McLean v Marshall
[2014] NZHC 1624
•11 July 2014
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2013-412-000188 [2014] NZHC 1624
BETWEEN DWF MCLEAN
First Plaintiff
DWF MCLEAN AND G H THORP AS TRUSTEES OF THE MCLEAN FAMILY TRUST
Second Plaintiffs
AND
R R MARSHALL Defendant
Hearing: 3 and 4 June 2014 Appearances:
L A Andersen for Plaintiff
Defendant Appears in PersonJudgment:
11 July 2014
JUDGMENT OF GENDALL J
MCLEAN v MARSHALL [2014] NZHC 1624 [11 July 2014]
Table of Contents
Para No
Introduction [1] The claim [7] The evidence for Mr McLean [11] Mr McLean [11] Mark Hook [21] The evidence for Mr Marshall [22] Mr Marshall [22] Pauline Steedman [24] Annette Marshall [25] The joint venture element [26] Analysis of the claimed breaches [30] Preliminary [30] Trading losses [32] Failing to provide source code [36] The so-called malicious “bug”/code [39] Analysis of quantum [40] Preliminary [40] Trading losses [41] Malicious code [42] Restoration of code [45] Loss of chance [47] Result [51] Costs [54]
Introduction
[1] On or around 12 March 2007 the first plaintiff (Mr McLean) and the defendant (Mr Marshall) entered into a joint venture agreement (the Agreement) which concerned the development of a software system which would enable automated trading of foreign exchange (the System).
[2] On 12 March 2012 Mr Marshall gave three months notice under the Agreement to terminate the Agreement as from 12 June 2012 (the Termination Date). Mr Marshall and in the pleadings the second plaintiff (the Trust) say that at the Termination Date there was “significant international interest in the purchase of the system and/or the right to use the system under license.”
[3] Mr McLean alleges that Mr Marshall has breached the terms of the
Agreement by:
(a) Failing to pay his one-half share of trading losses incurred in testing the software.
(b)Failing to provide Mr McLean with the source code for the System at regular intervals during and on termination in contravention of the Agreement.
(c) Taking steps to prevent Mr Marshall from using the software by
‘locking’ the System via the insertion of what Mr Marshall terms a
‘malicious bug’.
[4] As a result of this, Mr McLean alleges that he has suffered loss:
(a) from an inability to personally trade any version of the System.
(b)through an inability to demonstrate any version of the System to various interested parties.
(c) from being unable to commercially exploit the System following the termination by Mr Marshall because of the refusal to provide the source codes.
(d)as a result of being unable to amend the source code to “take into account the changing connectivity requirements of the parties that power the System, rendering it useless.”
[5] As a result, Mr McLean claims to have suffered loss totalling $635,991.87. This comprises $4,997.25 in unpaid trading losses, $12,961.54 being the cost of reviewing and discovering the malicious software, $103,033.08 being the cost of identifying issues with the undocumented source code and restoring it to its position as at termination, and loss of chance claims involving potential lost opportunity to market the system, lost IP sales and lost trading opportunities totalling $515,000.
[6] As a further and alternate claim, the Trust alleged that Mr Marshall owed it
$17,896.90 as advances made to Mr Marshall by Advanced Trading Platforms Ltd (ATP) that have not been repaid together with Judicature Act 1908 interest. This claim was subsequently withdrawn by Mr McLean and the Trust following settlement being reached between all parties. The matter is therefore concluded and is not addressed in this judgment.
The claim
The Agreement
[7] The starting point in assessing any contractual claim must be the constituting document itself, here the Agreement. For convenience I replicate below the relevant aspects of the Agreement:
1.1“CMS API” means computer software that connects to an internet trading platform made available under license by Commodity Market Systems of the USA.
…
1.3“Source Code” means the computer program instructions written by Rob consisting of a set of instructions or statements in both machine readable and human readable media and the associated documentation.
1.4“The System” means the Source Code, together with in the initial instance the CMS API, which has been and will continue to be enhanced by the Partners to include their particular trading requirements.
…
4 Resulting Source Code
4.1As the System is developed Rob [Mr Marshall] will progressively provide to Wayne [Mr McLean] an updated executable registered copy of The System.
4.2Rob will place a copy of the resulting Source Code in an agreed secure location accessible to both he and Wayne.
4.3Pre Initial Completion date Rob will maintain the issuing of executable copies of The System to ensure that only he and Wayne receive a copy.
4.4The Partners will equally share in any ownership of The System and its associated intellectual property, excluding that which is licensed from CMS or any other provider of trading platform APIs.
5 Use of the System Post Initial Completion Date
5.1The Partners agree that each may use their individual copy of the System for their personal trading purposes as they so decide, but they shall not be entitled to sell, license or otherwise make use of their respective copy of The System unless by mutual agreement to do so.
