same proportion as the Purchase Price is less than A$15 million.
SECOND SCHEDULE
[formula to calculate future value of royalties paid]
Future Value of Royalties Paid
The Future Value of Royalties Paid will be calculated as follows:
For each year, the royalty payments made will be totalled by quarter but should the royalties paid during the year being calculated exceed US$1.25 million then the amount in excess of US$1.25 million for that year will not be counted except to the extent that an amount equal to 66% of that excess has not been applied to reduce the aggregate Principal Outstanding under each Investor’s Loan Agreement.
For each quarter until the date of calculation, a calculated rate of return of 10% per annum shall be applied to increase the value of the royalties. The total of all quarters of such increased values thus calculated since inception to that date of calculation will be the Future Value of Royalties Paid.
A practical example of the application of the above is contained in the attached table.’

The last of the Transaction Documents was a “Take-Out Option Agreement”, also dated 27 October 1998, which recited that DDS wished to grant to each of the “Investors”, identified as Sharsbury Pty Ltd and Sidstone Pty Ltd, an option to require DDS either to subscribe for the Subscription Shares or provide a subordinated loan to the Joint Venture. The Joint Venturers were parties to the Take-Out Option Agreement and were identified as Shepridge Pty Ltd and Slademere Pty Ltd. The Take-Out Option Agreement provided in cl 2 under the heading “SUBSCRIPTION OPTION”;
‘2.1     Subscription Option
In consideration of, among other things, the payment of $1.00 by each of the Investors to DDS (the receipt of which DDS hereby acknowledges):
2.1.1DDS offers to each Investor to subscribe for the Subscription Shares in that Investor’s respective Joint Venturer for the Subscription Price (the “Share Offer”); and
2.1.2the Share Offer is not revocable prior to the day following the Termination Date.
2.2      Acceptance
2.2.1Any one or more of the Investors may accept the Share Offer on or after (but not before) the occurrence of a Purchase Event.
2.2.2The decision whether or not to accept the Share Offer as a result of the occurrence of a Purchase Event shall be made at the absolute discretion of each of the Investors.
2.3      Price
The Subscription Price on the Subscription Date for the Subscription Shares in each Investor’s respective Joint Venturer shall be the amount in respect of that date calculated in accordance with the formula in the First Schedule.’
There were then provisions in cl 3 governing the exercise of the subscription option and payment of the subscription price upon redemption of all of the shares owned in the relevant Joint Venturer by the relevant Investor.
The Take-Out Option Agreement then provided by cl 4 under the heading “Loan Option”;
‘4        LOAN OPTION
4.1      Loan Option
In consideration of, among other things, the payment of $1.00 by Subco to DDS (the receipt of which DDS hereby acknowledges):
4.1.1DDS offers to lend to Subco an amount equal to the Loan Amount ("the Loan Offer"); and
4.1.2the Loan Offer is not revocable prior to the day following the Termination Date.
4.2      Acceptance
4.2.1Subco may accept the Loan Offer on or after (but not before) the occurrence of a Purchase Event.
4.2.2Subject to Clauses 4.2.3 and 4.2.4, the decision of whether or not to accept the Loan Offer as a result of the occurrence of a Purchase Event shall be made at the absolute discretion of Subco.
4.2.3Subco shall not be entitled to accept the Loan Offer if any Investor has accepted the Share Offer.
4.2.4Subco shall not be entitled to accept the Loan Offer at any time after the aggregate income and capital returns received by the Investors since the date of this Agreement is more than the amount calculated in accordance with the formula in the Second Schedule.
4.3      Loan Amount
The Loan Amount on the Loan Date shall be the amount in respect of that date calculated in accordance with the formula in the First Schedule.
4.4      Exercise of Loan Option
4.4.1Subco may inform DDS of its decision to accept the Loan Offer by written notice substantially in the form of Annexure 2 signed by an Authorised Officer of Subco.
4.4.2A notice given under Clause 4.4.1 must specify the Loan Date which shall not be earlier than the Business Day after the date of such notice.
4.4.3A notice given under Clause 4.4.1 is irrevocable.
4.5      Loan Terms
4.5.1If the Loan Offer is accepted by Subco then DDS shall on the Loan Date provide a cash advance (the "DDS Loan") to Subco of the Loan Amount.
4.5.2There shall be no interest payable by Subco on the amount outstanding under the DDS Loan.
4.5.3Subject to Clause 4.6, after the DDS Loan has been made Subco will apply all monies as and when received from time to time in the following order of priority:
4.5.3.1first, to the Investors in their respective Proportions by way of distribution of income and/or capital until such time as the aggregate income and capital returns received by the Investors since the date of this Agreement is equal to the amount calculated in accordance with the formula in the Second Schedule; and
4.5.3.2secondly, to DDS in repayment of the DOS Loan.
DDS acknowledges and agrees that it shall not be entitled to make any claim or bring any action for the repayment of the DDS Loan until the whole of the moneys referred to in Clause 4.5.3.1 have been paid to the Investors.
4.5.4At any time after the whole of the moneys referred to in Clause 4.5.3.1 have been paid to the Investors DDS shall be entitled by notice in writing to Subco to require the immediate repayment of the DDS Loan whereupon the Investors shall automatically be deemed to have accepted the Share Offer and:
4.5.4.1Subco is hereby irrevocably directed by DDS to (in satisfaction of Subco’s obligation to repay the DDS Loan) apply an amount equal to the DDS loan in satisfaction of the payment of the Subscription Price to or at the direction of each Joint Venturer in their respective Proportions; and
4.5.4.2 the provisions of Clause 3.2 shall apply.
4.6Subco will on-lend the Loan Amount to each Investor in their respective Proportions and each Investor will firstly apply any amount so received in the reduction of the Principal Outstanding under its respective Loan Agreement.’
Clause 8 of the Take-Out Option Agreement provided;
‘EXERCISE OF OPTION
Neither the Loan Offer nor the Share Offer shall be capable of being exercised after any sale by Subco of the Application Software following any acceptance of the Sale Offer.’
The First and Second Schedules to the Take-Out Option Agreement were in these terms;
‘FIRST SCHEDULE
SUBSCRIPTION PRICE / LOAN AMOUNT
[formula]
Loan Amount
The Loan Amount will be equivalent to the Deposit placed with the Financier after deductions for repayments as permitted under Clause 6 of the Governing Terms Agreement and interest received as per Clause 3 of the Deposit Agreement.
The Loan Amount should at all times be equivalent to the aggregate Principal Outstanding under each Investor's Loan Agreement.
Subscription Price
The Subscription Price will be the total of
The Loan Amount
Plus
A$3.0 million
Plus
An amount equal to a 25% compounded Annual Return on A$3.0 million
Less
The future value of the royalty stream paid by DDS as per the Second Schedule of the Call Option Agreement.
This total is divided in the Proportions as per the First Schedule of the Joint Venture Agreement to apply for each Investor.
SECOND SCHEDULE
INVESTOR RETURNS
[formula]
Investor Returns
The calculation of aggregate income and capital returns by the Investors (combined) will be as follows:
A$3.0 million
Plus
An amount equal to a 25% compounded Annual Return on A$3.0 million
Less
The future value of the royalty stream paid by DDS as per the Second Schedule of the Call Option Agreement
This total is divided in the Proportions as per the First Schedule of the Joint Venture Agreement to apply for each Investor.’
(v) The Deloittes Report
By a report dated 9 April 1999, Deloitte Touche Tohmatsu (“Deloittes”) furnished to Elbaum, as managing director of DDS, a draft report in response to a request for Deloittes’ opinion as to the market value, as at 28 February 1999, of the Application Software of DDS “as described in the Licence Research and Commercialisation Agreement and the Sale of Application Software Agreement.” At the end of that report, Deloittes expressed this opinion;
‘In our opinion, as a result of the various agreements that are in place, the Application Software has a range of values depending on when the option to buy back the Application Software is exercised by DDS. Summarised below is the value of the Application Software, using the relief from royalty approach, assuming that the option is exercised at the end of the respondent years.

2000 2001 2002 2003 2004

$m $m $m $m $m

Low

2.8

2.3

3.3

5.0

6.9

High 2.8 2.6 4.0 6.6 10.6
This compares to the value of the Application Software using the cost approach of $9.7 million. We are of the opinion that the relief from royalty approach is the most appropriate basis of valuation in this instance.

