McLean v Marshall
[2015] NZCA 370
•13 August 2015 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA442/2014 [2015] NZCA 370 |
| BETWEEN | DOUGLAS WAYNE FRASER MCLEAN |
| AND | ROBERT RITCHIE MARSHALL |
| Hearing: | 29 July 2015 |
Court: | White, Heath and Collins JJ |
Counsel: | L A Andersen for Appellant |
Judgment: | 13 August 2015 at 11.00 am |
JUDGMENT OF THE COURT
A The appeal is allowed. The High Court’s dismissal of the appellant’s claim for damages in the sum of $103,033.08 is set aside.
BThe question of the quantum of damages for the breach of the obligation to provide the source code at termination is remitted to the High Court for rehearing.
C No order as to costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by Heath J)
The appeal
On or about 12 March 2007, Mr McLean and Mr Marshall entered into a joint venture agreement (the Agreement) to develop a software programme to facilitate automated trading in foreign exchange. On 12 March 2012, Mr Marshall gave three months’ notice of an intention to terminate the Agreement.
Mr McLean sued Mr Marshall for $635,991.87 to recover losses that he claimed to have been suffered in consequence of the alleged breaches. In a judgment given on 11 July 2014, following a hearing in the High Court at Dunedin, Gendall J found that Mr Marshall had breached contractual obligations owed to Mr McLean.[1] He awarded damages in favour of Mr McLean, in the sums of $4997.25 (trading losses) and $12,961.54 (costs involved in reviewing and discovering the malicious software code); a total of $17,958.79.[2]
[1]McLean v Marshall [2014] NZHC 1624 at [35] and [38]–[39]. See [10]–[11] below.
[2]At [52].
The Judge rejected a separate claim for $103,033.08.[3] That was the cost to which Mr McLean says he was put as a result of Mr Marshall’s failure to provide the source code on termination of the Agreement. Mr McLean appeals against that aspect of the decision.
[3]At [45] and [46]; set out at [12] below.
Gendall J also rejected Mr McLean’s claim for damages of $515,000 based on loss of a chance. There is no appeal from that decision.
The joint venture
Messrs McLean and Marshall were the “founding members of the Pork Bellies Fun Club”, an organisation established to trade in foreign exchange. The Agreement recorded that the two men had been “hindered” in the administration of foreign exchange contracts into which they had entered, by “the lack of an adequate system, especially an automated one”. The Agreement evidences Mr McLean’s and Mr Marshall’s intention to “join as partners” to create “their own system”. Mr McLean and Mr Marshall were to share ownership of the system equally.[4]
[4]Clause 4.4.
Messrs McLean and Marshall intended to use a combination of software and services to develop a system that would use a “CMS API”.[5] That expression was defined in the Agreement as a “computer software that connects to an internet trading platform made available under license by Commodity Market Systems of the USA”.[6]
[5]Clause 3.1.
[6]Clause 1.1.
The system was to be designed primarily by Mr Marshall. He promised to provide “progressively” to Mr McLean “an updated executable registered copy” of it.[7] Further, he agreed to put a copy of the resulting source code in a secure location accessible by both of them.[8]
[7]Clause 4.1.
[8]Clause 4.2.
The source code was to remain confidential to the partners until what was called the “initial completion date”.[9] Mr McLean and Mr Marshall expected that the initial completion date would be 30 April 2007. That date was fixed by reference to the time at which they believed that the system would be ripe for demonstration to Commodity Market Systems.[10]
[9]Clause 4.3.
[10]Clause 1.2.
The Agreement contemplated the possibility of early termination by either partner. Clause 11.3 provided:
11.3Either partner may terminate this joint venture by giving three months written notice to the other partner.
When one partner terminates the joint venture by giving such written notice to the other, each partner shall retain his respective rights to the ownership of the System and shall be able separately from the other partner to use and sell the System in its current format at the time of termination, however:
11.3.1No payment shall be required by either partner to the other for their own personal use of the System.
11.3.2Revenue from any future sales of that version of the System shall continue to be apportioned as per clause 7.2.
