Detection Services Pty Ltd v Pickering
[2019] NZCA 575
•21 November 2019 at 9.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA30/2019 [2019] NZCA 575 |
| BETWEEN | DETECTION SERVICES PTY LIMITED |
| AND | CHRISTOPHER LORRAINE PICKERING |
| Hearing: | 10 September 2019 |
Court: | Gilbert, Duffy and Wylie JJ |
Counsel: | M A Corlett QC, R D Butler and J Nedeljkov for Appellants |
Judgment: | 21 November 2019 at 9.30 am |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe cross-appeal is dismissed.
CThe proceeding is remitted to the High Court to determine the quantum of damages payable to the appellants.
DThe Costs judgment is set aside. Costs in the High Court are to be assessed by that Court in the light of this judgment.
EThe respondents are to pay the appellants costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Gilbert J)
Table of contents
Introduction [1]
Appellants’ claim [9]
Respondents’ defence and counterclaim [14]
High Court judgment [16]
Grounds of appeal [24]
Grounds of cross-appeal [25]
The issues [27]
Did the respondents breach their obligations to the appellants?
Submissions on appeal [28]
Analysis [31]
Was the High Court correct to deny relief to the appellants by
applying the clean hands maxim? [42]
Submissions on appeal [49]
Analysis [51]
Was the High Court correct to dismiss the respondents’
counterclaim for breach of contract?
Submissions on appeal [58]
Analysis [63]
What, if any, relief should be given? [66]Result [68]
Introduction
This appeal and cross-appeal illustrate the difficulties that can arise when long‑standing friends enter into a business venture without legal advice, formal documentation, or any clear understanding of their respective rights and obligations.
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.
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.
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.[1] 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.
[1]Detection Services Ltd v Pickering [2018] NZHC 3310, [2019] NZAR 515 [High Court judgment].
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 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.
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.
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.
To set the context for the appeal, we commence by briefly referring to the salient features of the pleadings. As will be seen, the parties’ respective cases in the High Court reflected the lack of clarity about the legal nature of their relationship and their polarised viewpoints on core factual issues. There was even uncertainty as to which parties were involved in the relationship.
Appellants’ claim
The statement of claim listed five plaintiffs, Mr Simmons and all four companies in the Detection Services group, and three defendants, being the two respondents and an electronics expert engaged by them to carry out work on one component of the system. At the commencement of the trial, the appellants advised the Court that the two New Zealand companies and Mr Simmons should not have been included as plaintiffs (because none of them had suffered any loss) and the claim against the third defendant was no longer pursued.
The appellants advanced five causes of action in their statement of claim: breach of fiduciary duty; estoppel; breach of contract; misuse of confidential information; and division of co-owned property pursuant to s 339 of the Property Law Act 2007. However, at the commencement of the trial, counsel advised that only the first two of these, breach of fiduciary duty and estoppel, were still pursued.
The central thesis of the appellants’ claims was that the parties engaged in a joint venture to develop a leak detection system for Detection Services. The system was initially called “DPX” by Mr Pickering but Mr Simmons later called it “Inscan”. The appellants claimed that DPX and Inscan were one and the same system whereas, as we will come to, the respondents maintained they were separate systems, developed independently. The appellants claimed the parties agreed to develop the system in New Zealand rather than in Australia because this was more cost‑effective. The appellants asserted that the parties owed fiduciary duties to each other in the context of the alleged joint venture, having reposed trust and confidence in one another.
The appellants claimed the respondents breached their fiduciary duties in various ways in mid-2011, including by asserting sole ownership of the system following its completion, refusing to allow Detection Services to have access to it and withholding disclosure of records and information regarding its development. The appellants acknowledged that Mr Pickering was to retain the intellectual property rights in the computerised control componentry. The appellants characterised this feature as “not necessary” for the use of the system but “useful to have”.
The appellants claimed that as a result of the respondents’ wrongful assertion of sole ownership and refusal to deliver the system to Detection Services, they were unable to use the system, exploit it commercially or develop it further. They sought judgment for the costs of developing the new system, said to be AUD 924,000, and loss of profits of AUD 603,880.
Respondents’ defence and counterclaim
The respondents disputed these core allegations. They contended that the DPX and Inscan systems were entirely separate. They claimed that Mr Pickering developed the DPX system independently of Mr Simmons and Detection Services. They said Inscan was the name given by Mr Simmons to the separate system Detection Services proposed to develop with City West Water, a government‑owned retail water business in Melbourne. The respondents denied there was any agreement between the parties for the joint development or joint use of the DPX system. They contended that Detection Services had no right to the DPX system and that they were within their rights to refuse to deliver it pending payment by Detection Services of “all costs incurred by Mr Pickering and Aqatar in developing the system, and an amount for the purchase of his intellectual property and any restraint on further activities by Mr Pickering or Aqatar, and compensation for the time and effort in development [of] the system”.