Furthermore, we note that in arriving at these values, we have disregarded any tax benefits that may arise as a result of this transaction.’

The documents supporting that opinion included cash flow forecasts from 2000 to 2004 based on “management’s global business plan” prepared in February 1999. That plan included actual sales revenues of $2,160,000 for the year ended 30 June 1998 and $2,033,000 for the seven months to 28 February 1999. The forecast sales revenues were for the year ending 28 February 2000, $20,800,000, for the year ending 28 February 2001, $77,800,000, for the year ending 28 February 2002, $141,900,000, for the year ending 28 February 2003, $204,000,000 and for the year ending 28 February 2004, $279,400,000.
(vi) DDS seeks to alleviate its financial difficulties
On 24 May 1999, GTM, Monit and Zacmore assigned to Palicave Pty Ltd (“Palicave”) all their rights, title and interest under the documents evidencing the loan to DDS including the deed of variation of 5 September 1996. Palicave, in turn, on 26 May 1999 notified DDS that the debt might be discharged by payment to Palicave of $1, 572,827.20 “plus costs plus interest”.
During 1999, DDS was exploring options for securing its listing on the NASDAQ Stock Exchange in New York. To that end, it enlisted the assistance of Banque Nationale de Paris (“BNP”). Through BNP, Elbaum and others controlling DDS were introduced to interests associated with one or more of the second respondent (“mCom Solutions”), the third respondent (“Dragonventures.com Inc”), and the fifth respondent (“David Hains”).
By the end of 1999 at the latest, DDS was experiencing severe financial difficulties. It had last paid royalties accrued under the LRC Agreement on 16 August 1999 when it paid $37,779 in respect of royalties which had accrued from January to May 1999. A cheque in payment of a further instalment of royalties was dishonoured by the ANZ Bank in about December 1999. Those financial difficulties prompted DDS to seek a further injection of capital by entering into an arrangement with an entity connected with David Hains.
In late 1999, BNP arranged a meeting between Elbaum, Mr Cattanach (“Cattanach”) another director of DDS and van Zanten representing DDS, a representative of the ANZ Bank and Michael Hains and another person who have been described by Elbaum as representing “Portland House interests.” The purpose of that meeting was to further BNP’s enquiries regarding the relationship between DDS and the ANZ Bank which, at that time, according to Elbaum, owned about 5% of DDS.
Later in the same month, the representatives of DDS were invited by Mr Mulholland of BNP and Michael Hains to a meeting at Portland House. Elbaum and Cattanach attended in company with a Mr Cleary who was then an adviser to DDS. According to Elbaum, David Hains arrived at the meeting 20 minutes after it started and “immediately took over the conduct of the meeting.” Thereafter, David Hains outlined the terms on which his or Portland House’s interests would invest $10 million in DDS with a view to procuring its listing on the NASDAQ Exchange.
At a later meeting to discuss heads of agreement, David Hains requested that representatives of Portland House be given free access to DDS’ documents for the purpose of conducting a “due diligence” investigation. That access was granted and the investigation was primarily carried out by the ninth respondent, Ian Morris Kiefel (“Kiefel”).
Another meeting was held on a Saturday morning at the Toorak home of David Hains attended only by him and Elbaum. In the course of that meeting, David Hains outlined a proposal for a takeover of DDS and indicated that he first required to be clear about the status of orders which it had obtained for the purchase of its product and to have an assessment made of its liabilities. To that end, discussions were held over the ensuing days between Kiefel and van Zanten who was then representing DDS. Later in the same week, a further meeting was held at Portland House to negotiate heads of agreement. As well as representatives of DDS and David Hains and Kiefel, that meeting was attended by Zeljko Ranogajec as a representative of Palicave which, it will be recalled, was the assignee of the loan by GTM, Monit and Zacmore to DDS.
(vii) The heads of agreement of 31 January 2000
Pursuant to that arrangement heads of agreement were executed on 31 January 2000 between DDS as vendor and the seventh respondent (“Dragonventures.com Ltd”) which had been incorporated on 27 January 2000, as purchaser. They were signed by Kiefel as authorised signatory for Dragonventures.com Ltd. Those heads of agreement provided for Dragonventures.com Ltd to furnish appropriate security to the ANZ Bank to facilitate an extension of credit to a maximum additional amount of $1,400,000 which it was anticipated would be required in the period ending on 18 February 2000. Other clauses of the heads of agreement included the following;
‘2.The Vendor agrees to sell all of the assets to be transferred pursuant to this Heads of Agreement free from encumbrances to the Purchaser, and the Purchaser agrees to buy those assets on the terms and conditions set out in this Heads of Agreement, for consideration comprising:
(a)a cash payment in the amount of $18,000,000 (on the basis that the amount outstanding to the ANZ is $6,000,000. If the amount outstanding to the ANZ is less or more than $6,000,000 the cash payment amount shall be adjusted accordingly);
(b)the issue of shares in the Purchaser to the Vendor as set out in paragraph 21 below; and
(c)$6,000,000 pursuant to the ANZ facility referred to in 11(b)
and otherwise subject to the conditions herein, and as adjusted pursuant to paragraphs 5, 9 and 15 of this Heads of Agreement.
3.The Purchaser will not assume any of the liabilities of the Vendor, whether contingent or otherwise, save for employee liabilities as described below in paragraph 5 and liabilities assumed pursuant to paragraph 15.
4.At completion of the sale transaction, the additional funds loaned by ANZ pursuant to the increase in the line of credit as referred to at paragraph 1 above will be repaid.
5.The Purchaser will, at completion of the Sale transaction, assume all liabilities of the Vendors to employees as at 31 January 2000 comprising wages or salaries, annual leave, sick leave and long service leave and the cash consideration portion of the purchase price will be reduced on a dollar for dollar basis, for the total amount of the liability so assumed.
6.The assets to be transferred to the Purchaser will include:
(a)all rights of the Vendor to the intellectual property of and relating to the business of the Vendor;
(b)all intellectual property owned by the Vendor;
(c)any rights held by the Vendor to have intellectual property assigned to it; and
(d)any rights held by Palicave to have intellectual property relating to the business of the Vendor assigned to it.
The Vendor warrants that it will be able to transfer unencumbered title to this intellectual property to the Purchaser and that the intellectual property can be effectively used and updated commercially by the Purchaser.
… … … … …
11.Other than in respect of the matters provided in paragraph 1, this Heads of Agreement is conditional upon the following conditions precedent being satisfied to the reasonable satisfaction of the Purchaser:
(a)Within 14 days of the signing of this Heads of Agreement, Achi Racov visiting the Vendor and satisfying himself as to the technology and intellectual property owned or used by the Vendor.
(b)The ANZ agreeing to make available a secured loan to the Purchaser in the amount of and on terms and conditions no less favourable to the Purchaser than the existing ANZ facility of the Vendor (believed to be $6,000,000). The proceeds of this loan are to be applied by the Purchaser at Completion of the Sale transaction (in part payment of the cash consideration portion of the purchase price) to pay out the Vendor’s debt to the ANZ.
(c)The Purchaser satisfactorily completing its due diligence of the Vendor, its assets and business within 14 days after the provision of the 31 January 2000 management accounts.
(d)Temwell Pty Ltd (“Temwell”) providing written confirmation that application software, which they purchased from the Vendor, may be repurchased by the Vendor, or its successors or nominee (which class of nominee may include the Purchaser), at a price of no greater $4,000,000 within 12 months of the date of this Heads of Agreement.
(e)Temwell and Palicave providing all necessary consents to the sale contemplated by this Heads of Agreement.
… … … …
12.The Vendor warrants in favour of the Purchaser that it has good title to all assets to be sold to the Purchaser and agrees to indemnify the Purchaser against any claims thereto.
… … … … …
19.The entity to be nominated by the Purchaser as the actual transferee of the assets (“the Purchaser Entity”) will, immediately prior to the issue of shares referred to in paragraph 22 below, be a wholly owned subsidiary of Dragonventures.com Ltd. The structure and place of incorporation of the Purchaser Entity will be determined as soon as practicable after the date of this Heads of Agreement, but in any event within 21 days thereof. The entity in which shares are to be issued to the Vendor pursuant to paragraph 22 below will be the entity which is likely to be listed, having regard to that structure, being the Purchaser Entity or the holding company of 100% of the issued shares in the Purchaser Entity.’
(viii) The events of February 2000
To further the negotiations for the sale of DDS’s business, Elbaum wrote in these terms on 4 February 2000 to Dragonventures.com Ltd, “c/o David Hains, The Portland House Group of Companies”;
‘Dear David,
Please accept this letter as consent by Dynamic Data Systems for Dragonventures.com and its representatives to enter into discussions with the relevant parties concerning the Application Software Licence between Dynamic Data Systems and Temwell.
The contact people for the Licence are:
Dynamic Data Systems - Andrew Jacobson at Marshall Dent (9670 5000)
Temwell - Roger Enriquez (9684 7121)
Palicave / Zeljko Ranogajec - Stephen Polzynski at Gray Perkins (02 8235 1211).’
Copies of that letter were sent to, amongst others, Mr Jacobson and Enriquez who were named in it as “contact people”.
On 7 February 2000, Jonathon Wenig (“Wenig”) of Arnold Bloch Leibler (“ABL”) who were the solicitors then acting for Dragonventures.com Ltd, wrote the following memorandum to Mr Sharp (“Sharp”) of the same firm who, had acted for Temwell in the preparation of the Transaction Documents;
‘We act for Dragonventures.com Ltd (the "Purchaser"). The Purchaser has signed a heads of agreement relating to the purchase of the business and assets of DDS. As part of that process, the Purchaser wishes to secure DDS' rights to the application software technology which is currently owned by, and licensed by DDS, from, Temwell - your client.