5.2 It is the Partners’ intention to:
(i) continue to work together to ensure that the System meets their on-going trading requirements and to enhance The System, and;
(ii) jointly deposit funds with CMS and trade foreign exchange on an agreed basis using The System, and;
(iii) use as much of The System as possible and develop a trading system that will operate automatically on various trading platforms, especially those of entities that have a very high credit rating for deposits, and;
(iv) jointly enter into agreements with third parties to expand the use of the System, such as a Managed Fund, particularly is association with Infoscan Limited, Mr Peter Bull and possibly Financial Markets Trading Limited.
6 Responsibilities of the Partners Post Initial Completion Date
6.1Rob will maintain the issuing of executable copies of The System to the Partners and to any third parties and he will inform Wayne as to how to issue executable copies.
6.2Rob will continue to write the Source Code for any further enhancements of The System.
6.3Wayne will promote The System to his financial market contacts as he and Rob so agree.
6.4Wayne will study and recommend where The System should best be located from a taxation point of view.
7 Revenue, Costs and Expenses
7.1 The Partners shall equally share in any income received under clause
5.2 and for example from royalties should the System be licensed to third parties.
7.2Should the Partners agree to sell an executable copy of the System or sell the System outright then they will share any revenue on the basis of Rob receiving sixty percent of any revenue and Wayne the balance.
7.3The Partners shall equally bear the costs of operating the System, purchasing hardware to do so, etc.
7.4The Partners shall bear their own legal and accounting costs and expenses of an incidental to this Agreement.
8 Co-operation in good faith
8.1 The Partners agree with each other that;
(i) at all times they shall actively co-operate together in the profitable use and expansion of The System, and that they shall at all times act towards each other faithfully and honestly.
(ii) they shall further document their business arrangement by way of a more extensive agreement if considered necessary due to the use made of The System.
9 Mutual Non-compete
9.1The Partners hereby covenant that they will not, save for any activity that is currently carried out by either of them, set up a structure that in any way competes with or mirrors the activities of this agreement.
…
11 Termination
…
11.2 Any sales of the System including royalties (if any) from sales shall continue to be shared by the Partners in the proportions set out in clause 7.0.
11.3 Either 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
11.3.1 No payment shall be required by either partner to the other for their own personal use of the System.
11.3.2 Revenue from any future sales of that version of the System shall continue to be apportioned as per clause 7.2.
11.3.3 For any continuing benefit to the partner giving notice of any pre termination agreement 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 of any ongoing management and direct costs relating to those pre termination agreements.
Alleged breaches of the Agreement
[8] In submissions before me Mr Andersen, counsel for Mr McLean, fleshed out the alleged breaches of the Agreement on the part of Mr Marshall. These were that Mr Marshall:
(a) Did not pay his half share of the trading losses incurred in testing the software, in contravention of clause 7.3.
(b)Did not provide the source code either during the currency of the Agreement or upon its termination, in contravention of clauses 4.1 and 11.3.
(c) Inserted a “malicious bug” into the System so that the software ceased to function as designed in breach of the good faith co-operation requirement in clause 8.1 and the general tenor of the Agreement.
Overview of the issues
[9] Though this claim as it has developed has seemed to take on an element of complexity, in my view the issues ultimately boil down to two simple questions:
(a) Has there been a breach of the Agreement by Mr Marshall? (b) If so, what loss genuinely flows from the breach or breaches?
[10] I now turn to consider the evidence which was before me.
The evidence for Mr McLean
Mr McLean
[11] Mr McLean commences his background narrative with the explanation that, because of Mr Marshall’s considerable software writing skills it was agreed that the two men would form the joint venture to develop a downloadable automated foreign exchange trading system.
[12] Mr McLean then states that part of Mr Marshall’s relevant obligations in
developing the System under the Agreement were as follows:
(a) He was obliged to progressively supply an updated and executable registered copy of the System known as “the Prosper System” (clause
4.1);
(b)He was required to place a secure copy of the resulting source code for the System in an agreed secure location accessible to both parties (clause 4.2).
[13] Four versions of the System were apparently developed. These were: (i) the “Prosper Equities” version, solely concerned with equities; (ii) the “Prosper” version for foreign exchange and futures; (iii) the “Prosper Plus” version which was primarily for foreign exchange; and (iv) the “Prosper_MY” version which was developed for the Malaysian market. Mr McLean notes that the “Prosper Equities” version was completed in January 2009 and sold to Apple Australia, with Mr Marshall receiving the total proceeds of sale to recognise his contribution.
[14] The “Prosper” version it seems was provided by Mr Marshall to Mr McLean in January 2010. Mr McLean then deposes that it had been necessary for the System to be tested and that this was done between October 2009 and June 2010. This testing resulted in losses of $NZ19,944, which are purported to be summarised from invoices from trades through a Singaporean company called “Phillip Futures PTE
Ltd”. However, it does seem that the amount in the summary is a loss of $13,961.15 (unknown currency) which has then had, what seems to be, an arbitrary “average exchange rate” applied, which results in the claimed loss of $19,944.50NZD. Mr Murray before me however, did not appear to take any real issue with this quantum calculation aspect.
