Detection Services Limited v Pickering

[2020] NZHC 2705

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2015-404-003135

[2020] NZHC 2705

BETWEEN

DETECTION SERVICES LIMITED

First Plaintiff

DETECTION SOLUTIONS LIMITED
Second Plaintiff

DETECTION SERVICES PTY LIMITED
Third Plaintiff

DETECTION SOLUTIONS PTY LIMITED
Fourth Plaintiff

STEPHEN CARL JOHN SIMMONS

Fifth Plaintiff

AND

CHRISTOPHER LORRAINE PICKERING

First Defendant

AQATAR LIMITED
Second Defendant

JAKE VAN DER PEYL

Third Defendant

Hearing:

21 September 2020

Appearances:

M Corlett QC and R Butler for the Plaintiffs

A Barker QC and J Grimmer for the Defendants

Judgment:

15 October 2020

JUDGMENT OF WOOLFORD J

[As to damages]

is judgment was delivered by me on Thursday, 15 October 2020 at 11:30 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

DETECTION SERVICES LIMITED v PICKERING [2020] NZHC 2705 [15 October 2020]

[1]    By judgment dated 21 November 2019, the Court of Appeal remitted this proceeding back to this Court to determine the quantum of damages payable by the first and second defendants (together “the defendants”) to the third and fourth plaintiffs (together “the plaintiffs”) for losses caused by breaches of the defendants’ obligations under a joint venture with the plaintiffs.1 Liability is not an issue. The Court of Appeal confirmed that the defendants were at fault by failing to supply a leak detection system, which the parties had jointly developed, to the plaintiffs. As a result of the defendants’ failure, the plaintiffs had to develop their own system at some cost.

[2]    The factual background is summarised in the Court of Appeal judgment as follows:

[2]        Stephen Simmons, who lives in Sydney, is the founder of the Detection Services group of companies which specialises in detecting leaks in water pipes. The group comprises the two appellant companies, both based in Australia, and two related New Zealand companies, Detection Services Ltd and Detection Solutions Ltd. For convenience, we will refer to these companies collectively as “Detection Services”. Detection Services’ customers include various Australian water authorities responsible for public water supply.

[3]        Christopher Pickering, who lives in Auckland, is the founder of the second respondent, Aqatar Ltd, a company incorporated in New Zealand in January 2010. Mr Pickering has expertise in computer software development.

[4]        Mr Simmons and Mr Pickering were long-standing friends until they fell into dispute over ownership of a new computer-controlled leak detection system, which the High Court found was designed and built for Detection Services in a joint venture between the parties. The system was intended to be used by Detection Services to detect leaks in high-pressure water mains. In very general terms, the system was a refinement of existing technology involving the deployment of a hydrophone attached to the head of a cable into the main. As the hydrophone travels down the main with the water flow it transmits acoustic changes to the operator indicating the location of a leak. Mr Pickering proposed that the new system be controlled using a computer that would display and record the data collected. The system is obviously far more complex and sophisticated than indicated by this brief description, but it will suffice for present purposes.

[5]        The High Court found that the joint venture was formed some time prior to December 2008. A year later, in late 2009, Mr Pickering was employed as the general manager of Detection Services. He took up this position from January 2010, reporting to Mr Simmons as managing director. Mr Pickering developed and built in New Zealand, mostly in his own time, a prototype of the new system with technical assistance from the appellants in Australia. Mr Pickering met the cost of the development from his own

1      Detection Services Pty Ltd v Pickering [2019] NZCA 575.

resources, but the High Court found that Detection Services was to reimburse him for these costs and pay reasonable recompense for his time. Mr Pickering was to retain the intellectual property rights in the computer software and interface.