As you are aware, as part of the arrangements which you put in place for your client, Temwell currently owns that software and has licensed it to DDS. Furthermore, Temwell has granted to DDS a call option in respect of the software. Under the sale agreement with DDS the Purchaser will acquire all of DDS' rights under and in respect of the call option. In addition, and to avoid any doubt or confusion, the Purchaser will obtain an irrevocable direction from DDS that any exercise by DDS of the call option will be in favour of, and will direct a sale in favour of the Purchaser.
As a condition precedent to the completion of the purchase by the Purchaser of DDS' business, the Purchaser requires:
1An acknowledgment and consent from Temwell as to the purchase by the Purchaser of DDS' assets and business, including DDS’ rights under the Licence and Commercialisation Agreement between Temwell and DDS, and the Call Option Agreement.
2Notice of confirmation from Temwell in favour of the Purchaser, that at any time during the term of the Call Option, the Purchaser (or its nominee being the party nominated by the Purchaser as the actual purchaser of DDS' assets) will, as a consequence of the purchase of DDS' rights under the Call Option Agreement, be entitled to purchase the Application Software for a price which will not in aggregate exceed $X. X shall mean the amount calculated in accordance with the formula in the Call Option Agreement, provided that in relation to the component of the formula which entitles Temwell to receive an additional 2% of the market value of the Application Software in addition to the sale price - Temwell shall acknowledge and confirm in favour of the Purchaser that market value for the purposes of that calculation shall not exceed the sale price calculated in accordance with the formula in the Call Option Agreement. For example, if the number calculated in accordance with the formula in the Call Option Agreement is $3.1 million, Temwell shall acknowledge that its total entitlement to consideration shall not exceed $3.1 million plus 2% of $3.1 million.
3Notwithstanding any of the above, or anything contained in any of the agreements between Temwell and DDS and any other party, Temwell acknowledges and agrees that at any time for a period of 6 months from completion of the sale by DDS to the Purchaser of its business and assets, the Purchaser will be entitled to purchase the Application Software from Temwell for an aggregate price which will not exceed $3.1 million.
If you have any queries, please contact me.’
That memorandum was referred to Enriquez who, on 22 February 2000, “for and on behalf of” Temwell, sent this response to Sharp;
‘In response to the memorandum dated 7th February 2000 relating to the above, Temwell Pty Ltd's position is as follows :-
(1)Temwell acknowledges and consents to the purchase by Dragonventures.Com Ltd as to the purchase of DDS' assets and business, including DDS' rights under the Licence and Commercialisation between Temwell and DDS and the Call Option agreement.
(2)Temwell confirms in favour of the Purchaser (Dragonventures.Com Ltd or its nominee) that at any time during the term of the Call Option, the Purchaser will be entitled to purchase the Application Software at an agreed price (yet to be determined) in accordance with the schedules relating to rates of return within the Call Option Agreement and final valuations relating to the software.
(3)In regard to Point 3 of your memorandum, the position of Temwell is that it is not yet in a position to determine the final price as copies of final valuations have not yet been received by Temwell.’
On the next day, 23 February 2000, Sharp sent this facsimile message to Enriquez;
‘Further to your facsimile yesterday, David Hains has requested some clarity as to the investors’ expectations regarding the ultimate purchase price. Would you please provide a working example of the expected purchase price, assuming a value of, say $9.2 million (which I recall was the approximate valuation you mentioned last week).
Would you please forward this as a matter of some urgency.’
In response to that request, Enriquez, again “for and on behalf of” Temwell, replied to Sharp by facsimile dated 24 February 2000 in these terms;
‘In response to your facsimile received yesterday, I refer you to the first schedule in the Call Option Agreement attached, which calculates the purchase price based on a $15million valuation.
If the valuation is for example $9.2 million, the purchase price would be 61.33% of the relevant quarter (ie $9.2 m/$15.0m = 61.33%). The current quarter applicable is Year 2 Quarter 2 as the initial transaction occurred on the 27^th October 1998.
This would mean that the purchase price would be 61.33% X $17.4m = $10,671,420. An adjustment would be made to this figure for royalties received to date, as per the agreement.
I hope this clarifies the position. These calculations are based on the current Call Option Agreement.
I suggest that a meeting should take place with David Hains in order to discuss the desired outcome of both parties. Please contact me if this can be arranged.’
A copy of that facsimile was forwarded on 25 February 2000 by Wenig’s secretary at ABL to David Hains. On the same day, Enriquez wrote to Sharp in these terms;
‘As discussed in our telephone conversation today, the investors in Temwell are basing the value of the software at $15.0m as per the original transaction. As the funding has not yet occurred in this transaction, the buy-back based on the first schedule would be as follows :-
Year 2 Quarter 1  $17.4m
Less outstanding funding                   $12.0m
Net purchase price of software          $ 5.4m
====
As discussed, I believe we should arrange a meeting of both parties in order to finalise this matter’
(ix)      The Sale of Business agreement of 1 March 2000
On 1 March 2000, DDS, Elbaum and Elbaum’s service company, D & E Consulting Pty Ltd (“D&E”) entered into a “Sale of Business Agreement” with mCom Solutions. That agreement provided for the sale of the business of DDS and included, as part of cl 2 headed “Conditions to Completion”;
‘2.1 Conditions Precedent
The obligation of the Purchaser to complete the purchase of the Assets and the Business and to assume the other obligations to be assumed by the Purchaser pursuant to this Agreement is subject to and conditional upon the satisfaction or waiver by the Purchaser of each of the following conditions precedent:
2.1.1ANZ increasing the current line of secured credit to the Vendor by a maximum amount of $1,400,000 to be advanced on a temporary basis;
2.1.2Achi Racov being satisfied as to the extent, existence and utility of the Intellectual Property and the Application Software and that the Employees have accepted employment with the Purchaser in accordance with Clause 1.1.12 and Clause 4;
2.1.3each of Zeljko Ranogajec, Palicave Pty Ltd, D & E and HDE [Elbaum] entering into a deed of release and indemnity with the Purchaser, in a form acceptable to the Purchaser, pursuant to which those parties acknowledge and agree that they have no interest in, or claims against any of the Assets or the Business, nor against the Purchaser, and indemnifying the Purchaser against any such interests or claims;
2.1.4ANZ agreeing to make available to the Purchaser, for draw down at Completion, a secured loan of not less than the amount referred to in Clause 2.4.3 (with the establishment costs of such facility being borne by the Vendor) but otherwise in an amount and on terms and conditions no less favourable to the Purchaser than the existing facility granted by ANZ to the Vendor;
2.1.5the Purchaser completing a due diligence review of the Vendor and the Business to its satisfaction within 14 days of delivery by the Vendor to the Purchaser of the Accounts;
2.1.6Temwell providing written confirmation that the Application Software may be repurchased by the Vendor or its successors in title or its nominee (which may include the Purchaser) within 12 months of the date of the Heads of Agreement, at a price no greater than $3,500,000;
2.1.7the Vendor giving to the Purchaser (or its nominee) an irrevocable appointment together with evidence that such appointment has been delivered to Temwell, which appointment shall appoint the Purchaser (or its nominee and no other person) as the Vendor’s appointee for the purchase of the Application Software pursuant to clause 2.1.1 of the Call Option Agreement entered into between the Vendor and Temwell on 27 October 1998 (each of the appointment and the evidence of delivery being in a form acceptable to the Purchaser);
2.1.8each of Zeljko Ranogajec and Palicave Pty Ltd (ACN 080 402 535) confirming in writing to the Purchaser (in a form acceptable to the Purchaser) that all rights it may have in respect of any Intellectual Property are waived, relinquished or assigned to the Purchaser, including, without limitation the Application Software, or any rights under the Call Option Agreement between the Vendor and Temwell dated 27 October 1998 and/or pursuant to an agreement between the Vendor, Zeljko Ranogajec, D & E and HDE dated 20 May 1999;
2.1.9Temwell (and any other parties to the arrangements pursuant to which Temwell purchased the Application Software) and Palicave Pty Ltd (ACN 080 402 535) providing all necessary consents to the sale of the Assets and the Business contemplated by this Agreement;
2.1.10there is no material outstanding breach of this Agreement (including the Vendor's Warranties) by the Vendor;
2.1.11no receiver, receiver and manager, official manager, liquidator or administrator has been appointed in respect of the Vendor and/or the whole or any part of the Assets or undertaking of the Business;
2.1.12recognising that the Employees and the knowledge possessed by and information held by those Employees are critical to the success of the Business, the Purchaser requires as a condition precedent to Completion, that all of the Employees to whom an offer is made by the Purchaser, accept such offer of employment from the Purchaser for a period of three years from Completion (or such other term as the Purchaser shall determine) on terms and conditions agreed between the Purchaser and the relevant Employee;
2.1.13the Vendor obtaining any consents necessary in relation to the transfer of the Assets to the Purchaser;
2.1.14the respective lessors consenting in writing to the assignment by the Vendor (or D & E Consulting Pty Ltd, as appropriate) to the Purchaser of the Leases;
2.1.15the respective lessors consenting in writing to the assignment by the Vendor to the Purchaser of the Equipment Leases; and
2.1.16all leases for equipment (other than the Equipment Leases) under which the Vendor has possession of certain assets which it does not own and which are used in relation to the Business, including without limitation assets owned by HDE and/or D & E and used in the Business, being paid out by the Vendor and the Vendor acquiring unencumbered title to that equipment such that that equipment will form part of the Assets transferred to the Purchaser at Completion.
2.2 Non-satisfaction
The Conditions Precedent are conditions for the benefit of the Purchaser only.
If any Condition Precedent is not satisfied or waived by the Purchaser by the End Date, this Agreement shall, at the option of the Purchaser, be terminated with immediate effect by written notice given to the Vendor.’

