New South Wales Supreme Court CITATION : P M Sulcs v Daihatsu Australia [2001] NSWSC 636 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 11489/93 01-05/11/99, 08-12/11/99, 15/11/99, 17/11/99, 15/12/99, 17/12/99, HEARING DATE(S) : 22/02/00, 16/03/00, 14-18/08/00, 21-24/08/00, 28-31/08/00, 01/09/00, 04-08/09/00, 14/11/00, 04-07/12/00, 11-15/12/00, 18-10/12/00, 24/04/01, 26/04/01, 30/04/01 JUDGMENT DATE : 1 August 2001 PARTIES : P M Sulcs & Associates Pty Limited (Plaintiff) Daihatsu Australia Pty Limited (Defendant) JUDGMENT OF : Kirby J COUNSEL : J J Garnsey QC/C Stevens QC/T J Hancock (Pl) S Rares SC/D Studdy (Def) SOLICITORS : Oliveri Attorneys (Pl) Clayton Utz (Def) CATCHWORDS : Loss of a chance - breach of contract - repudiation - factual matrix to assist construction - ready willing and able - recovery of money payable under contract but unpaid at date of termination - damages - reasonable contemplation of parties LEGISLATION CITED : Copyright Act, 1968. (Cth) Trade Practices Act, 1974 (Cth) Allied Pastoral Holdings P/L v Commissioner of Taxation [1983] 1 NSWLR 1 Australian Knitting Mills P/L v The Commonwealth (1954) 92 CLR 424 Autodesk Inc v Dyason (1992) 173 CLR 330 B P Refinery (Westernport) P/L v The Shire of Hastings (1977) 180 CLR 266 Baltic Shipping Co v Dillon (1993) 176 CLR 344 Burger King Corp v Hungry Jack's P/L [2001] NSWCA 187 Carr v J A Berriman P/L (1953) 89 CLR 327 Codelfa Construction P/L v SRA of NSW (1982) 149 CLR 337 Commonwealth of Aust v Amann Aviation P/L (1991) 174 CLR 64 G v H (1994) 181 CLR 387 Ghazal v GIO (1992) 29 NSWLR 336 CASES CITED : Hadley v Baxendale (1854) 9 EX 341 Laurinda P/L v Capalaba Park Shopping Centre P/L (1989) 166 CLR 623 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 Maks v Maks (1986) 6 NSWLR 34 Malec v J C Hutton (1990) 169 CLR 638 Maynard v Goode (1925-26) 37 CLR 529 Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 Roadshow Entertainment P/L v ACN.053006269 P/L (1997) 42 NSWLR 462 Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912 Sellars v Adelaide Petroleum (1994) 179 CLR 332 The Film Investment Corp of NZ v Golden Editions P/L (1994) AIPC 91-052 Watson v Foxman (2000) 49 NSWLR 315 DECISION : Refer para 915. I N D E X Para No. 1. ISSUES ON LIABILITY The Action 1 Background Concepts 3 The Claim by P M Sulcs 13 The Response of Daihatsu 15 The Factual Matrix 17 Authorities on the Relevance of Surrounding Circumstances 20 2. THE ASSOCIATION BETWEEN P M SULCS & DAIHATSU The Fragility of Recollection 28 The Computer System of Daihatsu 30 Early Contact Between P M Sulcs and Daihatsu 32 P M Sulcs and Fujitsu 59 Approach by P M Sulcs to Fujitsu 65 The Evidence of Fujitsu Personnel 70 Discussions Between Mr Hooper and Mr Kratsas 89 Investigation of Conversion 96 3. THE PROPOSAL Presentation of the Proposal 104 The Terms of the Proposal 110 The Fujitsu Proposal 125 4. THE REFERENCE SITE AGREEMENT Meeting 30 December 1988 129 The Response of Daihatsu 135 Was there a Binding Contract? 146 5. NEGOTIATIONS AND PREPARATION Resolution of Differences with ICL 153 Discussion Between P M Sulcs and Daihatsu 156 The Plaintiff's Original Submission 173 Payment of P M Sulcs by Fujitsu 178 6. AGREEMENTS BETWEEN DAIHATSU AND FUJITSU Agreements Executed 14 March 1989 206 The Prime Contract Agreement 212 7. THE ANALYSIS REPORT Work on the Analysis Report 227 The Visit by Rapitech 228 Installation of the Fujitsu Computer 238 Presentation of the Analysis Report 241 Conversation About Payment 250 8. THE AGREEMENTS BETWEEN P M SULCS AND DAIHATSU The Submissions 255 The Proposal 259 The Analysis Report 268 The Programme Licence Agreement 277 The Software Maintenance Agreement 287 The Terms and Conditions of Sale 300 9. CONSTRUCTION OF THE AGREEMENTS The Condition Precedent Issue 316 Submissions by the Parties 318 The Letter of 18 April 1989 325 Findings Already Made 328 Should a Term be Implied? 342 The Agreement of 18 April 1989 344 The Objections of Daihatsu 349 The Requirement of Presently Existing Software 352 10. THE BREAKDOWN OF RELATIONS Issues 357 Payment of P M Sulcs 360 Did P M Sulcs Demand Payment from Daihatsu? 377 What Was Said in Opposition to Such a Finding? 382 Modifications to the Software 388 Conversion of Software 406 Meeting on 23 May at Fujitsu 420 Other Documents Dealing with the Fujitsu Meeting 427 Daihatsu's Submissions 438 Was There a Shift in Fujitsu's Position? 442 The Availability of Paradyne 451 11. TERMINATION OF THE CONTRACT Calling a Meeting 461 The Submissions of Daihatsu on the Letter of 2 June 1989 472 The Contents of the Letter of 2 June 1989 473 The Meeting on 5 June 1989 490 The Different Cases 501 Events Immediately Following the Meeting 504 Correspondence with Pyramid 520 Work Relevant to the Contract 531 Termination of P M Sulcs 533 Lunch with Pyramid in November 1989 562 Daihatsu Dealings with ICL 575 The Two Competing Hypotheses 581 Ready, Willing and Able 594 12. CONVERSION OF THE SOFTWARE The Task 596 The Conversion of Computer Languages 598 Problems in the Conversion which was Contemplated 603 The Conversion Process 608 Differing Views from Experts 610 Could the Conversion be Achieved? 624 The Time Required to Convert the Software 643 13. THE LICENCE ISSUE The Presentation of the Licence Issue 672 The Evidence of Mr Hooper 679 Was there a Head Licence? 701 The Daihatsu Submissions 715 The Federal Court Proceedings 719 14. THE FINANCE ISSUE The Issue Restated 741 The Evidence Concerning Finance 742 The Canadian Evidence 754 The Course of Events if Daihatsu had Paid 757 Termination by the Defendant 766 15. DAMAGES The Plaintiff's Claim 770 Money Payable Under the Agreement 772 The Argument of Daihatsu 777 The Debate on Principle 781 Are the Fees Recoverable? 783 The Modifications 790 The Loss of the Chance 797 The Authorities on Valuing the Chance 802 The Issues Relevant to the Loss 807 Expert Joint Report 814 How Good was the Plaintiff's Product? 821 The Unix Market 834 The Likely Sale Price 840 The Likely Number of Sales 853 The ICL List 854 The Wholesale Market 862 The Manufacturing Market 864 The Submissions of Daihatsu 867 Payment of Royalties 881 Maintenance Profits 883 Research and Development 887 Conversion Costs on Later Sales 895 Mr Lonergan's Alternative Scenario 899 Calculations made by Mr Weeks (TABLE 1) 902 Calculations made by Mr Lonergan (TABLE 2) Modification of Mr Lonergan's Calculations (TABLE 3) The Discount Rate 903 Submissions on the Discount Rate 909 Orders 915 ******* 1. ISSUES ON LIABILITY The Action 1 P M Sulcs and Associates Pty Limited ("P M Sulcs") (the plaintiff) claims damages against Daihatsu Australia Pty Limited ("Daihatsu") (the defendant) for breach of contract. In the alternative, a claim is made for work performed on a quantum meruit. 2 P M Sulcs was registered as a company in New South Wales in 1984. It was established by its Canadian shareholders (P M Sulcs Limited ("P M Sulcs Canada") and Cullen Detroit Diesel Allison Limited ("Cullen Detroit")) to promote the sale of computer software developed in Canada. One such package was the Material and Customer Control System. The action concerns the sale of that software (together with an appropriate licence) to Daihatsu. Background Concepts 3 Before going to the issues, I should explain certain concepts which relate to computers. They are, no doubt, commonplace to some. They may be unfamiliar to others. 4 A computer system, typically, consists of three elements: · The computer ("the hardware"). · The operating system. · The software. 5 The function of the operating system was explained by Professor Rosenberg (the Dean of the Faculty of Information Technology at Monash University) in these terms: (report 26.11.00, p11 para 5.4.1) "The very first computer systems executed a single program at any one time. The program contained all of the code required for the task. It soon became obvious that there were many common operations required by every computer program. These operations include displaying things on a computer screen, getting characters from the keyboard, storing data on a disk, etc. Rather than have every program include its own code to undertake these operations, manufacturers decided to provide a standard set of programs with the computer. These standard programs, called an operating system , provided an environment to support computer programs written by others." 6 Professor Rosenberg added: (para 5.4.2) "The facilities provided by the operating systems include: The file system, allowing documents and files to be stored and retrieved. Access to input and output devices (eg the keyboard and printer). Support for multiple users to access the computer at once." 7 Microsoft Windows, UNIX and Wang VS are examples of operating systems. 8 The operating system and the software provide the instructions to the hardware, given in "machine language". Machine language uses only two values, zero and one. They are arranged in sequence to represent numbers, characters and data. Obviously, it is difficult for humans to read machine language. Accordingly, to assist programmers in the formulation of instructions, computers were designed which employed words and symbols in place of machine language. A computer programme (a translator or compiler) then transformed such words or symbols into machine language. 9 Now, the words and symbols so used together form a computer language. There are a number of such languages. Some are specific to particular applications. Fortran, for instance, is a computer language especially suited to the reproduction of scientific formulae. 10 The software of P M Sulcs Limited Canada ("P M Sulcs Canada") was written for use on a Wang computer. The Wang computer had its own operating system (Wang VS), and used the Cobol language, which it adapted, and altered. The language of Wang, therefore, became a dialect of the Cobol language. 11 In 1988 Daihatsu had a computer system which had reached the end of its useful life. It had a number of shortcomings. It did not allow dealers in Daihatsu motor vehicles, scattered throughout Australia, to consult the stock list to determine the availability of Daihatsu parts, and place orders. The company recognised the need for a new system, both a computer and appropriate software. The software of P M Sulcs (with certain modifications) fulfilled its requirements. However, Daihatsu did not want a Wang system. It wanted a computer system which combined a number of features: · First, a UNIX operating system, which gave it greater flexibility. · Secondly, a system which employed the C language, thought to be especially suited to UNIX. · Thirdly, a particular database (known as a Relational Database) to be accessed by what are termed "SQL commands" (Structured Query Language). 12 Ultimately, Daihatsu selected a Fujitsu mainframe computer (M760/4), and the software of P M Sulcs. The Claim by P M Sulcs 13 By an Amended Statement of Claim, the plaintiff asserted a number of agreements with Daihatsu: · First, by written agreement (made in April 1989), P M Sulcs agreed to grant, and Daihatsu to accept, a non-exclusive licence to the Material and Customer Control System (para 3), and services for the maintenance of that system (para 5) ("the Software Agreements"). · Secondly, by oral agreement made on 30 December 1988, Daihatsu agreed to allow P M Sulcs to use its premises as a reference site, to demonstrate its system to prospective customers (para 16) ("the Reference Site Agreement"). 14 The plaintiff says that it was ready, willing and able to perform its promises. By letter of 4 July 1989, the defendant, however, repudiated the agreements, thereby causing loss to P M Sulcs. The Response of Daihatsu 15 The defendant answered these claims by an Amended Defence which raised the following issues: · It did not admit the software agreement (Amended Defence paras 3 and 5), although it acknowledged that Daihatsu had received a number of documents (said by the plaintiff to constitute the agreement), and in some cases (by its Managing Director) signed such documents (the Contract Issue). · It asserted, moreover, that, were the court to find that either the Software Agreement, or the Reference Site Agreement had been made, they were, in each case, subject to a condition precedent (Amended Defence para 17). The condition precedent was that Fujitsu Australia Limited ("Fujitsu") would enter into an agreement with P M Sulcs whereby: "A. (Fujitsu) would take responsibility for the computer systems to be implemented for the Defendant including, but not limited to, the Programs; and B. The Plaintiff agree that (Fujitsu) and not the Defendant would be liable to pay it for the licences provided pursuant to the (Program Licence Agreement) and for any services provided pursuant to the (Software Maintenance Agreement)." (Amended Defence para 17; parenthesis added) However, Futijsu and P M Sulcs made no such agreement ( the Condition Precent Issue ). · Further, Daihatsu denied that the plaintiff was ready, willing and able to perform its various promises. It did so upon a number of bases: · First, when the agreement was made (if there was an agreement) the software was not capable of being used on the computer purchased by Daihatsu, namely the Fujitsu M760/4. It had to be converted from the Wang VS Cobol language, using the Wang operating system, to the C language, for use on a UNIX system. It required other features besides (the Relational Database and SQL commands). Daihatsu says that, technically, the task could not be done. Alternatively, it says it could not be done on time (the Conversion Issue). · Secondly, fundamental to the plaintiff's right to sue is proof that it was authorised to grant the software licence. P M Sulcs, the Australian company, had not written the software. The copyright lay elsewhere. The plaintiff, therefore, was obliged to show that the copyright owners had provided it with authority (the Licence Issue). · Thirdly, even were it possible to convert the software within a time acceptable to Daihatsu, it was beyond the capacity of P M Sulcs to fund the conversion. P M Sulcs was a small company. It was impecunious. It had accumulated losses. It had survived with the help of its Canadian parent. The conversion was, on any view, a large project. It was likely to be expensive. Whilst P M Sulcs may have thought, at one time, that it could look to Fujitsu as a source of funds, by July 1989, when the contract was terminated, that source was no longer available. Without that source the plaintiff, on the defendant's case, could not deliver the converted software (the Finance Issue). 16 Moving to the second agreement, the Reference Site Agreement, Daihatsu answered that claim in the following way: · First, it pointed to the evidence in support of that agreement. Proof of the agreement depended upon an acceptance of the evidence of Mr John Hooper, then the Managing Director of P M Sulcs. Mr Hooper gave evidence of a conversation with Mr Leon Kratsas, the Managing Director of Daihatsu. Mr Kratsas denied having had that conversation. In the course of Mr Hooper's cross examination, he was accused of lying on a number of issues, and deliberately speaking nonsense. Those accusations have been repeated in written submissions. Indeed, an entire section of Daihatsu's submissions is devoted to the credit of Mr Hooper. He is said to be a liar. His evidence is described as "slippery", and generally unreliable. Mr Hooper, the submissions point out, now beneficially owns the shareholding in P M Sulcs. Damages awarded to P M Sulcs therefore are damages awarded to Mr Hooper. Daihatsu urges that his testimony be rejected. · Secondly, and in any event, Daihatsu said that, even were I to accept that the conversation took place, there was no contract. There was, on the defendant's case, plainly no intention at that time to be bound. Mr Kratsas, at best, simply gave an indication that, if things were to work out, the parties may do further business. · Thirdly, as set out above, Daihatsu asserted that any such agreement was subject to a condition precedent, which was never fulfilled. The Factual Matrix 17 These, in broad outline, are the issues on liability. Some of the documents relied upon by P M Sulcs (said, with other documents, to form the software contract) were standard form contracts. They were used by P M Sulcs in the ordinary course of its business. However, the transaction with Daihatsu was not ordinary. The software was not available for immediate installation. It required conversion. Nonetheless, there was minimal adaptation to the standard forms. There was no reference, in terms, to the conversion. The plaintiff urges nonetheless that, within the factual context in which the parties were operating, the meaning was plain enough. 