Westsub Discounts Pty Ltd v Idaps Australia Ltd

Re: WESTSUB DISCOUNTS PTY. LTD.
And: IDAPS AUSTRALIA LIMITED
No. V G261 of 1986
FED No. 139
Trade Practices - Contract - Detinue

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Woodward J.(1)

CATCHWORDS

Trade Practices - misleading conduct - contract in writing to instal computer system for video hire company - earlier oral representations about effectiveness of system - whether defect in software system - whether conduct misleading - claim for damages including payments made for system, other out-of-pocket expences, loss of profit opportunities, employment of unnecessary staff, executive salaries related to wasted time - measure of damages - whether sufficiently direct - whether foreseeable - whether failure to mitigate.

Contract - whether any collateral warranties agreed - effect of clauses excluding such warranties and limiting liability.

Detinue - cross-claim for refusal to return on demand computer lent for a fixed period - whether any legal basis for refusal.

Trade Practices Act 1974 ss 52 and 53

HEARING

MELBOURNE

#DATE 9:4:1990

Counsel for the Applicant: Mr P.J. O'Callaghan QC and

Mr D.M. Austin

Solicitors for the Applicant: McLindins

Counsel for the Respondent: Dr J.McL. Emmerson QC and

Mr T.J. Hancock

Solicitors for the Respondent: Abbott Tout Russell Kennedy

ORDER

1. There be judgment for the applicant on the claim in

the sum of $195,162.15.

2. There be judgment for the respondent/cross-claimant

on the cross-claim in the sum of $85,555.

3. The claim and cross-claim be set off against each

other and the respondent pay the applicant the sum of $109,607.15.

4. The respondent pay the applicant two thirds of the

applicant's costs of claim and cross-claim.

5. The applicant, within 28 days, arrange for the S140

computer and any related terminals or other related hardware in its possession to be available for collection by the respondent or its agent at a time and place to be agreed.

6. There be liberty to either party to apply to the

Court within 14 days concerning Order 5.

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

JUDGE1

This is an action for damages for breach of contract, breach of warranty, negligence and breaches of ss 52 and 53 of the Trade Practices Act 1974 ('the Act'). The claims arise out of an agreement by the respondent ('Idaps') to supply computer hardware, software and services to the applicant ('Westsub'), which was seeking a more efficient means of handling its video library business. This business involved supplying video cassettes on loan both to individual borrowers ('the retail trade') and to proprietors of convenience stores, such as milk bars and newsagencies, who would in turn lend them to the public ('the constore trade').

The substance of the applicant's allegations is that the respondent assured it that the system it was supplying would fulfil the applicant's requirements and, in the event, it did not and could not. As a result, the applicant claims to have wasted large sums of money and lost opportunities for much greater profits.
The claim is for $1,637,616.80.
The respondent has cross-claimed for damages, totalling $340,962.81, for balance of purchase price and for additional equipment, programming, modifications, parts and services supplied, and the lease and maintenance of an additional computer. I note that the items are wrongly added in the amended cross-claim to total $335,978.
NARRATIVE
The story begins in 1983 with a decision by the management of Westsub that it should try to computerise a substantial part of its operations.
Mr Leigh Murphy gave evidence that he is the managing director and, with his wife, the effective owner of the applicant company. In about 1981 he began selling, and later hiring, video cassettes as an adjunct to the business which he was then running of selling television sets and video cassette recorders. By about the middle of 1983 he had sold his television and other related interests and was concentrating on the video cassette hiring, first from a store in Coburg and later from other stores in Dandenong and Collingwood. By the middle of 1983, plans were afoot to dispose of the Collingwood store and move the business from that and the Coburg store to a much larger site in Coburg. It was also intended to move to a better site in Dandenong. At about the same time, in mid-1983, Mr Murphy conceived the idea of hiring out videos in bulk to convenience stores. The difference between the retail trade and constore trade was that, whereas retail customers could take a maximum of five and later ten cassettes, paying cash when they were returned, the constore proprietors were required to take cassettes in multiples of 30 and they paid on receipt of a monthly statement.
It was at this time, when the business was clearly expanding, that Mr Murphy went with the company secretary, a public accountant called Brian Paterson, to a number of computer businesses and one or two computer seminars, in the hope of finding a system that would be suitable for their business. Among the systems looked at by Murphy and Paterson were Burroughs, Wang, and IBM. Mr Paterson, who gave the more detailed evidence on this subject, said that Westsub was aware that its then chief rival, a firm called Riley Bishop, had a computer system in operation. They looked at that system, but it was too slow. They also visited a firm in South Melbourne which was selling an ICL system which could only support two terminals, and so "it obviously was not adequate for the needs of Westsub". They also visited a firm known as Biztronics, which again was promoting a system which Murphy and Paterson considered too small to cope with Westsub's demands. Asked if Westsub had made inquiries of any of the larger computer companies, Mr Paterson replied,

"Yes. We had IBM, who came to the Collingwood store, and also Wang Computers who came. The IBM system, the quotation given there was extremely expensive, and the quotation given by Wang was considered but they had a time lag in installing the system of six months. They said to implement the software and to put in the system, it would be at least six months."

It was after these inquiries that a knowledge of the system installed at his local library led Mr Paterson to contact the respondent, which had installed the particular library system.

The computer system in use at the library was known as LIBS 100 and was marketed by Libramatic Systems Pty Ltd ('Libramatic'), a division of Adaps Holdings Ltd ('Adaps'), which itself was later absorbed by the respondent.
Mr Paterson, taking with him Mr Kevin Jellard, the general manager and later a director of Westsub, went to see two representatives of Libramatic, John Harker and Rosmarie Gubser. This was in about June of 1983. Mr Harker plays no further part in the story, but Rosmarie Gubser plays a pivotal role. She was a librarian, who had no formal training in the use of computers but was familiar with their application to library work. Over the next two or three months she had a number of contacts with Mr Paterson and Mr Jellard, which concluded with an acceptance on both sides that the LIBS 100 would not be a suitable system for the applicant's business, because it had little capacity to record charges for items being lent and, being a system designed in the United States for which Libramatic held merely an Australian licence, it could not readily be adapted for the purposes of a video library.
Although the discussions concerning the LIBS 100 came to nothing, they are important because they provided the basis for later discussions and the eventual formation of a contract concerning another system, known as Technocrat.
Because these discussions occurred over six years ago, and because there is a good deal of dispute between the parties concerned as to just what took place, it is important to consider the available contemporary written records. The first of these is a handwritten record, made by Miss Gubser, of a meeting with Westsub representatives which took place on 1 July 1983. The significant parts of those notes are, first, a record of a discussion about "bulk loans to shops", that is the constore business, secondly, her record of a reference to the need for "rapid check out" and, thirdly, the indication in her notes that there were to be several different categories of charges for different videos and several different categories of membership for persons borrowing those videos.
A more significant document is a typed summary, from further handwritten notes of Miss Gubser's, of points discussed at a meeting of 25 July 1983. Relevant extracts from these notes are as follows,

"1. Stock Control

1.1 The LIBS 100 will handle the indicated transaction load easily and simultaneously at the three shops, with an average response time of not more than 5 seconds 1.2 Simply reading of the members card and the item number(s) with a lightpen and/or laser scanner will record a loan. 1.3 Therefore at any time it is possible to ascertain whether an item should be on the shelves or out on loan and to whom.

1.4 By reading into the system all the stock on the shelves on a regular basis, say monthly, it is possible to produce listings for missing or very overdue items. The items can be purged in bulk or individually.

2. Loan Types

2.1 The LIBS 100 can cater for hourly, daily or bulk loans. 2.2 Loan periods are tied to member categories. Up to 11 member categories may be established for each shop (agency). 2.3 Bulk loans to outside agencies are done by simply reading the item numbers. Loans periods for these loans may be indefinite or a specified time. Stock reallocation printouts may be produced.

3. Charges

The LIBS 100 is basically designed for 'free lending' libraries and has therefore some limitation when dealing with a 'charge' library. 3.1 The LIBS 100 produces currently optional overdue notices and bill notices, as well as calculating fines. One off charges may also be entered. These facilities can be adopted (adapted?) to deal to some extent with the control of charges. 3.2 The LIBS 100 provides an adequate amount of flexibility to adjust varying pricing policies. 3.3 However the LIBS 100 does not currently provide full financial control over charges and subscriptions. 3.4 .....

3.5 .....

3.6 Separate charges, like subscription charges, penalties, replacement charges, and/or additional item charges may also be created. 3.7 The system alerts the operator at the point of checkout whether a member has outstanding charges. 3.8 Once fines are paid the system does not keep further records. It is currently not possible to produce reports of daily takings, refunds and/or other financial transactions. A cash register would still have to be used for this purpose.

4. Members

4.1 By selecting member categories carefully it is possible to distinguish between various subscription members, life members and casual members..... 4.2 ....."

Then, on 9 August 1983, Mr Brian Penny, the general manager of Libramatic, wrote to Mr Paterson as follows,

"Libramatic Systems has the pleasure in supplying a proposal for the automation of the stock control of your three shops. Although the proposed software package is primarily designed for 'free' library services, Libramatic is convinced that the LIBS 100 system can meet your requirements. Our offer is backed by the resources and skills we have obtained during 17 years of library automation services. The LIBS 100 configuration proposed in the attached document can be delivered within 6 weeks from the date of order. A further 2 weeks should be allowed to cover installation. We look forward to your evaluation of our proposal and to demonstrating the system to your staff."

On 19 August 1983 there was an internal memorandum from Rosmarie Gubser to Brian Penny which set out the enhancements to the LIBS 100 which would be required to meet Westsub's requirements and concluded "my personal assessment is that the LIBS 100 is not really suitable for Westsub".
The evidence shows that this view was accepted and was communicated to Westsub, and there the matter rested for some days.
It so happened that at this time Adaps was taken over by the respondent company which, at the same time, acquired the business of Software Specifics International Pty Ltd. This company had developed another library system known as Technocrat. Mr Paterson said, in evidence,

"....after we mutually agreeed LIBS 100 would not be adequate for our requirements, I then started looking elsewhere...and then approximately two or three weeks after that Rosmarie Gubser phoned up and said, 'We should be able to do the job for you. We have just been taken over by a firm called Idaps who have taken over another firm called Software Specifics who have a product called Technocrat', and she said 'I would like to demonstrate and show it to you because I have heard it has got the goods, it will do the job for you'."