The respondents’ counterclaim pleaded two causes of action, breach of contract and estoppel. The contract claim was founded on the contention that in early 2010, while Mr Pickering was staying at Mr Simmons’ house in Australia, Mr Simmons agreed to purchase the DPX system from the respondents “at cost”. Based on this commitment, Mr Pickering claimed he constructed the prototype at a cost of approximately $180,000. The respondents alleged that in the course of further discussions between Mr Pickering and Mr Simmons over the period September 2010 to June 2011, it was agreed that the purchase price would be $257,170 plus GST. The respondents sought judgment for this amount against Detection Services.
High Court judgment
Woolford J rejected the respondents’ contention that the DPX and Inscan systems were separate systems being developed side by side — Mr Pickering’s system in New Zealand and the Inscan system by Detection Services in Australia.[2] The Judge accepted the basic thesis of the appellants’ claim, saying he had “no doubt there was a joint venture between the parties to design and build a leak detection system for Detection Services group”.[3] The joint venture was formed some time prior to December 2008.[4] The Judge found that each stood to gain.[5] The benefit for Mr Simmons’ interests was to exploit the commercial opportunity to use the system for leak detection in high pressure water mains in Australia and New Zealand.[6] The benefit for Mr Pickering was in being paid for his time and effort in developing the system and in licensing the computer technology in which he had intellectual property rights.[7] The computer technology could also be exploited by Mr Pickering in other contexts such as deep‑water surveys of ocean vents.[8]
[2]At [37].
[3]At [26].
[4]At [36].
[5]At [28].
[6]At [28].
[7]At [28].
[8]At [28].
The Judge found the other terms of the joint venture were:[9]
(a)The leak detection system would be jointly owned by the parties throughout the development process.
(b)Mr Pickering would retain intellectual property rights to the initial phase of development, being the computer software and interface.
(c)Mr Pickering would fully disclose all third-party costs incurred in developing the system, which would be paid for by Detection Services group.
(d)Mr Pickering would be entitled to reasonable recompense for his time and effort in developing the system.
(e)The completed system would be available for the exclusive use of Detection Services group.
[9]At [38].
The Judge was also satisfied that the parties reposed trust and confidence in one another and owed fiduciary obligations to each other in the context of this joint venture.[10]
[10]At [40].
The Judge accepted the appellants’ claim that the respondents breached their fiduciary duties by wrongly claiming sole ownership of the system[11] and refusing to disclose the costs they had incurred in developing it.[12] The Judge also found the respondents failed or refused to raise an invoice for the system.[13] Although not pleaded by either the appellants or the respondents, the dispositive finding was that both parties had an obligation to negotiate and settle the terms of the transfer of the system from Mr Pickering to Mr Simmons in good faith and both parties breached this duty.[14] For this reason, the Judge denied the appellants any relief for the respondents’ breaches of fiduciary duty. The Judge considered that, having breached their duty to negotiate and settle the transfer of the system in good faith, the appellants had not come to equity with “clean hands”.[15]
[11]At [53].
[12]At [50]–[52].
[13]At [50].
[14]At [48], [49], [58], [63], [69], [82] and [84].
[15]At [66]–[69].
The Judge’s analysis can be seen in the following passages of his judgment:
[48] The parties owed fiduciary obligations to each other. The key obligation was that of loyalty. This duty has several facets. The parties had to refrain from preferring their own interests. And in doing so, they had to act in good faith. In other words, they owed an obligation to subordinate self interest to joint interest. Specifically, to the extent the agreement between Mr Simmons and Mr Pickering did not specify the terms of the transfer of the system from Mr Pickering to Mr Simmons, I consider the parties had an obligation to negotiate and settle the terms in good faith. That is what joint interest demanded.
[49] I regret to say both men failed to negotiate with each other in good faith, as is evident from Mr Pickering’s e-mails over many months and the position adopted by Mr Simmons’ lawyer in his letter of 4 July 2011. Instead, they preferred their own interests. …
[50] Mr Pickering, although acknowledging he needed to invoice Detection Services Group for the equipment, failed or refused to raise an invoice. …
[51] … Mr Pickering’s failure to supply invoices when requested did not facilitate matters. …
[52] … Mr Pickering acknowledged he could have provided Mr Simmons with an itemised invoice of the costs he had incurred and that Mr Simmons had agreed to pay, but he was not going to. He has never done so. …
[53] Mr Pickering also wrongly claimed ownership of the whole system. ...
[57] Mr Pickering continued to assert his right to any or all intellectual property in the system right up until the breakdown of the relationship. …
[58] Notwithstanding that Mr Simmons undoubtedly felt frustrated at the approach taken by Mr Pickering to negotiations regarding the transfer of the system, he also failed to negotiate and settle the transfer when he instructed his lawyers to write to Mr Pickering by letter dated 4 July 2011. …
…
[60] The letter wrongfully claimed Detection Services group was the owner of the system. … In fact, the system was jointly owned as Mr Simmons had earlier acknowledged. …
…
[63] … Instead of acting in good faith to negotiate and settle the terms of the transfer of the system, they acted in their own interest. Both Mr Pickering and Mr Simmons breached their fiduciary obligation of loyalty to one another.
