McLean v Marshall
[2016] NZHC 1276
•14 June 2016
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2013-412-000188 [2016] NZHC 1276
BETWEEN DOUGLAS WAYNE FRASER MCLEAN
First Plaintiff
AND
D W F MCLEAN AND G H THORPE AS TRUSTEES OF THE MCLEAN FAMILY TRUST
Second Plaintiffs
AND
ROBERT RITCHIE MARSHALL Defendant
Hearing: 31 May 2016 Appearances:
L A Andersen for the Plaintiffs
Defendant in personJudgment:
14 June 2016
JUDGMENT OF NATION J
Background
[1] As summarised by the Court of Appeal:1
[1] 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.
[2] 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. 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.
1 McLean v Marshall [2015] NZCA 370 (footnotes omitted).
MCLEAN v MARSHALL [2016] NZHC 1276 [14 June 2016]
[3] The Judge rejected a separate claim for $103,033.08. 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 appeal[ed] against that aspect of the decision.
[4] 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.
[2] In its judgment of 13 August 2015, the Court of Appeal allowed the first plaintiff’s appeal. They set aside the High Court’s dismissal of Mr McLean’s claim for damages in the sum of $103,033.08. They remitted back to the High Court for rehearing “the question of the quantum of damages for the breach of the obligation to provide the source code at termination”.
The plaintiff ’s claim as pursued on the rehearing of the quantum of damages
issue
[3] At the rehearing, Mr McLean sought to pursue damages on two claims which
Mr Andersen said were relevant, namely:
(a) costs associated with the identifying and remedying of the malicious code - $7,961.54 (the Bridge Programme); and
(b) costs associated with identifying the issues with the undocumented source code supplied and restoring it to the position the programme was at termination of $103,033.08 (the source code).
The Bridge Programme
[4] In relation to (a), the evidence I heard established that in February 2012 Mr Marshall had developed the system to the point where the parties had “an executable copy” of the programme they were developing. That was, as I understood it, a programme which could be marketed to potential customers but which would require further refinement to be personalised for their particular use and business. This was much more difficult, if not impossible, without the source code. Mr Marshall did not provide the source code to Mr McLean until April 2013.
[5] As the sole director and through the way shares were owned, Mr McLean effectively owned and controlled the companies Infoscan Limited and Infoscan NZ Limited. Late in 2013, the name of Infoscan NZ Limited changed to Te Mata Software Limited. I refer to these companies individually and collectively as Infoscan.
[6] Through Infoscan, Mr McLean had programmers devise a way of accessing the executable copies in a form that they could continue to work on. Mr McLean said that Mr Klumpers was engaged through Infoscan. Infoscan paid him for his work but it was on the basis those costs would be met by Mr McLean. Mr McLean said his family trust funded the work by advancing the amount required to cover these and other costs to Infoscan. Ultimately, those costs were debited to Mr McLean as recorded in Mr McLean’s current account with the company as part of a debit of $123,956.16 made by way of journal entry against that account on 1 April
2014.
[7] The executable copies related to what was known as the Prosper Plus programme and a new venture especially developed for marketing to a Malaysian client known as the Prosper MY programme. Mr Klumper’s evidence was:
In August 2012 both programmes suddenly began disconnecting which caused problems for Infoscan, the Plaintiff and to RMC. I was tasked to overcome this unknown issue and after tracing the problem to a router program that connects the Prosper program to our system I successfully built a bridge program which took me a good month as I had no documentation of the protocol used between Prosper and the router program.
[8] This claim was particularised in a memorandum dated 27 September 2013.
[9] Gendall J did not expressly and separately deal with this particular part of the claim in his initial judgment. He did deal specifically with a claim for $12,961.54 for the work of three programmers, including Mr Klumpers and Mr Hook, “reviewing and discovering malicious software codes”. In his judgment, Gendall J
stated:2
2 McLean v Marshall [2014] NZHC 1624.
[44] Clearly in my view Mr Marshall when installing this malicious code into the system did so with a significant degree of computing skill in the knowledge that substantial work would be required from other experts to locate and remedy his addition, which was “locking” the system. I am satisfied here that the quantum of Mr McLean’s claim is established through his and Mr Hook’s evidence and as I note above this is effectively uncontested. A damages award for this $12,961.54 is to follow.
[10] There was no appeal against Gendall J’s refusal to award damages in respect
of a separate claim for $7,961.54. It was the judgment in respect of the claim for
$103,033.08 which the Court of Appeal set aside and remitted to the High Court for rehearing.