It seems that there were then two meetings on successive days, on 25 and 26 August 1983, the first being held at the office of Libramatic in Inkerman Street, St Kilda, and the second, largely for the purpose of demonstrating Technocrat, at the office of Software Specifics in Prospect Hill Road, Camberwell. Both meetings were attended by Paterson and Jellard representing Westsub, and Miss Gubser and Geoffrey Brown, who had helped to develop the Technocrat system with Software Specifics and was now an employee of the respondent company, representing the respondent. Because the discussions at these meetings are important it will be necessary to consider the evidence of the four persons who were present. Before doing so it is convenient to say something about the degree of credibility which I attach to the evidence of each of the four.
Dealing first with Mr Paterson, I have to say that I treat his evidence with considerable reserve. He gave me the impression that many questions were answered carelessly, without regard to any accuracy of detail. He was concerned to stress a number of main points, which he believed would advance the applicant's case and, in doing so, he was not particularly troubled by the need for accuracy as to times, places or what was actually said. Although I am prepared to accept a good deal of his evidence, I think it is necessary to treat with caution anything which is contradicted by other witnesses speaking about the same circumstances. Mr Jellard, on the other hand, seemed to me to be a careful witness whose honesty could be relied upon. However, his memory of discussions and other events was not strong, except where he could be prompted by contemporaneous notes.
Of the respondent's witnesses, I thought Miss Gubser was careful and reliable, although inclined to be defensive and reluctant to make any admissions which might involve her in any misrepresentations, however innocent. Mr Brown had a poor memory of the events in question and left me with the impression that he was not trying very hard to remember accurately. On the other hand I did not feel that he was being untruthful.
On 6 September 1983 Mr Penny wrote to Mr Paterson at Westsub as follows,

"Dear Brian

Further to our discussions regarding the requirements for the computerisation of the Westsub Video Libraries we are pleased to submit a quotation for the supply and installation of the TECHNOCRAT system. The Technocrat configuration outlined in the attached quotation can be delivered and installed within 90 days from the date of order."

The letter continued with some references to training and payment terms and then concluded,

"We look forward to the opportunity of installing the TECHNOCRAT Library System at the WESTSUB VIDEO Libraries. We are confident that the installation will be a highly successful one."

The attached quotation was for an Eclipse S120 512Kb Processor from Data General which, with ancillary equipment, was quoted at $76,989. The addition of an RDOS operating software system and Extended BASIC language, together with customs charges, installation and training, brought the total for the computer to $93,597. Of this, only $2,500 for installation and training, together with any wholesale discount which Libramatic might have received, was actually destined for Libramatic. The Technocrat software package was then quoted at $16,000 and Video Library Customisation was $4,500. This last item covered the necessary re-writing of the Technocrat software to meet the specific needs of the applicant's video library. All this came to $114,097, and under the heading of Optional Software there was one further item which became relevant, namely Accounts Receivable, for which the quotation was $3,000.

Also included with this letter was a form of SOFTWARE SUPPORT AGREEMENT. This referred to the initial software charge of $20,500 and went on to provide for any additional work required by way of "support for the installed application software". Among the items listed by way of example of such support were,

a) consultation in the event of problems in the use of the application software, b) consultation in the event of problems encountered following computer breakdown or power failure, and c) installation of enhancements to the existing application software.

The final paragraph of the agreement read,

"The commencing charge of $20,500 will cover 200 hours of software support. Additional time over and above these hours in the period of the agreement will be invoiced at the rate of $50 per hour ..."

On 8 September 1983 Mr Penny wrote again to Mr Paterson giving details of two alternative Telecom systems for connecting the Coburg and Dandenong stores. The first quotation was for a low speed of 300 bits per second and the alternative was for 1200 bits per second.

Westsub replied in due course that it clearly wanted the higher capacity connection because of the amount of material it would be transmitting from Dandenong. In any event there was little difference in price between the two quotations.
On 4 October 1983 a formal offer was made by Libramatic to Westsub in a letter signed by P. A. Stedwell, General Manager, and G. V. Brown, Manager - Applications Software. It read,

"Further to our proposal dated September 6, 1983 and the discussions following that proposal we wish to confirm the basis of the agreement we have reached with Westsub Video. The points are as follows;

(1) The detailed equipment and software to be provided are as detailed in Schedule A attached to this letter.

(2) The Total Cost is shown as $127,236.00. We will provide the detailed equipment and software for a total price of $116,000.00.

(3) The computer equipment and terminals are to be ordered in the Data-General blue and ivory colour scheme.

(4) The computer equipment to be supplied and delivered through Data-General Australia will be paid for within 30 days of installation.

(5) The computer software and modifications will be paid for as follows; Operating Systems Software - 30 days after Installation TECHNOCRAT - 20% after signing off Changes 80% within 30 days of the installation of the System Training - Within 30 days after Invoice Date which will not occur until training is completed. On the understanding that the above terms will be met no deposit is necessary with the order.

(6) We will designate a trained Librarian and Systems Analyst to specify the changes required for Westsub Video. These changes will be documented and signed off before any programming of the changes is scheduled to commence. No further changes are possible until after system delivery.

(7) It is our intention to complete all specification and programming changes before delivery of the equipment by Data-General Australia (expected to be 90 days from date of order).

(8) The Monthly Maintenance costs are broken down as follows;

Computer Equipment 602.00 Bar Code or OCR Readers 140.00 Software Updates 425.00 $1,167.00 We agree to waive the software updates charge and the charges for monthly maintenance will be, Computer Equipment 602.00 Bar Code or OCR Readers 140.00 $742.00

(9) Future software requirements will be provided under the terms of the Software Support Agreement attached to our proposal dated September 6, 1983. We hope the above are acceptable to yourself and look forward to receiving your written confirmation prior to ordering the Computer Equipment.

We hope that this agreement is the beginning of a positive and long lasting business relationship with Westsub Video."

The next written record from either party which has survived is a telex on 13 October from Rosmarie Gubser to Mr Brown (who was overseas) pointing out that the Westsub "configuration" was for eight VDU's and seven wands. She said that Westsub needed eight wands and asked if the extra wand would be included in the total price. She also said,

"PLEASE CONFIRM THAT QUOTED OPERATING SOFTWARE CAN HANDLE 8 + TERMINALS."

Mr Brown replied telling her to check with Peter Stedwell about the eighth wand and continuing,

"CHECK WITH PETER STEDWELL ABOUT EXTRA TERMINALS AS I DO NOT HAVE THE CONFIGURATION WITH ME. IT SHOULD BE AT THE MOST A MEMORY UPGRADE."

On 19 October 1983 Mr Paterson wrote an important letter to Miss Gubser at Libramatic. The letter reads,

"Further to our telephone conversations this week, I am pleased to confirm that Westsub Discounts Pty. Ltd., will purchase your Data-General Computer System under the terms of your company's letter dated 4/10/83, except for the following conditions. 1/ That eight bar code wands are supplied under the same quotation of $116,000.00. 2/ That software design and computer hardware implementation is completed before 23/1/84.

3/ The monthly computer hardware and software maintenance costs are adequate to cover Westsub Discounts Pty. Ltd., support needs at $762.00 per month. 4/ A maximum response time on computer information retrieval system is guaranteed to be no more than five seconds. 6/ The computer operating system upon installation has the facility to accommodate 15 terminals with the same 5 second time guarantee.

7/ Westsub Discounts Pty. Ltd., Dandenong store has four terminals installed under the $116,000.00 quotation.

8/ Software specifications given by me to Geoffrey Brown and minor alterations to the software specification are covered by the $116,000.00 quotation.

The above conditions are considered by the Westsub Discounts Pty. Ltd's management to be reasonable considering the amount of money involved in computerising the Westsub Video stores.

If you have any queries concerning this letter please do not hesitate to phone me on 375-3253."

Mr Paterson in his evidence said that Miss Gubser did ring him about the items in his letter, and that the only reservation which she made about those points was that she could not guarantee the delivery of the hardware by the due date of 23 January 1984, because it had to come from overseas and the matter was beyond Libramatic's control. Miss Gubser gave a rather different account of this conversation, based to some extent upon some pen notes which she made in the margin of her copy of the letter. These notes show her acceptance of points 1, 7, and 8. With regard to point 2 her note reads "Hardware ok. Software mutual schedule." Against point 4 she has written "90%" and against point 6 (there being no point 5) she has written the the word, "No". I shall return to consideration of this conversation under the heading "Representations Made", below.
On 28 October 1983 Miss Gubser sent Mr Paterson copies of the purchase agreement asking him to sign and return them. This form of contract was, in due course, signed by Mr Paterson on behalf of Westsub and by Peter Stedwell on behalf of Libramatic, to take affect on 18 November 1983. Among the provisions of this contract were the following,

"2. Delivery Schedule

Delivery schedules will be mutually agreed between the Buyer and Libramatic. Libramatic agrees to co-ordinate the delivery of the equipment and operating software as listed in Exhibit 1 by 23rd January, 1984."

The items listed in the schedule 1 are substantially the same as in the previous quotation of 4 October, except that provision is now made for eight visual display units and for eight "Bar Code or OCR Wands" and the only item listed under "Optional Software" is "1 Accounts Receivable $3,000". The total cost for all items is shown as $127,236 and a note at the bottom reads "As per previous correspondence and negotiations Libramatic agrees to discount the total cost of $127,236 to a total of $116,000."

The other clauses of the contract, which are relevant for present purposes, are:

10. Maintenance

Libramatic shall provide separate agreements for the maintenance of the hardware and the support of the software. The agreements for maintenance and support of the System will commence from the date of System acceptance....

12. Terms of Payment

a) The computer equipment to be supplied and delivered through Data General Australia will be paid for within 30 days of installation. b) The computer software and modifications will be paid for as follows:

- Operating system software - 30 days after installation.

- TECHNOCRAT: 20% after initial acceptance and signing off of Buyer's specification for software enchancements. 80% within 30 days of installation of the System....