11.3.3For any continuing benefit to the partner giving notice of any pre termination arrangement made in respect of clause 5.2, the partners must negotiate a variation in the apportionment of income, specified in clause 7.1, in recognition on any ongoing management and direct costs relating to those pre termination arrangements.
The High Court judgment
After reciting the evidence given by Mr McLean and Mr Marshall, Gendall J considered whether Mr McLean had established a contractual breach from which damages could flow. By the time that the Judge reserved his decision, Mr McLean’s claims had been refined to allege that Mr Marshall:
(a)did not pay his one-half share of the trading losses incurred in testing the software, in contravention of cl 7.3;
(b)did not provide the source code either during the currency of the agreement or upon its termination, in breach of cls 4.1 and 11.3; and
(c)inserted a “malicious bug” into the system so that the software ceased to function as designed, in breach of the parties’ obligation to act in good faith towards each other, as required by cl 8.1.
For present purposes, Gendall J found that Mr Marshall should have complied with “Mr McLean’s repeated requests to furnish him with a copy of the source code”. Mr Marshall’s failure to do so, the Judge found, constituted a breach of cls 4.1 and 4.2 of the Agreement.[11]
[11]McLean v Marshall, above n 1, at [38]. The Judge referred also to the more general good faith provision (cl 8) and the obligations assumed by each of the parties on termination (under cl 11). Clauses 4.1 and 4.2 are set out at [13] below.
Having found in favour of Mr McLean on liability, the Judge turned to questions of quantum. The question on appeal is whether Gendall J was right to find that Mr McLean was not entitled to recover $103,033.08 for restoration of the source code. In rejecting that claim, the Judge said:
[45] The sum of $103,033.08 is sought by Mr McLean under this head. It is claimed that it represents costs of identifying issues with the undocumented source code and carrying out endeavours to restore it to the position that the programme was at termination of the Agreement. In my view however, the quantum of this particular claim is not made out here. The reasons for this are:
(a)Mr Marshall strongly disputes this claim and there is no independent or documentary evidence to support it.
(b)The obligation incumbent upon Mr Marshall was to supply the source code. Though it was considerably belated, he eventually complied with this request. The difficulties associated with Mr McLean and his associates coming to grips with what has been categorised as a very complex piece of software following termination of the Agreement is simply a natural consequence of that divorce. Moreover, the fact that the code was not self-documenting is further evidence of the rapid evolution of the System and that it was never complete. In this respect it has been long recognised that a defendant is not liable in damages for failing to do something of which they are not bound.
(c)Applying the sine qua non test, I am not satisfied that Mr McLean would not in any event have had to expend a significant portion of what has been claimed had the source code been provided to him by Mr Marshall at the date of termination (i.e. in conformity with Mr Marshall’s contractual obligations). The loss must result from the breach. The losses here claimed are, in my view, inherent to a point in the provision of incomplete code and, quite plainly, there was no obligation upon Mr Marshall to complete the System before initiating his right to terminate. Both parties appear to accept that development of the System was not complete at the time of termination. It seems to me that a reasonable argument exists here that much of what Mr McLean claims for work undertaken under this head might well have been expended even if a proper source code had been provided earlier, and given also that this work was carried out in the main by his own company Infoscan.
[46] Given that Mr McLean’s bare assertions as to the quantum of costs incurred here are strongly contested by Mr Marshall and given also a manifest lack of any independent or documentary evidence as to quantum has been provided in this area, I am not inclined to make an award under this head. These costs as I see it are inextricably interwoven with the type of project that was at issue here and the manner in which it all unfolded. There is to be no damages award of the figure Mr McLean seeks under this head.
(footnotes omitted).
Analysis
Clauses 4.1 and 4.2 of the Agreement state:
4.1As the System is developed [Mr Marshall] will progressively provide to [Mr McLean] an updated executable registered copy of The System.
4.2[Mr Marshall] will place a copy of the resulting Source Code in an agreed secure location accessible to both he and [Mr McLean].