[11] Mr McLean’s claim for $7,961.54 was effectively dismissed with Gendall J’s initial judgment. It was not this claim which the Court of Appeal remitted back to the High Court for rehearing. The principle of res judicata thus applies. It is not open for me to reconsider this claim. It would also be wrong for me to do so, particularly when there can be no consideration of this particular claim in association with the claim for $12,961.54 on which Mr McLean was successful. In that regard, I did ask Mr Hook, the general manager of Infoscan, what the difference was between the work covered in the original claim for $12,961 for reviewing and discovering the malicious software code and the $7,961 described as being associated with identifying and remedying malicious code and software. Mr Hook said he was unable to say how they were different and that “it was a very similar thing”.
The source code
[12] This was the claim which the Court of Appeal remitted to the High Court for rehearing. It was particularised in the memorandum of 27 September 2013 as follows:
(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
[13] Between March 2007 and February 2012, pursuant to their joint venture agreement, Mr Marshall developed software programmes to facilitate automated
trading in foreign exchange. In February 2012, he provided to Mr McLean executable copies of the Prosper and Prosper MY programmes. Mr McLean was hopeful of selling the Prosper MY programme to a potential major client in Malaysia. As he was obligated to do under the joint venture agreement, Mr Marshall supplied to Mr McLean with those programmes a copy of the source code. Source code, as defined in the joint venture agreement, meant “the computer programme instructions written by Rob [Marshall] consisting of a set of instructions or statements in both machine readable and human readable media and the associated documentation”.
[14] Although I was not concerned with whether a breach of contract had been established, it seemed from some evidence that Mr Marshall gave that he was aggrieved that he had not received the financial support he had expected as he continued to work on the programme. On 12 March 2012, Mr Marshall gave three months’ notice of his intention to terminate the agreement as he was entitled to do. The agreement thus ended on 12 July 2012.
[15] It was a condition of the joint venture agreement “as the system is developed, Rob [Marshall] will progressively provide to Wayne [McLean] an updated executable registered copy of the system”. Under the agreements, the system meant the source code together with computer software that connected to an internet trading platform made available under licence by Commodity Market Systems of the USA, as that had been enhanced by the partnership for their particular trading requirements.
[16] Under the agreement, on termination, each partner was to “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”.
[17] Without the assistance of evidence from an expert witness, it was not easy for me to understand how the source code could change and develop as the programme developed. Mr Marshall said that much of the information or knowledge which was needed to understand the programme that had been developed was in his head. It
was not information which was inherently incorporated into the programme and it was never in written form. He said that, after he had given his notice of intention to terminate the agreement, he was so disillusioned with the whole situation, he had no interest or incentive to, in some way, document the knowledge which was personal to him. He had also done something with the programme which meant that, if he could not log into the programme, then automatically no one else would be able to either. After the joint venture agreement had come to an end in August 2012, Mr McLean did do what was required to prevent Mr Marshall having access to the server. With that, because of what Mr Marshall had done with the programme, neither could access the programme or the source code which had earlier been available. This was caused by the “malicious bug” Mr Marshall had installed into the system.
[18] Mr McLean needed to be able to access the source code as it should have been in June 2012 to be able to continue working on the programmes in the way they might be marketed to potential clients. Mr Marshall refused to supply the source code when asked and until April 2013. The source code he supplied then was not as it should have been in February 2012. In his evidence, Mr McLean said he had to engage Infoscan:
… to determine why the source code provided in April 2013 would not compile executable copies such as the one supplied to me by [Mr Marshall] in February 2012, when I and others at Infoscan had signed off on the programme software after rigorous testing.
[19] He said that Infoscan found the source code had been changed since February
2012 with source code missing.
[20] Mr McLean’s claim for $103,033.08 relates to the work for which he said he had to pay to overcome these problems. Gendall J held that Mr Marshall was in breach of contract by failing to supply the source code when the agreement terminated. He nevertheless held Mr McLean had failed to prove the remedial work, the cost of which Mr McLean was claiming, would have been unnecessary if Mr Marshall had supplied the source code as and when he should have.
[21] Gendall J’s judgment, that Mr Marshall’s refusal to furnish Mr McLean with a copy of the source code was a breach of clauses 4.1 and 4.2 of the agreement, remains.
[22] With regard to quantum, the claim is now to be determined as against the judgment of the Court of Appeal, in particular these paragraphs: 3
[13] Clauses 4.1 and 4.2 of the Agreement state:
4.1 As 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].
[14] 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. 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.
[15] 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.
[16] 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 …
[23] The Court of Appeal referred in summary form to the evidence that had been
adduced as to the alleged loss describing it as “sparse”. They then went on:4
[24] 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. Mr Hook’s
3 McLean v Marshall, above n 1 (footnotes omitted).
4 Above n 1 (footnotes omitted).
evidence did no more than to identify the value of the work undertaken. He did not explain how the figure was calculated.
[25] 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.
[26] 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.