16. Warranty

Libramatic warrants that the Buyer shall acquire good and clear title to the Equipment being purchased by Buyer hereunder, free and clear of all liens and encumbrances. Libramatic further warrants all Equipment will be free from defects in workmanship and materials under normal use and service; but Libramatic's entire liability under this warranty is to repair or replace free of charge any such Equipment which, to the date of acceptance, is found by Libramatic's inspection at the site of the installation to be defective in materials or workmanship. Items of the Equipment which are of an expendable nature, both mechanical and electrical, such as ribbons, brushes, paper, etc., are excluded from this warranty. The terms of this warranty shall extend only to Buyer as an original purchaser and cover repair of

(or?) replacement of Equipment parts only. LIBRAMATIC MAKES NO REPRESENTATION OR WARRANTY OTHER THAN THAT SET FORTH IN THIS AGREEMENT. THE WARRANTY STATED HEREIN IS EXPRESSLY IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR AGAINST INFRINGEMENT, AND SUCH WARRANTY CONSTITUTES THE ONLY WARRANTY MADE BY LIBRAMATIC WITH RESPECT TO THIS AGREEMENT, THE EQUIPMENT, THE SOFTWARE, OR THE SYSTEM, OR ANY OTHER GOODS OR SERVICES SOLD OR SUPPLIED HEREBY. IN NO EVENT SHALL LIBRAMATIC BE LIABLE FOR INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND WHETHER OR NOT LIBRAMATIC HAS NOTICE OF THE LIKELIHOOD OF ANY SUCH DAMAGES.

17. Limitation of Remedy

Libramatic shall not be liable for any damages caused by delay in furnishing Equipment, products, services, or any other performance under this Agreement. The sole and exclusive remedy for any breach of warranty, express or implied, including without limitation, any warranties of merchantability or fitness and the sole remedy for Libramatic's liability of any kind, including liability for negligence, with respect to the Equipment, products and services furnished under this Agreement, and all other performance by Libramatic under or pursuant to this Agreement shall be limited to the repair or replacement (see Warranty Section of this agreement), of any defective Equipment or parts and shall in no event include any incidental or consequential damages, provided, however, that nothing in this article shall in any way limit the liability of Libramatic for any injury to the person or property of, or any loss, expense, or damage incurred by any employee, Buyer, invitee of the Buyer, or any other person or party, caused by the gross negligence of Libramatic, if such injury, loss, expense, or damage arises in any manner out of or connected with (a) the Equipment supplied hereunder or substitute equipment made available through Libramatic, or (b) its use, or (c) Libramatic's obligations and performance under this Agreement."

Nothing very much happened between the signing of the contract in November and the delivery of the computer on 4 April 1984. This was ten weeks later than the contract date and resulted in a number of enquiries and complaints from Westsub directed to Ms Gubser and Mr Brown. However the delay was in the delivery of the Data General computer, which had to be imported, and was beyond the control of the respondent. In the meantime, an order had been placed with Telecom for the link-up of the Coburg and Dandenong stores, and an order had also been placed for a large number of bar code labels to be placed on video tapes and on customers' identity cards.
On 10 April 1984 Brian Paterson sent a telegram to Geoffrey Brown at Adaps reading,

"COMPUTER INSTALLATION COMPLETE AT WESTSUB WE REQUIRE TECHNOCRAT FOR LOADING OF STOCK".

It is not clear just when the Technocrat software was delivered, but a weekly work schedule for the respondent shows work due to commence on the Westsub installation on or before 16 April. The employees designated to work on that task included Ms Gubser, Mr Doug Carey, Mr Graeme Taylor, Mr Greg Snibson and Mr Chris Tchen. All of these except Mr Tchen were called to give evidence for the respondent. I felt that I could rely particularly on Mr Carey's evidence. He had obviously gone out of his way to assist Westsub over many months and maintained a good relationship through trying times. I found him to be a careful and reliable witness. I thought Mr Snibson was rather less helpful and somewhat defensive, while Mr Taylor was opinionated and self-confident to an extent which caused me to doubt the reliability of his evidence.
Evidence for the applicant was given by Mrs Rachielle Taouk who had been in charge of computer usage for the applicant in both the Coburg and Dandenong stores from the times they were respectively installed. She was also supervising the relevant staff in both stores for most of that time. She was an impressive witness on whom I am prepared to place considerable reliance. Mr Jellard, the general manager of the applicant, was involved in many of the dealings with the respondent. As I have already indicated, his memory was not strong but, from 4 June 1984 onwards, he started to keep notes of his dealings with the respondent. These were often expressed in strong language and made no attempt at objectivity, but I am content to rely on them as being basically accurate so far as recorded facts are concerned. I treat the comments and judgments with caution although, as I have said earlier, I accept Mr Jellard as an honest witness.
The following sequence of events represents the best conclusions I can draw from the varying accounts given by these witnesses.
Through the second half of April and the months of May and June, the Idaps team was spending a good deal of time at Westsub's Coburg premises using the command module of the computer to adapt the Technocrat software to Westsub's requirements. The format which was suitable for a book library had to be adapted to a video library so that, for example, an operator keying in a new video title would be asked on the screen to supply the name of the film, distributor, running time, whether it was VHS or Beta and the amount to be charged for it.
Once this had been done, the theory was that individual cassettes, with a bar code attached, could have an electronic wand passed over the code, which would then link the particular cassette to the details of the film and enable the cassette to be tracked when another wand was passed across both it and a borrower's membership card - which also had a bar code fixed to it.
It was also intended that, in the case of constores, cassettes would be taken out in multiples of 30 and the computer would automatically record the amounts payable and then, through another software programme known as a debtor's interface, would transfer the transaction to a running account, so that an invoice could be sent to the constore client at the end of each month.
Thus it was intended that the system would register all cassettes, keep track of their movements, indicate when they were returned by a retail customer, how much had to be paid and, in the case of constores, maintain a running account and prepare invoices.
In order to find out just what Westsub required of its system, the programmers had to ask many questions - particularly about differential charges for old and new cassettes and different rates for daily, weekly and weekend hire, for example.
By 26 June this process was sufficiently far advanced to enable Idaps to prepare a User Specifications document, which was signed by Mr Jellard.
The following paragraphs of the specifications are most relevant for present purposes:
"1. Registration, Renewal and Maintenance of Patrons Records

b) Although lifetime membership is in effect and intended for future public members, the checking of the expiry date, with option for renewal and payment, would still be necessary (in the "charge" function) so as to handle expiry/renewal for old members who were on the former system of 12 monthly membership, and for any Patron type as so chosen by the user for continuing the 12 monthly renewal system.

d) For convenience stores whose memberships expire annually, the system would perform renewal automatically at the end of each month, with renewal fee billed and included into their month end invoice/statement.

e) There could be a maximum of 12 membership renewal fees, one per calendar month, for each convenience store, with each fee to be billed to the store for renewal till the same calendar month of the subsequent year.

It is the responsibility of the user to enter, increase, decrease or remove, via the Patron Addition or Change functions, the amount of fee applicable or to vary the calendar month the fee or fees to be applied.

This would cater for the requirements of maintaining multiple renewal fees with different expiry dates, and with automatic billing by the system.

2. Charging, Billings and Payments

a) For public members, uniform "loan limit" would be applied per Branch and Patron type (at the moment, 5 units throughout). However, "loan limit" for convenience stores could be determined individually and would be maintained by the users via the Patron Addition and Change functions. In addition, a "minimum" loan limit would also be maintained for individual convenience stores. It would be used for warning at the end of the charge function when the total items on loan fall short of the minimum.

b) The elements involved in the matrix for chargeable rate include:

- Branch

- Patron type

- Media type (VHS, Beta) - Charge Category (groups of titles with different rates)

- Chargeable period (7 and lower, 8-14 days, 15 days and over etc.)

h) In addition to charges incurred for items returned during a calendar month, charge for items still on loan would also be made for Convenience Stores at the end of each month, and be included into the month end invoice/statement.

3. Management and Control Reports

b) Month end invoice/statement for convenience stores would include:

- separate entries for rental charges, payments, renewal fee and sales etc. during the month; - Charges for item rentals would be grouped by the Date charged and Discharged, and the loan period chargeable;

- Break down to be provided for Current Month Due, Overdue, and total O/S Balance - For damaged item charges, item no. details would be shown.

- Individualised as well as global type Account Remarks could be maintained in the patron record, and be shown herein.

e) Cash Taking Reports would be produced daily, showing by Branch and Operator ID, the total daily payments, with break down by Rental Receipts, Membership Fee paid, Deposit paid, Deposit Refund and Net Takings.

f) Daily Revenue Reports would also be produced daily, showing by Branch and patron type (i.e. Members as opposed to convenience stores), the Daily, Month-to-Date and Year-to-Date revenue totals by category of Rental, Membership Fee, and Sales/Misc. charges etc."

These extracts serve to illustrate the comprehensive nature of Westsub's requirements, the emphasis on maintaining financial records, and the significance of both 'public' (retail) and constore memberships in the applications of the system.
On the same day that these user specifications were dated, 26 June 1984, a meeting was held between Geoff Brown of Idaps and Kevin Jellard of Westsub in which it was agreed that the computer system would be upgraded to enable it to take two extra terminals. This involved modifications to the S120 computer to convert it to an S140. An 8 line multiplexor to connect with terminals at Coburg and, by telephone, with those at Dandenong, was also ordered. The cost of the upgrade and multiplexor was to be $15,000. All these items, and two additional reading wands to go with the terminals, were confirmed in a letter from Jellard to Brown dated 27 June 1984. A further letter from Idaps to Westsub dated 17 July set out the detailed cost of all these items as $27,739.18.
It was at about this time that Idaps put pressure on Westsub to pay for the equipment supplied. I accept the evidence of Westsub witnesses that originally something was said to them by Idaps representatives to the effect that Westsub need not pay until the system was up and running. But as time went on and more problems appeared, the question of payment loomed larger.
According to the Westsub witnesses, Idaps threatened that, if payment was not made promptly, no further work would be done. On the other had, if payment was made, a viable system would be put in place quickly.
Idaps witnesses deny both the threat and the promise. They say that they pressed for payment because a great deal of work was being done for no reward and the contractual terms for payment had not been observed. I have no doubt that the respondent was insisting on payment at this time, and it seems to me to be probable that something was said to the effect that it could not be expected to go on working without payment. Data General's claim for the computer clearly had to be met, particularly if upgrading modifications were to be made. It also seems to me to be likely that certain assurances of the early success of the system would have had to be given to persuade sceptical and hard-headed businessmen, such as Mr Leigh Murphy and Mr Paterson, that payments should be made.
The applicant, in its amended statement of claim, has alleged that these assurances also amounted to misleading and negligent conduct. However, counsel for the applicant, in their final address, made clear that their primary submission was that

"....the facts in respect of the hire-purchase agreement are just part of the narrative of the events which reflect and manifest the problems of the unsatisfactory machine."