When, in May 2013, Mr Marshall supplied the source code to Mr McLean it was in a different form to that in which it existed at the effective date of termination, 12 June 2012.[12] Clause 1.4 of the Agreement provided that the source code to be written by Mr Marshall was expected to be “enhanced by [Mr McLean and Mr Marshall] to include their particular trading requirements” on a continuing basis. That is important because in the period between 12 June 2012 and May 2013, Mr Marshall made changes to the source code to suit his own requirements. Those changes would not necessarily have met Mr McLean’s own needs. Contractually, Mr McLean was entitled to call for a copy of the code in its termination date form.
[12]Being the date on which the termination notice took effect: see [1] above.
Because the code was not provided in that form, it was necessary for Mr McLean to engage a computer consultant to restore it to the form in which it had been on termination. He engaged Infoscan Ltd to undertake the work. That company is controlled by Mr McLean’s son-in-law, Mr Hook.
Mr McLean’s claim for $103,033.08 was linked to wasted costs that he contended had been incurred as a result of that work. However, the Judge appears to have considered the claim on a faulty premise. Instead of treating it as a claim for wasted costs in respect of the reverse engineering required, he regarded the losses as “inherent to a point in the provision of incomplete code … [when] there was no obligation upon Mr Marshall to complete” before initiating his right to terminate.[13]
[13]McLean v Marshall, above n 1, at [45](c).
As a result of that misapprehension, the Judge approached questions of causation on the basis that Mr McLean had engaged a consultant to “complete” the code, rather than to restore it to a prior state. That was an error.
Gendall J did not make any specific finding on whether the loss alleged had actually been incurred, or whether the amount claimed had been proved satisfactorily. Nor did he make any finding on whether any loss was caused by Mr Marshall’s breach of contract. That is not surprising given the mistaken premise on which the Judge was acting.
The evidence of the alleged loss was sparse. In the original Statement of Claim filed 8 March 2013 (on the basis of which the trial was conducted) an inquiry into damages was sought. That was superseded by a memorandum filed by counsel for Mr McLean, pursuant to a direction made by an Associate Judge, in which particulars of damages claimed were set out. The relevant part of the memorandum dated 2 November 2013 stated:
(e)Identifying issues with undocumented source code supplied and restoring it to the position that the programme was at termination
(i) Costs incurred to date $33,344.36
(ii) Anticipated costs to complete $69,688.72
[total: $103,033.08]
Particulars
[Mr] Hook determined that Mr Marshall had worked in the individual programmes after termination in order to connect to potential clients such as Squared Financial without the First Plaintiff’s knowledge.
The work that has been carried out was to learn the undocumented code and modify the programme to work as it did when the contract was terminated.
The cost for the two months work that has been carried out for July and August is:
(a) Mark Hook $10,500.00
(b) Bart Klumpers $ 6,923.08
(c) Alan Edwards $10,000.00
(d) Robert Vandermeer $ 2,960.64
(e) Chris Brokken $ 2,960.54
[total: $33,344.36]
Infoscan NZ Ltd has estimated four months work to ensure the software was running as it was at the time of termination using the four [sic] people referred to above. It is forecast the cost to be as follows:
(a) Mark Hook $ 24,000.00
(b) Bart Klumpers $ 13,848.16
(c) Alan Edwards $ 20,000.00
(d) Robert Vandermeer $ 5,921.28
(e) Chris Brokken $ 59,021.28
[total: $122,790.72]
The costs are payable by the First Plaintiff to Infoscan NZ Ltd.
(totals added).
Mr McLean’s evidence-in-chief went little further than confirming the particulars of loss set out in counsel’s memorandum. In his brief of evidence, he referred to a sum of $103,033.08, in connection with “identifying issues with undocumented source code supplied and restoring it to the position that the programme was at termination”. No invoice for the services was produced. No evidence of payment was given.
The work that led to that sum being incurred was described by Mr Hook. In his brief of evidence, not challenged in cross-examination, Mr Hook deposed:
6. Work identifying changes to the Prosper Software
6.1Infoscan identified the issues with the undocumented source code supplied which had been modified from the version that was signed off in February 2012. The programmes had been completed in February 2012 and signed off so it was necessary to identify and remedy any changes made after that date.