[6]        Upon completion of the prototype in mid-2011, Mr Simmons sought urgent delivery of it to Australia for testing, refinement and immediate commercial use, as had always been the parties’ intention. However, at that stage, Mr Pickering claimed sole ownership of the entire system and refused to deliver it to Detection Services until agreement was reached on price and other terms governing its future use. The parties were unable to reach agreement.   Lawyers   became   involved.   The   relationship    between   Mr Simmons and Mr Pickering broke down irretrievably leading Mr Simmons to terminate Mr Pickering’s employment as general manager of Detection Services.  Mr Pickering placed the system in storage and there it remains.  Mr Simmons and Mr Pickering have not only lost their friendship, their efforts have come to nought. The mutual benefit they aspired to has been replaced by a legal battle over who should bear the losses.

[7]        Detection Services subsequently developed a new system. They then issued proceedings against the respondents in the High Court claiming the costs of developing the new system and lost profits suffered in the interim. The respondents counterclaimed in contract for the costs they incurred in developing the original system. Detection Services’ claims and the respondents’ counterclaims all failed following trial in the High Court. The appellants appeal and the respondents cross-appeal.

[3]The plaintiffs now claim the following damages:

(a)Componentry costs of $187,577.27;

(b)Labour costs, in an amount to be determined by the Court, but not less than $160,000; and

(c)Loss of profits of $1,106,909 discounted by an unspecified percentage.

[4]    The defendants say that the plaintiffs have not only not proved the claimed losses, but they demonstrably have not suffered any losses over and above the amount they failed to pay to the defendants.

The law

[5]    The plaintiffs seek equitable compensation from the defendants. Counsel for the plaintiffs summarised what he says is the proper approach as follows:

Equitable compensation ought to restore the plaintiff to the position he would have been in but for the defendants’ wrongdoing. Compensation is assessed with the full benefit of hindsight. Causation is necessary, but it is not assessed strictly or rigorously; it should be assessed with common sense. The defendant who can show the plaintiff would have suffered some or all of the loss in any event has a narrow escape.

[6]    Counsel for the defendants submit that the above summary is not an accurate statement of the approach to equitable compensation in general, nor the approach that is appropriate in this case. He says it elides a number of different principles to create a general principle for equitable compensation that is not correct. Counsel for the defendants submits it is important to bear in mind the two stages in any damage/causation inquiry: (a) proof of loss/damage and (b) remoteness. There is no argument that a plaintiff must always prove that they suffered loss or damage in order to recover damages. It is a central issue in this case.

[7]    Counsel further submits the issue that has troubled the courts in respect of breaches of fiduciary duty has mostly concerned the inquiry into remoteness. That is not an issue in this case. However, it is the rules relating to remoteness in claims by fiduciaries that is the basis for the broad approach to the assessment of loss that is recommended by the plaintiffs.

[8]    In this case, however, the Court of Appeal held that the breach by Mr Pickering, while arising within a fiduciary relationship, did not itself have a fiduciary character. It is essentially a standard breach of contract claim. I therefore agree with counsel for the defendants that there is, accordingly, no reason to apply any different rule to the assessment of damages than would otherwise apply in equity or at law.

Componentry costs

[9]    The parties agree that the plaintiffs were obliged, in terms of the joint venture, to reimburse the defendants for componentry costs of $160,415.45. The question then to be answered is — did the plaintiffs spend more than $160,415.45 on componentry costs in replicating the original system built by the defendants, and, if so, how much more did they spend? The measure of damages on componentry costs will be the sum spent, if any, in excess of $160,415.45.

[10]   The plaintiffs initially claimed that they paid AUD 380,805.68 for componentry costs. At the conclusion of the trial, the plaintiffs acknowledged that costs totalling AUD 61,634.15 in respect of the van fitout, rebuilding the drive and replacing the initial faulty cable should be deducted, which resulted in a revised claim of AUD 319,171.53.

[11]   The componentry costs were itemised in a schedule produced by Mr Simmons, the managing director of the plaintiffs. The schedule set out the date of payment, the payee, the item/service bought and the Australian dollar cost. Although only some of the relevant invoices were included in the common bundle of documents, all but about two of the relevant invoices were produced during the course of the trial at first instance.