…
[65] To recapitulate, Mr Simmons’ claims against Mr Pickering for breach of fiduciary duty must fail because Mr Simmons was also in breach of his fiduciary duty to Mr Pickering. Both men are of strong and determined character. The conduct of the negotiations would ordinarily not lead to legal consequences. It was only because of the fallout from the relationship between the two men built up over many years that the conduct of the negotiations ended in this fashion.
[66] I, accordingly, decline to order any relief. He who comes into equity must come with clean hands. …
…
[69] In the present case, it is because of the manner in which both men, or their companies, pursued their self interest ahead of joint interest that the relationship between them deteriorated and the system ended in storage. And this matter in the courts. Mutual trust and commitment were crucial to the success of the venture. Each side failed in that regard. The relief sought is intertwined with the breaches by both parties.
(Footnote omitted).
The Judge did not consider the estoppel claim added anything to the claim for breach of fiduciary duty.[16]
[16]At [70]–[75].
Having found that the appellants were not entitled to relief because they had not come to equity with clean hands, the Judge did not determine the quantum of their claim but expressed the view it was significantly overstated.[17]
[17]At [86]–[91].
The Judge dismissed the respondents’ counterclaim for breach of contract because it was founded on the false premise that the entire system belonged to the respondents.[18] The Judge found there was no contract for the sale and purchase of the system.[19] Rather, there was a joint venture and Mr Pickering breached his “duty to negotiate and settle the transfer of the system to Mr Simmons”.[20] The Judge ruled that having paid for it, Mr Pickering was entitled to dispose of the system as he saw fit.[21]
Grounds of appeal
[18]At [80] and [84].
[19]At [84].
[20]At [84].
[21]At [92].
The appellants complain that the clean hands maxim was not pleaded by the respondents and does not apply. They seek an order remitting the proceeding back to the High Court to determine the quantum of damages payable by the respondents for their breach of fiduciary duty. The appellants also appeal against the subsequent costs judgment ordering them to pay the respondents scale costs uplifted by 25 per cent.[22]
Grounds of cross-appeal
[22]Detection Services Ltd v Pickering [2019] NZHC 638 [Costs judgment].
The respondents cross‑appeal arguing that their counterclaim for breach of contract should have succeeded. They contend the Judge was wrong to find that the leak detection system did not belong exclusively to the respondents. They seek judgment for the costs they incurred in developing it and an order remitting the question of costs on the counterclaim to the High Court for determination.
The respondents have also given notice to support the judgment on other grounds. They deny they were in breach of any duty or obligation owed to the appellants. In particular, they contend they had no obligation to raise an invoice, contrary to the Judge’s finding referred to at [19] above. Mr Pickering’s claim that he owned the entire system was irrelevant because it had no bearing on the negotiations. It was the appellants who required all intellectual property rights to be transferred before making payment for the system. The respondents contend that the appellants not only breached their obligations by sending the letter dated 4 July 2011 (referred to by the Judge at [49] of his judgment and quoted at [20] above) but also by requiring the sale of the whole system including all intellectual property before payment would be made for the physical componentry, by reserving rights to make further claims against the respondents, by failing to pay the costs incurred by the respondents in constructing the prototype and by asserting ownership of it following 4 July 2011.
The issues
The issues can be summarised as follows:
(a)Did the respondents breach their obligations to the appellants?
(b)Was the High Court correct to deny relief to the appellants by applying the clean hands maxim?
(c)Was the High Court correct to dismiss the respondents’ counterclaim for breach of contract?
(d)What, if any, relief should be given?
Did the respondents breach their obligations to the appellants?
Submissions on appeal
Mr Barker QC, for the respondents, commenced his submissions with his own summary of the relevant factual narrative leading to the dispute. During the period from January 2010 to May 2011, the respondents constructed what he describes as a “well‑developed prototype”. This did not form part of Mr Pickering’s work responsibilities.[23] Mr Pickering took out a mortgage over his home to meet the costs incurred. Mr Barker says it was accepted at trial that the appellants were required to reimburse Mr Pickering for these costs and that until payment was made, the prototype “belonged” to Mr Pickering. Mr Barker says the parties had been in dispute for a lengthy period over ownership of the intellectual property in the system, with Mr Pickering maintaining that he owned it all and Mr Simmons claiming Detection Services owned some, though not all, of the intellectual property. Matters came to a head around May or June 2011 because Mr Simmons wanted to take control of the prototype and the associated intellectual property and required Mr Pickering to transfer it to Detection Services. Mr Simmons told Mr Pickering that if he did not agree to this, he would be paid nothing and would be left to carry the costs personally. Mr Pickering agreed in principle to transfer the prototype and the intellectual property to Detection Services, but the terms of transfer were never agreed, most importantly the price.