18 The defendant's case, on the other hand, asserted that the condition precedent was an express term. It pointed to particular words in a letter written by Mr Hooper on 18 April 1989. It claimed that his words, understood in the factual matrix which then existed, should be construed as an acknowledgment of the condition precedent. Alternatively, such a term should be implied. 19 Both parties, therefore, relied upon the surrounding circumstances to make the terms of their agreement clear, where they would otherwise remain obscure. Authorities on the Relevance of Surrounding Circumstances 20 Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 identified the broad purpose of the parol evidence rule. He said this: (at 347) "The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument ( Goss v Lord Nugent (1833) 5 B & Ad 58 at pp 64-65 [110 ER 713 at p 716])." 21 In Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, Lord Wilberforce said this: (at 995-996) "In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating." 22 His Lordship added: (at 996) "It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties." 23 Lord Wilberforce concluded with these words: (at 997) "… what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed." 24 Mason J, in Codelfa (supra) formulated the rule in these terms: (at 352) "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed." 25 His Honour then considered the admissibility and relevance of prior negotiations. He said this: (at 352) "It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification." 26 Mason J added: (at 352) "Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract." 27 Against this background, I will now consider the evidence. There are many conflicts in the evidence, some unimportant. I will address only those differences between the parties which I believe necessary to resolve. 2. THE ASSOCIATION BETWEEN P M SULCS AND DAIHATSU The Fragility of Recollection 28 The events which are the subject of this action occurred more than a decade ago. Each party has filed affidavits. The affidavits, and especially those of Mr Hooper, contain the detail of discussions, some lengthy. Daihatsu, as mentioned, is highly critical of Mr Hooper's evidence. It is especially critical of his ability to recount in detail conversations which took place so long ago. Counsel drew attention to the words of McLelland CJ in Equity in Watson v Foxman (2000) 49 NSWLR 315: (at 319) "Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience." 29 Memories of distant events are unquestionably fragile. Clues as to the truth are usually scattered. Insight may be provided by documents created some time after the event being described. I have, therefore, in many cases (especially where events are evolving) simply recounted these events chronologically, noting differences between the recollections of witnesses, where they arise. It is sometimes convenient to postpone the resolution of those differences until some later event, which provides insight. The Computer System of Daihatsu 30 Daihatsu is, of course, the Australian subsidiary of a Japanese motor vehicle manufacturer. It imports motor vehicles and parts from its parent, which are then sold through dealers. In 1988 there were approximately 140 such dealers. 31 Daihatsu's computer system was installed in 1976 (Exhibit P). It was an ICL System 25 which used a software programme called "Spares". By 1987 the system was more than a decade old. It had, as mentioned, a number of shortcomings, principally, that the dealers were not "on line". Dealers could not directly consult Daihatsu's stock list and place orders. They were obliged to telephone or fax Daihatsu's office. That took time and added to expense both for the dealers and for Daihatsu. Early Contact Between P M Sulcs and Daihatsu 32 P M Sulcs made contact with Daihatsu in 1985 hoping to interest the company in its software. Mr Hooper joined P M Sulcs as its General Manager on 1 April 1987. He was made a director soon thereafter. He spoke to Mr Kratsas, the General Manager of Daihatsu, on 5 April 1987 (Hooper: Aff. 2.1.98, para 3). He was encouraged by his conversation. Mr Kratsas told him that he was familiar with the Sulcs MC2 software (the tradename for the Material and Customer Control System), and was impressed by it. Mr Kratsas, according to Mr Hooper, said that he would direct his Electronic Data Processing Manager (the EDP Manager) of Daihatsu, Mr Holubinskyi, to investigate the suitability of the P M Sulcs software as a replacement for Spares. 33 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 19). He acknowledged, however, that by August that year, Daihatsu was interested in replacing the ICL System 25 and Spares (T923). It appears to me likely that a conversation in these terms (which are rather less elaborate that Mr Hooper's account) took place. 34 On 30 April 1987, Mr Holubinskyi went to the plaintiff's office in the Wang building at North Sydney. He witnessed a demonstration of the P M Sulcs software on a Wang computer. Mr Hooper provided a written quote for the software the same day. A month or two later, with the co-operation of Wang, a Wang super-mini computer was installed at Daihatsu. Mr Hooper said that he and Mr Santa Maria, the Technical Services Manager of P M Sulcs, loaded the software. Mr Holubinskyi executed a confidentiality agreement, which included these words: (Exhibit A, doc 4) "The Company acknowledges that the materials provided herewith (the Information) are confidential proprietary information belonging solely to P M Sulcs & Associates Pty Ltd. …" 35 The computer and software remained at Daihatsu for approximately one week (T1642). 36 On 3 July 1987, Mr Hooper again saw Mr Kratsas. He wrote to him the next day. His letter opened with these words: (Exhibit A, doc 5) "Thank you for your time yesterday to discuss how we might extend our relationship to that of Daihatsu becoming a user of P M Sulcs' Management Information System and Material Control software." 37 The letter continued: "I thought it beneficial to confirm our agreement about the basis on which business will progress between our two companies. · I have drawn up draft copies of our Sublicence and Service Agreements which I have attached for your comment. · I will explore further the applicability of sales tax to any software licence purchased by Daihatsu. · Mr Jocelyn Santa Maria, Technical Services Manager, will be available to assist with user demonstrations during the month of July and he will also be available in my absence should you require any other assistance." 38 The draft Licence Agreement was enclosed. It asserted, in a recital, the following: (Exhibit A, doc 7) "A. PMS owns or licenses from other parties certain proprietary computer software." 39 Software usually requires modification or amplification to meet the particular needs of the user (a process known as "customisation"). The standard terms contemplated delay between the execution of the agreement, and the installation of the software. It made the following provision as to payment: (Exhibit A, doc 19) "1. Payment of the above prices and charges is to be made as follows: (a) 50% of the total price of each module upon execution of this Agreement; (b) 30% of the total price of each module immediately upon the Installation Date of the module; (c) 20% of the total price of each module immediately upon the earlier of the date which is 30 days after the Acceptance Date of that module and the date which is 60 days after the Installation Date of that module; …" 40 On 17 September 1987 Mr Hooper presented Daihatsu with a report comparing the existing Spares system with the P M Sulcs software, function by function (Exhibit A, doc 30). Mr Kratsas said that Daihatsu had not solicited that report. It was a report of the type commonly produced by software vendors (Kratsas: Aff. 31.3.98, para 21). Mr Hooper, on the other hand, said this: (Hooper: Aff. 12.2.99, page 3, para (i)) "Kratsas requested the comparison report and provided (P M Sulcs) with access to (Daihatsu's) computer system and organised (Daihatsu's) staff to assist (P M Sulcs) to produce the report. Without such access and assistance, (P M Sulcs) would not have been able to produce the comparison report because (P M Sulcs) had no detailed knowledge of how the SPARES software worked." (parenthesis added) 41 Looking at the report, the level of detail suggests the co-operation of Daihatsu asserted by Mr Hooper. Daihatsu was about to make a decision on the replacement of its system. I infer from this material, and the correspondence which followed (to which I will shortly refer), that P M Sulcs was regarded as a serious contender. The report of P M Sulcs, incidentally, also included the following: (Exhibit A, doc 30) " PROPRIETARY RIGHTS NOTICE : All rights reserved. This material contains the valuable properties and trade secrets of P M Sulcs & Associates P/L (PMS) embodying substantial creative efforts and confidential information, ideas and expressions." 42 Daihatsu, however, chose to remain with ICL, with whom it had a long standing relationship. In a document produced after September 1988 (but undated), ICL described its relationship with Daihatsu in these terms: (Exhibit P) "Daihatsu has used ICL equipment since 1976 when a System Ten was installed with the first version of SPARES. This was upgraded to a System 25 in 1982 which has run successfully ever since. There is a very good relationship between Daihatsu and ICL, and a strong personal rapport between the Company Secretary (Leon Kratsas) and our Account Manager (Dennis Rex). There is an equally strong rapport at this personal level with the third party software house (DMF Computing) and its chief executive (Neil McGrath) to both Leon Kratsas and Dennis Rex. All three have worked together since the first System Ten installation." 43 On 29 September 1987, Mr Kratsas signed the purchase order for the ICL System 39. Both Mr Hooper and Wang were surprised and disappointed by Daihatsu's decision. They plainly believed that they had the sale. On 27 October 1987, the Senior Sales Representative from Wang wrote to Mr Kratsas in these terms: (Exhibit A, doc 96) "Obviously the decision not to procede (sic) with the Wang solution was a great disappointment and in light of the encouragement and commitments made to Wang by Mr Kratsas came as a complete surprise. In consideration of the resources and money Wang has spent over the past eighteen months in tendering Daihatsu, Wang would appreciate the opportunity to discuss this matter further." 44 Mr Hooper claimed that Mr Kratsas spoke to him in October 1987 in the following terms: (Hooper: Aff. 2.1.98, para 9) "(Daihatsu) is not satisfied with WANG. Can (P M Sulcs) create a version of your MCS software to run on another brand of computer, as I prefer to buy our computer from ICL Australia Pty Limited … running the UNIX operating system." (parenthesis added) 45 Mr Kratsas denied that conversation. I believe, however, that a conversation in these terms probably took place. P M Sulcs had lost its bid. Its lack of success had come about, not through shortcomings in its system, but through its association with Wang. Amongst other things, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 22(e)) "(e) I was not interested in purchasing a Wang computer as it would have been incompatible with Daihatsu's other computer systems namely its vehicle and warranty systems." 46 By October 1987, Mr Kratsas was, I believe, well familiar with the P M Sulcs software. It had been investigated at his request by Mr Holubinskyi. It had been available for viewing at the Daihatsu premises (on the Wang system) a few months earlier. Its functions had been analysed and compared with the existing Daihatsu system, Spares, in the report prepared by Mr Hooper of 17 September 1987. It was the system which Daihatsu ultimately selected once it had unsuccessfully gone down the ICL path, as I will shortly describe. 47 I have been dealing with a conversation which Mr Hooper attributed to Mr Kratsas in October 1987. I have accepted as probable that Mr Kratsas raised with Mr Hooper whether P M Sulcs could create a version of its software compatible with the ICL computer and the UNIX operating system. Mr Hooper alleges that he responded to that suggestion by referring to his existing relationship with Wang. He claims to have said, amongst other things, the following: (Hooper: Aff. 2.1.98, para 9) "PMS is a Co-operative Software Vendor ('CSV') to WANG and we have a long standing relationship where WANG provides PMS with free computer resources, sales leads and a sales commission on computer equipment sold to run PMS's software." 48 Mr Hooper said that if P M Sulcs were to move from Wang, it would need a similar relationship with another supplier. 49 The defendant, in its submissions, identified Mr Hooper's statements about Wang as an illustration of his unreliability (submissions Daihatsu, Mr Hooper's credit, p 9ff). Mr Hooper, it claims, gave conflicting accounts of the breakdown of his relationship with Wang. However, the picture which emerges from Mr Hooper's evidence is reasonably clear. At the time relevant to the present discussion (October 1987), there was plainly collaboration between Wang and P M Sulcs. P M Sulcs still occupied an office in the Wang building at North Sydney. It had inherited an association with Wang from its Canadian parent. The association with Wang had benefits, as Mr Hooper said. Nonetheless, Mr Hooper plainly saw that Wang represented the past. He identified, accurately as it happens, UNIX (and the C language) as the future. He felt a degree of frustration in "having to carry Wang around on our backs" (T.1698), and the burden of "Wang's poor perception in the market place" (T.1698). 50 So, as Mr Hooper explained, he was anxious to cut the Wang umbilical cord, but hesitant to do so until he had an alternative. I think it likely, therefore, that he spoke to Mr Kratsas in the terms that he deposed. 51 Daihatsu, having rejected Wang, and the P M Sulcs software, determined that it would use a new version of the Spares software, which was to be known as Vanguard. The task of rewriting that software was to be undertaken by a company, DMF. Mr Richard Womack was a consultant to that company. Within less than six months, however, it was evident that neither the ICL computer, nor the proposed software, was satisfactory (Kratsas: T.936). On 16 January 1988, Mr Hooper again met with Mr Kratsas. Mr Kratsas asked him to speak with Mr Womack, who had since been appointed a consultant to Daihatsu. Mr Hooper did so. Mr Womack later conducted a review of software packages suitable for Daihatsu. His review included the P M Sulcs Material and Customer Control System, MC2. Mr Womack executed a Confidentiality Agreement to enable him to view that system (Exhibit A, doc 107.1). 52 ICL, in the meantime, endeavoured to reassure Daihatsu. Its General Manager wrote to Mr Kratsas on 15 March 1988, in these terms: (Exhibit 11) "We understand your expression of concern regarding the Vanguard system following the decision by Auto Holdings in Perth not to continue with the implementation of Vanguard into their company. As you requested, we can confirm that ICL is indeed proceeding with the marketing of DMF 's Vanguard in Australia. We regard the product to be a logical successor to SPARES , and we are confident that it will continue the success that SPARES generated for both ICL and many of our customers." 53 ICL repeated its commitment to the successful implementation of the Vanguard software at Daihatsu. By May 1988, however, ICL acknowledged failure. The modified Spares software "would never get off the ground" (Kratsas: T.937). Daihatsu, nonetheless, remained committed, for the time being, to ICL. A tender document was prepared on 18 May 1988, which opened with these words: (Exhibit A, doc 110) "It is envisaged that Daihatsu systems will have to be developed by an established 'Software House'; as professional quality and on-going support are both required. However, it is still desired that I.C.L. shall assist and monitor performance." 