[12]   I have used the same schedule to calculate the costs of the componentry. Because I have found that the leak detection system built by the plaintiffs was largely completed by mid to late-2012, I have deducted all invoices dated after the final invoice from Fast Automation on 11 January 2013, which was the last instalment of an account in the sum of AUD 25,000 plus GST for a control system.2 The plaintiffs acknowledge that after mothballing the system for a year because of a copyright challenge by a rival company, they extensively rebuilt the system in 2014 and 2015. The costs involved in the later rebuild cannot be attributed to the defendants’ fault.

[13]   I have also deducted invoices for items which were not part of the original system built by the defendants. These are:

(a)An underwater video camera system;3

(b)The faulty cable;4

(c)The cost of a lathe used to build the leak detection system;5

2The earlier invoices are dated 20 March 2012 (AUD 8,250), 24 April 2012 (AUD 5,500), and  28 September 2012 (AUD 12,000).

3      Dated 2 August 2011 (AUD 716.73).

4      Dated 22 November 2011 (AUD 6,120.58) and 20 February 2012 (AUD 12,293.57).

5      Dated 24 November 2011 (AUD 4,825.70).

(d)The costs of a parachute;6

(e)The chlorination/disinfectant container;7 and

(f)The costs of the fitout of the van.8

[14]   The costs deducted from the invoices dated 2 August 2011 to 11 January 2013 total AUD 44,176.02. The remaining costs total AUD 254,761.12, which is the loss that can be attributed to the defendants’ fault. The schedule is attached to this judgment.

[15]   Using the exchange rate on the date of the trial’s commencement (1.0903), AUD 254,761.12 is the equivalent of $277,766.04. From this sum, $160,415.45 is to be deducted as the sum the plaintiffs were obliged in terms of the joint venture to reimburse the defendants for componentry costs. That leaves the final sum of

$117,350.59, which are the componentry costs properly payable by the defendants to the plaintiffs.

Labour costs

[16]   Again, the parties agree the plaintiffs were obliged in terms of the joint venture to reimburse the defendants for labour costs of $40,000. The question then to be answered is — did the plaintiffs spend more than $40,000 in labour costs in replicating the original system built by the defendants, and, if so, how much more did they spend? The measure of damages on labour costs will be the sum spent, if any, in excess of

$40,000.

[17]   The plaintiffs initially claimed the sum of AUD 802,868 for the costs of     Mr Simmons’ time and that of its technical staff in redesigning and rebuilding the system. The labour costs were itemised in a schedule produced by Mr Simmons. The schedule set out the employee’s name, qualifications and experience, and the number

6      Dated 12 March 2012 (AUD 65).

7      Dated 15 May 2012 (AUD 1,894.64).

8      Dated 28 May 2012 (AUD 15,180), 6 June 2012 (AUD 2,614.75) and 8 June 2012 (AUD 465.05).

of hours spent in each of 2011, 2012, 2013, 2014, 2015 and 2016 on development of the new system. It also set out the net cost of each employee to the plaintiffs.

[18]   At the hearing in respect of damages, the plaintiffs acknowledged the Court’s assessment that they had a new system largely complete from mid to late 2012. Excluding staff costs post-2012 resulted in the following figures for Mr Simmons, Mr Caunter and other staff at the hourly rate of $115:

(a)Mr Simmons               2,420 hours — $278,300

(b)Mr Caunter                 1,345 hours — $154,675

(c)Other staff                  1,524 hours — $175,260

[19]   The plaintiffs submit that adopting a common sense approach to the assessment of loss under this head, one which is favourable to the plaintiff and accords with    Mr Pickering’s own assessment, might mean that the Court adopts a figure which represents solely Mr Caunter’s time or an amalgam of his time and Mr Simmons — that is, a figure between $154,675 and $432,975.

[20]   As to the hourly rate of $115, Mr Simmons says that if the staff in question had not been tied up with the development, the time they spent on the development could have been charged out to clients. The minimum rate they would have charged for the staff involved would have been AUD 90 per hour, which equates to $115 per hour.