[23]The Employment Relations Authority made this finding in the context of Mr Pickering’s claim that he was unjustifiably dismissed: see Pickering v Detection Services Ltd [2012] NZERA Auckland 260 at [68] and [69].
Mr Barker agrees with the Judge’s conclusion that the parties were obliged to negotiate these issues in good faith, but he contends the Judge was wrong to find that Mr Pickering breached this obligation. He submits the Judge’s criticisms of Mr Pickering were misplaced. Mr Pickering had no obligation to raise an invoice, contrary to the Judge’s finding. He could not do so because the parties had not agreed on a price. While Mr Barker accepts Mr Pickering may have been wrong in claiming ownership of the entire system, he submits this did not justify a finding that Mr Pickering acted in bad faith. He says this was simply an “ordinary commercial negotiation”.
Mr Corlett QC, for the appellants, maintains that Mr Pickering’s breach of his fiduciary obligations was clear cut. Mr Pickering refused to share basic pricing information with the appellants, asserted exclusive ownership and lacked transparency about cost components which made a finding of breach inevitable.
Analysis
Use of the term “joint venture” to describe the relationship between commercial parties can distract attention from a proper analysis of the legal nature of the relationship and the specific obligations owed. The label does not supply the answer. As the majority of the High Court of Australia (Mason, Brennan and Deane JJ) said in United Dominions Corp Ltd v Brian Pty Ltd:[24]
The term “joint venture” is not a technical one with a settled common law meaning… The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership. The borderline between what can properly be described as a “joint venture” and what should more properly be seen as no more than a simple contractual relationship may on occasion be blurred.
[24]United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 at 10.
The Supreme Court observed in Paper Reclaim Ltd v Aotearoa International Ltd that the joint venture label “may be apt to distract” and should be “applied with caution”.[25] The Court emphasised that when the parties have formed a contract the correct approach is first to decide exactly what they have agreed upon.[26] It is also important to bear in mind that even where the relationship is of a fiduciary kind, importing obligations of loyalty, the relevant duties at issue may have no fiduciary element.[27] This point was stressed by the Privy Council in Re Goldcorp Exchange.[28] Delivering the judgment of the Board, Lord Mustill stated:
But the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself.
[25]Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31].
[26]At [31].
[27]Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [72]. See also Bristol and West Building Society v Mothew [1998] Ch 1 (CA) at 16; and Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) at 680.
[28]Re Goldcorp Exchange Ltd (in rec) [1995] 1 AC 74 (PC) at 98.
The terms of the “joint venture” as found by the Judge, set out at [17] above, are not contested in this appeal. Three points may be noted. First, to the extent that these terms include positive obligations ((c) to (e)), they are not fiduciary in nature. They are all non-fiduciary obligations. Secondly, these terms were agreed between the parties and are best viewed as contractual in nature. Thirdly, the appellants’ claimed loss is based on the breach of the last of these obligations — contrary to the agreement the completed system was not made available for the appellants’ exclusive use.
Nevertheless, the Judge’s finding that the parties owed each other fiduciary duties in the context of the joint venture is not challenged. The respondents’ attempt to appropriate the system for themselves must accordingly be regarded as a breach of fiduciary duty of loyalty to the venture. So, for example, if they had profited from exploiting the system commercially to the exclusion of the appellants, they could be required to account strictly for any profits made.
We regard Mr Pickering’s so-called failure or refusal to raise an invoice (referred to by the Judge at [50] and quoted at [20] above) as a red herring. Detection Services did not plead that the respondents had an obligation to raise an invoice. Their complaint was that the respondents refused to disclose the third-party invoices evidencing the costs incurred in developing the system. In any case, we do not see how a failure to raise an invoice could properly be regarded as a breach of a fiduciary duty or that it could have caused the losses claimed by the appellants.
The Judge found the respondents were entitled to reimbursement for the third‑party costs they incurred in developing the system. However, this entitlement was contingent on the respondents making full disclosure of all such costs. The arrangement was an open book one. The respondents refused to provide this disclosure until late in the trial. This was no doubt because they regarded themselves as the owners of the entire system. This was their mindset throughout the negotiations, namely that the DPX system was theirs alone and separate from Inscan. DPX was available for purchase, but only if the appellants agreed to pay the price stipulated which bore no direct correlation to cost.
Whether or not the respondents were obliged to raise an invoice is beside the point. One can understand the respondents’ perspective that no invoice could be raised until the price was agreed. However, contrary to their understanding, their entitlement was only to be reimbursed for the costs incurred and reasonable recompense for the time spent. To obtain reimbursement, they needed to disclose the underlying invoices from the third-party suppliers. They failed or refused to do this which meant Detection Services’ payment obligation was not triggered. The Judge found that Detection Services would have made payment immediately if the costs had been disclosed:[29]
In that way, Mr Pickering is the author of his own misfortune. I have no doubt if Mr Pickering had provided Mr Simmons with a copy of what he has now produced to the Court, namely a schedule of costs totalling $160,415.45 together with the invoices evidencing those costs, Mr Simmons would have paid that sum immediately together with $40,000 which he had agreed to pay Mr Pickering for his time and effort in developing the system.