54 The selection method was described as follows: "The selection of the software supplier shall be from a short list of companies agreed by both Daihatsu and I.C.L. Each supplier shall be asked to tender for development of the Vehicle system, on the basis of the preliminary 'user' design and number of programs, created for the previous system plan. Also, for a 'standard' accounting system." 55 A Vehicle System, it should be explained, is not an inventory control system (such as MC2). The dealers are not on-line. Rather, it is concerned with keeping track of vehicles which have been sold, recording their serial numbers, warranty details, and other such matters (Kratsas: T.1162). 56 The selection criteria included, inter alia, experience with the use of relational database (INGRES), which P M Sulcs could not satisfy, being a Wang system. 57 ICL had worked with a software company, Lingua 10. Lingua 10 was selected to write a software package in respect of "the new vehicle distribution and accounting systems for Daihatsu" (Exhibit A, doc 112). On 6 June 1988, Lingua 10 wrote to Daihatsu defining the work it would undertake. Its letter included the following proposal: (Exhibit A, doc 112) "Prior to the commencement of any work Daihatsu Australia will need to finalise their decision on marketing the end product as a package. Should Daihatsu Australia wish to pursue the option of developing this as a package then all development costs would be as stated above plus sales tax at the applicable rate. Profits from sale of the package (not including the value of any customisation) will be divided equally between the two companies." 58 Daihatsu was asked to acknowledge acceptance of Lingua 10's work proposal. Mr Kratsas did so on 20 June 1988. P M Sulcs and Fujitsu 59 An issue arises which is one of some importance. Did P M Sulcs introduce Fujitsu to Daihatsu, as Mr Hooper claimed, or did P M Sulcs come to the defendant through Fujitsu? Mr Kratsas said this, referring to mid 1988: (Kratsas: Aff. 31.3.98, para 24) "Shortly after Daihatsu experienced problems with the ICL hardware, Daihatsu's parent company suggested that Daihatsu obtain computer hardware manufactured by Fujitsu as Daihatsu's parent company used Fujitsu hardware. Accordingly, Daihatsu contacted Fujitsu Australia Limited … at the request of its parent company and made enquiries of Fujitsu as to what it could provide. The decision to contact Fujitsu was made solely on that basis." 60 Mr Kratsas added: (at para 28) "(a) … Fujitsu re-introduced Sulcs to Daihatsu. In particular, at some time in 1988, Mr Ross McLean of Fujitsu said words to me to the following effect: 'We have the hardware and we have found a software vendor that might be appropriate, P M Sulcs & Associates.'" 61 Mr Womack supported Mr Kratsas' evidence. Mr Kratsas told him that Daihatsu's parent wanted the Australian company to use Fujitsu hardware. As a consequence he spoke with Mr Hooper in these terms: (Womack: Aff. 30.3.98, para 23(b)) "Fujitsu will be supplying the computer hardware and will be responsible for this project." 62 The issue is important in the context of the condition precedent asserted by Daihatsu (cf Kratsas: Aff. 31.3.98, para 30(a)). Daihatsu says that it dealt with Fujitsu. It had no interest in dealing directly with a small software house. P M Sulcs was a sub-contractor to Fujitsu. According to Daihatsu, all parties understood that P M Sulcs would look to Fujitsu for payment. Fujitsu was to be responsible for the system, both hardware and software. 63 P M Sulcs rejected all but the last of these assertions. It said that it had its own relationship with Daihatsu. Daihatsu was attracted to its product. It was P M Sulcs which brought Fujitsu to the project. P M Sulcs, maintained its independent contractual relationship with Daihatsu. Fujitsu, for its own purposes, had agreed to underwrite the system, both software and hardware. It presumably did so because that was the price of its inclusion in the sale, which it saw as strategic. 64 I will now address that issue. Approach by P M Sulcs to Fujitsu 65 Mr Hooper was aware that the ICL System 25 and the Spares software were obsolete. Companies using that system, or that software, were potential targets for a new system, both hardware and software. With that in mind, he approached Fujitsu. He spoke to Mr Docherty, the Sales Manager of Fujitsu. In substance he told Mr Docherty that P M Sulcs was acceptable to Daihatsu. If its software could be made to run on Fujitsu hardware (by its conversion to C and the UNIX operating system), Fujitsu could also be made acceptable to Daihatsu. Mr Hooper, according to his testimony, enquired whether, in these circumstances, Fujitsu was prepared to establish a CSV relationship (a Co-Operative Software Vendor relationship) with P M Sulcs, targeting not only Daihatsu, but others using the ICL system and/or Spares (Hooper: Aff. 2.1.98, para 12). Mr Hooper alleged that Mr Docherty responded in the following terms: "Yes, we would be very pleased to have (P M Sulcs) as a (Fujitsu) CSV. Fujitsu has had a long relationship with Daihatsu in Japan but (Fujitsu) has not been able to interest (Daihatsu) because (Fujitsu) has not had any software that (Daihatsu) wanted. I will arrange a further meeting to be held regarding (Fujitsu's) CSV support of (P M Sulcs) and to explore whether we organise the porting of (P M Sulcs') MCS software to (Fujitsu) as part of a sale of computer equipment to (Daihatsu) or as part of a wider marketing agreement. If we decide on the wider marketing agreement approach, we will have to have a study done by (Fujitsu's) marketing department and that could take some time. I would rather organise it through the sale of computer equipment to (Daihatsu) as this way it will be under my direct control and a much quicker process. This way we can quickly pursue the ICL customer base and all the other customers that would be interested in a combination of (P M Sulcs') software and (Fujitsu) computers." (parenthesis added) 66 "Porting" refers to the conversion of computer software so that it will operate on different hardware. 67 Mr Docherty acknowledged that he met Mr Hooper in mid 1988. He denied, however, having had the conversation alleged by Mr Hooper. Mr Hooper, thereafter, filed a further affidavit (12.10.99). It elaborated upon his dealings with Mr Docherty. Mr Hooper said that he met Mr Docherty on 13 May 1988. Through Mr Docherty he learned that Daihatsu was likely to spend approximately $1 million on computer hardware. According to Mr Hooper, having introduced the sale to Fujitsu, P M Sulcs would then be entitled to a 25% commission ($250,000), applying the standard which operated in the industry. That sum, according to his discussion with Mr Docherty, was to be used in the conversion of the P M Sulcs software so it would run on the Fujitsu system. P M Sulcs would make up any shortfall in conversion costs. Mr Hooper attributed to Mr Docherty these words: (Hooper: Aff. 12.10.99, para 4) "Hooper: 'How did your sales people go during their visit to DAP?' Docherty: 'It went well, I'm convinced with your support we will be able to sell at least a 1 million dollars of FAL computer equipment to DAP. What I would now like you to do is for you to accompany my sales people on a visit to DAP to show DAP a united PMS/FAL front.' Hooper: 'So it's confirmed, we can count on receiving at least a $250,000 CSV commission from FAL to put towards our porting costs? Docherty: 'Yes.'" 68 Again, Mr Docherty denied a conversation in these terms. However, Mr Docherty acknowledged that he said the following: (Docherty: Aff. 7.4.98, para 10(a)) "However, I did say words to the following effect: 'If: (i) a sale can be made to Daihatsu by Fujitsu; and (ii) $1,000,000 worth of hardware is sold by Fujitsu to Daihatsu as part of that sale; and (iii) all of that hardware is manufactured by Fujitsu and not a third party. Fujitsu will contribute $250,000 to assist with the conversion of the Sulcs software so that the Sulcs software can run on Fujitsu hardware. If any of those conditions are not met, the amount that Fujitsu will contribute to assist with the conversion of the Sulcs software will also change. However, that amount will only be paid by Fujitsu after the software is successfully converted so that it can run on Fujitsu hardware.'" 69 In the concluding sentence Mr Docherty deals with the timing of the payment of $250,000. There is some tension between that assertion and Mr Docherty's acknowledgment that Fujitsu agreed "to contribute $250,000 to assist with the conversion". I will return to this issue. In the months that followed, Fujitsu and P M Sulcs continued to discuss the conversion, and the terms upon which Fujitsu would assist the plaintiff. It is enough, in this context, to note that Fujitsu, on whatever terms, was prepared to contribute $250,000 to the conversion of P M Sulcs' software. The Evidence of Fujitsu Personnel 70 Mr Hooper's account finds support in the evidence given by witnesses from Fujitsu. Mr Docherty gave the following evidence: (T.436) "A. Fujitsu had been talking to Daihatsu prior to Mr Hooper and I meeting, and had been attempting to be permitted to bid to Daihatsu and had made an unsolicited offer to Daihatsu in the past so …" 71 Mr Docherty added (T.437): "A. My understanding is that that proposal had been rejected by Daihatsu." 72 Mr Hooper, therefore, offered Fujitsu a way back to Daihatsu. It was in that context that Mr Docherty agreed (upon whatever terms) that Fujitsu would assist in the funding of the conversion to the extent of $250,000. 73 Mr McInerney, the Sales Manager for the Commercial Group of Fujitsu, gave the following evidence: (T.1476) "Q. Was it Fujitsu's practice from time to time to pay commissions to third party vendors who were able to introduce a sale to Fujitsu? A. Yes, it was. Q. And was it the practice to sometimes enter into arrangements with third party vendors to pay that commission or use that commission in some way within the sale arrangement, for instance in this case, by absorbing it as the cost of the conversion of the software? A. That's correct." 74 Mr McLean, the person who arranged for Mr Docherty to see Mr Hooper, said this: (T.1507) "Q. You were first introduced to the opportunity of being able to sell Fujitsu hardware to Daihatsu by Mr Hooper of P M Sulcs, weren't you? A. Yes. Q. That was in about July of 1988? A. Yes." 75 Mr McLean added: (T.1507/8) "Q. So the situation was that it was the efforts of Mr Hooper and P M Sulcs that created the opportunity for Fujitsu with Daihatsu? A. Yes." 76 In my view it is probable that Mr Hooper approached Daihatsu directly. I believe he reintroduced Daihatsu to the possibility of using a Fujitsu computer, as he claimed. On this aspect, I prefer the evidence of Mr Hooper, Mr McLean and, so far as it goes, Mr Docherty, to that of Mr Kratsas and Mr Womack. 77 First, and most tellingly, Fujitsu agreed to pay P M Sulcs a commission of $250,000 (on whatever terms) to assist in the conversion. That is a substantial amount. An agreement to pay that sum is consistent with P M Sulcs having introduced Fujitsu to the deal. 78 Secondly, it is also consistent with the sequence described by Mr Docherty. At the time Mr Hooper came to him, Fujitsu had put its proposal to Daihatsu, and had been rejected. Mr Hooper was the pretext for a fresh approach (infra: para 542). 79 Thirdly, the software of P M Sulcs was plainly attractive to Daihatsu (provided it could be converted to run on a UNIX system). Mr Womack, as Daihatsu's consultant, made a review in 1988 of available software. He thereafter made a recommendation in these terms: (Womack: Aff. 30.3.98, para 17) "I recommended that the Sulcs' Material Customer Control System Software (the 'Sulcs Software') be further considered as the computer application software for the new parts system as the functionality of that software most closely reflected Daihatsu's requirements." 80 Mr Womack saw the software as "a good fit" (T.1291), and certainly superior, in some areas, to Spares. There was no other software which was "as good a fit" (T.1291). Mr Kratsas likewise believed that the P M Sulcs package "could deliver the goods" (T.1151). The hardware, on the other hand, was, to some degree, interchangeable. A number of the hardware vendors offered the features which were being sought by Daihatsu. 81 There was evidence that P M Sulcs was regarded by Daihatsu as more important than Fujitsu. Mr Hooper recounted a conversation with Mr Kratsas in July 1988. The conversation took place after Mr Hooper had seen Mr Docherty and discussed the provision of $250,000 funding for the conversion. The conversation with Mr Kratsas, according to Mr Hooper, was in these terms: (Hooper: Aff.2.1.98, para 14) "Kratsas: 'Is there any hope of PMS establishing a CSV relationship with ICL?' Hooper: 'No, I much prefer FAL to ICL. I have met with Neil Docherty and we have agreed on a CSV relationship between PMS and FAL where the costs of conversion of our software to run on FAL'' computers can be covered out of the sale of a FAL UNIX computer to DAP.' Kratsas: 'If you prefer FAL then it's OK with DAP that DAP buys its computer from FAL instead of ICL. …'" 82 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 25). 83 However,Mr Hooper's account was consistent with the attitude adopted by Daihatsu somewhat later, when the context had slightly changed. Daihatsu, it will be remembered, had a longstanding relationship with ICL (supra, para 42). The ICL computer, Lingua 10, and a replacement package for Spares (using DMF) had been chosen by Daihatsu in mid 1988. However, as I will describe shortly, the replacement system experienced significant difficulties and delays. Indeed, it was these difficulties and that delay which prompted Daihatsu to reconsider P M Sulcs, and Fujitsu. A meeting was held on 18 January 1989. The Minutes were prepared by Daihatsu (Mr Holubinskyi). Messrs Kratsas, Womack and Holubinskyi, attended the meeting, as well as ICL personnel. Neither Mr Kratsas nor Mr Womack could recall the meeting. Mr Holubinskyi did not give evidence. The Minutes, however, identified Daihatsu's concern with ICL's performance. There had been a cost overrun of $600,000 to December 1988. The project was a year behind schedule. The network proposed by ICL was overdue and not functioning. Daihatsu, according to the Minutes, made the following proposal: (Exhibit A, doc 352) "Daihatsu propose removal of all ICL equipment and replacing it with a UNIX based Fujitsu running Sulcs software. This would have the Dealer network in place within 3-6 months." 84 ICL responded (according to the Minutes) with its own proposal. It would provide a more powerful computer, a Clan, and investigate the following: · "Cost associated with Clan/network upgrade and sizing (re Lingua 10/Fujitsu sizing) … · The portability and compatibility of Sulcs software. · Network design." 85 After the meeting, ICL composed an internal memorandum which included the following: (Exhibit H) "I know Daihatsu want to switch to Fujitsu (UNIX) with Schultz software. Daihatsu have said: a. ICL to take back all equipment and refund the money Daihatsu have paid or, b. Daihatsu would accept a Clan 7 running Schultz software if ICL took prime contractorship (as Fujitsu have offered) - however there does not appear to be a working UNIX version of the Schultz software (according to Daihatsu), so this is unacceptable to me." 86 "Schultz" is the phonetic equivalent of (P M) Sulcs. 87 The issue was put to Mr Kratsas in cross examination. He was asked the following: (T.969) "Q. Did you also say to ICL on or before 19 January 1989 that Daihatsu would accept a Clan 7 running Sulcs software if ICL took prime contractorship 'as Fujitsu have offered'? A. No. Q. You deny making that statement? A. I deny making that statement." 88 However, I accept that the Minutes are a more reliable guide, ten years on, than Mr Kratsas' recollection. I believe the statement was made. Indeed, I think it probable that Mr Kratsas had the conversation with Mr Hooper in July 1988, to which Mr Hooper deposed (supra, para 81). The evidence strongly suggests that Daihatsu was prepared to continue with ICL (rather than Fujitsu), using converted P M Sulcs software. Discussions Between Mr Hooper and Mr Kratsas 89 Mr Hooper gave evidence that he met Mr Kratsas at Daihatsu's premises, accompanied by Mr McLean of Fujitsu, in July 1988. Mr Kratsas made the following statement: (Hooper: Aff. 2.1.98, para 15) "The combination of MCS software, Lingua 10 software and FAL hardware is preferred by DAP over other suppliers. What I want is for FAL to prepare and submit a proposal for a complete FAL system based on porting the selected MCS software modules to FAL equipment running the UNIX operating system." 