[24] Mr McLean’s evidence before me was that he engaged Infoscan to carry out the remedial work. His son-in-law, Mr Hook, was the general manager of this company. Mr Hook and various programmers in Hawkes Bay, including Mr Klumpers, were engaged by Infoscan to do the work. They were to be paid by Infoscan but on the basis Infoscan would be reimbursed for those costs by Mr McLean because he was the owner of the software they were working on. Mr McLean said he had to make cash advances to Infoscan to pay for the work as it was done. He said the cash advances were made from his family trust. He said the
$103,033.08 was ultimately paid by him to Infoscan through his personal current account with the company being debited with a liability for that amount as part of a debit of $123,965.16 debited to his current account on 1 April 2014. He produced a record of journal entries recorded against his current account with the company under its changed name of Te Mata Software Limited, showing a debit against his account for $123,956.18.
[25] Mr Klumpers gave evidence. He had considerable experience in computing and had worked for Infoscan in developing the Prosper programmes from 2010 through to February 2012. He described how the programmes began disconnecting in August 2012 and how he had worked on dealing with this problem after that time. He ultimately identified that the disconnection was due to what he described as a malicious code added to a version of the router programme provided by Mr Marshall on 2 December 2011. He worked on getting the Prosper MY source code to compile
which was difficult, firstly, because the source code had not been available but also because, when it was provided by Mr McLean, it had been changed since February
2012. Mr Klumpers said he was assisted in this work by two programmers from a software consultancy company, WeaveIT. Mr Klumpers said they spent a lot of time attempting to document the source code with him. He said that none of the work he did over approximately six months related to further development or modification of the software.
[26] Mr Hook had begun working as general manager of Infoscan in late 2008. He said the source code Mr Marshall delivered in April 2013 was incomplete, undocumented and not self-documenting. It was also different to the February 2012 versions which had been signed off. Mr Hook said that, after May 2013 and a change in Infoscan’s business, he was free to concentrate all his efforts on getting the Prosper Plus software to compile executable document copies. He said the files were very large, comprising some 45,000 lines of code. At that time his salary was
$75,000 per year. He said that extra assistance was obtained from Alan Edwards, a former Infoscan employee whose speciality was with routers. He was employed on contract. He said two other programmers had been employed through a software consultancy company on a contract between Infoscan and the software consultancy company, WeaveIT. He said WeaveIT was paid an average of $3,000 per week for two full-time equivalent people.
[27] Mr Hook said in his evidence:
23. $115,994.62 was the value of work carried out over this time in relation to the documentation of the software, the restoration of the programme and the reviewing the discovering [sic] the malicious code.
(a) $38,722 was paid to Mr Edwards;
(b) $60,000 was paid to WeaveIT but only $17,763.08, being 30% of the WeaveIT payment, related to the documentation of the source code and the balance was for the further development of the source code which began as the source code documentation and then other matters as work progressed;
(c) The balance of $59,509.54 was my wages and Mr Klumpers’
wages at cost.
24. Mr McLean was charged $123,956.16 by Te Mata for the work done as follows:
(a) $12,961.54 for reviewing and discovering the malicious software code (awarded in the previous decision);
(b) $7,961.54 for building the bridge programme
(c) $103,033.08 for documenting the source code.
[28] He said the $123,956.16 had been charged to Mr McLean by way of debiting his current account with Te Mata on 1 April 2014.
[29] In his brief of evidence, Mr Marshall said he agreed with Gendall J’s original decision. He made a number of assertions as to why he should not be liable for the claim to costs, how Mr McLean had allegedly been in breach of the agreement and as to the limited information which he had to provide in relation to the source code.
[30] I do not need to deal with those assertions. Gendall J found Mr Marshall had been in breach of contract in failing to provide the source code when he should have. The Court of Appeal has held Mr McLean is entitled to recover the cost of engaging computer consultants to restore the source code to the form it should have been in on termination.
[31] Mr Marshall asserted that Mr McLean and the Infoscan companies which he used should all be treated as one and the same because Mr McLean was the sole director of Infoscan so that Mr McLean was in reality paying himself for the work he was doing.
[32] I cannot reject the claim on that basis. The evidence satisfies me that Infoscan, as a company, did incur costs in carrying out the remedial work. The work was done not by Mr McLean but by others who were paid for their work. The evidence satisfies me that those costs have been passed on to Mr McLean personally and have been recognised through the debit to his current account.
[33] Mr Marshall claimed that the problems which Mr McLean encountered as a result of not having the source code and the programme being disconnected could have been remedied much more simply and more effectively through reinstating Mr Marshall’s log-on record and deleting a few lines of code.
[34] I do not accept Mr McLean could or should have mitigated his loss in this way.
[35] Mr Marshall acknowledged that he had never told Mr McLean of what he had done with the router programme at the end of 2011 to cause it to disconnect if Mr Marshall could not log-on. He never told Mr McLean how reinstating his log-on code could have remedied the problems they were facing. Furthermore, while taking those steps might have enabled Mr McLean and his programmers to access a version of the source code, it would not have enabled them to access it in the form and with the information which Mr Marshall was contractually obliged to provide.