Then followed these sub-clauses under the heading “Sale and Purchase”
‘3.1 Sale and Purchase
Subject to the provisions of this Agreement, the Vendor agrees to sell, transfer and assign to the Purchaser, and the Purchaser shall purchase and take from the Vendor, the Business and the Assets for the Purchase Price free from all Encumbrances.
… … …
3.3.1The Purchase Price for the Assets and the Business is, subject to Clause 8.3, $18,000,000 plus the allotment and issue to the Vendor of 24,000.000 ordinary shares in the capital of the Purchaser pursuant to Clause 9.2. The Purchase Price is to be paid in accordance with Clause 2.4.
3.3.2The Purchase Price shall be apportioned as determined by the Purchaser.’
The Sale of Business Agreement of 1 March 2000 included these definitions;
‘“DDS Software” means all computer software and related programs developed and owned by the Vendor or any Associate of the Vendor in connection with the Business, other than the Application Software;’
‘“Application Software” means the software and related programs for use on mobile transaction devices (together with all modifications thereto) (or enhancements thereof developed by the Vendor and sold to Temwell pursuant to an agreement entered into between them on 27 October 1998;’
‘“Assets” means all the assets of the Vendor used or owned in connection with the Business as at the Completion Date wherever they are located including (without limitation);
… … …
(k)any and all right, title to or interest of the Vendor in the Application Software, pursuant to the Licence Research and Commercialisation Agreement between Temwell and the Vendor dated 27 October 1998, the Call Option Agreement between Temwell and the Vendor dated 27 October 1998, or otherwise; and
(l) the Other Assets.’
According to Elbaum, he had been assured by David Hains during February 2000 that he (Hains) had “settled all issues” in relation to Temwell. But for that assurance, Elbaum said, he would not have permitted DDS to proceed with the deal. Moreover, Elbaum said, before signing the Sale of Business Agreement, he had been shown by Kiefel a copy of the letter from Enriquez dated 22 February 2000 quoted at [33] above and been told that all conditions concerning the consent of Temwell had been met.
(x) Richard Hains’ letter of 7 March 2000
On 7 March 2000 the eighth respondent (“Richard Hains”), a son of David Hains “for and on behalf of” mCom Solutions wrote this letter to Enriquez of Temwell;
‘Thank you for your facsimile of 22 February 2000 responding to our memorandum of 7 February 2000.
I note that upon receipt of your facsimile, and in reliance on the position reflected therein, we have proceeded to invest further funds in the business of Dynamic Data Systems Pty. Ltd. (“DDS”), and on 1 March 2000 we signed a formal Sale Agreement for purchase of DDS’ business and assets.
We note that while the party to the formal Sale Agreement is mCom Solutions Inc, a company incorporated in Delaware (and a wholly owned subsidiary of Dragonventures.com.Ltd), many of the Australian assets of DDS will be owned by mCom Solutions Australia Pty. Ltd. (ACN 091 375 950), a wholly owned subsidiary of mCom Solutions Inc.
DDS’ rights and interests under the Licence, Research and Commercialisation Agreement will be among those assets assigned to mCom Solutions Australia Pty Ltd.’
That letter was passed by David Hains to Wenig of ABL with a request to give a copy of it to “Temwell’s legal representatives”. It was then apparently passed to Sharp who faxed it to Enriquez, under cover of a note “I attach copy fax received from David Hains. Please contact me to discuss.”
(xi) The meeting of 9 March 2000 between David Hains, Tauber and Enriquez
On 9 March 2000 a meeting was held at David Hains’ office between David Hains, Tauber and Enriquez. According to David Hains, there was discussion of the price at which the Call Option could be exercised. Enriquez proposed a price of $5.4 million which Hains contended was incorrect. On David Hains’ version, Tauber and Enriquez did not indicate any readiness by Temwell to move below that price. However, Tauber and Enriquez assert that David Hains “gave the clear impression” that Temwell would be “bought out” for “a figure somewhere between $3.1 million and $3.4 million.” It is probable that David Hains mentioned those figures when disputing the correctness of Enriquez’s assertion that the formula yielded an exercise price under the Call Option Agreement of $5.4 million.
(xii) Events between 20 and 24 March 2000
Temwell was formally advised of the sale by DDS of its assets and business to mCom Solutions when this letter dated 20 March 2000 by Elbaum as “Chairman and CEO” of DDS was written to Enriquez of Temwell;
‘As discussed. I confirm that DDS is in the process of selling its assets to mCom Solutions Inc. for a combination of cash and shares in mCom Solutions Inc.
I also confirm that the mCom Solutions Inc. shares which will be held by DDS as part of this transaction, are to be distributed in proportion with the shareholding held by the shareholders of DDS within 6 to 8 months of settlement and prior to the listing of mCom Solutions Inc.’
After the letter of 20 March 2000 advising Temwell of the agreement to sell DDS’ business had been sent, Enriquez telephoned Elbaum to say that he (Enriquez) had made a very good deal with mCom Solutions. Elbaum made no enquiries of Enriquez about the nature of the “deal”.
On the evening of 21 March 2000, Enriquez sent a facsimile message to van Zanten requesting him to;
‘Please check the attached and confirm it is as per the formula in the call option agreement.’
Settlement of the acquisition of the business of DDS by mCom Solutions was expected to occur at a meeting on 22 March 2000. That meeting was attended by Enriquez, Fraid, Mr Stankovich representing the ANZ Bank, Elbaum and van Zanten, together with Ms Renner of Deacons, the solicitors for DDS and Kiefel, Wenig and David Hains on behalf of mCom Solutions. Fraid indicated at an early stage of the meeting that, unless its rights to the Application Software were “bought out” by the purchasing interests, Temwell would not sign a deed of consent which had been proffered by Wenig to Enriquez on the morning of 22 March under cover of a letter noting that he attached “a simple form of consent deed which we would propose having Temwell execute at settlement this afternoon.” The recipient was invited to contact Wenig with any queries or comments. The proposed deed of consent included these provisions;
‘2.Temwell hereby consents to the assignment (pursuant to the Sale Agreement) by DDS to mCom (or a wholly owned subsidiary of mCom nominated by mCom) of its rights to the Application Software, including DDS’ rights under the Call Option Agreement and the LRC Agreement.
3.Temwell acknowledges that in addition to the assignment by DDS of its rights under the Call Option Agreement, to which Temwell has consented under this Deed, Temwell has been provided with a copy of an irrevocable appointment executed by DDS in favour of mCom pursuant to which DDS irrevocably appoints mCom (or mCom’s nominee) as DDS’ appointee for the purchase of the Application Software pursuant to clause 2.1.1 of the Call Option Agreement.
4.Temwell acknowledges and agrees that upon receiving notice from mCom (or a party nominated by mCom) exercising the Call Option, Temwell will comply with its obligations under the Call Option Agreement in favour of mCom (or the party nominated by mCom).
5.Temwell agrees to exercise all powers available to it, do all acts, matters and things and sign, execute and deliver all documents and instruments which may be necessary or reasonably required to give full force and effect to the provisions of this Deed.’
When he was told by Kiefel at the settlement meeting of 22 March that no “buy out” would occur on that day, Fraid asked for Sharp of ABL to come to the meeting. When that occurred, Fraid and Enriquez consulted Sharp who, according to Fraid, advised them that the deed of consent was not contrary to their interests and that mCom Solutions would eventually “buy out” their rights to the Application Software.
However, Fraid and Enriquez resolved to persist in their endeavours to extract a “buy out” price immediately and Fraid took the opportunity to telephone Tauber who was then on vacation at Byron Bay. Tauber’s reaction was that Temwell was being “set up” and he expressed the view that Temwell should adamantly refuse to execute the proffered deed of consent. That attitude was adopted by Fraid and Enriquez, who communicated it to the others in attendance. Fraid has deposed that, at that point, he was asked by Kiefel at what amount Temwell wanted to be “bought out”, to which he replied $5.4 million and suggested a 60 day settlement. The offer was refused. Both Fraid and Enriquez left the meeting.
At a meeting on the day after the abortive settlement meeting of 22 March 2000, David Hains, according to Elbaum, said that he had “encountered big problems with Temwell and the ANZ”, and that he would have to advance from the cash resources of his group $3.5 million to satisfy Temwell’s demand and $6 million to satisfy those of the ANZ Bank. Again according to Elbaum, David Hains said that those payments would only be made if DDS and Elbaum were to agree to forego all or most of the shares in the acquiring vehicle which they were to receive under the Sale of Business Agreement. Elbaum replied that the deal was at an end and left the meeting. During the same day, according to Elbaum, he continued to insist that he would not proceed with the Sale of Business Agreement while matters remained unresolved with Temwell. Elbaum also claimed that he had been assured by Kiefel that those matters had been resolved and that this had been supported by the personal assurance of David Hains. However, because of David Hains’ threat to dilute the equity of the DDS interests in the acquiring vehicle, Elbaum telephoned Fraid and told him that “the deal with mCom was off”. On Fraid’s recommendation, Elbaum approached Levi Mochkin, a stockbroker, who was seen as another potential partner or investor because of his interest in “technology issues”. Elbaum met with Mr Mochkin in company with two senior representatives of the ANZ Bank on the evening of 23 March. However, no concrete alternative proposal for financing the continuation of DDS’ business emerged from that meeting.
Early on the morning of 24 March 2000, Wenig sent by facsimile this letter to DDS with a copy to Vivi Renner of Deacons;
‘I refer to the Sale of Business Agreement between Dynamic Data Systems Pty Ltd (“DDS”), mCom Solutions Inc (“mCom”), Hector Daniel Elbaum and D & E Consulting Pty Ltd dated 1 March 2000 (the “Sale Agreement’).