[15] At this point I feel compelled to state that Mr McLean’s narrative on all this is not altogether clear. For example, if the source code for Prosper was not provided until January 2010, I struggle to appreciate how it was being tested some three months earlier in October 2009. One answer to this could be that the testing was done on an incomplete version or that it was done on the Prosper Equities version. However, as I will discuss below, an issue does arise as to whether the Agreement was intended to encompass the development of four discrete pieces of software, or “systems”.
[16] Mr McLean continues his evidence by deposing that the difficulties between he and Mr Marshall originated in about February 2011 when:
Mr McLean alleges Mr Marshall failed to supply the source code pertaining to the data routing side of the software or any documentation:
(a) On 4 February 2011, after staff at Infoscan raised some questions with Mr Marshall as to how to compile the Prosper source code into an executable copy which he did not answer satisfactorily ,meaning [Mr McLean] did not obtain the benefit of the source code;
(b) On 21 April 2011 I again requested that new source code be available for Prosper, and suggested that our mutual friend Ken Lawson who introduced us, assist with this and the outstanding January code issue;
(c) On 22 April 2011 Mr Marshall said that I had “once again raised the perennial issue of posting the source code” and claimed “There have been NO changes to Prosper since it was benchmarked and “the source code that is on the ftp site and the compiled program match”. That was a reference to the source code supplied in January 2011 even though he had been told that Infoscan had not been able to use the source code provided;
(d) On 24 November 2011 I supplied Mr Marshall with a spreadsheet with all work items listed, the highest priority being to update the source code. This resulted in a detailed response from Mr Marshall and in the course of my reply to that response I again requested the source code;
(e) On 16 December 2011 I sought Mr Marshall’s confirmation that he would post up all source code the following week on completion of the larger “Raja Bursa Roadshow” version testing (Prosper_MY);
(f) On 20 December 2011 I had a conversation with Mr Marshall whereby he verbally agreed to provide the source code when the latest versions of Prosper Plus and Prosper_MY were completed.
[17] As at 14 February 2012 it was Mr McLean’s understanding that Prosper Plus and Prosper_MY were completed, which was the apparent impetus for him sending multiple emails to Mr Marshall between 18 February 2012 and 11 March 2012 enquiring as to the whereabouts of Mr McLean’s copy of the source code. Mr McLean says that Mr Marshall, in response to his final email dated 11 March
2012, simply gave three months notice to terminate the agreement on 12 March
2012. As I have noted above, Mr McLean has suggested that at this time there was considerable international interest from parties interested in purchasing or licensing the System, but I need to say at this point that there was little real evidence before me and certainly no independent evidence that this was in fact the case.
[18] Mr McLean then contends that Mr Marshall’s failure to provide the source code, both during the currency of the Agreement and at the date of termination, meant that Mr McLean was unable to trade, market or sell the Prosper Plus or Prosper_MY versions of the software. This was because the source code provided earlier in January 2011 simply did not work.
[19] Mr McLean continues by stating that the day after he served on Mr Marshall his information capsule in related District Court injunction proceedings, which also coincided with the removal of Mr Marshall’s login rights with the computer system run by Mr McLean’s company Infoscan, all of Mr McLean’s versions of Prosper ceased working. Mr McLean alleges that this cessation of function resulted from the insertion by Mr Marshall of a “Trojan horse” or malicious bug into the System. Mr McLean alleges this was done prior to the actual date of termination.
[20] It is as a result of all these issues that Mr McLean alleges he suffered loss until his company Infoscan was able to have the version of the Prosper system that had been provided to him, following the issuing of this proceeding in April 2013, properly working. It was only then that it seems Mr Marshall capitulated and gave
to Mr McLean an updated copy of the source code for the System. But, as a result of what he said were deficiencies in the April 2013 version, Mr McLean maintains that significant work was still required to be undertaken to get the software into working order and that, because of all these difficulties, real opportunities were lost.
Mark Hook
[21] Mark Hook (Mr Hook) is the General Manager of Infoscan and the son-in- law of Mr McLean. He deposes in his evidence to four main points:
(a) Following the router connection problem in August 2012, Infoscan had to develop and implement a bridge programme as a workaround. This was not a complete fix and cost $7,961.54 to remedy.
(b)On 22 April 2013 Mr Hook went to the solicitors firm of Bramwell Grossman to begin accessing the source code which had finally been provided by Mr Marshall but not until April 2013. This was found to be non self-documenting despite prior assertions to the contrary by Mr Marshall. Additionally, it is said this source code appeared to be incomplete. There were also issues with the Prosper_MY version, but these were resolved, at least partially, following Mr Marshall’s subsequent assistance.
(c) The router connection problem persisted according to Mr McLean and did not work until Infoscan identified and remedied what is described as the malicious code. The code was identified by a comparison between the router file supplied by Mr Marshall on 2 May 2013, and the decompiling of the last file that was functioning at the time of termination. The malicious code is said to stop all versions of the system from operating 1,000 seconds following any attempts that are made to remove Mr Marshall’s user name and associated mobile number from the system. The cost of remedying this according to Mr Hook was claimed to be $12,961.54.