It was only if the Court found no liability for misrepresentations before the contract was entered into that the applicant would seek to base a separate claim for misleading conduct on the events surrounding the applicant's entry into its hire purchase agreement. Counsel put that "very much as a subsidiary submission", and in my view they were right to do so. I think the action must suceed or fail on the basis of the respondent's conduct leading up to the contract, although later events may throw some light on that earlier conduct. At the time in question, the respondent was doing no more than insisting that the applicant observe its side of the bargain, as a condition of the respondent's continuing to work towards the fulfilment of its existing obligations.
I therefore do not believe that the precise words used to secure payment from Westsub are important. The fact is that, on 15 August 1984, Westsub signed a hire-purchase agreement with Australian Guarantee Corporation Ltd ('AGC') which required it to make 48 monthly payments of $3,182.90, totalling $152,779.20, together with an initial deposit of $46,270.38, making a final sum of $199,050, to the nearest dollar. The basic cash price was shown as $157,572.18, which was paid by AGC to Idaps.
Mr Jellard's diary note about this payment was dated 10.8.1984 and reads,

"Westsub agree to pay next week providing there are no further stuff ups and that we can start to load patrons, titles and item. Geoff and Doug felt this could be done all going well but would be lacking in speed."

There is no evidence here of any substantial fresh representations.

In fact the loading of data at Coburg seems to have begun in a steady way some time in the second half of August, though some work may have been done in July. In spite of estimates or assurances from Idaps that the Dandenong store would be on line by 12 October, then late October, then 2 November, it was not in fact connected until late November. And, for a long time, the system was not able to be used to record transactions at Dandenong, because of unacceptably slow response times.
The upgrade of the S120 to S140 occurred in October. Before then Mrs Taouk and other staff had begun loading the titles of videos. The response time was very slow and this no doubt confirmed the view that an upgrade was necessary. Mrs Taouk said that with three people keying in data on separate terminals, "it could take up to a minute to accept something". After the S140 upgrade there seemed to be an improvement for a time, but by the time they were loading patrons as well as titles and items, it was back to delays of 1-2 minutes for each entry.
This situation continued until December 1984 when the first attempt was made at Coburg to use the computer system to record constore borrowings and returns. Until then the girls at the counters had continued to use a manual card system to record these transactions as well as those for the retail trade. In fact, apart from a short break in January 1985, the manual system was used in parallel with the Technocrat system as long as Westsub persevered with it. This was done, first, because the manual system was quicker, due to the slow response times of Technocrat and, secondly, because the computer system was regularly failing and losing information.
One cause of such failures seems to have been errors or inadequacies in the Technocrat programmes, and another was the absence of a battery back-up - to protect the system against momentary power failures, which occurred on two or three occasions and resulted in loss of data or corruption of data.
Until the first of these power interruptions occurred, all parties seem to have assumed that the computer had been supplied with a battery back-up, but this was not so. Certainly Idaps had taken no steps to warn Westsub of the need for such a back-up. I have no doubt that Westsub would have agreed to pay for it had it been warned of the risks of being without one.
So far as the defects in the Technocrat programmes were concerned, Mrs Taouk spoke of instructions coming up on the screens to "contact systems manager", whereupon work had to stop until an Idaps programmer could find the cause of the problem. At other times it would become clear, for example, that cassettes had been attributed to the wrong borrower. When such errors were referred to Mr Carey, he would assure Mrs Taouk that things would get better in time.
Mr Jellard's notes for the period from late September to Christmas 1984 include the following relevant references:
"26.9.84

Doug advised Rachielle (Mrs Taouk) he would have in place within 2 weeks a program which would prevent the problems she is experiencing now and rectify existing file corruption. 15.10.84

New program installed, result a complete stuff up. 16.10.84

Tried to contact Stedwell all day, no response. 18.10.84

Tried to contact Stedwell all day, no response, his secretary advised he has received my messages but was busy. 19.10.84

Finally Stedwell received my call, advised Stedwell of the problems and the costs Westsub is incurring due to computer not being up and running and that Westsub has falling

(fallen?) so far behind schedule. Stedwell asked for 24 hours to assess the situation. 20.10.84

Rung Stedwell, he advised multiplexor to be fitted next week and that Dandenong store would then be on line to enable commencement of item and patron loading. The above never happened.

26.10.84 MEETING PETER STEDWELL Stedwell promised Dandenong to be on line no later than Friday 2nd November, 1984. Response time on system will be improved. Stedwell asked for further week to enable him to assess situation. He would then get back with a firm completion date but felt 30 days should see job completion. He advised Data General would fit multiplexor on Wednesday, 31st October, if not completed by then Idaps would fit multiplexor.

19.11.84

Tried to contact Stedwell all week. Made himself unavailable.

21.11.84

Data General (Kris Kirby) fitted AMI 8 board (the multiplexor), one month after Stedwell promised faithfully it would be fitted.....

21.11.84

System down most of the day, what else is new] 22.11.84

Idaps left files in a mess had not deleted programming files which had caused a malfunction to the operating system when using circulation. End result 3 days work down the drain. 22.11.84

Rachielle (Mrs Taouk) unable to obtain assistance, Doug not available, nobody else could assist, great back up]] 29.11.84

Doug advised of further problems:- Screen jumping and shaking

Printing goes from small to large When keying in letters are appearing on screen 2 letters behind.

TUESDAY 11.12.84

Doug advised that to rectify problems of computer not discharging stock from customers, he requires that the computer to be shut down to enable the unloading of the disk. The disk is in a mess due to all the files that were created in programming.

To arrive 5 p.m. Tuesday night to unload machine finished for the night approx. 10 p.m.

Job completed Wednesday morning. WEDNESDAY 12.12.84

Doug was called in due to the computer not discharging tapes. There was a problem with the disk, therefore all records were wiped off. Doug then put a backup tape onto the disk, but unknown to us the backup tape was a couple of days old, therefore we lost account of all transactions for 2 days..... THURSDAY 13.12.84

Computer running very slow taking approx. 18 to 26 seconds to charge or discharge a cassette. 1200 cassettes have been put into circulation over flow of 1207. Doug advised a rebuild has to be done, even at lunch time, reason being, while we are still loading clients, and until we complete that job, we may be required to do a midday rebuild. There is a marked slow down at approx. 15% at 8% there is no problem. 2000 wanded out 25000 circulation 8%. FRIDAY 14th DECEMBER 1984

Computer down, did not rebuild last night. 3 people tied up on phone with Doug relaying instructions trying to fix problem over phone-40 mins. on phone. .......

12.15 p.m. Rachielle rung Doug, at lunch so spoke to Greg. Asked Greg time taken to do a one file rebuild on circulator, M1, Doug advised would take 30 mins. Rung Doug after one hour and told him it had not moved, Doug stated so I was wrong it may take one hour.

Spoke to Greg asked the same question regarding how long to rebuild, he stated 20 minutes. When Rachielle advised Greg the rebuild was still in the rebuild position from the last two hours, Greg stated something is wrong, I will come out. Greg and Doug worked on system all Friday afternoon. Computer was left running all weekend with a special program to rectify the faults that had been caused to the filing system by the master terminal, which was not programmed correctly to allow it to wand cassettes in and out of the system.

MONDAY 17.12.84

Doug has told us not to use master. Has been removed from front counter. Doug to contact Data General for assistance on how the master may be used like another terminal without screwing up the records.

MONDAY 17th DECEMBER, 1984

Due to disk corruption and the rebuilding of the files, many of our customer files are incorrect due to Doug and Greg using an old file to rebuild the new and current file. 21.12.84

Doug using machine to change over system to enable master console to be used as a normal system (reducing the programs so it will accept basic)....large deliveries of P.B.V. and Video Classic arrived today, very slow trying to set them on computer. Dandenong has had to stop work and only one terminal at Coburg beside the master that Doug is using. 21.12.84

3 p.m. I now find Doug was putting the debtors system and not working on the master console problem. Hence master console as a normal terminal useless, staff are trying to key in stock on front counter, causing many problems with customers wanting the new stock that they see, tapes getting mixed up with Coburg stock.

21.12.84

Rung Doug re: master terminal, he now advised that master cannot be used as a normal terminal as its function will be circulation to tape back up. Once again we are now advised that to perform our duties as is required, we now have to purchase a further terminal.

MONDAY 24.12.84

Same problems continue up at the front counter with trying to key in stock, computer not accepting some titles-to follow up with Doug."

It is clear from these diary extracts that there were many problems at this time in the installation of the Technocrat system. One was the obviously painful discovery, after some time, that it was not practicable to use the master terminal on the computer for the purpose of keying in new titles or patrons or wanding in individual cassettes. It had to be reserved for its overall control function. This placed additional strain on the terminals available for such file-building, because they were also required for the day to day counter activities of recording the borrowing and return of videos by constores.
However, the basic problem of the Technocrat system was that referred to in the notes for 13-14 December 1984. The significence of the facts referred to on these days was not fully appreciated at the time; but it proved eventually to be the major flaw in the system.
As Mr Carey explained in his evidence,

"The way the system worked with the indexes, there were two main portions. One was an area where everything was maintained in alphabetical order and the other area, which we call the overflow area, was where they were in chronological order rather than alphabetical order. To find a transaction, say, in the circulation file for example, it would be able to find it very quickly in the area that is in alphabetical order because it would be able to go half way and decide whether the transaction half way is greater or less than the transaction that you are looking for - for example, if you are looking for a patron. If there were any areas in the overflow, you had to read through every one because you were not sure of the order they were in. If the overflow area got too large then that slowed the system down markedly."

Mr Carey went on to explain that the purpose of a re-build was to put back into alphabetical order all those patrons or cassettes which now found themselves in chronological order. By dividing the index in half, and then in half again, and so on, the computer could find a particular item in an index of 65,000 items with no more than sixteen operations. Each operation took only a fraction of a second. However, if 2,000 separate items were taken out of the index and placed in chronological order, when these were searched it required up to 2,000 operations to identify the appropriate item if it happened to be towards the end of the list. Mr Carey went on to say in his evidence,

"We always said that if there was more than 10 to 15 percent of the file in the overflow area, then that was when performance would be degraded....because there were circulations happening all the time, circulation files should have been re-built every night."

As can be seen from Mr Jellard's notes, on 13 December Mr Carey was advising that a re-build be done at lunchtime also. At the same time he was making the point that, if there were 25,000 items in the file, as many as 2,000 could be dealt with without creating any serious problem; but if twice that number were dealt with, there was "a marked slow down". However, as the record for 14 December shows, the re-build process was also very slow and hardly appropriate for the lunch hour. When re-building was in progress no other work could be done on that file.