[29]High Court judgment, above n 1, at [83].
The failure to raise an invoice, or disclose the supplier invoices, did not cause the losses claimed by the appellants. The operative breach was the respondents’ refusal to ship the prototype to Detection Services in Australia so it could be exploited commercially, as the parties had always intended. The respondents’ ongoing retention of the system in New Zealand is what derailed the joint venture. The respondents had no right to claim exclusive ownership of the entire system and retain possession of it pending successful negotiation of an overall sale price.
While we accept Mr Barker’s submission that the respondents were entitled to negotiate in their own interests any unresolved terms of their future relationship with the appellants, particularly the terms governing the use of the intellectual property rights they retained in the computer software, they were not entitled to gain leverage in those negotiations by refusing delivery of the system until these issues were resolved. We also agree with Mr Barker that an incorrect assertion of a legal entitlement does not constitute bad faith, particularly if it is based on a genuine misapprehension of right. However, this must cut both ways and apply equally to the appellants. Self-evidently, if the parties had been able to reach agreement in mid‑2011 on the ownership of the system, and on the amount to be paid for the rights and interests associated with it, there would have been no loss and no claim. However, it is not easy to accept that the failure to reach agreement was caused by a breach of fiduciary duty by anyone. On the appellants’ version of events, the matters in dispute had already been agreed. On the respondents’ version of events, further agreement was necessary. The parties were unable to resolve this impasse, but they had no obligation to do so.
As noted, the Judge found that the completed system was to be available for the exclusive use of Detection Services. The retention of it in New Zealand was therefore contrary to the respondents’ obligations under the joint venture and frustrated its entire object. The parties could have, and should have, progressed their negotiations without impeding the furtherance of the object of the joint venture for their mutual benefit in the meantime.
It follows that we agree with the Judge’s finding that the respondents breached their obligations under the joint venture by claiming sole ownership of the system, refusing to disclose the third-party costs incurred in developing it, and refusing to deliver the completed system to the respondents for their exclusive use. These were all breaches of pleaded obligations that were found by the Judge to have been terms of the joint venture. These obligations were unquestionably breached. Whether these breaches of obligation are properly characterised as breaches of fiduciary duty is doubtful. Rather, we consider the better analysis is that they were breaches of non‑fiduciary obligations assumed under the joint venture and contractual in nature. Nevertheless, we are satisfied the attempt by the respondents to support the judgment on other grounds by asserting they did not breach their obligations, must fail.
Was the High Court correct to deny relief to the appellants by applying the clean hands maxim?
In applying the clean hands maxim to deny relief, the Judge was particularly concerned about the letter written by Mr Simmons’ solicitors to Mr Pickering on 4 July 2011. It is therefore necessary to set out the relevant parts of this letter. Before doing so, we summarise the correspondence between the parties that led to this letter being sent.
On 4 May 2011, Mr Pickering sent an email to Mr Simmons stating:
Aqatar has IP in the system, and is selling the system as it is to Detection Services Pty Limited. Once it is paid for in full and shipped, then Detection Services Pty can discuss anything they wish or are able to, and can modify the system as required.
To which Mr Simmons responded on 25 May 2011:
DS also has considerable IP timer (sic) invested in inSCAN as does Aqatar.
Mr Pickering replied later that day:
As I’ve said before, there is very little IP of Detection Services in the equipment. Whatever you believe you have you should clearly identify it and register it to Detection Services. Having said that, there is very little that can be protected — and classified as IP.
This led to the following response from Mr Simmons:
I suggest you list out what you (sic) IP you believe is “owned” by Aqatar, from your email I would suggest there is going to be some disagreement.
The Judge quoted from the next email sent by Mr Pickering to Mr Simmons on 26 May 2011 in which he claimed sole ownership of the system:
Regards below, Aqatar owns the whole lot at present so the list is short — everything. What you need to do is list what you believe Detection Services “owns” — if you consider it worth spending your time doing it.
There are no warranties or guarantees given with the product even when it is paid for and changes hands. Purely and simply because it is done at cost there is no margin to cover anything. I can add 30% margin to cover it if you like, just let me know.
In terms of payment, if we want to complete Melbourne in June then the platform needs to be paid for very very soon. It will take at least 2 weeks to ship it, probably to Sydney, then get it down to Melbourne. Advise what you want to do.
The Judge also quoted from Mr Simmons’ response on 26 May 2011:
Aqatar can certainly claim IP ownership to the software development but the majority of the system design concept was developed in Aus by myself and DC.[30]
Certainly Aqatar does own the equipment, this is only because you decided to go it alone against my requests in order to I believe retain the IP for yourself (this has certainly caused me concern and is directly against the spirit of the joint development).