[21]   On the other hand, the net salary cost to the plaintiffs of Mr Caunter was AUD 45.80 per hour or $52.40 (at a multiplier of 0.874). Thus, if Mr Caunter had spent a total of 1,345 hours in 2011/2012 on the system, the direct salary costs to the plaintiffs would have been $70,478, rather than $154,675.

[22]   The difficulty for the plaintiffs is that no timesheets were kept. Nor is there any other documentary evidence to substantiate the large number of hours charged. Mr Simmons says that the plaintiffs operated on trust. He says he was intimately involved with the development and has a good knowledge of the time spent. However, he estimated staff time years later in preparation for the court hearing. In the statement

of claim filed on 22 December 2015, the plaintiffs allege that Mr Caunter had conservatively spent 2,550 hours at $44 per hour on the concept, design and research, sourcing and building the new system.

[23]   This “conservative” total was reduced to 1,980 hours in the schedule attached to Mr Simmons’ brief of evidence for trial in 2018. No explanation is given for the variance, nor how Mr Simmons is able to accurately estimate, six years later, that  Mr Caunter spent 935 hours in 2012 working on the system. He makes estimates for all other staff. Another example is a hydrologist, Thomas Hoppe. Mr Simmons estimated  that  Mr  Hoppe  spent  230  hours  in  2012  working  on  the  system.   Mr Simmons explained thus:9

Tom’s time ranged from 10–20 per cent of a typical working week on [the system], some weeks it may be a 100 per cent, some weeks between design and development period, may be one to five per cent of his time, these allocations are conservative.

[24]   Although time records were not kept and there is a degree of a guesswork in the claim for labour costs, the Court cannot be absolved from making an assessment of the likely time involved in building the leak detection system. Perhaps the best way of approaching the issues is to adopt Mr Pickering’s estimate of the time he himself spent in developing the original system. He estimated the total time he spent as 1,415 hours. This is similar to Mr Simmons’ revised estimate of 1,345 hours (down from 2,550 hours) spent by Mr Caunter in 2011 and 2012 in developing the plaintiffs’ system. This comparison gives the Court some confidence that Mr Caunter, who was the principal staff member involved in building the system for the plaintiffs, may well have spent 1,345 hours on the project. I am however not satisfied that I can rely on Mr Simmons’ guesswork as to the hours spent by himself and other staff members without any verification, corroboration or documentary evidence.

[25]   In those circumstances, I adopt the figure of 1,415 hours, which Mr Pickering says he spent on development of the original system as a reasonable determination of the likely labour costs for the plaintiffs. Mr Pickering claimed an hourly rate of $107

9The statement of claim alleges that Mr Hoppe spent a total of 640 hours on the development. In the schedule to his brief of evidence, Mr Simmons now estimates that Mr Hoppe spent a total of 390 hours over a two year period.

per hour. The plaintiffs’ claim of $115 per hour is therefore not unreasonable. I therefore assess the labour costs for the plaintiffs at $162,725 (being 1,415 hours at

$115 per hour), from which $40,000 is to be deducted as being the sum agreed between the parties as payable by the plaintiffs for Mr Pickering’s time. That leaves the sum of $122,725 as labour costs properly payable by the defendants to the plaintiffs.

Loss of profits

[26]   The plaintiffs initially claimed that the absence of a system caused the plaintiffs loss of revenue and, consequently, profit estimated at no less than AUD 603,880, based on lost revenues of AUD 1,948,000, as set out in the second schedule to the statement of claim.

[27]   At  trial,  Mr  Simmons  increased  his  estimate  of   lost   revenues   to   AUD 11,008,000, calculated over the six years it took the plaintiffs to develop their own system. The plaintiffs also briefed a forensic accountant, Mr Jai Basrur, to quantify the loss of profits on the estimated revenue of AUD 11,008,000. He calculated that the plaintiffs lost $2,694,343 with a present value of $1,983,565 because they were unable to use the asset which was being developed.