(d)In particular, following the date in March 2012 when Mr Marshall gave notice terminating the Agreement and the joint venture, Infoscan (by default) undertook the task of endeavouring to identify changes made to the source code. This work was necessary as it seems clear that Mr Marshall was refusing at that time to provide the updated source code. The work undertaken by Infoscan and others was said to be detailed and intensive (although it appears that it was unsuccessful). It is claimed that this work cost Mr McLean through Infoscan $103,033.08.
The evidence for Mr Marshall
Mr Marshall
[22] At times Mr Marshall’s narrative evidence here is prolix and confusing to say the least. Much of it too is strongly disputed by Mr Marshall and Mr Hook. But, for the sake of brevity I elucidate below what I see as the more pertinent points and claims made by Mr Marshall arising from that evidence:
(a) A registered executable copy of the System has never been provided as Mr Marshall says no executable version has ever been completed. This means, he explained, that it has never undergone any registration process.
(b)Throughout development, according to Mr Marshall, the source code changed rapidly and radically. As a result he suggests it was agreed early on that depositing source code was only required on the completion of major milestones.
(c) Notwithstanding the above two points, copies of the software were deposited twice with Mr Marshall’s lawyer, Neville Martin, on a flash drive, and later on encrypted files which were sent to an ftp site on one of Infoscan’s servers as often as Mr Marshall said he thought was necessary. More recently files were also sent to a drop-box account. The newest files over-wrote older ones as Mr Marshall says he wanted
to ensure only good versions existed, and not ones with experimental code. The flash drives were uplifted from his lawyer’s office in 2012 as Mr Marshall considered them out of date.
(d)Although not specified in the Agreement, Mr Marshall claims that Mr McLean agreed to financially support him if he left his previous employment at AgResearch and commenced development work on the System full-time. Mr Marshall states that this support was at times minimal and at other times non-existent.
(e) In terms of the development of various Prosper iterations, Mr Marshall deposed as follows:
(i)No trading version of the Prosper suite has ever been completed. The version provided at the beginning of 2011 was the closest to completion in terms of functionality, but required a major recoding to become stable and reliable.
(ii)Prosper Equities was a simple program that was unrelated to the objectives of the Agreement. This was abandoned by a party from Australia who had shown some interest after only a few months.
(iii) Prosper, Mr Marshall says was “parked” at the beginning of
2011.
(iv)Prosper Plus was an incomplete and ‘cut-down’ version of Prosper which was rebranded for Infoscan and only had FOREX capabilities.
(v)Prosper_MY was a hastily constructed and incomplete cut- down version for Malaysia, which Mr Marshall maintains had no trading capability at all. It was branded for Rapid Merchant Capital Berhad in Malaysia and Mr Marshall rather
confusingly says that this software simply talked to the “host
running at Infoscan”.
(vi)No system documentation has ever been done, and Mr Marshall contends that none was ever promised by him, due to what he says was the rapidly changing nature of the project and time constraints.
(f) Insofar as the trading losses claimed by Mr McLean are concerned, Mr Marshall asserts that he is not liable for any contribution. He claims that the live testing was undertaken by Mr McLean at a time when the software was not stable, against Mr Marshall’s recommendation. Mr Marshall submits that the “demo environment” which simulated live trading was the appropriate place to test the software before it was stable with all bugs in the system fixed.
(g)In terms of the opportunities that Mr McLean claims existed, such as with Phillips Capital of Singapore and Capital Markets of Wellington, Mr Marshall maintains the system in reality was still in development phase and these were not ever going to transpire into a commercial reality.
(h)Mr Marshall then explains the impetus for him giving a termination notice. He says this was because he felt overwhelmed toward the end of 2011 and, in particular:
(i)He was experiencing significant financial and psychological stress with a real lack of any foreseeable income on the horizon. This included what he says was Mr McLean’s refusal to honour the promise to support Mr Marshall, in contravention of the good faith requirement in clause 8.1.1 of the Agreement. Additionally, Mr Marshall felt that there was a poor likely outcome from the “Malaysia situation” after they
had invested significant time and money in pursuing a result there.
(ii)He complains that Mr McLean allegedly excluded Mr Marshall first, from the development of an online training application and secondly, from a competitive software operation Mr McLean had commissioned. Mr Marshall claims these were in breach of clause 8.1.1 and the non-competition clause 9.1 of the Agreement.
(iii) The discovery Mr Marshall says that he made Mr McLean had
been planning on “replacing” Mr Marshall as early as March
2011 in breach of clause 8.1.1 of the Agreement.
(iv)What Mr Marshall describes as “the deceitful use of Prosper by Infoscan in an attempt to stave off demands by the IRD before its liquidation” in contravention of clauses 5.1 and 8.1.1 of the Agreement.
(v)Other various matters which Mr Marshall maintains first, go to Mr McLean’s general honesty and secondly, relate to the general tightening of laws relating to financial markets globally.