The result was that, throughout the time it was in operation, the Technocrat system always became unacceptably slow in the second part of the day, as the number of items filed in chronological order built up. This index search system was a basic flaw in the Technocrat software when it was applied to the requirements of a busy video library handling thousands of videos in and out each day. As Mr Stedwell explained, it had originally been designed for school libraries, holding some 30-40,000 books and, presumably, staffed by one or two librarians. Nothing which the respondent was able to do with other aspects of software or by endeavouring to speed up the operation of the hardware, proved sufficient to compensate for this fundamental flaw in the system.
Another related problem which was to prove insurmountable was that of the "debtors' interface". This required a modification of the Technocrat software so as to enable it to tie in with the 'accounts receivable' package which had been ordered as part of the software system. A computer program for a lending library does not require records to be kept of the charges made for each borrowing. Westsub, on the other hand, wanted the computer to calculate the amount payable when each cassette was returned and, in the case of the constores, the results should have been capable of being transferred to the running accounts of the individual stores. These were intended to be maintained on the accounts receivable software. When the computer was first installed, the task of developing the debtors' interface was given to Chris Tchen. He worked on it for some weeks, but had only achieved a basic overall system summary when he left the employ of the respondent about the middle of 1984. His task, which still involved the programming, testing, debugging and any final modification of the debtors' interface, was then passed to Doug Carey.

Mr Carey worked on this program from time to time in the second half of 1984, while he was also engaged in coping with the other more general problems which were being experienced. An internal document of the respondents shows that;

"The full debtors' interface was totally installed and enabled on 2nd February (1985) by Doug Carey...yesterday 5th February Kevin Jellard rang to complain that the charge and discharge functions are running unacceptably slowly. On a loaded system - ie. with 10 terminals operating, response times were as follows;

a. Charge - 18 seconds approx. b. Discharge - 25 seconds approx. Prior to the enabling of the debtors module, response times in the range 2 to 5 seconds were consistently experienced for both charge and discharge."

In his evidence in chief Mr Carey was asked, "When you completed the program and installed it, are you able to comment on how the system was functioning at that time?---Yes. It was very slow, so slow in fact that we had to remove it almost immediately and put the old system back.

When you say you put the old system back, what do you mean by that?---The charge and discharge functions without the billing interface programmed into them. When you say slow, are you able to say, in terms of seconds, what the response time was?---I seem to remember round about 15 seconds.

In what context was that response time obtained?---There were a number of times where we actually stood and timed it. By response time, we were timing from the wanding of the item till the system had done its processing, because it was doing updates on the screen at the time, like updating the person's item count as it goes. So we were timing from wanding till the system was available for the next item to be wanded in. .......

When you removed the debtors' module and restored the previous system, what was the response time like?---Still slow, but about half the response time as what it was previously. 8 seconds rings a bell."

When asked later in his examination in chief whether the reference in the document quoted above to delays of 18 and 25 seconds was correct Mr Carey said, "They would have been round about right". Asked if that was with the debtors' interface installed, he said that it was. Asked whether the reference to 2 to 5 seconds in the same document was correct, and in accordance with his recollection, Mr Carey replied,

"I do not recall - the only time I recall seeing a 2 to 5 second response time was for a smaller data base than Westsub had. I do not recall seeing a 2 second response time out at Westsub.

Do you recall seeing a 5 second response time?---I do not recall that.

Mr Carey was later asked again about the debtors' interface:

"Mr Carey, based on your experience as a computer programmer at that time, how would you describe then the task that you were given to prepare the debtors' interface? In programming terms was it an easy task, a difficult task?---Well it did not seem that difficult at first, but as it went on it sort of got more and more difficult, because the programming was not that hard, but to try and get all the functionality into the system without increasing response times too gravely was very difficult."

Later Mr Carey described attempts in about July 1985 to improve the situation. He said,

"We also were looking at a software change to solve our problems and that was the converting of the two main modules, the charge and discharge, where the response time problems were, to machine level code to try to speed them up."

As early as 4 March 1985 a meeting was held between representatives of Idaps and Data General to discuss the Westsub installation. One paragraph of the Idaps minutes of that meeting reads as follows;

"The main problem is one of poor response time using RDOS on an S 140 with 10 screens plus a Master Console. Westsub were led to believe that their current configuration could handle up to 15 terminals with a response time of no more than 5 seconds."

Among the possibilities discussed at this meeting, which was attended by Peter Stedwell and Doug Carey, was the replacement of RDOS with AOS, a more efficient operating system with four times as much memory. No conclusion was reached at the meeting but, as Mr Carey described in his evidence, this change was carried out. He was asked,

"Did that have an effect on the response time?---It brought it down, but again not to the levels that we would have hoped. What levels were those?---Westsub were hoping for about 2 seconds to start with but after discussions, and we said that 2 seconds was unrealistic, they agreed on round about 4 seconds and, as I recall, 4 seconds is what we were aiming for.

Did you achieve 4 seconds?---Not that I can recall, certainly not with the debtors installed.

Well in relation to the system without the debtors installed what do you recollect the response time was after you installed AOS?---Without the debtors? Yes---And after we had done all the work? Yes---I think we got it down to about 6 to 8. Now in what context are you talking about 6 to 8 seconds? Are you talking about 1 or 10 terminals?---That would have been with a normal load on the system. We would have simulated normal operating conditions."

In response to further questions, Mr Carey indicated that when tests were done at Westsub which produced the results he had described, there were probably 3 or 4 terminals operating.
Returning to the general narrative of events, in January 1985 a new managing director, Mr John Dougall, was appointed by the respondent. As a result of a telephone call from Mr Jellard, he began to take a close interest in the Westsub contract, and agreed to meet Murphy, Paterson and Jellard on 14 February. Mr Stedwell advised him against the meeting, because "he had found them to be unreasonable people to do business with". But Mr Dougall went ahead with the meeting and was obviously quite impressed by the strength of the case presented to him. This appears from his notes on a memorandum about the meeting of 4 March, referred to above, which was prepared by one of the Idaps officers at the meeting.
The months that followed saw strenuous efforts by Mr Dougall to right the situation. There was also a sequence of correspondence and some internal minutes which document these efforts conveniently, and these are now set out at some length, omitting formal parts.

LETTER DOUGALL TO JELLARD 13 MARCH 1985 "This serves as confirmation of the actions we agreed to take, following the meeting at Idaps on March 12, 1985.

Based on detailed study and recommendation by Data General Australia Pty. Ltd., in conjunction with Idaps' staff familiar with the Westsub Video implementation, we plan to take the following action to resolve the installation to the satisfaction of all concerned.

1. Idaps will immediately order 1 million character memory upgrade for the Data General Eclipse S/140 installed at Westsub Video.

2. I will instruct my staff, under the project management of Doug Carey, to convert your programs from the RDOS operating system to Data General's AOS operating system - this change will allow the S140 computer to access two million characters of memory rather than five hundred thousand characters. Further, this change will allow the programs to have up to 16 files open concurrently, rather than maximum of 8 files at present.

3. Based on my best endeavours with Data General, we will secure supply of the extra memory and install together with the AOS converted programs the weekend of March 23-24, or March 30-31, 1985.

4. The debtors' system will not be installed until parallel running commences May 1, 1985, with a view to going live July 1, 1985.

5. While work will continue at Idaps in endeavourng to gain performance improvement with the compiled version of Extended Basic, this work is not part of our action plan.

Based on the above work, while we have no detailed statistics to verify, I believe that the expanded S140 should run 8 screens, a master console and a screen dedicated to insertion of new titles, with an average response time between 5 and 8 seconds. I see no way in which any of us can expect that the system can handle 15 screens with an average maximum response time of 5 seconds. Separately, I have asked Doug Carey to work with my accounting staff and with you, Kevin, to ensure that the details of the $30,000 yet to be paid by Westsub Video to Idaps is clearly understood and agreed between both parties.

Based on Lee Murphy's commitment that this $30,000, once reconciled, will be paid to Idaps upon satisfactory resolution as outlined above, I agree to waive the $19,623 on invoice of 06273 dated September 25, 1984. While not specifically discussed at our meeting, in return for Idaps taking the above action, both parties agree to drop claims they may have against the other party, in this matter.

I would appreciate receiving by return, confirmation from you that this letter accurately reflects the agreed actions between both parties."

LETTER JELLARD TO DOUGALL 20 MARCH 1985

"In regard to our meeting on the 12.03.85 where you proposed certain improvements to our computer system, Westsub Discounts Pty. Ltd. agrees to have the necessary improvements in order for its computer system to perform the tasks required of it.

However, Westsub Discounts Pty. Ltd. will not forfeit any legal rights or remedies that it has concerning the past performance of your company in supplying an unsatisfactory machine.

I would like to point out John that your company had previously agreed to supply and support a video library computer system consisting of an S140 Data General Eclipse computer which would support 15 terminals with a maximum response time of 5 seconds per terminal for an agreed price of $160,765.18. Westsub Discounts Pty. Ltd. has and will honour its part of that agreement and pay all monies outstanding upon satisfactory completion of the computer system installation that will perform its original tasks. It was IDAPS which could not fulfill its contractual obligations and is proposing to supply a larger machine which appears not to be able to fulfill our specifications, which to clarify the point is an S140 Data General Eclipse computer with associated hardware and a video library software system that will perform our companies requirements at a maximum 5 second response time with a maximum of 15 terminals fully operational.

At our meeting on the 12.03.85 you indicated that IDAPS cannot achieve its original target of a 5 second maximum response time, but an average figure between 5 and 8 seconds is attainable with 9 screens operating plus the master console. This proposal is a significant drop in computer performance. (i.e. 15 terminals operating with a maximum 5 second response time.)

Mr. Leigh Murphy had agreed at out meeting to your proposal John that Westsub Discount's Pty. Ltd. will accept this drop in computer performance but upon the following conditions.

1. That the scheduled upgrade of our computer system is successful and supporting 8 terminals operating at capacity in the charge/discharge mode, with the debtors software operating. An additional terminal is dedicated to the insertion of new titles and a master console is also operating. In other words, there are 10 terminals all operating to capacity with a maximum response time of 8 seconds.

2. That in consideration for Westsub Discounts Pty. Ltd. accepting the 8 second maximum response time IDAPS will waive the $19,623 on invoice 06273 dated 25.09.84.