90 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 26). He said that no combination of software and hardware was preferred by Daihatsu at that time. 91 Mr McLean, the Sales Representative of Fujitsu, however, recollected such a conversation, although he attributed it to a time later than July. Mr McLean said this: (T.1507) "A. My view was that after a meeting in discussion with Leon Kratsas, he had specified that his ideal solution was to use the P M Sulcs software in a UNIX environment on a mainframe computer with an Ingres database. That's the solution that then John Hooper, representing P M Sulcs, and I, representing Fujitsu, configured. The appropriateness of the P M Sulcs software to Daihatsu was between P M Sulcs and Daihatsu, in my view." 92 It seems likely that something along the lines deposed by Mr Hooper was said by Mr Kratsas. 93 However, Mr Hooper went further. He alleged that he and Mr Kratsas negotiated the price of the P M Sulcs software. They also discussed the feasibility of marketing the Daihatsu system, once installed. Mr Hooper alleged that he quoted $350,000 as the price for the MC2 package, once ported to UNIX. Mr Kratsas, however, persuaded him to accept $150,000, holding out the prospect of further shared profits as a result of Daihatsu becoming a demonstration site. Mr Hooper attributed to Mr Kratsas these words: (Hooper: Aff. 2.1.98, para 17) "Don't worry about that, the combination of PMS software with FAL's computers and DAPs Lingua 10 financial software will be unbeatable in the market, particularly to Japanese companies and to ICL SPARES users. I want you to agree to only charging DAP $150,000 as a licensing fee and that the 15% annual maintenance should be based on this lesser figure, not the minimum price of $350,000. FAL is paying you a CSV commission and my calculation is that you can do it for that." 94 Mr Kratsas denied having discussed price with anyone other than Fujitsu. That denial was linked to his assertion (which I have rejected) that P M Sulcs came to Daihatsu through Fujitsu, rather than independently. I think it likely that there were discussions between Mr Hooper and Mr Kratsas on price. There were negotiations before agreement was reached at $150,000. That is the figure that appears in various documents thereafter (to which I will later refer). 95 I also believe it likely that there were discussions, at some point, about Daihatsu becoming a reference site. I will return to this aspect later when I deal with the alleged agreement to provide a reference site. Mr Hooper, in October 1988, had been handed a document by a Sales Representative of Fujitsu, Mr Warren Blood. The document listed almost one hundred companies which had the ICL System 25. Daihatsu was on the list (Exhibit A, doc 118). That system was now obsolete, and those companies, like Daihatsu, were potential targets for both hardware and software. I have no doubt that Mr Hooper was excited by that prospect, and sought to transmit his optimism to Mr Kratsas to secure his co-operation, to their mutual advantage. Investigation of Conversion 96 With the prospect of securing a sale to Daihatsu, P M Sulcs began investigating the conversion of its software from Wang VS Cobol to the C language. I will later deal with the technical feasibility of undertaking that conversion. I should, at this stage, explain that it involved two steps, although it was conceivable that they could both be taken at the same time. The two steps were: · First, the conversion of the Wang VS code (the Wang dialect of the Cobol language) to standard Cobol (sometimes referred to as ANSI standard Cobol or MicroFocus Cobol). · Secondly, the conversion of ANSI Standard Cobol to the C language. 97 On 1 November 1988, Maris Sulcs in Canada (one of the founders of the company) drew attention to an Australian company, Sticky Software, which had a conversion tool for the first stage (Exhibit A, doc 126.1). The plaintiff's written submissions helpfully describe what was involved: (p 10, para 24) "24. Wang VS COBOL contains a number of statements that are not found in standard COBOL . These statements are shorthand routines for various system functions such as input/output routines to printers, hard disks and so forth. PMS contacted a company called Sticky Software Pty Ltd ('Sticky') which owned a program which could 'strip out' these statements from the Wang program, and thereby produce standard COBOL that in turn would be capable of being automatically converted to C by another program called a 'conversion tool'. The standard COBOL referred to in the evidence is sometimes called 'MicroFocus COBOL '." 98 On 17 November 1988, P M Sulcs met with Sticky Software. Sticky Software furnished a quote for the entire project (including the second stage) of $350,000. The time estimate was sixteen weeks (Exhibit A, doc 128A.1). 99 In addition, P M Sulcs explored the use of a conversion tool (known as Coblix-C) which would address the second stage. The tool (which was a computer programme) was owned by the US corporation, Rapitech Systems Inc ("Rapitech"). It was marketed in Australia by Paradyne Australia Limited ("Paradyne"). On 2 September 1988 Mr Santa Maria (the Technical Services Manager of P M Sulcs) spoke to Paradyne. On 26 October 1988 Rapitech wrote to Paradyne identifying what had to be done to convert Wang VS Cobol to the C language. Rapitech needed a sample of the code. It would then strip away ("comment out") features specific to Wang, thereby generating standard Cobol, which could be converted (Exhibit A, doc 125). On 11 November 1988 Paradyne quoted A$35,000 for the Coblix-C conversion tool. 100 P M Sulcs provided Rapitech with a sample of its code (20,000 lines). The sample converted well. Rapitech wrote to Mr Hooper on 2 December 1988 in these terms: (Exhibit A, doc 128B.2) "In the present project, P M Sulcs has Cobol applications written specifically for the Wang VS environment. You wish to convert and migrate those applications to the Fujitsu UTS target. Based upon the sample provided us of Wang VS Cobol previously converted to MicroFocus Cobol, we have demonstrated our unique capability to a 99% + automatic conversion." 101 It was suggested that P M Sulcs retain Rapitech to undertake further analysis in Australia. No guarantee could be given until that was done. The letter concluded with these words: (Exhibit A, doc 128B.3) "John, I hope this offer allows you to proceed to the next level of approval for this project with some degree of confidence and comfort." 102 On 13 October 1988 Mr Hooper met Mr McInerney of Fujitsu. Mr McInerney asked for a corporate profile of P M Sulcs (Hooper: Aff. 18.2.98, para 5). On the letterhead of Cullen Detroit Diesel Allison Ltd ("Cullen Detroit") (a shareholder of P M Sulcs Limited), Mr Hooper was sent the following message for Mr Maris Sulcs: (Exhibit A, doc 128.1) "Enclosed please find the Company Profile for P M S Enterprises, as supplied by Maris." 103 The documents enclosed related to both P M Sulcs Enterprises, and Cullen Detroit. I will return to this aspect in the context of the licence issue. 3. THE PROPOSAL Presentation of the Proposal 104 P M Sulcs prepared a document headed: "A Software Proposal to DAIHATSU AUSTRALIA 15/12/88" 105 The document is voluminous. With annexures it runs to 167 pages (Hooper: Aff. 2.1.98, annexure G). It is one of the documents said by the plaintiff to constitute the agreement which is the subject of this action. I will examine its terms shortly. 106 Mr Hooper said that he delivered the proposal personally to Mr Kratsas at Daihatsu's premises. Mr Kratsas claims that he received the document under cover of a letter from Fujitsu dated 16 December 1988 (to which I will shortly refer). Mr Hooper further alleges that, upon the occasion of his delivering the proposal, he spoke to Mr Kratsas. He was told that Fujitsu had accepted responsibility for the efficient running of the system, both hardware and software, which was the normal Japanese way of doing business. Mr Hooper's account of his conversation with Mr Kratsas included the following: (Hooper: Aff. 2.1.98, para 21) "That seems a good offer, it sometimes is very hard to co-ordinate a lot of different suppliers in the one project, it's good that FAL are going to fulfil this role. You understand that PMS is an independent supplier and we always deal directly with our customers." 107 Mr Kratsas, according to Mr Hooper, acknowledged that he had that understanding. Mr Kratsas denied that conversation. In his affidavit in response, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 30) "(a) At the time referred to in that paragraph (that is December 1988) Daihatsu was dealing with Fujitsu." (parenthesis added) 108 I have rejected that assertion. I believe it probable that Mr Kratsas was dealing directly with Mr Hooper. I also think it probable that the proposal was hand delivered by Mr Hooper, and that he spoke to Mr Kratsas. Although the proposal documents had been compiled using a word processor (and reappear in other tenders made in 1989), it was the product of considerable work. It also represented a substantial opportunity for Mr Hooper. 109 The text of the conversation with Mr Kratsas is less certain. I accept that Mr Kratsas said that Fujitsu was to take responsibility for the system, both software and hardware. That is consistent with the defendant's case. I shall defer, for the moment, making a judgment as to whether Mr Hooper also said that P M Sulcs was an independent supplier who always dealt directly with its customers (which Mr Kratsas was said to have acknowledged). I will return to that issue once I have assembled all the evidence relating to the condition precedent issue. The Terms of the Proposal 110 The proposal put by P M Sulcs described in some detail the Material and Customer Control System. It identified the modules included in that system (Exhibit A, doc 204). The system could be varied by adding or subtracting modules. The modules ultimately selected in April 1989 (the subject of the analysis report, which I will come to), in fact, included modules additional to those set out in the proposal (Exhibit A, doc 475, Items 41, 42 and 43). 111 The proposal included a client list, information concerning P M Sulcs, as well as a pamphlet describing the MC2 software. The pamphlet referred to the Wang computer, and was obviously prepared with that system in mind (Exhibit A, doc 259). 112 Two phases were described; the identification phase, and the implementation phase. The proposal said this: (Exhibit A, doc 206) "The first is the identification phase, whereby staff from P M Sulcs and Daihatsu Australia review the existing procedures to understand the flow of information and data through your business and to determine those features which must be carried forward in your new implementation. This information is documented in an analysis study that assures both parties that all details have been covered and provides an acceptance plan indicating the milestones for project completion. A detailed design specification that describes all the modifications required for the packaged software to reflect the special needs of your organization is then produced. It is signed off by Daihatsu Australia before we commence the actual programming work." 113 The proposal continued: (Exhibit A, doc 208) "At the completion of this phase, P M Sulcs will confirm the viability of the implementation within the time frame, budget and hardware recommendations. The conclusions and recommendations will be presented in the form of an analysis report to Daihatsu Australia." 114 The function of the analysis report was then defined in these terms: (Exhibit A, doc 208) "The analysis report becomes the project definition document and is used to control what work is to be done. In effect, becomes the acceptance document, together with an appropriate DPAR s, defining the completion of the project." 115 The second phase was defined as follows: (Exhibit A, doc 206) "The implementation is next. In this phase, the software modules are modified, documented and installed with any other additional activities necessary to ensure that the system meets your requirements and can go into full production." 116 The proposal also dealt with the software installation, although in terms which were clearly appropriate for a client who had a Wang computer. It said this: (Exhibit A, doc 210) "The software will be delivered from our Sydney office to the machine location designated by Daihatsu Australia. Software will be installed and pretested before being turned over for your use. Any modules which do not require customization can be installed as soon as the hardware has been installed. …" 117 No modules could be installed upon the Fujitsu computer until the software had been converted to the C language, running on a UNIX operating system. 118 The proposal included a project schedule which was as follows: (Exhibit A, doc 215) Project Schedule The following project plan is presented for review by Daihatsu Australia. Modifications to this schedule may be required subject to client priorities. No. Date Activity Responsibility 1 2 weeks Analysis Study & Report P M Sulcs 2 2 weeks Analysis Report Approval Daihatsu Aust 3 1 week Systems Design P M Sulcs 4 1 week Installation of P M Sulcs unmodified software & training P M Sulcs 5 1 month Parallel Testing with Financial System Software Daihatsu Aust 6 1 week Systems Design Approval Daihatsu Aust 7 3 weeks Software Modifications P M Sulcs 8 3 days Data Conversion P M Sulcs 9 2 weeks Installation of Software Modifications P M Sulcs 10 1 week Start up Daihatsu Aust 11 2 weeks Operational Training P M Sulcs 12 1 month Parallel Run Daihatsu Aust 119 The schedule, in total, presupposed that the job could be completed in approximately 24 weeks. The reference to conversion in the project schedule, incidentally, is not a reference to conversion of the P M Sulcs software to the C language. It is reference to data conversion, which would enable the system to interface with existing systems, and "data formats" (cf Exhibit A, doc 211). 120 The quote was valid for a period of thirty days. A summary was provided in these terms: (Exhibit A, doc 221) SUMMARY OF SOFTWARE AND SERVICES - FUJITSU M760-4 UTSM One off Charges Annual Charge Description $ $ Analysis Report 15,000 nil Software Material & Customer Control System 150,000 22,500 (under UNIX, C, Ingres Database) Implementation Services 12,000 ______ Training (3 weeks) System Total 177,000 22,500 OPTIONAL SERVICES TBA Data Conversion (re Analysis Rpt) 7,500 Project Management 121 The summary is the only reference to the conversion of the software to C language, and even then the reference is oblique. The heading referred to the Fujitsu M760-4 computer. That system plainly was not a Wang system. It did not use Wang VS Cobol. It used C language and was to be adapted to have a UNIX operating system. A description of the software, however, stated that it was "under UNIX, C, Ingres database". 122 Nonetheless, one fact unquestionably part of the factual matrix, well known to both parties, was that the plaintiff's software required conversion. Indeed, Mr Kratsas said this (referring to 16 December 1988): (Kratsas: Aff. 31.3.98, para 28(f)) "By the time I received the Fujitsu Proposal, I understood that: (i) the Sulcs' software was written in a version of the computer language known as ' COBOL ' to run on Wang hardware (' COBOL ') and it was not written to run with a RDBMS ; (ii) as a result, that software could not be run on Fujitsu hardware with an RDBMS ; (iii) Mr Hooper proposed to rewrite or convert the Sulcs software into another computer language known as 'C' in order for the Sulcs' software to run on the Fujitsu hardware and with the Ingres RDBMS (which was to be the RDBMS that was to be used in the new computer system); (iv) it was a highly technical and complex process to change software written in ' COBOL ' to run on Wang hardware to 'C' code to run on Fujitsu hardware with an Ingres RDBMS ." 123 The proposal was accompanied by a number of appendices, including: · The P M Sulcs standard Terms and Conditions (Exhibit A, doc 224). · The standard Programme Licence Agreement (Exhibit A, doc 233). · The standard Software Maintenance Agreement (Exhibit A, doc 246). 