(i)Mr Marshall contends that throughout he offered to do whatever was necessary to resolve the impasse he had with Mr McLean, but there appears to be little evidence before me to support this claim. As to source code issues, Mr Marshall suggests that he could not test the code as latterly he was denied access to Infoscan servers. In addition, he claims he was prepared throughout to do what was necessary to get the development environment set up and the software running, but that full development was never completed.
(j)Mr Marshall further asserts that Mr McLean never lost the opportunity to personally trade using the Prosper suite. He says Mr McLean always had the latest versions and if he wanted to trade using an incomplete system, that was his prerogative.
(k)Finally, in terms of the code inserted into the software, Mr Marshall suggests that this was not unusual and in fact is common practice in the IT industry. He claims that it existed to ensure that Mr McLean could not breach clause 11.3 of the Agreement (relating to each party’s rights and obligations on termination) and that in any event the software did not stop the System from functioning, but rather simply ensured that the System ceased serving up historical data.
[23] Mr Marshall then turned to address the losses claimed by Mr McLean, On this he commented as follows:
(a) As noted above, he accepts no liability for any trading losses as he maintains Mr McLean proceeded with the live trades against his advice and without his permission.
(b)In terms of the cost associated with work undertaken to identify the source code, Mr Marshall bluntly claims that Mr McLean stymied his offers of assistance and his assurances that Mr Marshall would get the System up and running. (But I need to say at this point that what evidence there is before me would seem to suggest the opposite).
(c) The cost of reviewing the software undertaken by Mr McLean according to Mr Marshall is not attributable to him. His evidence is that it would never be possible to blindly take over a system as complex as Prosper without a significant review. Moreover, no “system documentation” has ever existed for the System because of rapid development and time constraints. Additionally, Mr Marshall claims that Mr McLean allegedly refused his offer of what he said was a smooth transition period.
(d)And, the future development work for the System, says Mr Marshall, is not his responsibility. He maintains there was no obligation incumbent on him to provide a completed system upon termination and that costs towards achieving this end asserted by Mr McLean, in any event, are unjustifiable.
(e) In terms of lost trading opportunities, again Mr Marshall notes that Mr McLean could have used the latest version supplied to him to trade. However, as no version was ever fully completed, Mr McLean would have been using an unstable system at his risk, but that was a matter for him.
(f) In terms of lost opportunity to market the System, Mr Marshall contends that it was far from ready to achieve this. He maintained functionality for any future opportunities would require at the very least significant further development.
Pauline Steedman
[24] Pauline Steedman (Ms Steedman) is a co-owner and managing director of Front-Line Trading Consultancy in Invercargill, a “business college” working in the private tertiary education sector. Her evidence was simply that she had had dealings with Mr McLean relating to the Prosper suite, and the possibility that her consultancy might become the New Zealand trainer for “Prosper” software. In her brief affidavit she deposes:
Mr McLean (Wayne) stated very clearly and specifically that it was his intention “to get rid of Rob (Mr Marshall) and that he was training Allan (Edwards) in Wellington and his son-in-law Mark in Hastings to do his job”. The statement was witnessed on both occasions. Hearing this caused concern as I knew Mr McLean and Mr Marshall were business partners.
But, Ms Steedman does not go on to say that she took matters any further or made any additional enquiries as to the allegations.
Annette Marshall
[25] Annette Marshall (Mrs Marshall) is Mr Marshall’s wife. Her evidence in support largely mimics Mr Marshall’s evidence and in my view contributes little to the discourse.
The joint venture element
[26] Prior to engaging an analysis of the present claim, it is useful to first traverse the overlay of the joint venture arrangement here. Perhaps an appropriate starting point is what is in fact meant by the term “joint venture”. Guidance is provided in this respect by the High Court of Australia in United Dominions Corporation Ltd (known as AMEV-UDC Finance Ltd v Brian Pty Ltd and Others where Mason, Brennan and Deane JJ stated:1
The term “joint venture” is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots’ law, “adventure”) will often be a partnership. 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.
Joint venture contracts are clearly of a fiduciary nature when “one party is entitled to repose and does repose trust and confidence in the other”.2 However, in the joint venture context, the Supreme Court in Chirnside v Fay appears to confirm that ‘true’ joint ventures are inherently fiduciary:3
Where parties join together with a view to sharing the profit obtained, their relationship is inherently fiduciary within the scope of the venture and while it continues.
[However, not] every breach of duty by a fiduciary is a breach of fiduciary duty. The distinguishing obligation of a fiduciary is the obligation of loyalty.
(citations omitted)
1 United Dominions Corporation Ltd (known as AMEV-UDC Finance Ltd v Brian Pty Ltd and
Others (1985) 60 ALR 741 at 746.
2 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31].
3 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [14] – [15].
[27] In addition to the joint venture arrangement, it may be that Mr Marshall and Mr McLean here were carrying on business as partners.4 A partnership is “the relation which subsists between persons carrying on a business in common with a view to profit”.5 While this question need not be resolved in the present context, I simply note that it would likely turn on whether Mr McLean and Mr Marshall were regarded as “carrying on a business”.