3. Upon satisfactory completion and the computers performance meets the requirements in 1. above Westsub Discounts Pty. Ltd. will pay to IDAPS $30,240.38.

4. Westsub Discounts Pty. Ltd. expects to have use of the compiled version of extended basic within six months. (01.10.85.)

In early 1984 Westsub Discounts Pty. Ltd. was promised by IDAPS that we would have the compiled version of extended basic

(compiler) by the end of 1984, at no cost to Westsub Discounts Pty. Ltd. Mr. Leigh Murphy feels that he can wait until the 01.10.85 and he believes that six months is ample time for your company to test and install your compiler into our computer, in order to shorten its response time.

At out meeting I stressed the point that

Westsub Discounts Pty. Ltd. will live up to its part of our previous agreement, and has co-operated with IDAPS to resolve this problem since January 1984 which was the proposed parallel running date.

Your comment in your letter dated 13.03.85 that Westsub Discounts Pty. Ltd. drops any claims that it has against IDAPS was not discussed at the 12.03.85 meeting and as indicated in the body of this letter, IDAPS still have not come up with the goods promised to Westsub Discounts Pty. Ltd. and until your company can achieve your current proposal Westsub Discounts Pty. Ltd. will not forefit its legal rights.

Before I close I would like to thank you for your co-operation and personal involvement in our computer problem, before your involvement we had received numerous commitments with no action and Leigh and myself feel that we can finally see a light at the end of the tunnel due solely to your efforts. I hope that my letter has cleared the air and clarifies our position on the matter. If you feel that further discussions are required, by all means contact me, if not then the installation date scheduled for 23rd/24th or the 30th/31st March 1985 will be expected." LETTER DOUGALL TO JELLARD 24 APRIL 1985 "Thank you for your letter dated March 20,

1985. I have delayed responding in detail to your comments therein, until I had a clearer picture of the performance improvements which Doug Carey and the Idaps team were able to deliver with your staff. Doug tells me today that the additional memory and the modification of operating systems has occurred, and as at this week, your system is now running with sixteen files open simultaneously under that new environment. In addition, several programs are now running under the compiled version of BASIC. Doug believes he has another week or so of work to convert all your programs to the compiled version, and we then expect to see the performance that I outlined in my letter of March 13, 1985. At that stage, I will be better prepared to respond in detail to the points you make in your letter.

Separately, as Doug would advise you, I agreed

on an extraordinary basis to pay the cost of two keypunch operators for one day's work to assist you through the bottleneck at Easter, caused by some delay in conversion of operating systems. While I do not accept the concept of consequential damage, as a matter of goodwill I felt it appropriate to make this gesture.

Subsequently, I have paid those invoices. However, I attach a third invoice for $103.13 that was not authorised by Idaps. Without being "penny pinching", nor wishing to upset our improving relationship, I truly believe that this cost is with Westsub Video and therefore return it for your attention. I look forward to meeting with you in the weeks ahead to review the success of our actions in recent weeks." LETTER CAREY TO JELLARD 9 MAY 1985 "Further to our telephone conversation of 8th May, I would like to confirm the following points:

1. Current Schedule

a) 10-5-85

Newly compiled programs running onsite with high speed disk 1/0 enabled.

Debtors Interface Circulation Programs to be installed onsite but not enabled.

Current Circulation Programs

(non-Debtors) to be recompiled with high speed disk 1/0 enabled. Above configuration to be used by Westsub Video until 1-6-85 at which point Debtors Interface Circulation Programs to be enabled. b) 1-6-85 to 30-6-85 Full parallel running using Debtors System. This period may be extended at users discretion for a further one month period. c) 1-7-85

Full compiled system with Debtors Interface running live, and including Transaction Logging to Tape.

Note: Onsite testing of this function by Idaps prior to July 1st will be necessary.

2. Battery Backup Facility After discussions with Data General we can advise that cost of installation of a Battery Backup Unit and upgrade power supply to Westsub's machine will be $1,800.00.

This relates to the hiring of a temporary employee on 9 April 1985. There was correspondence about it between the parties, the respondent having agreed to pay for two temporary employees (given the problems which had arisen) and declining to pay for the third for which an account was sent by Westub. Because of the general impression I have gained that the applicants have set out to claim every possible dollar in this action against the respondents, I find that I am not satisfied that the charge was properly incurred, given the nature of the arrangement between the parties. Accordingly this minor claim fails.
Fees of Brian W Paterson and Associates for accountancy services - $77,820.00
This claim represents 60% of all the moneys paid by way of fees to Mr Paterson by Westsub during the period from 23 January 1984 to 9 July 1986.
The amounts are made up of a series of weekly payments made directly by Westsub and recorded in its books. The amounts paid were, at the early part of the relevant time, either $650.00 or $542.00 per week. Later in the period this rose to typical payments of $1200 per week, which seemed to begin in July 1985. The amounts covered by cheques totalled $107,410.49. In addition to this there was a total sum of $25,200.00 made up of $200.00 a week which Mr Paterson took from the moneys of Westsub, with the concurrence of the directors of Westsub. He took these amounts in cash in order to avoid tax. He admitted this in evidence although, having done so, he then tried to suggest that there was also an element of convenience in keeping the cash so that it did not have to be paid into a bank. I do not accept this explanation at all because it hardly seems likely that the amounts of cash he received totalled exactly the $200.00 which he regularly kept. Of course the existence of this device, and the way in which he gave evidence about it, does nothing to enhance the general credibility of Mr Paterson or, for that matter, Mr Murphy his co-director.
I am not prepared to make any allowance for the $200.00 per week paid in cash to Mr Paterson. This was obviously pursuant to some private arrangement between him and Mr Murphy, and there is no reason to believe that it was in any way related to the work which Mr Paterson performed in connection with the Idaps contract. So far as his regular remuneration at rates of up to $1200.00 per week was concerned, there are two points that need to be made about the claim. The first is that it was clear that the payments were not related to the amount of work done in any particular week by Mr Paterson on behalf of Westsub. They amounted to an arbitrary figure by way of director's remuneration and reward for the benefits of his accounting work and advice generally. Secondly, Mr Paterson's estimate that 60% of his time was spent on work for Westsub which would have become unnecessary had the computer system operated properly, was not relevant in view of the findings I have made.
The only element of this particular claim which could properly be maintained as a claim for damages for misleading conduct is any loss to Westsub represented by the time that Mr Paterson undoubtedly devoted to the problems created by the contract. Time spent on doing work which would have been avoided had the contract operated as intended would be relevant to a claim for breach of contract but not for misleading conduct.
The best that can be said for the claim, bearing in mind that his remuneration was at a fixed rate, is that had Mr Paterson's time not been taken up with the problems created by the defects in the Technocrat system, he might have been able to give better service to Westsub in other areas. However, in the absence of any evidence that his remuneration would have been less had it not been for the entry into the Technocrat contract, and in the absence of any evidence that his work on other Westsub requirements was deficient, I can identify no particular sum which is appropriate by way of damages on this issue. I accept that Mr Paterson put in many hours of work on the problems created by the failure of the Technocrat system; but I am not persuaded that this resulted in any specific loss to Westsub. I shall return to this matter shortly.
Stationery and repairs - $16,543.82
This claim has been criticized by counsel for the respondents on the basis that it represents all the stationery purchased by the applicant from the time the contract commenced until June 1986, with no attempt to distinguish between stationery which was directly related to the Technocrat system and other items such as pencils, note pads and so on. Apart from the submission that the period covered is too long and that the chain of causation must have been broken at some point before June 1986, it is argued for the respondent that it is not open to the applicant simply to list all its stationery charges and leave the respondent to refute particular items.
It is clear that the way the matter has been approached by the applicant is that this is stationery which would not have been required had the computer operated satisfactorily.
Mr Paterson admitted in cross-examination that much of the stationery had nothing to do with the computer - it related to the manual system operated by the applicant which, it was hoped, the computer would replace. Items which did relate to the computer included bar codes for placing on cassettes and on client identification cards. There is no evidence to show that this bar coding, so far as it was still in existence at the time of the change-over, was not used effectively by the new AWA system when it was introduced. Further, this was one part of the system which was of some value to the applicant in the period during which the Technocrat system operated. In the event there is no item in the list of individual amounts put before the Court as to which I can find that the payment was thrown away because of the contract to use the Technocrat system. Accordingly I can make no allowance for damages for the applicant under this heading.
Insurance - $2,679.32
These claims related to the insurance of the computer hardware, and fall to be decided along with the cost of that hardware. Obviously the equipment had to be insured. All but $349.84 relates to the S120 or S140 computers. The only possible doubt about these claims is an item of $918.65 which relates to the period from February '86 to February '87. Since, as I have said earlier, I think that it was reasonable and appropriate for the applicant to keep the S140 at least until the AWA computer came on line in the middle of 1986, I believe that it was reasonable for it to enter into insurance for the period beginning in February 1986. I think it was reasonable for it to pay 12 months premium at that time, since the time within which it could make other arrangements was uncertain.
The amount of $349.84, shown as part of this claim, related to the MV8000 computer. Since this was lent in an effort to overcome the problems caused by the Technocrat system, I think that the insurance of it was necessary and a sufficiently direct and foreseeable consequence of the misleading conduct which led to the applicant's entry into the contract for that system.
Additional staff - $517,853.39
This claim is made up as follows;

1 Coburg 23.1.'84 to 9.7.'86 ) 2 Dandenong 23.1.'84 to 9.7.'86 ) 3 Managerial $82,034.50 ) $474,708.92 4 Payroll tax 5% of additional staff $ 24,083.30 5 Workers compensation $ 12,104.15 6 Annual leave loading $ 6,957.02