124 In the Terms and Conditions, clause 14, Wang is crossed out (Exhibit A, doc 231). Nothing was substituted in its place. The other documents refer to Wang, and had not been adapted or completed to reflect the specific proposed terms. The Fujitsu Proposal 125 As mentioned, Fujitsu wrote a separate letter to Daihatsu the next day, 16 December 1988. The letter opened with these words: (Exhibit A, doc 345) " FUJITSU is pleased to have the opportunity to present our proposed solution to the computing requirements of DAIHATSU, as we understand them from our recent discussions with yourself and your technical staff." 126 The letter continued, defining the proposal: "In keeping with the FUJITSU concept of providing a total solution, this proposal incorporates the following: FUJITSU M-760/4 Mainframe and Communications Processors UTS/M UNIX Operating system, (Includes 'C') COBOL ' 85 P M SULCS Material and Customer Control System INGRES Relational Database Management System and 4GL" 127 Fujitsu's letter concluded as follows: "We feel that the combination of the above components provides an ideal solution to DAIHATSU'S computing requirements as well as providing a compatible environment for the existing application suite. Conversion of current applications would be minimal and current development could continue virtually uninterrupted. We recommend acceptance of the enclosed proposal and those attached from P M SULCS for the application software and RELATIONAL TECHNOLOGY PTY LTD for the Relational Database INGRES and we look forward to your early decision." 128 The letter was accompanied by a copy of the P M Sulcs proposal of 15 December 1988, and that of Relational Technology Pty Ltd, who marketed the Ingres database. I think it probable that the proposal of P M Sulcs did not include the various appendices (cf Womack: Aff. 30.3.98, Exhibit RHW1 (Exhibit A, doc 129) with Mr Hooper's affidavit (Exhibit A, doc 177). I have concluded already that, by the time Mr Kratsas received the Fujitsu proposal, he already had a copy of the P M Sulcs proposal delivered by Mr Hooper. 4. THE REFERENCE SITE AGREEMENT Meeting 30 December 1988 129 Having submitted the proposal, Mr Hooper met Mr Kratsas at his office on 30 December 1988. He stated that he discussed the possibility of Daihatsu becoming a reference site. 130 There can be no doubt that the meeting took place. Mr Hooper wrote a letter the same day, which began with these words: (Exhibit A, doc 346) "Thank you for your time today to discuss our MC2 software solution running under Fujitsu's UTSM environment. As you are aware there are (sic) been a large number of ICL/Spares installations in Australia which are now exceeding their system life. It is P M Sulcs' intention to convert these ICL/Spares users to Fujitsu/MC2 users as these systems come up for renewal. We need Daihatsu's help to achieve this goal. This help is in the form of Daihatsu's being the first ICL/Spares user to instal a Fujitsu/MC2 replacement system and in your being a demonstrations and reference site for MC2 to other ICL/Spares users." 131 The consideration was then set out. The letter continued: "In recognition of this, P M Sulcs will reduce the annual software maintenance to Daihatsu by 25% for each sale of MC2 systems to ICL/Spares users, (where Daihatsu has acted as a demonstration centre during the pre-sales effort). Therefore, Daihatsu's then current software maintenance fee will be totally refundable after four sales. This discount will accumulate to a maximum of 100% over 30 months from the date of order of your Fujitsu/MC2 system. Also, should Daihatsu be required to upgrade the initial Fujitsu M series computer during the same 30 month period P M Sulcs will provide, free of charge, a MC2 licence for the enlarged Fujitsu M series UTSM system. Leon, I hope that this proposal meets with your approval as I am looking forward to working with you and Richard on this project. …" 132 Mr Hooper says that he later spoke to Mr Kratsas. The conversation was in these terms: (Hooper: Aff. 2.1.98, para 23) "Hooper: 'Did you receive my fax and do you accept our incentive proposal?' Kratsas: 'Yes, I have it and we agree with it.'" 133 Mr Kratsas denied that conversation. He acknowledged, however, that at some point he said to Mr Hooper words to the following effect: (Kratsas: Aff. 31.3.98, para 32) "Hooper: 'If you implement the Sulcs' software, can we use your site as a reference site?' Kratsas: 'Yes, if it all goes okay.'" 134 It is this conversation which, in the context of the letter of 30 December 1988, is the foundation for the plaintiff's claim that it had an agreement with Daihatsu in respect of a reference site (supra: paras 13, 16). The Response of Daihatsu 135 Two issues arise: · First, is it probable that a conversation in the terms alleged by Mr Hooper took place? · Secondly, if so, did that conversation, in the context of the letter of 30 December 1988, amount to an agreement? 136 Addressing the first question, it will be remembered that Mr Hooper alleged (and I have found) that the subject of co-operation between Daihatsu and P M Sulcs had been discussed in the latter part of 1988 (supra: para 95). In the context of those discussions, Mr Kratsas said this: (Kratsas: Aff. 31.3.98, para 22(c)) "… any computer system used by Daihatsu was to be for its own internal purposes. At no time was there any intention for Daihatsu to sell, market or promote any goods other than motor vehicles and parts for those vehicles. At all material times neither Daihatsu nor its parent company participated in any business other than the manufacture and distribution of motor vehicles and parts (apart from the provision of finance in relation to the purchase of motor vehicles and parts, which business is carried on by Daihatsu's parent company)." 137 Board approval for an agreement to market software would be required. 138 However, it is plain that Mr Kratsas was alive to the potential advantages to Daihatsu of the company becoming a reference site. He accepted such a proposal in the context of Lingua 10 in June 1988 (supra: para 57). Indeed, Mr Hooper wrote to Mr Kratsas on 23 March 1989 in order to prevent a collision between Daihatsu's interests (as the sponsors of Lingua 10), and those of P M Sulcs. The letter referred to discussions concerning these issues. It was in these terms: (Exhibit A, doc 407) "Further to our discussion last month regarding Daihatsu's desire to sell your financial software now being developed by Lingua 10. I confirm that P M Sulcs would be happy to promote your financial software to the exclusion of our own financial software to existing ICL SPARES Users if Daihatsu's General Ledger, Account's Payable, Account's Receivable and Vehicle System are completed and of marketable quality by July 31. In addition to your having the software completed in time to capitalise on the existing prospects now available to us we would require that Lingua 10 (as your agents) agree to promote the P M Sulcs Material and Customer Control system to the exclusion of any inventory management or purchase order software they may develop. This requirement ensures that both parties are bound to work together in the mutual promotion of each others products and to present a professional image to the existing ICL SPARES users. In addition P M Sulcs also offer to work with Lingua 10 (as your agents) on prospective accounts, other than the existing ICL SPARES users, on a prospect by prospect basis where it is mutually agreed at the time to do so." 139 Further, Mr Kratsas discussed with Fujitsu a similar marketing arrangement involving the Fujitsu computer and the Sulcs software. On 16 March 1989 Fujitsu wrote to Mr Kratsas in these terms: (Exhibit A, doc 403) " FUJITSU is pleased to confirm our agreement with you as follows: 1. For each new sale of the minimum hardware and software configuration listed in item 3 below where DAIHATSU AUSTRALIA PTY LTD has provided a positive reference to the prospective client thereby contributing to the success of the sales effort FUJITSU AUSTRALIA LTD agrees to credit DAIHATSU AUSTRALIA PTY LTD the sum of $30,000. 2. This offer is limited to a maximum of 5 sales, (ie a total of $150,000), or 3 years whichever occurs first. 3. The minimum configuration of hardware and software applicable to this agreement is: FUJITSU 'M-Series' Mainframe Configuration FUJITSU UTS/M UNIX Operating System P M SULCS Material and Customer Control System ( UNIX/C code version) We look forward to working with you in further developing a close and mutually profitable business relationship." 140 Mr McLean, the Sales Representative from Fujitsu, was aware that Daihatsu was under consideration as a demonstration site (T.1517). Mr Womack, the EDP Manager of Daihatsu, wrote to P M Sulcs on 1 June 1989 (attempting to agree upon modifications to the system) in these terms: (Exhibit A, doc 1042) "It should also be noted that both Sulcs and Daihatsu both have an on going benefit if the package is sold to other Australian Users. In this context, screen layout and terminology changes required by Daihatsu will both enhance the product and be mandatory for other sales in Australia." 141 Mr Womack gave the following evidence: (T.1318/9) "Q. Had you been involved in discussions with Mr Hooper and Mr Kratsas where the issue of further sales of the product of Sulcs software was discussed? A. Probably. I was certainly aware that there was a desire to on-sell the product and I certainly had been asked to participate in that. Q. And what did you understand from your participation as to what was going to happen? A. That potential clients may be shown around Daihatsu and, as the main user of the Spares or the Sulcs system at Daihatsu, I would explain to them how it worked and explain to them the benefits that Daihatsu would get out of that system. Q. And there was to be a fee paid to Daihatsu in the event of anybody who visited Daihatsu as a demonstration site if they subsequently bought the Sulcs software? A. I was vaguely aware of that. I was not aware of the details of it. Q. And that is something that you understood had been agreed between Mr Kratsas and Mr Hooper before you wrote this document on 1 June? A. Yes. Q. And it was because of what Mr Kratsas had told you about the agreement that you considered it appropriate to insert such a paragraph in what you were providing back to P M Sulcs? A. Yes, yes." 142 Daihatsu sought to answer this material with two arguments. First, it pointed to the terms of two faxes sent by Mr Hooper the same day as his letter (30 December 1988) (Exhibit A, docs 346.1 and 346.3). One letter was to Canada and the other to Mr McInerney at Fujitsu. Both letters annexed a copy of Mr Hooper's letter to Mr Kratsas. The letter to Mr McInerney referred in a footnote to that letter, saying, "My letter to Leon is attached". Neither letter, however, referred to Mr Kratsas' agreement to make Daihatsu a reference site. 143 I am not persuaded by that argument. It assumes that Mr Hooper had already spoken to Mr Kratsas at the time the faxes were sent. I would infer that Mr Hooper returned to the office, despatched his letter to Mr Kratsas, and the faxes to Canada and Fujitsu, and allowed Mr Kratsas some time to digest the proposal which was being made. 144 Daihatsu relied upon a second argument. It pointed to the evidence of Mr Hooper in the context of a sales presentation on 31 January 1989. It described his evidence as "contradictory" and "slippery". The cross examination culminated in the following question and answer: (T.203) "Q. You would agree with me that that is not something that explicitly refers to any sales, is it? A. It is a bullet point referring to what we had proposed or agreed with Mr Kratsas to that point in time." 145 I am not persuaded that Mr Hooper's evidence was contradictory or slippery. I believe it is clear that a conversation between Mr Hooper and Mr Kratsas in the terms alleged by Mr Hooper took place. Mr Hooper's last answer is, however, instructive on the second issue, to which I will now turn. Was there a Binding Contract? 146 The written submissions of Daihatsu included the following: (Daihatsu submission 2, p 17/18) "2.49 It is one thing for business people like Messrs Kratsas, McLean and Hooper to discuss plans about what might happen if things went well in a complex arrangement in which Sulcs was to undertake the Conversion and then get the MCC System running on the M760. It is another thing to say that Daihatsu had some present contractual obligation to Sulcs under the Reference Site Agreement. All that could be said is that if Daihatsu in the future allowed Sulcs to use it as a reference site, then Daihatsu may be able to say that the consideration payable to it by Sulcs would be the reduced fee. 2.50 But there were no conditions laid down, apart from Daihatsu's sole discretion to allow itself to be so used if and when the MCC System were running on the M760 at Daihatsu, as to how Daihatsu might be put on display. Could Sulcs turn up with a customer at any time whether convenient to Daihatsu or not so that Daihatsu had to let them come and inspect? What obliged Daihatsu to open its doors? And what if Daihatsu said that it did not want someone Sulcs wished to bring along, to come into its premises - could Daihatsu be in breach of this ' agreement' if it refused entry selectively, or at all?" 147 The submissions continued: "2.51 The net result of any analysis of the so called Reference Site Agreement, is that it did not bind Daihatsu to do anything. And at 30 December 1988 Daihatsu had no obligation to Sulcs under the SMA to which the reduction in fee proposed, if a sale were made in the future, could attach." 148 My attention was draw to the joint judgment of Dixon CJ, Williams, Webb, Fullagar and Kitto JJ in Australian Knitting Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, where the following was said: (at 457) "It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty. In such cases as the present, therefore, in order that a contract may be created by offer and acceptance, it is necessary that what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation. The intention must, of course, be judged in the light of the principle laid down in Freeman v Cooke ((1848) 2 Ex 654 at p663 [154 ER 652 at p656]), but, in the absence of such an intention, actual or imputed, the alleged 'offer' cannot lead to a contract: there is, indeed, in such a case no true 'offer'." 149 At first I was attracted to the defendant's argument that there was no intention to be bound. After all, as at 30 December 1988, Daihatsu simply had a software proposal from P M Sulcs. There had been no acceptance. On the plaintiff's case, a contract was ultimately made once an analysis report had been prepared by P M Sulcs, and examined and accepted by Daihatsu. That was some months away. 150 However, the detail which is missing (the hours during which the site would be made available, the role of Daihatsu personnel in displaying the software, etc) is also missing from the agreement between Daihatsu and Fujitsu on 16 March 1989 (supra: para 139). Yet I believe that both Daihatsu and Fujitsu certainly intended to be bound. Moreover, in November 1989, Daihatsu entered a formal agreement with the software company DIS, which replaced P M Sulcs. That agreement was, likewise, in general terms: (Exhibit A: doc 1236) "This fee will be reduced by twenty-five percent (25%) for each of the first four contracted sales of the same software product by DIS and for which the licensee has been used as a reference site by DIS." 151 For there to be agreement arising out of Mr Hooper's letter of 30 December 1989, and Mr Kratsas' acceptance of that letter, it would be necessary to imply the following terms: · First, that the agreement was subject to a condition precedent that Daihatsu agree to purchase the P M Sulcs software, and an appropriate licence (which condition was fulfilled on 18 April 1989). · Secondly, that Daihatsu should provide reasonable access to the reference site (cf Burger King Corporation v Hungry Jack's Pty Limited (2001) NSWCA 187, para 141ff). 