[28] Despite this overlay, many of the issues fall away in light of the fact that an express written agreement exists in this case which governs the relationship of the parties. As Cooke P stated in Petrocorp Exploration Ltd v Minister of Energy:6
As was held by the High Court of Australia in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, it is unnecessary to resort to doctrines of fiduciary relationship or fiduciary duty or implied term when the express provisions of the contract cover the matter.
[29] In the present case there is an express obligation incumbent on both parties to co-operate and to act towards each other in good faith (clause 8.0 of the Agreement). The disputed matters before the Court need to be considered in light of this requirement and the other express contractual terms. It is therefore my view that no further issues necessarily arise from the fact that this particular contractual relationship was one of joint venture, other than to be clear throughout that theirs was a fiduciary relationship with the requirement that they “…shall at all times act towards each other faithfully and honestly.” – clause 8.0.
Analysis of the claimed breaches
Preliminary
[30] At this point, I need to record that I do have some slight reservations about the way in which this claim has been advanced. No independent expert evidence has been put before this Court in an attempt to resolve without question what very really is a specialist dispute over issues of fact. This of course must have some possible bearing here when one considers that it might affect the very heart of Mr McLean’s
claim. Accordingly this Court is not as well placed as it perhaps ought to be to
4 Partnerships Act 1908.
5 Section 4(1).
6 Petrocorp Exploration Ltd v Minister of Energy [1991] 1 NZLR 1 (HC & CA) at 36.
resolve such issues. And it must be remembered throughout that the onus rests on
Mr McLean as plaintiff to prove his claim. If he has not done so the claim will fail.
[31] Additionally, I find it slightly troublesome here to appreciate how the Agreement, concerned as it was initially with the development of one general System, can necessarily be said now to extend across what Mr McLean has expressly categorised in his affidavit as four versions. However, as no argument was put before me by Mr Marshall or otherwise contesting the application of the Agreement to all four versions of the Prosper software, this is not a point which I need engage here. I will therefore proceed on the basis that the parties agreed, probably orally, to extend the scope of the Agreement such that the System, as defined in the Agreement, was agreed to be “enhanced” and does cover all four versions of Prosper.
Trading losses
[32] The meaning of clause 7.3 of the Agreement is quite clear. This required that Mr Marshall and Mr McLean were to bear equally “the costs of operating the System” as defined in the Agreement and of “purchasing hardware to do so, etc”. Again that definition of “the System” provides:
“The System” means the source code, together with in the initial instance the CMS API (computer software that connects to an internet trading platform…), which has been and will continue to be enhanced by the Partners to include their particular trading requirements.
[33] It appears to me that trading losses here would be included broadly in the expression “costs of operating the System” being the costs of development and operation of the System as defined. “Operating” is generally defined as “causing to function” which in my view in the joint venture context here would cover both design and development and the functioning of the System. Moreover it is quite plain that generally if costs and trading losses were to be incurred by one party, and they did fall within the ambit of clause 7.3, each party would not have carte blanche to incur whatever costs on their own they considered appropriate. Some measure of permission would be needed from the other party to incur such costs and debt. And, I think this interpretation may draw support from clause 5.2 which contemplates the
parties jointly depositing funds to trade FOREX on an agreed basis. This would be
an “operation” of the System.
[34] While I appreciate that Mr Marshall has endeavoured here in his evidence but only to a limited extent to raise a dispute as to whether permission was granted by him to incur these trading loss costs, the reality is that this was entirely part of what I accept to be the testing arrangement agreed between the parties. The fact that losses were made is unfortunate but as I see it, this was part and parcel of the joint venture undertakings both parties accepted. And, after all, Mr Marshall had earlier deposited
$5000 with Mr McLean in an account for this very trading purpose. It is not appropriate in my view for Mr Marshall to now endeavour to suggest he did not agree to this course of action. Although the onus must rest on Mr McLean as claimant throughout to prove his claim to recovery of these trading losses, in my judgment the evidence he has provided, which confirms the established patterns between the parties during the testing phases in question, is sufficient to show that Mr Marshall accepted under the Agreement the possibility that these losses could be incurred for the joint venture. I accept here Mr McLean’s evidence provided before me that the demo environment for the System was not sufficient on its own for testing purposes and that Mr Marshall did agree to a reasonable investment in the possibility of losses incurred in the live trading tests.
[35] As I have noted at [14] above some questions may arise regarding the quantum of this trading loss claim but I will turn to address that issue below. At this point I simply record my finding here that Mr McLean has done sufficient to establish on the balance of probabilities that Mr Marshall is in breach of clause 7.3 of the Agreement in that he has failed and continues to refuse to meet his one-half share of these trading losses as part of the “costs of operating the System”.