[28]   At the hearing on damages, counsel for the plaintiffs acknowledged the Court’s finding that there was a new system available for use by the plaintiffs by the end of 2012. The Court was therefore referred to the present value of the cashflows lost by the plaintiffs in 2011 of $606,039 and 2012 as $500,870, which together total

$1,106,909.

[29]   Counsel did,  however,  further  acknowledge  the  Court’s  comment  that  Mr Simmons also claimed lost revenue from leak detection programmes with identified customers when he did not know whether those customers did in fact undertake any leak detection work at all in that time and accepted that the figures for 2011 and 2012 could be further discounted.

[30]   The claim for loss of profits is presented as a claim for loss of a chance. Loss of chance analysis still requires a party to first prove, on the balance of probabilities, that they had a substantial chance of obtaining the opportunity which would have

conferred a benefit. This requires the plaintiff to prove at least some evidential foundation for the alleged opportunity. I agree with counsel for the defendants that a speculative opportunity is not sufficient.

[31]   The plaintiffs advance their claim in respect of six customers, or potential customers, but Mr Simmons acknowledged that he did not know whether or not any of the six customers, with the exception of Sydney Water, had actually put out a tender for leak detection programmes for which the system they were developing could have been used.

[32]   As to Sydney Water, Mr Simmons referred to discussions he had with representatives of Sydney Water in 2009 about a plan to undertake 100 kms of leak detection in water mains. They had not issued a tender for the work prior to 2011 and Mr Simmons did not have a copy of any tender that they had later issued. Mr Simmons acknowledged in cross-examination that he did not know in fact if they ever went ahead with the plan.

[33]   In his comprehensive submissions, counsel for the defendants analyses the evidence in respect of Sydney Water and the other five customers, or potential customers. His analysis is not contradicted by counsel for the plaintiffs. He asks the rhetorical question — “How can [the plaintiffs] claim reviews lost from leak detection programmes with identified customers when [they did] not even know if that customer was undertaking any leak detection work at all?”

[34]In my first judgment I stated:10

[91]     Finally, the claim for lost profits also has substantial difficulties.     Mr Simmons claims lost revenue over a six-year period when the new system was largely completed in mid to late 2012. Mr Simmons acknowledged that work on the new system stalled for over a year because Detection Services group was facing a breach of copyright claim from a competitor, which was eventually settled by the payment of a substantial sum to  the competitor.  Mr Simmons also claimed lost revenue from leak detection programmes with identified customers when he did not know whether those customers did in fact undertake any leak detection work at all in that time. The claim for lost revenue is therefore largely speculative.

10     Detection Services Ltd v Pickering [2018] NZHC 3310, [2019] NZAR 515.

[35]   My view remains the same. The plaintiffs have not established a sufficient factual basis for any claim for loss of profits.

Result

[36]   I assess the quantum of damages payable by the defendants to the plaintiffs to be a total of $240,075.59, being componentry costs of $117,350.59 together with labour costs of $122,725. There is no award for any loss of profits. There will therefore be an order for payment by the defendants of $240,075.59 to the plaintiffs.

[37]   Costs are to follow the event. It is my sincere hope that counsel can agree costs given my earlier judgment on costs and the considerable sums already expended on this case.