152 Although the implication of such terms does not appear to me unreasonable (cf BP Refinery (Westernport) Pty Limited v The Shire of Hastings (1977) 180 CLR 266 at 282/283), that is not the way in which the plaintiff has pleaded or presented its case. However, I do not believe that it is necessary that I resolve this issue. I am persuaded that the parties regarded themselves as having a Reference Site Agreement, whether in law they had one or not. Hence, I believe it probable (almost to the point of certainty) that, had the software been successfully installed, Daihatsu would have operated as a reference site for P M Sulcs on the terms identified by Mr Hooper in his letter of 30 December 1988. The Agreement had been accepted in principle, if not in law. Details concerning access would have been worked out by reasonable arrangements made at the time. 5. NEGOTIATIONS AND PREPARATION Resolution of Differences with ICL 153 I have referred to a meeting between Daihatsu and ICL on 18 January 1989 (supra: para 83). The meeting concerned the failure of ICL to deliver a computer system within budget and on time. Daihatsu, throughout January 1989, explored a number of options. On the one hand, it threatened the removal of ICL equipment, and its replacement with Fujitsu and P M Sulcs, unless a satisfactory solution could be found. At the same time, it negotiated with Fujitsu and P M Sulcs. It was, of course, perfectly appropriate that Daihatsu should, at the one time, pursue both courses. 154 Having discussed their differences on 18 January 1989, ICL and Daihatsu met again on Friday 27 January 1989. On 30 January 1989 ICL wrote to Daihatsu. It outlined a basis upon which the parties could continue to work together (Exhibit A, doc 352.26). On 1 February 1989 Mr Kratsas responded. He agreed with the ICL proposal, subject to certain refinements. Essentially, ICL was to waive certain charges; it was to upgrade the computer hardware from a Clan 5 to a Clan 7, and attend to various other matters. The agreement included the following term: (Exhibit A, doc 353) "6. ICL will not be prime contractor with regard to Spares and Vehicles development. ICL will be prime contractor for Network and Communication development." 155 ICL persevered for a further month or so, by which time it was apparent that the system had failed. A meeting between Daihatsu and ICL took place on 24 February 1989. On 17 March 1989, ICL wrote to Daihatsu setting out the basis for disengagement which had been agreed (Exhibit A, doc 404.1). The way was clear for the replacement of the ICL system. Daihatsu continued to use that ICL system, with its shortcomings, in the meantime. Discussion Between P M Sulcs and Daihatsu 156 On 10 January 1989, Mr Kratsas sent a request to P M Sulcs in these terms: (Exhibit A, doc 347) "Confirmation of requirement of analysis on spare parts systems subject to reaching an agreement with Fujitsu on costing of hardware." 157 That was not quite an acceptance of P M Sulcs proposal, for reasons which can now be understood (supra: paras 153/4). 158 On 31 January 1989 a presentation to Daihatsu was arranged by Fujitsu. Mr Kratsas and others from Daihatsu were present, as well as representatives from Fujitsu, Ingres database, Lingua 10, and Mr Hooper from P M Sulcs. The notes of Mr Hooper's presentation have survived (Exhibit A, doc 352.2). He spoke, amongst other things, about the migration of P M Sulcs' software from Wang to UNIX on a Fujitsu system (Exhibit A, doc 352.5). His talk included a project schedule suggesting completion by the end of May 1989, were he to start work on the analysis immediately (Exhibit A, doc 352.24). 159 In the course of the presentation Mr Docherty, from Fujitsu, made the following remark, according to Mr Hooper: (Hooper: Aff. 2.1.98, para 25) "In addition to the commitments and obligations by the companies present, FAL accepts an overall responsibility for the coordinating, the installation of the computers and the porting of the PMS software for DAP. As in Japan FAL will be DAP's 'Prime Contractor'." 160 Mr Docherty denied having said these words, although he acknowledged that, by March, Fujitsu had agreed, in principle, that it would accept that responsibility (Docherty: Aff. 7.4.98, para 12(c)). Mr Kratsas, however, confirmed that Mr Docherty said the words attributed to him by Mr Hooper. I think it likely they the words were said, and that Mr Docherty is mistaken. 161 Mr Kratsas said that Mr Docherty added: (Kratsas: Aff. 31.3.98, para 33) "Docherty; 'Fujitsu will be the prime contractor for this project. Let's make sure we all know what that means. As prime contractor, Sulcs asks for money from Fujitsu, Fujitsu pays Sulcs and Daihatsu pays Fujitsu, provided the software has been delivered and is working.' Hooper: 'That's right.' Kratsas: 'That's right'" 162 Mr Hooper disagreed with this account. In the context of a presentation, such a comment by Mr Docherty seems to me unlikely. 163 In the meantime, Daihatsu reached its agreement with ICL, so that the engagement of Fujitsu and P M Sulcs stalled momentarily. One gathers, however, that it soon became apparent that ICL would not succeed. On 24 February 1989 Mr Kratsas (on behalf of Daihatsu) signed a Licence Agreement in respect of the Relational Database. On 2 March 1989 P M Sulcs wrote to Daihatsu in the following terms: (Exhibit A, doc 365) "Relational Technology have advised that you have accepted their proposal and I understand from Fujitsu that they anticipate that their contract with you will be finalised tomorrow, Friday 3 March 1989. Therefore, there remains the issue of confirming the suitability of the P M Sulcs Material and Customer Control System to address Daihatsu's material control requirements by conducting the analysis as proposed in our quotation of 15 December 1988." 164 The terms of that letter are consistent with the plaintiff's assertion that it regarded itself as independent from Fujitsu, with its own quotation. 165 P M Sulcs, by this letter, sought confirmation that it could begin the analysis. It asked for a cheque for the analysis fee ($15,000). Mr Kratsas was invited to endorse the letter with his acceptance, which he did at a meeting with Mr Hooper on 9 March 1989 (Hooper: Aff. 2.1.98, para 29). 166 On 10 March 1989 P M Sulcs sent an invoice to Daihatsu for $15,000, being the fee specified in the proposal for the Analysis Report (Exhibit A, doc 221). Mr Kratsas consulted Fujitsu before paying that money. He was told that it was in order for him to pay, and a cheque was then sent to P M Sulcs. Mr McLean (of Fujitsu) confirmed his conversation with Mr Kratsas by letter on 17 March 1989, adding these words: (Exhibit A, doc 404) "We are proceeding with the tripartite agreement between our three organisations." 167 Mr McLean had in mind an agreement between Daihatsu, Fujitsu and P M Sulcs (McLean: Aff. 2.4.98, para 11). No such agreement was ever executed. Indeed, no such agreement was ever drafted. 168 On 23 March 1989 Mr Hooper wrote to Mr Womack (of Daihatsu) in these terms: (Exhibit A, doc 406) "Further to our telephone conversation of today this is to confirm our request that Daihatsu confirm its acceptance of our Terms and Conditions of Sale, Software Licence Agreement and Software Maintenance Agreement documents so that we can proceed with the conclusion of our contracts with Fujitsu. Please understand that this request is for your confirmation of the acceptance of our Terms and Conditions of Sale and Agreement documents, not the Agreements themselves. These will be signed at the completion of the analysis prior to the conversion commencing." 169 Daihatsu did not formally respond to Mr Hooper's letter. However, on 3 April 1989 Mr Hooper met Mr Womack and was shown a draft response. The draft was dated 29 March 1989. It opened with these words: (Exhibit A, doc 408) "This is to assure you that Daihatsu agree in principle to your standard terms and conditions of business, as detailed in the 'Terms and Conditions of Sale', the 'Program Licence Agreement' and the 'Software Maintenance Agreement'. In particular, we agree with your terms of payment which form part of the Terms and Conditions of Sale. These three contracts will be executed, assuming that the detailed analysis results are satisfactory, and it is agreed to progress with the installation of the Sulcs Materials Control System." 170 The letter continued, identifying three conditions, the first two of which were as follows: "1. Approval by our legal department. 2. Acceptance by Fujitsu as 'prime contractor'." 171 The third condition concerned disengagement, should Daihatsu find the P M Sulcs package unsatisfactory. There was a second version of the draft letter, with an interlineation by Mr Kratsas, amending Mr Womack's draft of the third condition (Exhibit A, doc 409). 172 The conversation between Mr Womack and Mr Hooper followed the signing by Daihatsu of the Prime Contract Agreement on 30 March 1989 (Exhibit A, doc 447). That agreement had been prepared by Fujitsu, and presented to Mr Kratsas for signature. It is an important document, which I will deal with more fully below. Mr Womack told Mr Hooper that he had drafted the letter before Daihatsu had signed the Prime Contract Agreement. Point 2 was now "superfluous" (Hooper: Aff. 12.2.99, para 2(uu)). According to Mr Hooper, the only point which remained, concerned the terms of disengagement (Point 3). Mr Hooper suggested that the parties correspond on that issue. He later wrote to Daihatsu on 10 April 1989 (Exhibit A, doc 455). However, the draft letter of 29 March 1989 was never sent. The Plaintiff's Original Submission 173 Written submissions by the plaintiff made the following assertion: (page 14, para 36) "By signing the letter of 2 March, DAP signified its acceptance of the terms of the PMS Proposal; a contract for the supply of the MCS software came into existence between DAP and PMS. FAL was not a party to that contract. By paying the $15,000 fee for the preparation of the Analysis Report, DAP part-performed the contract." 174 The submissions made by Daihatsu in response protested that this was a new case. Indeed, it was a case which had been expressly disowned by the plaintiff in its Opening (Daihatsu submissions, chapter 2). It was, moreover, a case inconsistent with the pleading, which defined the contract between the plaintiff and Daihatsu by reference to a number of documents (Particulars accompanying para 3 of the Amended Statement of Claim). The documents spanned the period 15 December 1988 to 18 April 1989. On the plaintiff's pleaded case, the contract only came into existence on the latter date. 175 The defendant's submissions also drew attention to a number of difficulties with the plaintiff's "new case". Amongst other things, such a case was inconsistent with the terms of Mr Hooper's letter of 23 March 1989, set out above (para 168). Mr Hooper, by that letter, plainly contemplated a signed contract once the analysis had been completed and accepted. 176 In the face of these arguments, the plaintiff abandoned this aspect of its written submissions (T.2326). It reverted to the case as pleaded. The contract came into existence upon the signing of various documents on 18 April 1989. 177 The concession was properly made. On 9 March 1989 Daihatsu solicited from P M Sulcs an Analysis Report, not the software. A contract would arise, if at all, once that report had been completed and accepted. Payment of P M Sulcs by Fujitsu 178 It will be remembered that Mr Hooper first approached Fujitsu in May 1988. He secured Mr Docherty's agreement (on whatever terms) that Fujitsu would assist in the conversion of the P M Sulcs software (supra: para 67). The contribution would be at the rate of $250,000 for $1 million hardware sold by Fujitsu to Daihatsu. In March 1989, as Daihatsu was about to commission the Analysis Report, Mr Hooper took up the issue of funding with Mr Docherty once more. He wrote on 3 March 1989, opening with these words: (Exhibit A, doc 378) "This letter is to ask you for your assistance to resolve the frustration we have been experiencing in addressing the outstanding relationship issues with Fujitsu. As you are aware, I am empowered by P M Sulcs to formalise our agreement that Fujitsu fund the $350,000 conversion of P M Sulcs's Material and Customer Control System to Fujitsu's UTSM environment on the sale of Fujitsu's system to Daihatsu with P M Sulcs reimbursing Fujitsu $100,000 on completion of the conversion." 179 Mr Hooper complained that "he had yet to formalise the agreement between our two companies". A formal relationship was required. 180 Mr Docherty responded at once. His letter of 6 March 1989 identified two potential business relationships which were open (Exhibit A, doc 379). First, a formal long term marketing arrangement, which would require a sales plan, and the involvement of Fujitsu marketing staff; or secondly, a specific deal by deal arrangement. 181 In respect of the second alternative, Mr Docherty said this: (Exhibit A, doc 379) "In this method, the specific deal which P M Sulcs and Fujitsu were investigating jointly would be looked at to fund a conversion of the software from the Wang environment to the Fujitsu environment. Fujitsu would contribute to the costs of P M Sulcs converting its software. The Daihatsu situation is a typical example of this type of opportunity." 182 Mr Docherty then provided his understanding of his arrangement with Mr Hooper: (Exhibit A, doc 379) "There was never any concept that Fujitsu would fund P M Sulcs to convert the software to the Fujitsu environment in the deal-by-deal basis. The understanding I had was that Fujitsu as part of the deal to Daihatsu, for example, would fund a proportion of the conversion." 183 Mr Docherty sought to correct Mr Hooper's impression of their arrangement by adding these words: (Exhibit A, doc 380) "My understanding of the arrangement was that P M Sulcs would organise and complete the conversion of the Material and Customer Control System to the Fujitsu UTS/M environment for Daihatsu and that Fujitsu would contribute to this conversion, which P M Sulcs would fund, at the rate of $250,000 from a sale of $1 million to Daihatsu. This, of course, is a very different arrangement from the one you seem to have understood." 184 It was suggested that Mr Hooper speak to the Sales Manager, Mr McInerney. 185 Mr Docherty did not deal expressly with the timing of Fujitsu's payment. The letter does not suggest, to my mind, that funding will be withheld until after the conversion has been achieved. 186 Mr Hooper wrote back on 9 March 1989. His letter included the following: (Exhibit A, doc 380.1) "I agree with your points 1 and 2 that we are jointly exploring two separate avenues for the recovery of costs of the conversion of P M Sulcs's Material and Customer Control System to UTSM. I re-interate (sic) that at no time has it ever been discussed with Fujitsu or agreed by P M Sulcs that P M Sulcs would pay for the conversion of its software upfront. All discussions that I have had with yourself and other Fujitsu staff members have been on the clear understanding that Fujitsu would finance the conversion. You will recall from our discussion in December that we agreed that Fujitsu would fund the conversion of our software as part of the Daihatsu sale and that P M Sulcs would then re-imburse Fujitsu with $100,000.00 (or if the sale price of our software to Daihatsu was under $100,000.00, 75% of this sale price would be re-imbursed)." 187 Mr Hooper sought a meeting "to resolve the confusion". 188 Again Mr Docherty responded at once (letter 10 March 1989). He said, somewhat tersely, that he had "no confusion". He was responding to the suggestion that Fujitsu would fund the conversion, and that P M Sulcs would then reimburse Fujitsu. He added: (Exhibit A, doc 380.3) "At no stage have I agreed, nor would I agree to give you $350,000 in blind faith for you to go away and convert your software. Please understand that is not good business sense. What I have always said, is that Fujitsu would contribute to the conversion. You may have assumed other words, John, but that is what I have said." 189 The correspondence continued. Mr Hooper wrote back on 13 March 1989 as follows: (Exhibit A, doc 383) "I agree that you have not agreed to give P M Sulcs $350,000 in blind faith for us to go away and convert our software. I do not resile from my statement that you agreed to finance the conversion project to $350,000 and that P M Sulcs would contribute $100,000 on commissioning of its software at Daihatsu." 