Failing to provide source code
[36] So far as this aspect is concerned, it is my view that Mr Marshall is in breach of his obligations under the Agreement to provide the source code. However, I reach this conclusion only by a reasonably fine margin. This has not been an altogether easy decision. While clause 4.1 provides for the progressive provision of executable
registered copies of the system, clause 4.2 is expressly confined to “the resulting source code”. Quite plainly the reference to “resulting” requires that some catalyst must bring the obligation into existence or, put another way, there must be something from which the obligation results.
[37] I heard no real persuasive argument on this point and it was not advanced by any party. However, in my view there is a possible argument that, during the currency of the joint venture arrangement, the reference to “resulting” means the source code resulting from the development of the System, that is, once the System is completely developed. However, notwithstanding this potential interpretive issue, and without resolving it, I am satisfied that there was an obligation incumbent upon Mr Marshall from at least the date of cancellation to provide the source code in accordance with clause 11 of the Agreement. At that time the parties were entitled to retain their rights under the Agreement as to ownership, use and sale of the System generally.
[38] I am also satisfied that Mr Marshall should have complied with Mr McLean’s repeated requests to furnish him with a copy of the source code. This is clearly in my view, a breach of clause 4.1 and 4.2 of the Agreement and also is likely to be in breach of the obligations under clause 8.0 of co-operation and good faith and under clause 11 relating to shared ownership and use of the System post termination. Mr McLean has discharged the onus upon him to establish that Mr Marshall’s failure to provide the source code is a clear breach of the Agreement here. Liability on the part of Mr Marshall for this breach is also established.
The so-called malicious “bug”/code
[39] I accept that Mr Marshall inserted something into the System that had a deleterious effect on the operation or utilisation of the System by Mr McLean and his interests. While the evidence differs to some extent on the purpose and scope of interference caused by this code, I am satisfied that it was not consistent with clause 8 of the Agreement, or the general tenor of the obligations of each party under a joint venture agreement. I therefore find there was also a breach in this respect.
Analysis of quantum
Preliminary
[40] At the hearing of this matter it became apparent that irrespective of the conclusion reached on liability, quantum was going to be the more difficult aspect of this claim. To an extent I am of the view that, in this case despite there being established breaches of contract on the part of Mr Marshall, development of the System to a stage where it could be properly commercialised had largely lost its way and thus only nominal damages for reliance loss can be awarded here. That was the
approach taken by Panckhurst J in Ti Leaf Productions Limited v Baikie7 in not
altogether dissimilar circumstances where a low budget film project was abandoned. And, as to issues over the loss of a chance which Mr McLean claims here, comments in the Law of Contract in New Zealand8 are apposite:
Again, the chance for a licensee to sub-licence certain technology was held to be merely speculative and of no value, and a claim for its loss accordingly failed – Powerbeat Canada Limited v Powerbeat International Limited [2002] 1 NZLR 820.
With these preliminary considerations in mind I now turn to consider each head of the quantum claim advanced by Mr McLean here.
Trading losses
[41] This claim is for a net figure of $4997.25. It represents initially a half share of total trading losses incurred amounting to $19,994.50 whilst testing the system programme and identifying what was described as a Currenex problem. This half share thus totals $9997.25 less the sum of $5000 which had previously been contributed by Mr Marshall towards these losses. Hence the final trading loss net figure sought from Mr Marshall is the $4997.25. This trading loss breach of contract claim succeeded. But, the criticisms I express above at [14] as to the quantum of this claim remain. These relate in part to certain exchange rate issues which I note there but I confirm again that Mr Marshall has raised no real issues as to the calculation of
this particular loss. In his evidence Mr McLean was adamant as to the quantum of
7 Ti Leaf Productions Limited v Baikie [2001] 7 NZBLC 103,464.
8 J Burrows, J Finn & S Todd, Law of Contract in New Zealand 4th Ed, Lexis Nexus NZ 2012 (at p
840).
this loss and provided invoices for trades through the Singaporean company mentioned at [14] above in support. On balance and given what is effectively a lack of any real opposition to the quantum of this claim by Mr Marshall, I find that Mr McLean has established on the balance of probabilities that this $4997.25 is due and represents his loss in this respect. A damages award for this amount is to follow.
Malicious code
[42] As noted above, I am satisfied here that there has been a breach of the Agreement by the introduction of the “malicious code” by Mr Marshall. Mr McLean claims $12,961.54 under this head. As to evidence of this quantum claim, both Mr McLean and Mr Hook have deposed as to this amount being expended to undertake the necessary work to review and discover the malicious software code introduced by Mr Marshall.
[43] At the quite arbitrary rate of $75 per hour, this work amounts to well over four weeks work, which is not an insignificant figure. Nevertheless the figure claimed by Mr McLean is effectively uncontested by Mr Marshall.
[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.
Restoration of code
[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.9
(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.10 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
9 Abrahams v Herbert Reiach Ltd [1922] 1 KB 477 at 482.
10 The classical exposition of this principle is found in Hadley v Baxendale (1854) 9 Exch 341 at
354.
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.