6.2This work was necessary as I discovered from the source code provided in April 2013 that Mr Marshall had worked on the individual programmes after termination in order to connect to potential clients such as Squared Financial and had modified the software and restricted its general use. It was necessary to learn the undocumented code and modify the programme to enable it to work as it did when the contract was terminated.
6.3There were 45,000 lines of code and only Mr Marshall knew how it had been constructed. I would have known if he had provided the documentation to explain the source code but his failure to do so meant it was necessary to learn the undocumented code in order to restore it to the position that the programme was in February 2012.
6.4The work required to identify and remedy the changes to the software was to the value of $103,033.08. The work was all carried out under my supervision by myself, Bart Klumpers, Alan Edwards, Robert Vandermeer and Chris Brokken.
During the course of Mr Marshall’s cross-examination of Mr McLean, the Judge asked a series of questions about the claim for $103,033.08. The following exchange occurred:
THE COURT:
Q. Did you employ computer experts to try?
A. Yes, indeed we have, Sir, at considerable expense.
Q. How much?
A. Ah, it’s in our, it’s in our claim.
Q. Is this the $130,000?
A. It’s over 100,000, yes, correct.
Q. So you spent $103,000, with your own or other computer experts –
A. Yes.
Q. - to try and make the source code work –
A. Correct.
Q. - for you?
A. That’s right.
Q. To put it blunt language.
A. Thank you.
Q. And what was the outcome?
A.It’s, um, still unstable but it’s getting to the point that we’re, we’ve got some confidence in it.
Q.And it’s your evidence that you were required to do that because Mr Marshall had not provided you with sufficient information to enable you to use the source code data otherwise?
A.Correct.
(emphasis added).
An exchange between the Judge and Mr Marshall, immediately after Mr McLean had answered the Judge’s questions, suggests that Mr Marshall was confused about whether (or, at least, the extent to which) he could cross-examine Mr McLean on this topic.
While we are satisfied that costs of the type that Mr McLean says were incurred are recoverable for Mr Marshall’s breach of cl 4.1, there are deficiencies in the evidence adduced by Mr McLean to prove the amount claimed. Mr McLean took the view that the quantum of the claim was not in dispute. In the absence of adequate evidence about commitment and payment, it might have been open for the Judge to find that Mr McLean had failed to prove the loss. The highest that Mr McLean can put his case is in his answers to Gendall J in which he spoke (in the past tense) of incurring “considerable expense”, and having “spent” the amount in issue.[14] Mr Hook’s evidence did no more than to identify the value of the work undertaken.[15] He did not explain how the figure was calculated.
[14]See the emphasised portions of the exchange between Gendall J and Mr McLean set out at [22] above.
[15]See above at [21].
In our view, it would be unfair to make a finding on appeal that Mr McLean had failed to prove his loss. We say that because, having regard to the way in which Mr Marshall tested the evidence, Mr McLean might genuinely have believed quantum was not in issue. But, similarly, we think it would be unfair to make a finding that Mr Marshall is obliged to pay the sum claimed. Mr Marshall appears to have been under a misapprehension about the need for him to challenge the amount that Mr McLean was seeking. Of course, the onus of proving the amount claimed and that the costs had been incurred reasonably rested on Mr McLean.
In our view, neither party focussed sufficiently on this issue. In fairness to both parties, the question whether the amount sought is recoverable should be retried on proper evidence. Evidence would need to be directed to a breach of the type to which we have referred, as opposed to the way in which Gendall J approached the claim.
In our view, the right course is to allow the appeal but to remit the question of damages on this topic to the High Court for determination. Case management in the High Court will enable the parties to adduce any additional evidence on the point. Once such evidence is available, any relevant challenges that Mr Marshall may have can be identified and pursued. While it is unfortunate that a further hearing will be required, that is better than potentially providing an unjust response, from the perspective of either Mr McLean or Mr Marshall.
Result
For those reasons, the appeal is allowed. The High Court’s dismissal of the appellant’s claim for damages in the sum of $103,033.08 is set aside. The question of the quantum of damages for the breach of the obligation to provide the source code at termination is remitted to the High Court for rehearing.
Neither party can be regarded as having been fully successful on appeal. No order as to costs is made.
Solicitors:
Bramwell Grossman, Hastings for Appellant
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