We have next week to prove the system works and will be able to work in Melbourne.
It will (sic) not likely to take 2 weeks to get to Aus, if it works we need to ship it immediately to Aus, probably Melbourne to save time.
You have not raised any invoice nor have we agreed a transfer price, we agreed the cost would be open book.
What day are we do (sic) the first insertion?
[30]DC refers to David Caunter, an engineer employed by Detection Services in Australia.
The Judge also quoted Mr Pickering’s reply that day:
Nice try. You can tell anyone you like that you and DC have developed anything at all. You have not furnished any drawings, you have not done any of the sourcing and liaison, absolutely nothing. All of the electronics, the drive mechanism and the software have been developed completely independent of anything to do with yourself and DC. The rest is public domain.
The Judge observed that Mr Simmons would have “undoubtedly felt frustrated” by Mr Pickering’s approach. However, Mr Simmons also “failed to negotiate and settle the transfer when he instructed his lawyers to write to Mr Pickering by letter dated 4 July 2011”.[31] This is the letter primarily relied on by the Judge to disqualify the appellants from relief. We therefore set out the key parts of it:
[31]High Court judgment, above n 1, at [58].
…
A company search reveals you incorporated Aqatar in January 2010. You appear to have formulated a plan to appropriate the system from the beginning of your employment, and to have kept this quiet until such time as Detection Services urgently needed the system.
Mr Simmons found himself in an impossible situation. He could resist your claims, inflame the situation and jeopardise Detection Services’ ability to acquire the system, or he could negotiate pragmatically with you to acquire something that should have belonged to Detection Services. He elected to (sic) the second option in the hope of obtaining the system quickly, even at a cost of having to pay something. This appears to have been the wrong approach as it has not worked. Mr Simmons has therefore decided to enforce Detection Services’ legal rights.
…
In the circumstances, I am instructed to require the following:
1.That, by close of business on Friday, 8 July 2011 (or any later deadline to which Detection Services agrees), you provide Detection Services with possession of the ‘as built’ system and all related materials. These related materials include all hard and soft copies of plans and software (and any other physical or electronic record or manifestation of the intellectual property in the system).
2.That, by close of business on Wednesday, 6 July 2011, you confirm in writing that:
(a)You will comply with paragraph 1.
(b)Neither you nor Aqatar claim any ownership in the equipment or related materials (including the intellectual property).
(c) Neither you nor Aqatar will use the equipment or related materials (including the intellectual property), to supply it to anyone else.
Failure to comply with these requirements will result in the commencement of proceedings against you without further warning. The proceedings will include an application for an interim injunction and (sic) well as claims for permanent injunctions, monetary relief (including damages and/or an account of profits) and costs.
You should also treat the above requirements as an instruction from your employer. Failure to comply with the instructions will be treated as a disciplinary matter.
In addition, Detection Services is concerned with your action in appropriating the project, failing to disclose what you were doing and then asserting a claim when the system was needed. It reserves its rights as an employer to take action in this regard independently of whether the above requirements are met.
I suggest you take legal advice. Please also advise whether your lawyer in instructed to accept service of proceedings.
The Judge referred to the view subsequently taken by the Employment Relations Authority that if the negotiations had been “conducted in a more measured and considered manner the parties may well have been able to negotiate a sale and purchase of the development”.[32] As to this, the Judge observed:
[63] I agree. Instead of acting in good faith to negotiate and settle the terms of the transfer of the system, they acted in their own interest. Both Mr Pickering and Mr Simmons breached their fiduciary obligation of loyalty to one another.
Submissions on appeal
[32]Pickering v Detection Services Ltd, above n 23, at [93].
Mr Corlett submits that for the clean hands maxim to apply there must be a nexus between the equity sued for and any alleged impropriety on the part of Detection Services. He maintains that the 4 July 2011 letter was not relevant to the appellants’ claim which was based on prior breaches of fiduciary duty. Mr Corlett contends that the basis for refusing relief in reliance on the clean hands maxim is related to the idea that a claimant should not be allowed to take advantage of their own wrong. Here, he says there is no connection between the 4 July 2011 letter and the rights to the system which the appellants seek to enforce. The letter did not affect the validity of their claim for breach of fiduciary duty, nor did it enhance that claim. Accordingly, the appellants’ right to compensation for the respondents’ breaches of fiduciary duty was not an advantage derived from the appellants’ own wrong in sending the letter. In any event, Mr Corlett submits that a lack of clean hands is not an absolute bar. All relevant circumstances must be assessed. He contends that depriving the appellants of any recourse for the respondents’ breaches of fiduciary duty is not a proportionate response to the appellants’ overstatement of their legal interest in a letter sent by their solicitors.