On behalf of mCom, I hereby notify DDS that each of the conditions precedent to the Sale Agreement have either been:
1 Satisfied to mCom’s satisfaction; or
2 Waived by mCom.
There are several conditions which will be satisfied at completion by the execution by DDS of documents which DDS is contractually required to execute under the Sale Agreement (eg the irrevocable appointment document for the purposes of the Call Option), and others (such as third party consents) which will be satisfied at Completion by the handing over of releases upon payment of funds.
Accordingly, mCom requires that DDS attend at settlement at 10 am this morning at our offices, and complete the purchase of the Assets under the Sale Agreement - as DDS is contractually bound to do under the Sale Agreement.
If you have any queries, please contact me.’
On instructions from Elbaum, Ms Renner replied in these terms to the letter just quoted;
‘SETTLEMENT
We have been asked to reply to your 24 March 2000 letter to the directors of Dynamic Data Systems Pty ltd
Before they can agree that the proposed settlement should proceed, would you please confirm that the ANZ Bank will be paid $6,000,000 from loan funds without the equity to be issued to Dynamic Data Systems Pty Ltd in mCom Solutions Inc being reduced or diluted beyond 49.9 per cent in order to fund this payment or to provide additional working capital except as contemplated by clause 10.5 of the Sale of Business Agreement (ie to provide working capital over and above the $11,000,000 of loan funds contemplated to pay out the ANZ Bank and by clause 10.3.1 of the Sale of Business Agreement).’
As a result of that exchange of correspondence, Wenig caused this letter dated 24 March 2000 to be sent to the Directors of DDS;
‘Settlement
By countersigning this letter, mCom Solutions Inc confirms in favour of DDS that:
1the $6 million to be paid to the ANZ Bank at Completion will be funded out of debt provided by Dragonventures.com Ltd. The term of that $6 million loan will be until the earlier of the date 12 months from the date of this letter, or the listing of mCom Solutions Inc. The $6 million loan will be on terms no less favourable to mCom as the terms of the loan (in particular in relation to interest) referred to in clause 10.3 of the Sale Agreement. This $6 million loan is provided in addition to the loan referred to in clause 10.3 of the Sale Agreement; and
2mCom Solutions Inc will not issue shares in a manner which contravenes the provisions of the Sale Agreement.’
That letter was countersigned by Elbaum as an authorised signatory of DDS. The settlement of the Sale of Business Agreement occurred on 24 March 2000 when payments were made out of the purchase price of $18 million to satisfy the liabilities of DDS to Palicave ($1,835,807.24), Temwell ($37,013.47 for accrued royalties), the State Revenue Office (for unpaid payroll tax), the Australian Taxation Office (for unpaid group tax), the Australian Securities and Investments Commission ($120) and the ANZ Bank ($8,183,590.11). Out of the proceeds of settlement an additional sum of $750,000 was paid to Mr Ranagajec personally at the direction of DDS apparently in satisfaction of a liability to him assumed by DDS pursuant to a deed made 14 February 2000. A balance of $5,737,055.73 was paid out of the settlement proceeds to DDS.
The decision to proceed, on 24 March 2000 to settle the Sale of Business Agreement with mCom Solutions was taken by the directors of DDS on advice from its solicitors, Deacons. According to Cattanach, the moving force behind that decision was Elbaum as Chairman of Directors and Chief Executive Officer of DDS.
At the settlement meeting of 24 March 2000, DDS executed an irrevocable appointment of mCom Solutions as DDS’ appointee for the purchase of the Application Software pursuant to cl 2.1.1 of the Call Option Agreement. DDS also executed a further agreement which included this clause;
‘3.       The rights of the Vendor to the Application Software pursuant to the terms of the Licence, Research and Commercialisation Agreement (“LRC Agreement”) between the Vendor and Temwell Pty Ltd (ACN 082 656 157) (“Temwell”) dated 27 October 1998 are included in the sale of the Assets, and will be transferred to the Purchaser pursuant to the Sale Agreement on the Completion Date. If for any reason, at any time following the date of this Agreement, Temwell claims that it did not adequately consent to such assignment, or that for any other reason, the assignment was invalid, the Vendor agrees that it will sub-licence any rights it holds to the Application Software to the Purchaser (or a party nominated by the Purchaser):
(a)at the Purchaser’s option to be exercised by the Purchaser at any time in its absolute discretion by written notice to the Vendor;
(b)      for consideration which in aggregate shall not exceed $10; and
(c)on terms which will include an undertaking that the Purchaser will not do anything or act in any manner pursuant to the sub-licence, which will cause the Vendor to be in breach of the LRC Agreement, and the sub-licence will include an indemnity from the Purchaser in favour of the Vendor supporting this undertaking.’
(xiii)     Elbaum’s report to shareholders and noteholders of DDS
On 31 March 2000, Elbaum, again as Chairman of Directors and Chief Executive Officer of DDS sent this circular letter to its shareholders and convertible noteholders;
‘As you are aware, continued delays in getting DDS’ main product, the mobile transaction device, on the market has resulted in threats to the solvency of DDS. As a consequence, DDS has on 24^th March 2000 sold its assets, technology and business to mCom Solutions Inc, a U.S. based mobile commerce systems and solutions provider, for a consideration comprising part cash and part shares in mCom Solutions Inc.
DDS was advised in this transaction by law firm Deacons Graham & James.
The sale enabled DDS to settle its considerable debts to its creditors, the Australian Taxation Office and the State Revenue Office and successfully removed the immediate threat of foreclosure of the company.
The sale transaction has now settled and the Board of Directors is currently assessing the financial position of the company and is engaged, in consultation with its advisors, in putting together a strategy for the company on a go forward basis.
The Board of Directors expects to present that strategy to you in the near future. In the meantime, the Board of Directors thank you for your patience in this very difficult time.’
(xiv) The letter before action on behalf of Temwell
By letter dated 5 May 2000 Meerkin & Apel, who by then had been retained by Temwell as its solicitors in place of ABL, wrote as follows to the Directors of the fourth respondent (“mCom Solutions Australia”);
‘Unauthorised Purported Assignment of Software Rights under Licence
We act for Mr Morry Fraid and Mr Geoff Tauber as well as Temwell Pty Ltd and their associated entities.
We have recently been provided with instructions in relation to what we believe might be an unauthorised dealing with Mobile Eftpos Application Software ("the software") owned by our client, Temwell Pty Ltd ("Temwell"). Based on our preliminary instructions, we note the following:
1.On or about 27 October 1998 our client licensed to Dynamic Data Systems Pty Ltd, now known as DKGR Holdings Pty Ltd ("DDS") certain rights to the software.
2.Under the Licence Agreement, the business was exclusive to DDS and DDS could only assign the licence to a Related Body Corporate with Temwell's consent.
3.Throughout February and March 2000, DDS entered into negotiations relating to or affecting the software with mCom Solutions Inc and its related entities ("mCom") ("the mCom sale").
4.To facilitate the mCom negotiations, our client was approached by DDS in relation to a "buy-out" of the software, where mCom would buy the rights to the software from Temwell. Negotiations took place during February and March 2000 and a buy-out price was discussed on numerous occasions.
5.A settlement date was arranged for the mCom sale and the buy-out of the software for 22 March 2000 ("the settlement"). The day before the settlement however, our client received a deed by facsimile which requested that our clients consent to the assignment of the software from DDS to mCom with no advantage, financial or otherwise, to our client and inconsistent with our client's belief that it was being "bought-out" of the software. Our clients refused to sign the deed and thereby put DDS and mCom on notice that Temwell did not consent to the assignment.
6.On 22 March 2000, our clients attended the settlement and again placed all parties associated with the matter on notice that Temwell did not consent to the assignment of the software. The settlement did not take place.
7.Notwithstanding our clients' clear position in this matter, it now appears that DDS might have wrongfully assigned the rights which it held to mCom without our clients' knowledge or consent.
If that is so, our clients consider DDS to be in breach of the Licence Research and Commercialisation Agreement dated 27 October 1998 by purporting to assign its interest in the software to you (if that be the case), without our clients' consent. Our clients further consider mCom to be using the software contrary to our clients' legitimate rights. Until we are able to properly investigate this matter and advise our clients, we require that you provide, by 4.00pm, Wednesday 10 May 2000:
(a)a copy of any documentation which purports to deal with the software in a manner inconsistent with DDS's rights and obligations under the licence arrangements and, in particular, any contracts and other documentation passing between DDS and mCom relating to the software;
(b)without admission that any valid assignment has been effected, a written undertaking that mCom will abide by all of the terms, conditions and obligations imposed on DDS, under the licence arrangements, including the obligations of confidence, protection of intellectual property rights, non-competition and the research, development, commercialisation and accounting obligations;
(c)detailed written advice as to whether and, if so how, mCom has dealt with our clients' software following the purported assignment on 24 March 2000.
Unless we receive the information, documents and the undertaking requested above by the required time, our clients will be forced to approach the Court to protect their interests, including making an application for injunctive relief and obtaining compensation from DKGR.
Our clients reserve all of their legal rights.’