[36] Mr Marshall also referred to the fact that, on 29 March 2012, he had offered to provide the equivalent of one week’s full time training to a replacement programmer/developer as to the code and structure of the system and would be available for a period of three months to assist with questions from the replacement developer about the code and the structure.
[37] I do not accept that Mr McLean could or should have mitigated his loss in this way either.
[38] Under cross-examination, Mr Marshall acknowledged that it was a condition of his offer that Mr McLean pay to Mr Marshall $120,000 (under the joint venture agreement, neither party was entitled to any payment from the other). It was also clear from Mr Marshall’s evidence that at that time he was refusing to cooperate and withholding the source code because he wanted to strengthen his bargaining position in attempting to obtain some further payment for the work he had done.
[39] Mr Marshall also asked a number of questions of Mr McLean suggesting that the documentation which he had to provide with the source code, if any, was less than the documentation which Mr McLean had, through Infoscan, engaged other programmers to recreate. Mr Marshall suggested that the documentation he had to provide could be defined as “a narrative written by a human for a human to understand the system or a particular section of code”. Mr Marshall seemed to be suggesting that this sort of information was what was in his head, and the joint
venture agreement had never required him to record or produce that sort of documentation.
[40] The answer to this is that the agreement required Mr Marshall to provide Mr McLean with the source code. The source code was defined as meaning the computer programme instructions Mr Marshall was required to write “consisting of a set of instructions or statements in both machine readable and human readable media and the associated documentation”. His obligation has also been determined by the Court of Appeal in its judgment through their holding that Mr McLean was entitled to recover costs he had incurred with computer consultants in restoring the source code to the form in which it had been on termination. It is implicit in their judgment that Mr McLean is entitled to recover the costs he incurred in having the source code restored to the state it should have been in at termination.
[41] Mr McLean and Mr Klumpers gave evidence that they were advised that, to obtain the benefit of the source code as Mr McLean was entitled to, Infoscan needed to recreate the documentation to understand how the system worked and fitted together. Mr Hook also explained how they needed to have the source code so they could know how the programme was created so they could make changes to the programme. He said they had accepted the advice that the first thing they needed to document was the source code because they needed the instructions to know how the source code had been written to make the software work. He said the documentation they needed was an explanation of what a particular section of the code was doing so that another programmer could take over the code and be able to continue working on it.
[42] Under cross-examination, Mr Marshall also accepted that, for them to be able to understand the programme and to be able to work out differences that had occurred with it, they first had to document it. Mr Marshall agreed “that would have been the smart thing to do”. There was also evidence from the witnesses, including Mr Marshall, that the programme had been changed between February 2012 and April 2013 when Mr Marshall supplied the source code to Mr McLean, and that it was necessary to document the way the programme worked in order to identify the changes.
[43] I thus reject Mr Marshall’s contention that the work which Infoscan did in documenting the source code was unnecessary to remedy his breach of contract in not providing the source code.
[44] As a check as to the reasonableness of the costs that Mr McLean incurred, it is also of some relevance that, when the relationship between Mr McLean and Mr Marshall broke down in 2012, Mr McLean was asking for the source code. Mr Marshall offered to provide it and to assist with providing further information to enable Mr McLean to use the programme which they had developed through the joint venture but in return for a payment of $120,000. Mr Marshall said he would in fact have accepted less than this and it would have been commercially sensible for Mr McLean to make that sort of payment because, without that cooperation, it was going to cost Mr McLean “a fortune”. In that context, he referred to Mr McLean having incurred total costs of $250,000. Mr Marshall acknowledged that, if Mr McLean had been given the 2012 version of the software, it would have been worth “a considerable sum of money” and would have saved Mr McLean from “reinventing the wheel”.
Conclusion
[45] The evidence has thus satisfied me that Mr McLean has incurred costs of
$103,033.08 and is entitled to judgment for damages in that sum for Mr Marshall’s breach of the obligation to provide the source code at termination. Accordingly, there is judgment for the first plaintiff against the defendant in that sum together with interest on that sum under the Judicature Act 1908 calculated from the time proceedings were filed.
Costs
[46] My tentative view is that Mr McLean is entitled to costs in respect of this hearing but not steps earlier in the proceedings leading up to and including the first hearing before Gendall J, and that costs should be fixed for the hearing on a 2B basis. If there is no agreement over costs, counsel for Mr McLean is to file a memorandum within 21 days. Mr Marshall is to file his response within 14 days. Any reply from Mr McLean must be filed within a further seven days. The
memoranda are to be no longer than four pages. If required, I will deal with costs on the basis of those memoranda.
Solicitors:
Bramwell Grossman, Solicitors, Hastings
L A Andersen, Barrister, Dunedin.
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