Mr Barker supports the Judge’s analysis and conclusion on this issue. He says Mr Simmons was in breach of his obligation to negotiate in good faith. Mr Barker submits the High Court was correct to make this finding against Mr Simmons notwithstanding his submission on behalf of Mr Pickering that this was nothing more than an “ordinary commercial negotiation”. He attempts to justify this distinction by saying that Mr Simmons “largely accepted” that the purpose of the 4 July 2011 letter from his solicitors was to put pressure on Mr Pickering to yield to his demands. Mr Barker argues that Mr Simmons’ breaches of good faith in the negotiations “inevitably precluded” Detection Services from claiming any relief.
Analysis
The learned authors of Snell’s Equity describe the clean hands maxim — he who comes into equity must come with clean hands — in these terms:[33]
Again, the question is not whether any general moral culpability can be attributed to B, the party seeking relief, but is rather whether relief should be denied because there is a sufficiently close connection between B’s alleged misconduct and the relief sought. The maxim is therefore applicable only in relation to conduct of B which has “an immediate and necessary relation to the equity sued for”, and is not balanced by any mitigating factors.
(Footnotes omitted).
[33]John McGhee (ed) Snell’s Equity (33rd ed, Sweet & Maxwell, London, 2015) at 5–010.
The closeness of the required connection between the equitable remedy sought and the claimant’s misconduct for the maxim to apply was emphasised by Lord Scott in Grobbelaar v News Group Newspapers Ltd:[34]
... it is long-established practice that an equitable remedy should not be granted to an applicant who does not come before the court with ‘clean hands’. The grime on the hands must, of course, be sufficiently closely connected with the equitable remedy that is sought in order for an applicant to be denied a remedy to which he ordinarily would be entitled.
[34]Grobbelaar v News Group Newspapers Ltd [2002] UKHL 40, [2002] 1 WLR 3024 at [90]. See also Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] EWCA Civ 328, [2013] 1 CLC 596 at [158]–[172].
The respondents did not plead in their statement of defence that any equitable relief should be denied based on the operation of the clean hands principle. Nor was it pleaded that any damages should be reduced by reason of contributory fault on the appellants’ part. It is also worth noting that neither the appellants nor the respondents alleged in their pleadings that the other breached an obligation “in good faith to negotiate and settle the terms of the transfer of the system”.[35] Thus, there was no pleaded basis for the dispositive finding of breach by the appellants that was found by the Judge to justify the denial of any remedy for the respondents’ breach of obligation, applying the clean hands maxim or otherwise.[36]
[35]High Court judgment, above n 1, at [63].
[36]The point was, however, raised in closing submissions.
The Judge’s findings as to the terms of the joint venture are summarised at [16] and [17] above. There is no challenge to these findings and they are amply supported by the evidence. The system would be jointly owned throughout the development process, Mr Pickering would retain intellectual property rights to the computer software and interface, he would disclose all third-party costs incurred in developing the system and would be entitled to reimbursement, he would also be entitled to reasonable recompense for his time, and the completed system was to be available for the exclusive use of Detection Services. For the reasons given, we do not regard these as fiduciary duties, strictly so-called.
In any event, the respondents breached these obligations by asserting sole ownership, refusing to disclose the third-party invoices and refusing to make the system available for the exclusive use of Detection Services following completion. The critical failure, causative of the appellants’ loss, was the ongoing refusal to ship the system to Australia for the exclusive use of Detection Services. The respondents must accept sole responsibility for this failure. The demands they made as a condition of shipment were excessive, unjustifiable and based on their mistaken view that they owned the system outright. It is quite clear that if they had complied with their obligations, disclosed the third-party supplier costs and sought only reimbursement and reasonable recompense for Mr Pickering’s time, the respondents would have paid promptly. As noted, the Judge said so expressly.[37]
[37]High Court judgment, above n 1, at [83].
We see no room for the application of the clean hands principle in these circumstances. Assuming the claim is properly regarded as one for equitable compensation for breach of fiduciary duty, the appellants’ losses consequent on not being able to use the system were not in any way caused or contributed to by the letter sent by their solicitors on 4 July 2011. We accept Mr Corlett’s submission that this letter, while ill‑advised, had no sufficiently close connection to the relief sought by the appellants as could justify the denial of any relief for the respondents’ breach of fiduciary duty. Put another way, the letter had no bearing on the appellants’ proprietary rights to the system in terms of the joint venture. It had no consequence other than in the employment context.[38] The Judge found that the appellants would have paid the amount the respondents were entitled to had they given proper disclosure. They were thus found to be willing to meet their obligations and were entitled to delivery.
[38]The employment dispute was settled on the basis that the parties’ rights and remedies in respect of the leak detection system were unaffected.
The parties were free to negotiate a sale and purchase of the entire system, including the intellectual property in the computer software and interface, acting in their own interests. What they were not free to do was disregard the obligations they had already assumed under the joint venture. Mr Pickering chose not to fulfil those obligations. He could have shipped the system to Australia so that the object of the joint venture could be realised. This would not have prevented the parties from continuing with their negotiations, whether that be for an outright sale, a licensing agreement or some other arrangement. Mr Pickering maintained possession of the system in New Zealand. He alone must take responsibility for that decision which resulted in Detection Services not being able to exploit the system commercially and the consequent failure of the joint venture.