Woolford J

Solicitors:           MacKenzie Elvin Law, Tauranga

Langton Hudson Butcher, Auckland

Counsel:M Corlett QC, Auckland R Butler, Auckland

A R Barker QC, Auckland J Grimmer, Auckland

SCHEDULE

No.	Date	Company	Details	(Australian Dollars)
				Disallowed	Allowed
1	02/08/2011	Jetview Electronics	Underwater      video camera system	716.73
2	10/10/2011	Austral	Hydraulic service	624.25
3	31/08/2011	E H Wachs	Hydraulic    pump    & reels	6,948.53
4	02/11/2011	R N Cribb	Frame	1,190.20
5	22/11/2011	Falmat	Cable – deposit	6,120.58
6	24/11/2011	Hare & Forbes	Lathe      to       build inSCAN	4,825.70
7	05/12/2011	S & S Springs	Springs	407.00
8	20/12/2011	Convair	Pinch valves	1,048.30
9	22/12/2011	Southern Engineering	Uhing traverse unit	2,037.20
10	30/01/2012	R S Components	Measuring wheel	215.60
11	02/12/2011	R S Components	Counter	414.70
12	01/02/2012	UVS	818.29
13	09/02/2012	R S Components	Measuring wheel	215.60
14	13/02/2012	Pacific Hydraulics	Hydraulic pumps	985.27
15	13/02/2012	Motion Technologies	Pulleys/belts	2,085.60
16	30/11/2011	Nielsen Design	Design drawings	29,979.60
17	20/02/2012	Whitehorse Industries	Cable     drum     and components	1,140.70
18	12/03/2012	Renold	Chain	565.40
19	22/02/2012	Gibbens Industries	Spring	140.25
20	20/02/2012	Falmat	Cable	12,293.57
21	12/03/2012	Strapworks	Parachute	65.00
22	20/03/2012	Fast Automation	Control system 30% of 25,000 + GST	8,250.00
23	22/03/2012	Maxon Motor	Motor	1,779.12
24	21/03/2012	Bruel &Kjaer	Hydrophone,      LDS Proton	19,047.27
25	30/03/2012	Lucan Engineering	Cable     winder     & access	16,527.50
26	02/04/2012	Nepean Rubber	Rubber rollers	3,173.50
27	02/02/2012 & 23/03/2012	R S Components (x 2)	PTFE     rod,     LED counter	521.35
28	11/04/2012	Hills Scale Services	1 tonne crane scale	858.00
29	16/04/2012	Pacific Hydraulics	Bank valve, pressure control valve	5,042.40
30	17/04/2012	Pacific Hydraulics	Signal converters	2,156.00

31	24/04/2012	Fast Automation	Control system 20% of 25,000 + GST	5,500.00
32	14/03/2012	Pirtek	Hoses	651.20
33	02/05/2012	Motion Technologies	Pulleys/belts	3,204.30
34	02/05/2012	Nepean Rubber	Rubber rollers	985.60
35	02/05/2012	Cetnaj West	Gel for sonde housing	61.32
36	08/05/2012	Aussie Magnets	Rare earth disc	74.45
37	15/05/2012	ProMinent Fluid Controls	Beta pump & access	1,894.64
38	17/05/2012	UVS	Poly U	349.80
39	23/05/2012	Omni Instruments	Pressure     &     temp transmitters	2,268.20
40	22/05/2012	D & D Barry	Ball       lock       pin, retaining cable	134.20
41	01/03/2012	Nielsen Design	Design drawings	25,115.75
42	18/03/2012	Stark	Pressure testing	7,911.20
43	08/06/2012	Pirtek	Supply & fit fittings to van	465.05
44	08/06/2012	Pirtek	Supply & fit hose to suit water leak detection van	2,614.75
45	22/06/2012	Rexroth	Motors	1,415.70
46	30/06/2012	Nielsen Design	Engineering design	29,713.61
47	03/05/2012	Lucan Engineering	Parts      for      winch assembly	15,105.86
48	28/05/2012	Lucan Engineering	Fitout of van	15,180.00
49	26/07/2012	Lucan Engineering	Parts     for     launcher assembly	17,515.30
50	30/07/2012	Lucan Engineering	Strut assembly	4,873.00
51	18/07/2012	Maxon Motor	Ceramic      gearhead, hardware	413.00
52	27/08/2012	Lucan Engineering	Roller shafts	1,320.00
53	22/09/2012	Nepean Rubber	Rollers	862.40
54	22/10/2012	Convair	Pinch valve	586.30
55	28/09/2012	Fast Automation	Control system 43% of 25,000 + GST	12,000.00
56	19/10/2012	Lucan Engineering	Work on cable winch launcher	14,426.50
57	29/11/2012	Lucan Engineering	Modifications	2,351.80
58	11/01/2013	Fast Automation	Control system 7% of 25,000 + GST	1,750.00
TOTAL	44,176.02	254,761.12