Mr Paterson explained in his evidence that he had arrived at these figures by taking the total wages of five staff members at the Coburg store for the period from 23 January 1984 to 9 July 1986. To that he had added the total wages of five members of staff at the Dandenong store for the same period. He had then taken the wages of Mr Jellard, Mr Leigh Murphy and Mr Harris for the same period and claimed 50% of those wages. Having added those sums together he had added a further 5% for payroll tax and additional amounts for workers compensation and annual leave loadings.
The five members of staff at each of the two stores were arrived at by comparing the staff required when the AWA system was functioning smoothly and the staff which had been in place while the Technocrat system was in use. This could be an appropriate calculation of damages for a claim in contract, but not for a claim for misleading conduct. I have no doubt some time was wasted and additional staff were employed because of the necessity to run the manual system in tandem with the Technocrat system. But the applicant is not entitled to claim any additional savings that might have been achieved if the Technocrat system had been as it was represented.
In justification of the claim for 50% of managerial time Mr Paterson said that Mr Harris used to work at the counter when the work was particularly busy. And Murphy and Jellard were involved in a lot of meetings and discussions concerning the system. Further, managerial reports were not being supplied instantaneously as the computer should have provided them, so more work had to be done in obtaining information.
In my view, none of the work wasted by staff on the Technocrat system and its problems is sufficiently identifiable to be made the subject of a specific claim for damages for misleading conduct. As with Mr Paterson, there is nothing to show that senior staff cost the applicant any more than they would have if the contract had never been signed. And although it might be inferred that some of the shop staff would not have been employed if the Technocrat had never been heard of, there is no evidence on which a sensible estimate could be based. And, in any event, there would have to be an off-setting of these costs against any benefit received by the applicant from the system. I infer that there was some benefit because of the way the applicant took care to maintain the system in operation until after the AWA system took over. As Mr Jellard said, when asked to return the MV8000 computer, "... it is running our business for us." If Westsub obtained no benefit, it should have mitigated its damages by ceasing operation of the system in October or November 1985. There would also be some slight benefit to Westsub from the experience gained by its staff in grappling with Technocrat's problems. Some of them went on to use the AWA system. Again, I shall return to the topic of wasted staff time later, under the heading 'Other issues concerning damages'.
Costs incurred for planned video store in Sydney - $14,190.33
This figure is divided into

1. Wages for K. Murphy $10,734.00

2. Travel re K. Murphy $ 2,494.80

3. Motor Vehicle re K. Murphy $ 961.53

Loss of profits otherwise obtainable in Sydney during the period 1.2.86 to 30.6.86 - $815,944.00

It is convenient to deal with these two items together, because they both arise from an allegation that the respondent knew, when it made its representations, that the applicant was planning a large expansion into the Sydney market and would require the computer facilities for that purpose. The evidence on this matter is far from clear. Mr Paterson said that in the course of the early discussions with Rosemarie Gubser, when the Libramatic 1000 was still being discussed, reference was made to a possible move to Sydney. Mr Paterson was being questioned about the number of terminals which the system would require and he was asked,

"Did you tell them anything further in relation to that as to how many terminals you would need?...Yes. We still would have required four for the moment at each store but there was going to be growth in the business and expansion interstate. What did you say in relation to that, as to the number of terminals?...At that time we were more concerned about getting the two stores computerized, that is Coburg and Dandenong, but we required a system which would meet our future requirements. The growth of Westsub was enormous at that time and we required additional terminals and a computer system had to allow the growth."

Later, still speaking of the Libramatic 1000 discussions with Miss Gubser in July-August 1983, Mr Paterson said,

"I told her that because of the increase in business in Westsub in Melbourne, Leigh

(Murphy) had every intention of moving to Sydney in the foreseeable future, very shortly, and we would require a system which would accommodate a branch in Sydney."

Mr Paterson also gave evidence about a discussion with Geoffrey Brown in which he asked how many terminals the S120 would support, and he was told it would support 15 in addition to a printer. Mr Paterson was then asked,

"Was there any other discussion with respect to terminals?...Yes he wanted to know the purpose of it and obviously it was expansion to Sydney."

Mr Paterson later said that the constore business of Westsub really "took off", he thought, in June-July 1983. However details of constore sales for 1983 showed that the first were recorded in August at $504 and that the later months of the year showed as follows;

$ September 8,500 October 17,600 November 21,800 December 34,700

To complete the picture, the sales passed $100,000 in March 1984 and reached a peak of $220,000 in July of that year. These figures record the receipts from the constore business, and it must be recalled that accounts were sent out every 30 days and there was a requirement of prompt payment. Thus the middle period covered by each account would be some two weeks before its date and, allowing for an average of two weeks for payment after the sending out of the account, it would mean that the figures recorded relate to sales which, on average, were one month earlier than the period indicated. The figures certainly do not support Mr Paterson's recollection that the sub-store business "took off" in June-July 1983.

Mr Leigh Murphy's evidence was to rather different effect. He was asked,

"....what was your intention, or Westsub's intention, with respect to Sydney?"

He replied,

"Well, Sydney was, you know, something that I felt that we would be quite strong on. Very early in the piece, back in early '83, but you know, it would have to wait until we got ourselves in order in Melbourne, you know, and we only really relocated our stores in late '83. We thought maybe, at the outside we could be in Sydney in February 1985....in fact, we had conversations in early '84, you know."

Mr Murphy was then asked,

"What was the basis upon which you intended to expand in Sydney?."

He said,

"It was going to be retail and trade, you know, because they work together quite well. You know, the idea was that it would be put in the working class area, you know, the collar worker area. My brother lived in that type of area, so it was also going to help him as a family person. So he was obviously the person who was going to take over managing."

The brother referred to, Mr Kevin Murphy, also gave evidence. He said that there was a proposal of opening up a video store in Sydney. Asked when this was, he said,

"It was mid '84, I suppose, July '84, mid '84, somewhere around there."

Asked if he was then given any instructions to pursue any activity he replied,

"No, I was just told to hang in the wings there, that something may happen."

Asked if that was the first that he had heard of any such suggestion he replied,

"No. At Christmas '83 there was just talk over the table sort of thing."

He was quite definite that no-one had mentioned the suggestion to him before Christmas 1983.

Mr Kevin Murphy went on to say that the next he heard of the proposal was in June or July 1985. He was then told to "sort of start looking around" for suitable premises. He made some trips to Melbourne in July and August 1985, but only began to work full-time for Westsub in Melbourne on 26 September 1985. During the period when he worked for Westsub he generally returned to Sydney each weekend, either by driving himself there and back or by flying. The claim for some $14,000 relates to the wages paid to Mr Murphy and his travelling expenses. It includes a lump sum of $4,000 which was paid to him some time early in 1986 as compensation, as I understand it, for the disruption caused to him by the decision not to go ahead with the opening of Sydney premises. Mr Zilinsky, called by the applicanta as a Sydney supplier of videos, said he had urged Mr Murphy to make the move in discussions between April and July 1984. They had only gone into delails about the project in the winter of 1985.
Rosemarie Gubser was asked about her recollection of any conversations concerning Westsub opening a Sydney branch. She said,

"The only time I can for sure recall something along those lines is when I was actually visiting them at the new shop in Sydney Road, so that would have been after some time in January or even later than that because I think the shop did not open until some time in January."

"Can you remember what happened in that conversation?...Not precisely. I was more under the impression that it was sort of an idea, a planning, because the wholesale business seemed to have grown so quickly here in Melbourne that Westsub were looking at expanding into Sydney."

Later she said,

"I was under the impression at that stage that it was very much still at a negotiation stage and they had not quite made up their mind to proceed with that project."

There may be some doubt about the date of this discussion, because the new premises of which Miss Gubser spoke were actually open for business in about September 1983. However Miss Gubser was adamant that the time she visited the premises was after an official opening early in 1984.
The sum of this evidence leads me firmly to the view that there was nothing said, before the contract in this matter was entered into, about expansion to Sydney, which would make the respondents liable for any expenses occurred in the abortive scheme to open in Sydney, let alone the huge claim for loss of profits in that venture.
I think that it is clear from the evidence of the Murphy brothers that, in October 1983, the Sydney venture was no more than an idea in Mr Leigh Murphys' mind, which he had not even communicated to his brother who was to be the central figure in that venture. I accept that there was some mention of Sydney in the discussions which Mr Paterson had with Rosemarie Gubser, but I do not believe anything was said to the effect that the move to Sydney was dependent upon the successful operation of the computer system or that the move to Sydney was anything other than a possibility. The 15 terminals to which Westsub officers had referred could be fully accounted for by the 8 terminals required for the two existing stores, together with further expansions in the Melbourne area. And, although I think Mr Paterson may have asked Miss Gubser a question about the cost of a telephone link to Sydney, I do not believe that any statement was made which should have put Idaps officers on notice that if the system they contracted for proved to be ineffective, then damages arising in Sydney were foreseeable.

There are a number of other obvious criticisms to be made of these claims concerning Sydney. In the first place, it was clear by late 1985 that there were serious problems with the system. Any representations made before the contract was entered into were spent, in the sense that the officers of Westsub were very much on their guard about the viability of the Technocrat system. Furthermore, the constore operation in Melbourne had been extremely successful when worked, in substance, as a manual system; and I can see no reason why a similar manual system should not have been introduced into Sydney if Westsub thought that the time was ripe for such an expansion. Computer terminals could have been introduced later.
In my view the claim for the potential profits in Sydney was grossly exaggerated. I am certainly not persuaded that the enterprise, had it gone ahead at that time, would have been such a dramatic success as the figures would indicate. In particular, Mr Kevin Murphy, who was to have the chief responsibility for setting up and running the Sydney operation, had worked for ten years as a truck driver for the Commonwealth Government. He said he had had no experience in sales work or in computer work and this was why he was brought to Melbourne to get him "out on the road, in the field, and find out what actually went on." Having observed him in the witness box, I would have to question his capacity to manage, with only limited assistance, a new business which, in my opinion, would have required both flair and enterprise.
There were also some very doubtful elements in the detailed claim for loss of profits - particularly those relating to the absence of any proper allowance for depreciation of the videos to be used - but I do not find it necessary to go into any of the details on this aspect of the case.
Other issues concerning damages
As I have indicated in dealing with the various heads of damage, I am conscious of the fact that the applicant did suffer additional losses, very difficult to estimate, in the form of wasted staff time, while attempting to cope with all the problems presented by this unhappy venture into the use of computers. Although I am unable to quantify these losses in any useful way, I believe they should be off-set against the equally hard-to-define benefits which the applicant may have received from the limited use it was able to make of the system and the continuing value to it of any minor items of hardware, stationery or other tangible assets. In my view, justice would be done if no allowance was made either way for such considerations.
I must also make it clear that I have not been persuaded by the applicant that, if it had not signed the Technocrat contract, it would have entered into another contract shortly afterwards for a system which would have supplied its needs.
There is no evidence that such a system was then in existence. Indeed the evidence is to the contrary. Mr Jellard, in his evidence, spoke of,

"... my experience of going around to many computer companies, they promised but they did no always deliver.... Mr Brown was able to convince us that they were the people that could do the job....... It was just that the facility they demonstrated on was not quite up to scratch. And because we had nowhere else to turn at this stage they were the only people that seemed reliable to us."