It seems to be implicit in the cross-claimants’ reliance on this alleged indication of ulterior purpose that Temwell understood that recovery of the Application Software was the sole or highest relief which it could obtain in the instant litigation. As I have found at [245] above, neither Temwell nor those controlling it had any interest in procuring the return to Temwell of the Application Software. They had neither the resources, the expertise, nor the inclination to exploit it for themselves and the unavailing efforts of Elbaum to find another financier or purchaser of DDS’ business suggests that the Application Software could not have been sold on the open market. In these circumstances, if the alternative, legitimate, purpose to be imputed to Temwell in continuing to prosecute its claim is that of recovering the value of the interest in the Application Software of which it believed it had been wrongly deprived by the events of March 2000, it is difficult to see how its failure to seek the physical return of the Application Software negatived or detracted from that purpose.
(d) Refusal to accept the open offer of 27 August 2001
The terms of this offer have been set out at [63] above. For the reasons explained in the last preceding paragraph, Temwell had no interest in receiving the latest, or any, version of the Application Software. The royalties, if any, at the rate of 4% on sales of the MTD 2000 and MTD 3000 by the mCom respondents would, by the date of the letter, have been minuscule compared with the damages which Temwell was then claiming in the action.
As already hypothesised, Temwell’s presumptive purpose, in pursuing the action, was to recover the value of the interest in the Application Software which was alleged to have been wrongfully taken from it in March 2000. It is only if the Court is persuaded that Temwell and its advisers knew or believed in August 2001 that it had no arguable prospect of making out that allegation that its rejection of the open offer can be called in aid to support the imputation of a predominant collateral purpose. I am not prepared to find that to have been the state of knowledge or belief, at that time, of Temwell and those controlling and advising it.
(e) The joinder of the individual respondents
The cross-claimants contend that this aspect of the proceedings illustrates that Temwell’s ulterior or collateral purpose in pursuing it was to so embarrass David Hains and the other individual respondents or otherwise oppress them by the demands made by the litigation on their time, financial resources and attention that one or more of them would pay a sum of money to Temwell to be rid of it despite knowing that all Temwell’s claims were spurious. The principal obstacle to the imputation of this predominant purpose to Temwell is that it continued to prosecute its claim long after refusing the open offer of 27 August 2001 when it must have been obvious that none of the individual respondents with the necessary resources would yield to Temwell’s coercion. The rejoinder might be made that the institution of this very cross-claim compelled Temwell to prosecute its claim to judgment to provide a colourable defence to the cross-claim. However, that analysis imputes to two hard-headed, experienced and successful businessmen, Fraid and Tauber, the quixotic decision to continue to accrue a huge liability for Temwell’s and the respondents’ costs of a claim which they knew could not succeed in order to avoid liability for, presumably, a much smaller amount in respect of the cross-claim and the costs thereof.
It has been further suggested under this head that Temwell’s claims against David Hains and Richard Hains personally were advanced and pursued in order to preserve recourse against solvent respondents by contrast with DDS. However, that strategy is not uncommon in actions under the TPA or for analogous causes of action where efforts are made to attach accessorial liability to directors or other individual protagonists to preserve the fruits of victory which would be denied to the applicant if the action were maintained solely against an insolvent, or doubtfully solvent, corporate respondent. Provided that the claims against the individual respondents are not manifestly unarguable, the claims against them will not, without more, be outside the scope of the remedy made available by the cause of action relied upon. The reasoning indicated at [262]-[263] above in respect of claims for exaggerated or exorbitant damages can be paraphrased to apply also to this suggested basis for imputing a collateral purpose to Temwell. The same basis, ie, the need to keep one or two financially responsible individual respondents in the litigation, also evaporates after the point has been reached when the applicant has presumably realised that the wealthy individual respondents will not succumb to the pressure being exerted through the allegedly abusive proceedings. From that point, the decision to persist in the litigation for the presumptively ulterior purpose would become quixotic for the reasons explained in the last preceding paragraph.
(f)Litigation as an attempt to compel a “buy out” of Temwell’s interest under the Transaction Documents
It has been urged under this head on behalf of the cross-claimants that those controlling Temwell, having seen, in the course of the negotiations to the end of March 2000, an opportunity for Temwell to have its interest under the Transaction Documents “bought out” for an amount in the range from $3.1 to $3.4 million which later vanished, instituted these proceedings for the ulterior purpose of compelling the “buy-out” which had not eventuated. It is true that Temwell seems impliedly to have recognised that it had no right to compel mCom Solutions, DDS or any other party to exercise the Call Option. Had it not recognised that inability, it would, presumably, have mounted a claim for specific performance of the Call Option Agreement. However, what I have called in [264] above “the alternative, legitimate, purpose to be imputed to Temwell”, that of recovering the value of what it believed had been lost to it in March 2000, was also to be achieved, like the desired “buy out”, by receipt of a substantial sum of money by judgment or compromise of its claim. That degree of similarity between the two purposes makes it that much harder for the cross-claimants to persuade the Court to adopt the analysis which results in the imputation of a purpose foreign to the design, or legitimate object, of the litigation.
It is also to be borne in mind that the notion of a “buy out” of Temwell’s interest was not confined to its side of the record. It was adverted to in the Heads of Agreement of 31 January 2000 and was revived by Wenig’s memorandum of 7 April. In those circumstances, I consider that something more is required than a disappointed expectation of a “buy out” to read into a claim by one party for pecuniary compensation, however extravagant or exaggerated, a predominant purpose of achieving a result outside the legitimate scope or intendment of the claim. This requirement is underlined by the following observation of Brennan J in Williams v Spautz (supra) at 535;
‘There is no impropriety of purpose (whatever may be said of motive) when a plaintiff commences or maintains a proceeding desiring to obtain a result within the scope of the remedy, even though the plaintiff has an ulterior purpose -- or motive -- which will be fulfilled in consequence of obtaining the legal remedy which the proceeding is intended to produce. To amount to an abuse of process, the commencement or maintenance of the proceeding must be for a purpose which does not include -- at least to any substantial extent -- the obtaining of relief within the scope of the remedy.’
After referring to a passage from Varawa v Howard Smith Co Ltd (1911) 13 CLR 35, at p 91 his Honour continued:-
‘Putting to one side, then, the cases where the plaintiff intends to obtain relief within the scope of the remedy, the problematic cases arise when the plaintiff's purpose is to obtain some benefit, to impose some obligation or to affect some relationship otherwise than by verdict, by order or by compromise of the particular claims made in the proceeding. These are cases where the plaintiff's objective lies outside the relief which, if the proceeding were prosecuted to completion, might be obtained by verdict or by order.’
If one excludes the supposition that Temwell’s objective was to obtain a large sum of money from the respondents by exploiting the “nuisance value” of the proceedings, it is difficult to impute to Temwell any objective lying outside the scope of the relief obtainable in the proceedings. There is no suggestion of any pre-existing relationship between Temwell or its controllers and any of the respondents which might have inspired an extrinsic concern to injure them or impede the pursuit of their commercial interests. In this sense, the present case is quite unlike Packer v Meagher (supra) and Speed Seal Products Ltd v Paddington [1985] 1 WLR 1327 where the ulterior purpose leapt readily to the eye. In the last-mentioned case the alleged purpose was to injure a competitor’s business, but there can be no suggestion that Temwell or any of the other cross-respondents were ever in competition with any of the cross-claimants.
(g) Other matters
Counsel for the cross-claimants pointed to a number of matters which were relied on as supporting the inference of collateral purpose. None of those matters, as I understood the argument, was relied on as by itself permitting the inference to be drawn. Rather, they were “straws in the wind” which, viewed in combination with other indications of the same kind or with one or more of the factors discussed above, should persuade the Court, to its comfortable satisfaction, that the cross-claimants have discharged their onus.