190 Mr Hooper added that it was important to the success of the conversion that it be a joint effort between Fujitsu and P M Sulcs. Mr Hooper reminded Mr Docherty that it was P M Sulcs who had introduced Fujitsu to the deal. He said this: (Exhibit A, doc 384) "I can only re-state the agreement that if we assisted you in selling your hardware to Daihatsu you would finance and jointly fund the conversion of our latest software to Fujitsu's UTSM operating system. This is the reason for our collaboration on your sale to Daihatsu. We have fulfilled our part of the agreement and in doing so rejected ICL's offer that they match your financing and funding offer which has enabled you to gain the sale at Daihatsu. We now simply ask that you fulfil you part of our agreement to finance and fund the conversion." 191 Mr Docherty wrote back the next day, 14 March 1989, putting an end to the correspondence. He repeated his suggestion that Mr Hooper speak to Mr McInerney (Exhibit A, doc 386). Upon receipt of that letter, Mr Hooper says that he telephoned Mr Docherty. His conversation included the following exchange: (Hooper: Aff. 2.1.98, para 30) "Hooper: 'What's this all about. I'm getting really annoyed at receiving these facsimile letters from you after we have been working in good faith on our verbal agreement for nearly a year and DAP is about to sign our contracts.' Docherty: I'm sorry, but I have been completely tied up in meetings, don't worry, you and I are in agreement. FAL will pay you the $250,000.00 commission I promised you. The porting has been costed at $350,000.00 to which Fujitsu will contribute $250,000.00 as your CSV commission and PMS is to contribute $100,000.00. What I objected to in your letter of 3 March 1989 was your use of the wording 'fund', it read to me that you expect FAL to be responsible for all of the porting work and any over-run in the cost.'" 192 Mr Docherty denied that conversation. It is hard to imagine that the conversation was in quite the terms suggested. Mr Docherty was a person of some seniority within Fujitsu. The peremptory terms of his final letter displayed his impatience. 193 Daihatsu, in its submissions, branded Mr Hooper's evidence as yet another instance of his "verballing" a witness. The submissions said this: (Submissions, para 4.8) "Moreover, as Mr Hooper time and again did whenever the documents showed him up, he resorted to 'verballing' the person who disagreed with him by giving evidence 9-12 years later of conversations breath takingly at odds with contemporaneous extant documentary material." 194 The suggestion, according to the Daihatsu submissions, that Mr Hooper and Mr Docherty "worked it out" in their telephone conversation, was preposterous (Daihatsu submissions, para 4.9). However, the events which followed (which I will shortly describe), suggested that Mr Docherty, in this conversation, reaffirmed to Mr Hooper's satisfaction Fujitsu's commitment to assist P M Sulcs in the conversion. There is no question that Fujitsu had given that commitment. The only uncertainty was when it would be provided, and upon what terms. 195 As suggested by Mr Docherty, Mr Hooper met Mr McInerney. The meeting took place on 15 March 1989. Mr Franks, also from Fujitsu, was present According to Mr Hooper, Fujitsu agreed to pay, but by instalments. The conversation included the following: (Hooper: Aff. 2.1.98, para 31) "McInerney: 'That's understood, as far as the $250,000.00 CSV commission is concerned, FAL will pay it to PMS on a monthly basis.' Hooper: 'That seems to be in line with our policy of time and materials billing, I will recommend it to PMS Canada.'" 196 Mr McInerney acknowledged there was such a meeting. He scribbled a note which recorded certain figures mentioned at the meeting (Exhibit A, doc 402A.1). He could not recall the conversation. 197 However, documents generated by Fujitsu in the weeks and months that followed, appear to bear out Mr Hooper's account. Once Daihatsu had executed the Prime Contract Agreement on 30 March 1989 (supra: para 172), Mr Docherty directed that Mr McLean draw up an agreement between Fujitsu and P M Sulcs (McLean: Aff. 2.4.98, para 9(b)). Mr McLean said this: (McLean: Aff. 2.4.98, para 9) "… I attempted to formulate a schedule with John Hooper setting out when Fujitsu would make payments to Sulcs and the amount of those payments that was acceptable to Sulcs and Fujitsu." 198 Mr McLean drafted a series of Work Orders, which were then discussed with Mr Hooper. The first was sent by fax on 30 March 1989 (Exhibit A, doc 409.1). It included the following payment schedule (Exhibit A, doc 409.7) " ITEM 6 Payment Schedule Payment of monies to the Sub-Contractor under the terms and conditions of this work order will be structured as follows: 1. Upon receipt by FAL of $75,000 from the Customer subject to the Customer signing the Sub Contractors standard terms of trade agreement FAL will pay $50,000 to the Sub-Contractor. 2. FAL will pay to the Sub Contractor the sum of $10,000 per week payable monthly at mid month to a maximum of sixteen (16) weeks from the date of commencement of the conversion project. 3. FAL will pay to the Sub Contractor the sum of $17,000 upon the Sub Contractor signing a standard licence agreement with Sticky Software for the use of the 'Cascaid" Cobol Conversion software tool. 4. FAL will pay to the Sub Contractor the sum of $35,000 upon the Sub Contractor signing a standard licence agreement with Rapitech Systems Inc. for the use of the ' COBLIX-C' Cobol to 'C' Conversion software tool. 5. DELIVERABLES: 5.1 FAL will pay to the Sub Contractor the sum of $8,000 upon completion of deliverable item no. 1 as per Item 1 of this Work Order. 5.2 FAL will pay to the Sub Contractor the sum of $10,000 upon completion of deliverable item no. 2 as per Item 1 of this Work Order. 5.3 FAL will pay to the Sub Contractor the sum of $10,000 upon completion of deliverable item no. 3 as per Item 1 of this Work Order." 199 There were two further clauses (clauses 6 and 7), dealing with payment, which it is unnecessary to reproduce. Successive versions of the Work Order included the paragraphs set out above, with annotations by Mr Hooper. The undated draft (Exhibit A, doc 409.15), for instance, included the following addition to clause 2: (Exhibit A, doc 409.20) "2. …. The date of commencement is defined as the date of the customer signing the Sub Contractor's standard terms of trade agreement as per 1 above." 200 Fujitsu and P M Sulcs were never able to settle upon a final agreement before a meeting between Mr Hooper and Mr Docherty on 23 May 1989. Mr Hooper asserted that Mr Docherty, in that meeting, changed the entire basis of Fujitsu's association with P M Sulcs. I will deal with that meeting, and Mr Hooper's assertion, when I deal with the events of late May 1989. 201 Mr McLean identified the reason for the failure to reach agreement. It was Mr Hooper's insistence throughout that P M Sulcs be paid the $250,000 "up front". Mr McLean attributed the following words to Mr Hooper, which he said were repeated on many occasions: (McLean: Aff. 2.4.98, para 11) "Hooper: 'I want to be paid up front. I won't agree to anything that does not involve Sulcs being paid up front.'" 202 However, I believe that Mr McLean is mistaken in that recollection. Whilst Mr Hooper may have been hopeful in early March 1989 that P M Sulcs would be paid up front, by the time he spoke to Mr McInerney on 15 March, he understood and accepted that his company would be paid progressively. Indeed, he annotated the first Payment Schedule (set out above) in the Work Order sent by Mr McLean on 30 March 1989, with these words: (Exhibit A, doc 409.7) "Payments must be strictly as per PMS contracts with Daihatsu. The $250k commission from FAL paid at $10k 1 week for 25 weeks." 203 Later versions of the Work Order did not reflect Mr Hooper's suggestion. Rather they reproduced the Payment Schedule set out above, without apparent resistance from Mr Hooper (see Exhibit A, docs 409.15, 410, 446.2). 204 Two other documents created by Fujitsu during this period are also relevant. Fujitsu used a form for each contract known as a PCS. It was an important accounting document. Various managers were obliged to sign at the foot of the page. It recorded the sale price, discounts and other detail. Against the item "Conversion", it recorded $250,000 (Exhibit A, doc 1007). A cash flow was also prepared in May 1989. It showed $50,000 being paid to P M Sulcs at the outset (reflecting the payment in the Schedule above, para 1), and $40,000 every four weeks thereafter (reflecting the Schedule, para 2). Instead of the payment for the conversion tools referred to in paras 3 and 4, it included three payments (totalling $114,000) to Paradyne. That company was put forward by P M Sulcs in May as being the company which would undertake the conversion. 205 These documents reflect, therefore, that Fujitsu would advance monies to P M Sulcs during the course of the conversion. That is where matters stood before Mr Hooper's meeting with Mr Docherty on 23 May 1989. 6. AGREEMENTS BETWEEN DAIHATSU AND FUJITSU Agreements Executed 14 March 1989 206 On 14 March 1989, Daihatsu and Fujitsu executed and exchanged two agreements: · First, an agreement for the purchase of the computer hardware (the Fujitsu M760 computer and associated equipment). · Secondly, an agreement for the provision of maintenance services in respect of that equipment. 207 There was a puzzle, however, in respect of the first of these agreements. The agreement was a standard form contract of Fujitsu to which various typed schedules (marked "A" and "B") had been added. However, the version of that agreement in Exhibit A was curious. There were two versions of Schedule B, one after the other, each different. The first (Exhibit A, doc 400) was as follows: " SCHEDULE B 1. APPLICATION SOFTWARE PACKAGE This contract is subject to the successful execution of an agreement between FUJITSU AUSTRALIA LIMITED, DAIHATSU AUSTRALIA PTY LTD and the application software supplier of the DEALER PARTS system. This agreement to be completed by all parties before the 30th March, 1989. 2. EQUIPMENT PURCHASE AGREEMENT The equipment specified in Schedule A as being third party equipment has been supplied to FAL/FNZL by a third party. FAL/FNZL warrants that as between that third party and FAL/FNZL, FAL/FNZL is entitled to sell the equipment to the Purchaser. Apart from that express warranty and the warranties and conditions implied by the Trade Practices Act 1974 as amended and similar State and Territory laws which are incapable of exclusion, restriction or modification under those, FAL/FNZL makes no warranties or representations and no conditions are to be implied into this Agreement concerning FAL 's/ FNZL 's right to sell the third party equipment." 208 The second Schedule B (Exhibit A, doc 401) did not include clause 1 (Application Software Package). It included, however, (without numbering) clause 2 (Equipment Purchase Agreement). The heading to the second version of Schedule B was also different. It conformed to the format of Schedule A. It was as follows: (Exhibit A, doc 401) " SCHEDULE B PAGE 1 of 1 DAIHATSU AUSTRALIA PTY LTD AGREEMENT NO. 00951/0101 96 BELMORE ROAD AGREEMENT DT. 14-3-89 RIVERWOOD, NSW, 2210" 209 The provenance of Exhibit A, doc 400 was therefore investigated. The issue was important because clause 1 of doc 400 was linked to the further agreement executed by Daihatsu later that month, the Prime Contract Agreement, to which reference will be made shortly. The Prime Contract Agreement opened with these words: (Exhibit A, doc 447) "In accordance with clause 1 of Schedule B of contract number 00951/0101 between the above parties and subject to the signing of a licence agreement for the Material and Customer Control System application software between Daihatsu and P M Sulcs and Associates Pty Ltd then it is agreed as follows:" 210 Fujitsu and Daihatsu both produced the originals of the hardware contract (Exhibits G(1) and G(2)). The documents revealed different coloured biros for the initials and signature of the same individual. Schedule B in doc 400 presented a number of curious features: · First, unlike each page of Schedule A, it neither referred to the contract number, nor the number of pages (1 of 1). In this respect it differed from the alternative Schedule B (Exhibit A, doc 401). · Secondly, clause 1 of Schedule B referred to "the software supplier of the DEALER PARTS system". Why did it not refer to P M Sulcs? 211 Mr Brydie from Fujitsu provided an explanation. He was responsible within Fujitsu for the contract paper work. In July 1989, the P M Sulcs contract was terminated. An alternative software supplier was found (DIS). In November 1989 changes were made to the original Daihatsu and Fujitsu agreement, to reflect the changed circumstances. Instead of executing fresh contracts, the same contracts (executed on 14 March 1989) were used, substituting new schedules for those which were related to P M Sulcs, and which were therefore no longer appropriate. Page 1 of Schedule A, and Schedule B (Exhibit A, doc 400), were replaced. Schedule B (Exhibit A, doc 401) was inserted. I accept this explanation. There was nothing sinister in the presence of two versions of Schedule B. The relevant version, in the context of this action, is document 400. The Prime Contract Agreement 212 As mentioned, the agreement of 14 March 1989 (supra: paras 206; 209), was expressed to be subject to a further agreement to be executed by 30 March 1989 (Schedule B, clause 1) (Exhibit A, doc 400). A further agreement was prepared by Fujitsu. It was an agreement between Daihatsu and Fujitsu. P M Sulcs was not a party. Mr Brydie and Mr McLean (the Sales Representative) each probably had a hand in its preparation (Brydie: T.1331; McLean: T.1514). The document was drafted with some haste. The 31st March was the end of the financial year for Fujitsu. Sales commissions were calculated by reference to that day (McInerney: T.1471). Mr Kratsas had been pressing Fujitsu to assume responsibility as Prime Contractor (McLean: T.1589). He had told Mr McLean that he wanted Fujitsu, as Prime Contractor, to make payments to P M Sulcs (McLean: T.1592), rather than Daihatsu. Daihatsu would pay Fujitsu. 213 The Prime Contract Agreement was presented to Mr Kratsas for signature. It was signed on 30 March 1989, witnessed by Mr Womack (Exhibit A, doc 448). The version of the Prime Contract Agreement in Exhibit A (doc 448) was then faxed to Fujitsu. It is an important document. It is convenient to set it out in full, omitting formal parts: (Exhibit A, doc 447/448) "In accordance with clause 1 of Schedule B of contract number 00951/0101 between the above parties and subject to the signing of a licence agreement for the Material and Customer Control System application software between Daihatsu and P M Sulcs and Associates Pty Ltd then it is agreed as follows: 1. Fujitsu Australia Limited agrees to Prime Contract the conversion of those standard modules of the P M SULCS and ASSOCIATES PTY LTD software application package known as the "Material and Customer Control System" as defined by the attached APPENDIX A. The software will be converted from WANG VS COBOL to 'C' language with SQL commands appropriate for the INGRES Relational DMBS and operating in the FUJITSU UTS/M UNIX operating system environment. 2. FUJITSU 's Prime Contractor responsibilities under this contract will be deemed to have been met when the converted software has been commissioned on the DAIHATSU M760/4. 3. The term 'commissioned' is defined as the installation and demonstration of the converted standard modules as defined in paragraph 1 above on the Daihatsu M760/4 using the INGRES Relational DBMS . All of the software systems shall demonstrate equal functional performance on processing test data supplied by P M SULCS for all of the software systems to produce output files and/or output records equivalent to those which were produced on the WANG VS COBOL version of the software. Additionally, the software will include the minimum mandatory modifications required to allow the software to be put into production at commissioning. Such modifications to be identified by the Systems Analysis process between P M SULCS and ASSOCIATES PTY LTD and DAIHATSU occurring during the period Monday 3rd April 1989 through Monday 17th April 1989 inclusive. The scope, schedule and cost of development of such modifications is to be agreed between DAIHATSU, FAL and P M SULCS . Charges on a time and materials basis to be paid by DAIHATSU to FAL on presentation of a monthly invoice from FAL to DAIHATSU. Such costs to be additional to the $150,000 licence fee for the Standard modules. FAL 's agreement to the proposed modifications will be conditional upon its satisfaction that they will not unduly impact the original project schedule or the agreed basis of acceptance on commissioning. Excluding those modifications defined in paragraph 3 above, modifications, ongoing support and maintenance of the software is outside of the scope of this Prime Contracting agreement. No modification outside the scope of paragraph 3 of any of this application software shall be commenced until after the commissioning of the software as per paragraph 3. 