Loss of chance
[47] Claims for loss of chance are well known to our law. When confronting such a claim, one of the first issues is causation. The authorities were traversed by Penlington J in Powerbeat Canada Ltd v Powerbeat International Ltd, which was followed by an outline of fact-specific principles which can be generalised as
follows:11
(i) the innocent plaintiff must establish that it did, or would have, sought the claimed lost opportunity.
(ii) as a result of the breach the plaintiff lost a real and substantial, and not merely a speculative chance of obtaining the opportunity which would have conferred a benefit.
(iii) the plaintiff suffered loss (which can be measured in monetary terms).
In that case Penlington J also observed that the more contingencies that exist which represent an impediment to the realisation of the chance or opportunity, the lower the value of that chance or opportunity.12
[48] In light of these principles I now turn to consider the claims under this head which together total $515,000. Essentially they are for:
(a) Lost IP sale to the Malaysian company because of inability to supply programme (half share) - $240,000;
(b) Lost trading opportunities for personal trading - $125,000;
11 Powerbeat Canada Ltd v Powerbeat International Ltd [2002] 1 NZLR 820 at [196], referring to
Mallett v McMonagle [1970] AC 166 (HL); Sellars v Adelaide Petroleum NL (1994) 179 CLR
332 (HCA); Martelli McKegg Wells & Cormack v Commbank International NB CA75/96, 7November 1996; Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602 (Eng CA).
12 At [199], citing Hall v Meyrick [1957] 2 QB 455 at 471.
(c) Loss of opportunity to market programme (half share) - $150,000.
[49] Of all the claimed heads of damages to be addressed here, I have found it easiest in one sense to reject the quantum claim under this loss of a chance head. The reasons for this are:
(a) As with some of the other heads of damages in this claim, quantification on these grounds is severely lacking. No evidence whether independent or otherwise has been provided which purports to value the software itself, or the rights to use the software. It seems to me that these figures have been simply created by Mr McLean and are wholly dispossessed of any compelling evidential foundation. Even a narrative justification of the figures may have provided a somewhat more secure footing from which to proceed.
(b)The System was not complete nor even approaching the final stages of its development at the date of termination. It is difficult to appreciate how there was a loss of chance to market or sell a system or program which was not then even near to being in a position to function as it was designed to. Any lost chances were therefore, at best, speculative. At least at the date of breach, I have found there is nothing before the Court to establish that such lost chances, be they in
Malaysia, New Zealand or elsewhere, were real or substantial.13
(c) During the currency of the Agreement, any commercial exploitation other than that undertaken personally required broad agreement from the parties. Any claim for loss of a chance occurring up until 12 June
2012 is even more remote than any other claims here. The lack of opportunity to enter into a profitable agreement14 was therefore contingent on other factors not least of which was an established market for the System, which also, given the relationship between
Mr McLean and Mr Marshall, was far from certain.
13 Davies v Taylor [1974] AC 207.
14 Chirnside v Fay (No 2) [2005] 3 NZLR 689.
(d)In terms of lost opportunity to trade personally, I am not satisfied that Mr McLean would have made any profit whatsoever from his trading of FOREX. I understand earlier he had lost money utilising Prosper as a trading platform. The club which he and Mr Marshall founded proved to be generally unsuccessful, and my reckoning of the evidence is that his past trading endeavours have not proved to be positive. Moreover, as Mr Marshall states, there was nothing preventing Mr McLean using the executable versions of the software previously supplied to him to trade.
[50] I therefore find that these claims for loss of chance are too speculative and too far removed from the actions of Mr Marshall to sound in damages. There is to be no award of damages made under this head.
Result
[51] In conclusion, as to liability in this case, Mr McLean has established that
Mr Marshall breached his obligations under the Agreement in a number of respects.
[52] As to quantum, damages are now awarded against Mr Marshall in favour of
Mr McLean for these breaches of the Agreement as follows:
(a) As to trading losses as outlined at para [41] above the sum of
$4997.25.
(b)As to costs of reviewing and discovering the malicious software code as outlined at para [44] the sum of $12,961.54.
[53] Mr McLean has failed to prove loss under the other heads outlined above being costs claimed for restoration of the code and damages for loss of chance.
Costs
[54] As to costs Mr McLean has largely succeeded as to liability and succeeded in part as to his damages quantum award. As such in my view he is entitled to an award of costs on this proceeding.
[55] No submissions were made to me on the question of costs at the hearing of this matter. Costs are therefore reserved. If the parties are unable to agree between themselves on the issue of costs then the following directions shall apply:
(a) Counsel for Mr McLean shall within 20 working days of today file and serve his memorandum as to costs.
(b)Mr Marshall shall have a further 15 working days from that date to file and serve his memorandum as to costs.
(c) Counsel for Mr McLean shall have a further 5 working days from that date to file and serve any brief reply memorandum on costs.
(d)Those memoranda are then to be provided to me and in the absence of either party indicating they wish to be heard on the issue of costs, I will decide that question based upon the memoranda filed and all other material which is then before the Court.
...................................................
Gendall J
Solicitors:
Bramwell Grossman, Hastings
L A Andersen, Dunedin
Copy to Defendant
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