One such matter was the letter before action of 5 May 2000 which is reproduced at [58] above. That was criticised for its failure to advert to the exchange of correspondence between Wenig and Enriquez on 7 and 22 February 2000 which was clearly central to the issue of consent on which the respondents have ultimately succeeded. I accept, on the basis of the authorities cited by Counsel for the respondents, that Temwell is liable for, and bound by, the actions and statements of its counsel and solicitors. However, the letter of 6 May 2000, assuming, without deciding, that it was disingenuous or deliberately elliptical, does not support an inference that the foreshadowed action would be commenced and prosecuted for a collateral purpose. Moreover, the letter was written at a time when Temwell’s newly retained solicitors were not as fully apprised of the available bases for the proposed action as they later became. In the same context, it is reasonable to infer that those standing behind Temwell may have perceived that ABL had, in February 2000, been confronted by a conflict of interest which entitled Temwell to distrust any advice or representation by that firm about the necessity or appropriateness of consent.
The fact that Temwell sought and obtained, by consent, an interlocutory, and later, a permanent injunction does not support the imputation of a collateral purpose. As pointed out at [271] above, Temwell had no extrinsic interest in damaging or frustrating the business of the mCom respondents. The applications for injunctions, in one or other of their forms, may have been conceived as applying a degree of pressure on the respondents to make a pecuniary offer of compromise but, as explained at [263] and [270] of these reasons, that does not take the prosecution of the proceedings outside the scope of the relief claimed.
Similar considerations apply to the threat allegedly made by Fraid to David Hains on about 9 June 2000 that Temwell might sell the Application Software to Ingenico, a French-based competitor of the mCom respondents which had already established itself as a developer of mobile transaction devices. If made, that threat was more consistent with an attempt, by means different from the present proceedings, to procure a payment which was within the scope of the relief sought in the same proceedings. In my view, the Ingenico threat was ancillary to the present proceedings and, at worst for Temwell, was neutral on the ascription of a predominant purpose in continuing to prosecute the action.
Counsel for the cross-claimants also adverted to other aspects of Temwell’s conduct of the proceedings which, as I understand it, were said to support the inference that they had been maintained for a collateral purpose. They have been referred to in the particulars to the relevant paragraphs of the cross-claim. They include Temwell’s collaboration with Elbaum and its payment of his costs of separate representation to a limited extent by Counsel in the proceedings. As well, Counsel instanced Temwell’s unsuccessful attempt to compel production for inspection of David Hains’ privately printed autobiography written well before the events with which the subject litigation was concerned. Another instance was what was called “the tortured history” of revisions of expert reports and a stream of fresh instructions to Wilson and Rayner requesting them to make new and doubtfully available assumptions in order to underwrite a successively larger and larger sum claimed as damages. In a related way reference was made to the fees, described as “enormous”, paid to some of Temwell’s expert witnesses.
I am prepared to assume, without deciding, that these criticisms or characterisations were justified. Even allowing that Temwell’s legal advisers may have been over-zealous in seeking to recruit the expert witnesses to the “Temwell team” and that Fraid’s Ingenico threat could be stigmatised as “sharp practice’, the matters just recounted do not, on balance, warrant an inference that the proceedings were maintained for a collateral purpose. They are at least equally consistent with a determination to apply every conceivable piece of pressure to extract a settlement in the form of a lump sum representing a substantial fraction of the damages claimed in the action, and, if that failed, to “win at all costs.”
(h) Conclusion on Abuse of Process
It will be apparent that I have not been persuaded that any of the foregoing considerations, alone or in combination, affords a basis for imputing to Temwell the requisite predominant collateral purpose. That part of the cross-claim therefore fails making unnecessary a resolution of the complex factual and legal questions which would be required for an assessment of the damages forming part of that cause of action. I should, however, observe in passing that, had I come to a different conclusion on the question of liability for collateral abuse of process, I would have had considerable difficulty in attributing the full amount of the loss claimed which is in excess of $7 million to the “cloud” over the marketing of the MTD 3000 constituted by the pendency of the instant proceedings. My strong impression is that a large part of the losses sustained by mCom Solutions Australia before it went into liquidation and by its parent company, mCom Solutions was attributable to adverse currency fluctuations, changes in distributorship arrangements and delays in developing the MTD 3000 to the point of obtaining certification by a sufficient number of participating banks. These difficulties were exacerbated, even after the mCom interests had injected a substantial amount of fresh capital, by the competitive pressures of a highly innovative capital intensive industry. The cross-claimants fell victim, not so much to the present proceedings, as to the dot.com “boom and bust” which had facilitated its absorption of DDS but eventually destroyed the whole business.
(ii) The cross-claim for misleading and deceptive conduct
The allegations disclosing this cause of action by the cross-claimants have been summarised at [82] of these reasons. Paragraph 18 of the further amended cross-claim alleges that the letter of 22 February 2000 from Enriquez on behalf of Temwell contained a representation to the effect there set out (“the Consent Representation”). It is next pleaded that, in reliance on the Consent Representation, mCom Solutions entered into the agreement of 1 March 2000 to purchase the assets of DDS and to take an assignment of its right, title and interest under the LRC Agreement and the Call Option Agreement. Reference is next made to mCom Solutions’ letter to Temwell of 7 March 2000, the meeting of 9 March 2000 between Enriquez, Tauber and David Hains, the abortive settlement meeting of 22 March 200 and the payment of $37,013.47 as arrears of royalties to Temwell and of $100,000 to the trustee of Enriquez’ family trust which occurred at the actual settlement meeting on 24 March 2000. Further acts done and payments made by mCom Solutions in reliance on the Consent Representation are then pleaded in par 29. It is next pleaded in pars 31 and 32 that;
‘31.If The Consent Representation was false (which is denied) and if, as contended by Temwell in the said letter of 5 May 2000 and this proceeding:
(a)Temwell was not in fact giving its binding consent to the purchase by Dragonventures.com Ltd or its nominee of the assets and business of DDS including DDS’ rights under the LRC Agreement and the Call Option Agreement;
(b)Temwell never consented to the assignment to mCom Inc of the right title and interest of DDS under the Transaction Documents;
(c)       Temwell never intended to give, and never gave, such consent’
-          then
(i)        the Consent Representation and/or;
(ii)the conduct of the Cross-Respondents and each of them was false and misleading or likely to mislead and deceive.
32.The said conduct of Temwell and/or Enriquez and/or Tauber and/or Fraid in making the Consent Representation and engaging in the February/March conduct constituted misleading or deceptive conduct by each of Temwell, Enriquez, Tauber and Fraid in trade or commerce in contravention of section 52 of the Trade Practices Act.’
Then follow allegations of the ways in which mCom Solutions, through its investment in mCom Solutions Australia suffered damage in consequence of the conduct referred to in par 31 on the assumption that it had been misleading and deceptive.
It can be seen from that form of pleading that the cross-respondents’ engagement in misleading or deceptive conduct depends on the falsity of the Consent Representation. The denial of that falsity in the defence to the statement of claim was repeated in par 31 of the cross-claim. I have earlier found that Enriquez’ letter of 22 February 2000 constituted an affirmative and unequivocal consent by Temwell to the assignment by DDS of its right title and interest under the Transaction Documents to Dragonventures.com Ltd and was thereafter incapable of withdrawal; see [177], [182] and [191]-[193] above. As a result, the conditional premise of the cross-claimants case that the Consent Representation was a contravention of s 52 of the TPA cannot be made out.
Since neither limb of the cross-claim has been made out, it must be dismissed.
Part V: Disposition of the Proceedings
For the reasons which I have endeavoured to explain there will be orders that both Temwell’s application and the cross-claim by mCom Solutions and the other cross-claimants be dismissed. I shall stand the proceedings over to a date to be fixed to allow submissions to be made in respect of the orders as to costs said to be appropriate in the light of these reasons. I expect that, in aid of those submissions, each party with an interest in the question will file and serve written submissions. In case directions are required for the filing and service of those submissions or some further or other substantive orders are thought necessary, I shall reserve general liberty to apply.