I am therefore not persuaded that the applicant would, in 1983 or 1984, have entered into a much more expensive contract with Wang, or any other company, to develop over a period of time a system custom-made for it. I am left with a clear impression that, in 1983, the applicant was looking for a comparatively inexpensive system, and would have been most reluctant to commit itself to very large expenditure. It might have been prepared to do so by mid-1984, following the great success of its constore business, but that is mere speculation; it would have depended on the price quoted and the nature of any guarantees or assurances that might have been given. The AWA system which the applicant eventually used, was not developed until 1985, a comparatively short time before the applicant adopted it. Its purchase price of about $213,000, even allowing for 19 terminals, was a good deal higher than the contract price of $116,000 in the present case. Although it gave much better response times than the Technocrat system, it also failed to deliver the required accounting facilities, and that contract also resulted in litigation, which was ultimately settled. Under this settlement Westsub apparently finished by paying only about $100,000 for the system. There is no evidence that any other company could have done any better than AWA either in 1986 or, more relevantly, in 1983/84. I accept that it was possible for another company, at the relevant time, to devise a system to suit Westsub's requirements. I am not, however, satisfied that it could have done so on terms - as to cost, time and performance assurances - that Westsub would have accepted.
For all these reasons, I am not satisfied that I should make any allowance by way of damages for lost opportunities to invest in a better system than Technocrat.
SUMMARY OF DAMAGES
For the reasons I have given, I would allow the following heads of damage:

$ Data General costs 17,855.96 Idaps 5,685.00 Borrowing costs 152,779.20 Telecom charges 16,162.67 Insurance 2,679.32 Total $195,162.15

There will accordingly be judgment on the claim in the sum of $195,162.15. I am conscious of the fact that this is a heavy burden on a company which entered into a contract from which it hoped to make some $20,000 to $25,000 in return for a good deal of skilled work. It becomes even more onerous when it is remembered that the respondent claims that the contract has already cost it over $300,000. I have no reason to doubt this claim. It is, however, a long way short of the applicant's exaggerated claim of $1.6 million. Because of the time spent in pursuing claims which have not succeeded, I think it would be a just result if I ordered the respondent to pay the larger part, but not all, of the applicant's costs of the claim. I shall return to this question of costs after dealing with the cross-claim.
CROSS-CLAIM
The first item in the respondent's cross-claim is the sum of $18,531.20, being the balance of purchase price, which was not paid by the applicant in spite of invoices submitted in August and September 1984 and August 1985.
I find that these amounts were left unpaid, but in view of my findings as to the respondent's misleading conduct, this amount could have been claimed by the applicant if it has been paid. It should be disallowed as an item of cross-claim.
The second item of cross-claim is a sum of $27,739 arising from the agreement of June 1984 to upgrade the S120 computer to an S140 and to provide two additional terminals and bar code readers. Since the upgrade was provided in a largely futile attempt to make the system workable, I am not prepared to make any allowance for this part of the cross-claim. It is true that the applicant did receive an item of some value in the S140 computer and this has been considered in arriving at a final figure for the applicant's damages. The same is true in the case of the VDUs and bar code readers. The delivered price of these was $8116. The cost of the S140 upgrade was $19,623, but I have no evidence as to the salvage value of the S140 computer.
The next item of cross-claim was an amount of $129,285 for the supply of additional computer programs and the making of modifications, additions and enhancements to the programs already supplied. Of this amount all but $58,500 related to the debtor's software program, which the respondent was never able to bring into useful operation because of the defect in the basic system. This work was of no value to the applicant and the claim relating to it must be disallowed.
So far as the claim for $58,500 is concerned, it is necessary to consider whether this related to work done before it had become clear that the system was defective, or whether some of it was paid pursuant to a possible separate agreement between the parties after they had agreed to terminate the contract. In fact this cross-claim relates to work done before the end of July 1985, and for reasons given in relation to certain items of the claim, I believe that any work such as this, done by the respondent for the applicant as their relationship was falling apart, was done in order to reduce the applicant's potential claim and had such an effect. I think it was directly attributable to the original misleading statements of the respondent's officers and can give rise to no valid cross-claim.
The balance of the cross-claim relates to the MV8000 computer, which was hired from Data General by the respondent and lent to the applicant, initially for a period of 90 days, which I find was later extended by tacit agreement between the parties. The first part of this claim is for the hire charges paid to Data General, together with maintenance charges, and repairs paid for after the machine was returned to Data General.
If there was a time when the applicant should have returned the MV8000 to Data General or the respondent before it actually did, then the respondent would be entitled to recover hire and maintenance charges after that time. And if the repairs were made necessary by any default of the applicant, then that item of cross-claim would be made good. The claim for rental and maintenance charges was $120,555. That for repairs was $9,452.61.
Of these amounts, the claim for repairs can be disposed of simply. There was no evidence before the Court to suggest when any defect to the MV8000 occurred. Nor was there anything to suggest that it resulted from the applicant's default rather than ordinary usage or the circumstances of its retrieval by Idaps and Data General employees. The claim is based on a series of invoices, which were tendered in illegible form, all dated 13 February 1987. They were not explained by any oral evidence, and this claim must fail for want of proof.
The determination of the claim for rental and maintanence charges requires a review of the evidence relating to the MV8000. This evidence begins with the letter of 9 July 1985 from Dougall to Jellard, set out above in its sequence. This shows that the MV8000 was to be installed for 90 days while the input/output programs on the S140 were rewritten in Assembler language. This intention was made clear by Mr Dougall in his oral evidence. In fact, as set out above, the attempt to rewrite in Assembler was abandoned on the advice of the Data General employees who were attempting it.
Although Mr Dougall demanded the immediate return of the MV8000 in a letter to Mr Jellard dated 20 August 1985, this was clearly waived by later discussions and correspondence. It was however renewed in a letter dated 14 October 1985 which also demanded the return of "the additional 1 megabyte memory board on the S140 computer". Nothing was said in this letter about the reinstallation of the S140. However that had been offered in the letter of 20 August and should be assumed to remain a condition of removal of the MV8000.
Mr Dougall also said in evidence, and I accept, that when he made a formal request for the return of the MV8000 on 23 October 1985, Mr Jellard,

"essentially said that until the programmes were performing and providing 15 terminals and a maximum 5 second response time he would not return it to us. .....he said 'You've got to be joking; it is running our business for us'."

Mr Dougall said further that, at the end of August, Mr Murphy had said to him, "We have suffered; now it is your turn to suffer. We have got the MV8000". I accept this evidence also.
Mr Paterson gave evidence that he instructed the applicant's solicitors to invite the respondent to collect the MV8000, in July or August 1986, after the AWA system was installed. He conceded that the instruction might not have been given until September. He also said that, until then, the work being done by the MV8000 was of sufficient value that Westsub was not prepared to give it up. Westsub was also concerned about the possible loss of its data base. The MV8000 could at least service four terminals. The S140 "would be lucky to push two terminals".
Whatever Mr Paterson may have said to the applicant's solicitors, it is clear that as early as April 1986 the respondent had commenced proceedings against the present applicant in the New South Wales Supreme Court claiming, among other things, the return of the MV8000. This part of the claim (which it seems was otherwise put aside in favour of the present cross-claim) was settled by a letter between solicitors, dated 19 November 1986, which arranged for the reinstatement of the S140 and the return of the MV8000, without prejudice to the present respondent's cross-claim for "costs incurred by it while the MV8000 has been on the premises of Westsub."
I find this the most difficult question to resolve in the present action. I believe I should decide it on the basis that the respondent would have restored the S140 to working order, but this would have proved inadequate to maintain the level of work which the MV8000 was performing. It would have been necessary to revert to a largely, if not entirely, manual system for constore clients. The S140 would have assisted in the transition and might have been able to continue servicing two terminals.
However I am persuaded that this is what the applicant should have done. It had no legal right to detain the MV8000 after the respondent, which had possessory title to it, demanded its return. I therefore find that the applicant's conduct in refusing to return the MV8000 to the respondent or Data General after November 1985 was both commercially high-handed and unjustified in law. It knew the machine was only on loan for 90 days in the first place, and that the respondent had briefly extended the period of loan in an attempt to maintain good relations. Once it was clear that relations had broken down completely and legal action was inevitable, there was no sufficient reason for the applicant to refuse to release the MV8000 - provided that the respondent was willing to reinstate the S140, as indeed it was. Although the S140 was a good deal less powerful than the MV8000, it could maintain the applicant's records in a viable state while other options were considered - including a temporary return to a largely manual system.
However annoying it might have been to revert to a much less satisfactory system, the applicant knew that it would be claiming on the basis of total failure of the contract, and it had no legal right to retain Data General's property when the respondent, as hirer entitled to possession, demanded its return.
Nevertheless the position is somewhat complicated by the fact that, in early December 1985, Idaps was blaming Data General for failing to co-operate in the removal of the MV8000. Late in the same month Data General assured Idaps of its co-operation. It seems, from its statement of claim in the NSW Supreme Court action that the cross-claimant's last letter of demand for return of the computer before it commenced proceedings was dated 11 December 1985. That letter is not in evidence.
Doing the best I can on the material before me, and taking a broad view of the situation, I think Westsub should reimburse Idaps for all rental paid on the MV8000 in 1986 and part of January 1987, when it was returned, at $7,000 per month. The amount involved is $85,555.
The final item of cross-claim, for parts and services related to the MV8000, can be more easily dealt with. They relate to the costs of installing the computer at Westsub's premises and the two attempts to make it more effective by providing a memory upgrade to 2 megabytes, supplying the Advanced Operating System (AOS) and rewriting Technocrat core programs in Assembler language. All these were intended by Mr Dougall to enhance the performance of the system so as to make it meet the requirements of Westsub. Because of the fatal flaw in the index system of Technocrat, none of these steps was effective to provide a reasonably efficient system. There was, in my view, no reason why the applicant should be called upon to pay for these amounts - totalling $35,400.
There will be judgment for the respondent/cross-claimant on the cross-claim in the sum of $85,555. Because it succeeded on only one issue I would normally allow only the larger part of the cross-claimant's costs.
However, because the cross-claim arises from the same transaction as the claim, I think it is appropriate that the two judgments be set off against each other and the respondent be ordered to pay the applicant $109,607.15. The respondent should also pay two thirds of the applicant's costs of the claim and cross-claim.

[1990] FCA 139

09 APRIL 1990