Was the High Court correct to dismiss the respondents’ counterclaim for breach of contract?
Submissions on cross-appeal
It will be recalled that the respondents pleaded an agreement between Detection Services and Aqatar that the former would pay Aqatar the sum of $257,170 plus GST for the DPX system. It was alleged that this agreement was reached in negotiations starting with a meeting between Mr Simmons and Mr Pickering in Sydney in early 2010 and subsequent correspondence during the period 29 September 2010 to 23 June 2011. At the hearing of the appeal, Mr Barker contended for a different contract, namely a concluded contract said to have been formed at the early 2010 meeting. The contract price was not $257,170 plus GST as alleged in the pleading, rather the price payable under the asserted contract was “at cost”.
Mr Barker points to Mr Simmons’ evidence acknowledging that Detection Services would meet the cost of developing the system, given that this was being done for its benefit:
Q.… Mr Pickering in his evidence, does say that sometime in early 2010 there was a meeting with yourself where it was confirmed that Detection Services, Solutions, one of them, would pay for the equipment if it’s built in New Zealand, do you recall that meeting and that discussion?
A.Well if that was — the systems being built in New Zealand of course we’d be paying for it, yes.
Q.So you don’t necessarily remember the meeting but you don’t deny the substance of what he says on it?
A.Well, if we’re building a system for Detection Services in New Zealand then of course Detection Services for Detection Solutions would be paying for it. I know I don’t understand why we wouldn’t.
Mr Barker also notes Mr Simmons’ claim he asked Mr Pickering to supply invoices so that he could reimburse him. Mr Barker argues this was a recognition of the obligation to reimburse the costs Mr Pickering incurred in building the system. Mr Barker says there was no challenge to the costs Mr Pickering incurred; the invoices were summarised in a table attached to Mr Pickering’s closing submissions presented in the High Court.
In the light of this evidence, Mr Barker submits the Judge should have given judgment for the respondents for the amount of these costs.
Mr Corlett resists Mr Barker’s contractual analysis. He observes that the respondents’ position on the contract has been a “moving target”. The pleaded counterclaim asserted a contract to pay $257,170 plus GST. That claim was abandoned in closing. He says the agreement now relied on was no more than an agreement to agree and is inconsistent with the subsequent negotiations in mid-2011 in which the respondents made clear through their solicitors they did not intend to be bound to any agreement until it was signed. No formal contract was ever executed.
Analysis
The Judge found there was an obligation to pay the costs incurred in developing the system, but this was contingent on provision of the third-party supplier invoices. That obligation can only have arisen from an agreement. We consider this finding was justified on the evidence and it is not directly challenged by either side in their respective notices of appeal and cross appeal. That Mr Pickering refused to provide these invoices until late in the trial is beyond argument. The information was not provided until closing submissions. The joint venture was terminated long before then. Assuming Mr Barker’s contractual analysis is correct, the termination of the joint venture agreement brought an end to the parties’ obligations to perform it further.[39]
[39]Contract and Commercial Law Act 2017, s 42(1).
We agree with the Judge that the pleaded contract was not established. Indeed, this was conceded by the respondents in closing submissions at the trial.[40] The problem with the claim based on the contract now asserted is that the payment obligation was never triggered before the agreement was terminated. As the Judge said, Mr Pickering is the author of his own misfortune. If he had supplied the underlying invoices, he would have been paid. He failed to do so before the contract terminated and his right to payment under the asserted contract was irretrievably lost. Further, the respondents cannot expect payment for a system they wrongly refused to deliver, and which is now of no value to the appellants they having been required to develop their own system following the non-delivery. That said, the amount that would have been payable to the respondents may need to be taken into account in the assessment of any damages.
[40]High Court judgment, above n 1, at [79].
For these reasons, the cross-appeal fails.
What, if any, relief should be given?
For the reasons given, the appeal must be allowed. Relief should not have been denied in application of the clean hands maxim. The Judge did not determine the quantum of damages caused by the breaches of the respondents’ obligations under the joint venture. Accordingly, the proceeding must be remitted to the High Court for this to occur.
Consequently, the Costs judgment must be set aside.[41] It follows that the appellants’ appeal against that judgment need not be considered. Costs in the High Court are to be fixed by that Court in the light of this judgment.
Result
[41]Costs judgment, above n 22.
The appeal is allowed.
The cross-appeal is dismissed.
The proceeding is remitted to the High Court to determine the quantum of damages payable to the appellants.
The Costs judgment is set aside. Costs in the High Court are to be assessed by that Court in the light of this judgment.
The respondents are to pay the appellants costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.
Solicitors:
Mackenzie Elvin Law, Tauranga for Appellants
LangtonHudsonButcher, Auckland for Respondents
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