I certify that the preceding two hundred and eight-three (283) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.
Associate:
Dated: 4 October 2005

Counsel for the Applicant: Mr C D Golvan SC with Dr S Ricketson

Solicitors for the Applicant: Meerkin & Apel

Counsel for the mCom Respondents
and Cross-Claimants: Mr J L Sher QC with Mr J Delany SC

Solicitors for the mCom Respondents and Cross-Claimants: Minter Ellison

Dates of Hearing:
31 July, 1, 18 - 22 August inc,

1 - 5, 8 -12, 22 - 26, 29 & 30 September inc,

1, 7 - 9, 20 - 24, 27 - 31 October inc,

10 - 14, 17 - 20 November inc,

8 - 12, 15 - 17 December 2003 inc,

11 - 13, 23 - 27 February 2004 inc,

3 & 4 March 2004, 1 April 2004

Date of Judgment: 4 October 2005

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY		V 663 of 2000
BETWEEN:	TEMWELL PTY LTD (ACN 082 656 157) Applicant
AND:	DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616) First Respondent
mCOM SOLUTIONS INC. Second Respondent
DRAGON VENTURES.COM INC Third Respondent
mCOM SOLUTIONS AUSTRALIA PTY LTD (ACN 091 375 950) Fourth Respondent
DAVID HAINS Fifth Respondent
ROBERT VAN ZANTEN Sixth Respondent
DRAGONVENTURES.COM LTD Seventh Respondent
RICHARD HAINS Eighth Respondent
IAN MORRIS KIEFEL Ninth Respondent
AND BETWEEN:
mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Cross-Claimants
AND:
TEMWELL PTY LTD (ACN 082 656 157) SLADEMERE PTY LTD (ACN 082 656 139) SHEPRIDGE PTY LTD (ACN 082 696 077) GEOFFREY MICHAEL TAUBER MORRY FRAID ROGER ENRIQUEZ Cross-Respondents

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY		V 663 of 2000
BETWEEN:	TEMWELL PTY LTD (ACN 082 656 157) Applicant
AND:	DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616) First Respondent
mCOM SOLUTIONS INC. Second Respondent
DRAGON VENTURES. COM INC Third Respondent
mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Fourth Respondent
DAVID HAINS Fifth Respondent
ROBERT VAN ZANTEN Sixth Respondent
DRAGONVENTURES.COM LTD Seventh Respondent
RICHARD HAINS Eighth Respondent
IAN MORRIS KIEFEL Ninth Respondent
AND BETWEEN:
mCOM SOLUTIONS INC. and mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Cross-Claimants
AND:
TEMWELL PTY LTD (ACN 082 656 157) SLADEMERE PTY LTD (ACN 082 656 139) SHEPRIDGE PTY LTD (ACN 082 696 077) GEOFFREY MICHAEL TAUBER MORRY FRAID ROGER ENRIQUEZ Cross-Respondents

JUDGE:	RYAN J
DATE OF ORDER:	4 OCTOBER 2005
WHERE MADE:	MELBOURNE

JUDGE:	RYAN J
DATE:	4 OCTOBER 2005
PLACE:	MELBOURNE

Year	Quarter	Total A$Million*
1	1^st	15.38
2^nd	15.76
3^rd	16.15
4^th	16.56
2	1^st	16.97
2^nd	17.4
3^rd	17.83
4^th	18.28
3	1^st	18.73
2^nd	19.2
3^rd	19.68
4^th	20.17
4	1^st	20.68
2^nd	21.19
3^rd	21.72
4^th	22.27
5	1^st	22.82
2^nd	23.39
3^rd	23.98
4^th	24.58
* These amounts shall be reduced by the same proportion as the Purchase Price is less than A$15 million.

2000	2001	2002	2003	2004
$m	$m	$m	$m	$m
Low	2.8	2.3	3.3	5.0	6.9
High	2.8	2.6	4.0	6.6	10.6

Counsel for the Applicant:	Mr C D Golvan SC with Dr S Ricketson
Solicitors for the Applicant:	Meerkin & Apel
Counsel for the mCom Respondents and Cross-Claimants:	Mr J L Sher QC with Mr J Delany SC
Solicitors for the mCom Respondents and Cross-Claimants:	Minter Ellison
Dates of Hearing:	31 July, 1, 18 - 22 August inc, 1 - 5, 8 -12, 22 - 26, 29 & 30 September inc, 1, 7 - 9, 20 - 24, 27 - 31 October inc, 10 - 14, 17 - 20 November inc, 8 - 12, 15 - 17 December 2003 inc, 11 - 13, 23 - 27 February 2004 inc, 3 & 4 March 2004, 1 April 2004
Date of Judgment:	4 October 2005