5. DAIHATSU agree to pay FUJITSU the sum of $75,000 upon signing the standard terms and conditions of sale and licence agreements as appropriate for the supply, installation, support and maintenance of the P M SULC 's Materials and Customer Control System. This sum representing a 50% payment for the agreed licence fee for the application system software. 6. DAIHATSU agree to pay FUJITSU a further sum of $75,000 upon commissioning of the Material Customer Control System. This sum representing the remaining 50% payment of the agreed licence fee for the software." 214 Mr Hooper said that he was present when the Prime Contract was signed by Mr Kratsas. He provided an elaborate account of the conversation, which involved Mr Kratsas, Mr McLean and himself (Hooper: Aff. 2.1.98, para 34). It is, I believe, unrewarding to concentrate closely upon the words Mr Hooper (and for that matter, other witnesses) attributed to each participant in various discussions. I accept that it is difficult, if not impossible, for witnesses to recall such detail, ten years on. With this conversation, as with others (including those of Mr Kratsas), I have found it better to direct attention to the substance of what was allegedly said. In substance, Mr Hooper recollected the following: · First, that he was present when the Prime Contract was signed by Daihatsu. · Secondly, that he was shown the agreement, which prompted him to assert his independence from Fujitsu, which was accepted by those present. · Thirdly, that he said that he had "no problem" with being paid by Fujitsu, if that is what Daihatsu wanted. · Fourthly, that Mr McLean said he would have the original agreement signed by Fujitsu and returned to Daihatsu. 215 Mr Kratsas and Mr McLean both denied having had such a meeting (and therefore denied having participated in such a conversation) (Kratsas: Aff. 31.3.98, para 38; McLean: Aff. 2.4.98, para 13). 216 In resolving this issue, I should refer to two matters. First, Mr Hooper gave evidence of other conversations with Mr Kratsas (and, indeed, with Mr McLean) where similar things were said. I have referred to one already involving Mr Kratsas (supra: para 106). On 15 December 1988, when Mr Hooper delivered the P M Sulcs proposal to Mr Kratsas, he claimed that he told Mr Kratsas that P M Sulcs was an independent supplier, who always dealt directly with its customers. When recounting that evidence, I deferred making a judgment on that issue (supra: para 109). 217 Secondly, the Prime Contract Agreement unquestionably came to the attention of Mr Hooper. Mr McLean sent a copy to Mr Hooper on 31 March 1989 under cover of a fax, in these terms: (Exhibit A, doc 450.2) "Dear John, I'm not authorised to give you a copy of the signed contracts executed between FAL and DAP . However, attached is an unsigned copy. Now all that is needed is for you to complete the Systems Analysis to determine the agreed modifications." 218 The importance of the meeting on 30 March 1989 is perhaps the suggested reaffirmation by Mr Hooper of his independence as a supplier to Daihatsu, although one prepared to accept payment through Fujitsu. On that issue, Mr Hooper's fax to his principal in Canada the same day (31 March 1989) is instructive. It opened with these words: (Exhibit A, doc 450.1) "Further to our telephone discussion of yesterday, I confirm that the Prime Contract agreement between Fujitsu and Daihatsu has been signed (unsigned copy attached). You will note that the agreement is between Fujitsu and Daihatsu and does not involve us as it is agreed that Fujitsu is to pass on all payments to us as they fall due under our contracts with Daihatsu." 219 The fax then referred to a work order presented by Mr McLean on 30 March 1989 (Exhibit A, doc 409.1). I have referred to that document already (supra: para 198). Mr McLean adapted the standard Fujitsu work order, inserting details of the arrangements between Daihatsu and Fujitsu. The work order began with these words: (Exhibit A, doc 409.2) " THIS WORK ORDER constitutes an offer by FAL to acquire from the Sub-Contractor the converted Software Systems herein specified on the terms and conditions set out in the Software Systems sub contract Standard terms and conditions …" 220 The document was annotated by Mr Hooper, and returned to Mr McLean. Mr Hooper's comments appear on each page. Against the opening words, extracted above, Mr Hooper wrote the following: (Exhibit A, doc 409.2) "Our contracts are with Daihatsu not Fujitsu." 221 There was a further annotation in relation to the same paragraph. Above the words 'to acquire from the Sub-Contractor the converted Software Systems …', Mr Hooper wrote this: (Exhibit A, doc 409.2) "We will never accept the transfer of ownership of our software to Fujitsu." 222 Mr Hooper added: "* Ross. Our agreement is that PMS will put a copy of our source code in escrow so that FAL can finish the DAP project if we do not." 223 Mr Hooper sent a copy of the Work Order to Canada with his fax of 31 March 1989, to which I was referring (supra: para 218). He said this: (Exhibit A, doc 450.1) "In regard to the draft subcontractor agreement faxed to us yesterday I've told Fujitsu that there is no way that we would ever accept such a master servant role with Fujitsu. I have always insisted that our contracts are directly with Daihatsu and that we would only accept Fujitsu as a Prime Contractor in the role of prime manager rather than us ever being a subcontractor to them. This has always been clearly understood and I made a point of it being confirmed again by both Leon Kratsas and Ross McLean when Daihatsu signed the Prime Contractor agreement. Our legal relationship is to be with Daihatsu and not Fujitsu, I've told Fujitsu that the only documentation that is needed between us is their confirmation that they will pay us our 250K commission." 224 The Work Order and the fax, therefore, strongly support Mr Hooper's account. I am satisfied that at the meeting Mr Hooper asserted the independence of P M Sulcs as the supplier of software to Daihatsu. It is probable that Mr Hooper said much the same thing when he delivered the software proposal to Mr Kratsas on 15 December 1988 (supra: para 109). 225 There were many discussions in Mr Hooper's presence in which Fujitsu was described as Daihatsu's prime contractor. Such evidence was given by Mr Kratsas, Mr Docherty, Mr McLean and Mr Womack. I accept that evidence. A number of witnesses gave their understanding of the role of a prime contractor. There were differences between witnesses. However, most understood that the prime contractor was responsible for the system, both hardware and software. Most understood that the prime contractor was also responsible for paying those who contributed to the system. 226 Fujitsu did not execute and return the Prime Contract Agreement, even though Mr McLean had promised to do so. Nor did Daihatsu request a copy of the executed agreement. The issue was apparently overlooked. Daihatsu, not unreasonably, simply assumed that the document had been executed. Meanwhile Fujitsu, as it acknowledged, continued to act as though it were the prime contractor (Docherty: Aff. 7.4.98, para 25). 7. THE ANALYSIS REPORT Work on the Analysis Report 227 Having commissioned the Analysis Report on 7 March 1989, P M Sulcs began its preparation at once. It was required to form an appreciation of the way in which Daihatsu ran its business, and the modifications which would be required to the standard P M Sulcs software. Meetings were held between P M Sulcs (Messrs Hooper and Santa Maria) and Daihatsu (Messrs Womack, Munro, the latter being the National Parts Manager). Mr McLean, the Sales Representative of Fujitsu, occasionally attended such meetings (Munro: Aff. 30.3.98, para 12). Mr Spetch and Mr LaVerne Peters of P M Sulcs Canada came to Australia part way through the process, and assisted. The Visit by Rapitech 228 Fujitsu arranged for Dr Larry Woodruff of Rapitech to come from the United States to examine more closely the conversion of the plaintiff's software, and provide a quote. 229 Dr Woodruff arrived on 4 April 1989. He returned to the United States on 13 April. Fujitsu assigned Mr Franks, the Systems Engineering Manager, to the Daihatsu sale. Mr Franks arranged for Dr Woodruff to have access to the equipment which he needed. Arrangements were also made for Sticky Software to consult with him. It will be remembered that Sticky Software had a conversion tool to carry out the first stage of the conversion, that is the transformation of code from Wang VS Cobol to ANSII standard Cobol (supra: paras 96, 97). 230 However, the demonstration by Sticky Software did not proceed smoothly. Mr LaVerne Peters reported to Mr Maris Sulcs in Canada on 13 April 1989, in these terms: (Exhibit A, doc 455.2) "Sticky Software conversion test did not go all that well. Apparently some copy members & data files were initially not set (sic) to him. Joce couriered these to Sticky but they got mixed up in Sticky's office." 231 There were three problems. First, there was the mix-up to which Mr Peters referred, which hampered the conversion. Secondly, the version of the P M Sulcs software was one which was in the process of being installed at British Colombia Transit in Canada. Mr Peters had brought it to Australia. It contained a number of "bugs" which had not yet been removed. Thirdly, there were problems with the screen. The plaintiff's written submission described the problems in these terms: (Plaintiff's subs p17) "44. During this time, those present identified a need to add an additional small sub-program called a 'screen-handler' to the converted MCS software. This was necessary because the special Wang VS - COBOL statements which were removed by the sticky Software converter (see paragraph 22 above) contained the commands necessary to activate the screen. UNIX screen-handler programs were available for purchase from independent suppliers, but FAL offered to have one of its programmers write one for the converted MCS software which was appropriate for the UTS/M version of UNIX designed to run on Fujitsu computers." 232 The problem, one gathers, was in part the consequence of Sticky Software having brought an old version of its conversion programme (Exhibit A, doc 455.2). 233 Ultimately, Rapitech provided a quote. The quote was in writing. Neither party produced a copy. Nor was it amongst the documents produced by Fujitsu on subpoena. It was common ground, however, that the quote was for $1 per line of converted code. The modules being sold to Daihatsu included 350,000 lines. The quote was therefore for $350,000. It is assumed that the quote was in US dollars. The exchange rate, at that time, was rather less unfavourable than it is now. Not having the written quote, it is not clear which tasks were comprehended. It certainly included the conversion from Wang VS to C language. It is uncertain whether it also included the Relational Database and the SQL commands, although doc 455A (dated 12 April 1989) (prepared during Dr Woodruff's visit) may suggest that all aspects of the conversion were contemplated. 234 There is a further issue as to when the quote was provided. Daihatsu, in its written submissions, said this: (Daihatsu subs: para 4.38) "The contemporaneous documents suggest that it was only in early May 1989 that Rapitech's quote of USD 1.00 per line - ie USD 350,000 for the MCC System ordered for Daihatsu - was communicated to Sulcs and Fujitsu." 235 I accept that comment. It is likely, however, that Dr Woodruff communicated his misgivings about the cost of conversion during the course of his visit, and before he returned to the United States. There is more doubt as to whether he provided the dollar cost at that time. Whilst Mr Hooper thought that he had done so (T.131) (and was suspicious of Dr Woodruff's motivation), the evidence of Mr Franks (T.1429) suggested that the dollar cost may have come later. Mr Hooper was suspicious of Dr Woodruff, first, because he believed him unqualified in computing science (his qualifications being in music), and secondly, because he believed that Rapitech was seeking to exclude Sticky Software, and perform the conversion work themselves in New York (T.131). Mr Hooper, however, believed that the work could be done more cheaply in Australia. 236 During the time Dr Woodruff was in Australia, a further time schedule for the conversion was formulated. The person responsible for the formulation is not named on the document. The annotation suggests that the document was prepared at Fujitsu on 12 April 1989. The time for completion of all work, including SQL commands, was thirty weeks (Exhibit A, doc 455A). 237 There was no evidence that anything was said by either Fujitsu or P M Sulcs to Daihatsu concerning the views of Dr Woodruff before the signing of the documents on 18 April 1989. Installation of the Fujitsu Computer 238 On 5 April 1989, The Fujitsu M760 computer was delivered to Daihatsu. It was then installed, and accepted by Daihatsu on 2 May 1989 (Exhibit A, doc 642). Fujitsu sent an invoice dated 21 April 1989 to Daihatsu for $857,883. That sum included the following: (Exhibit A, doc 643) "PROJECT MANAGEMENT FACILITIES & SERVICES AS PER OUR LETTER DATED 13 JANUARY 1989." 239 The letter of 13 January 1989 was not produced by Daihatsu. It was not amongst the documents produced by Fujitsu on subpoena. The cost to Daihatsu included $150,000 which was variously described as the Project Management Fee, or the Prime Contracting Fee (Exhibit A, doc 1007). Mr Brydie of Fujitsu said this (in the context of the PCS contract form completed by Fujitsu, Exhibit A, doc 1007): (T.1334) "Q. Now, the first item is 'loading on hardware price $150,000'? A. yes. Q. Can you tell his Honour what that item is about? A. I believe that's the prime contracting fee and I don't recall exactly these at the moment but that would have been - the fact that I said 'loading on hardware price', I assume the prime contract fee was going to be added to the hardware price and represented to the customer as an inflated hardware price as a method of changing a prime contract fee." 240 Mr Brydie added: (T.1334) "Q. And I may have missed your last answer - what was the purpose of inflating the fee for project management? A. If we were - it's not for project management. If we were going to prime contract the supply of third party product, it was our practice to charge a prime contract fee for that. That fee partly covered project management but it also covered risk in being the prime contractor of the supply of products or services that some other party had to deliver." Presentation of the Analysis Report 241 According to the Project Schedule, the Analysis Report had to be provided to Daihatsu by 17 April 1989. 242 Mr Hooper said that a draft copy of the report was given to Mr Womack on Friday 14 April 1889. Further work was then done on the draft over the weekend by Messrs Spetch and LaVerne Peters, Mr Santa Maria and Mr Hooper (Hooper: Aff. 12.2.99, para 2(ww)). A revised copy was provided on Monday 17 April 1989 (the date on the front-piece of the document). There were meetings between Daihatsu and P M Sulcs that day. As a result of these meetings further revisions were made. The meetings continued the following day, 18 April 1989. Although the parties disagreed as to the precise sequence, the detail is of no consequence. At some point on 18 April 1989, the report was completed and presented to Mr Kratsas. 243 The report was accompanied by a letter dated 18 April 1989, signed by Mr Hooper. The letter is important. It is the cornerstone of Daihatsu's argument that the arrangements between Daihatsu and P M Sulcs were the subject of a condition precedent. The letter was in these terms: (Exhibit A, doc 481) "P M Sulcs is very pleased to submit this Analysis Report. We would like to thank you and your staff for the excellent co-operation received during it's development. We know how difficult it is to schedule time during your normal operating day. The purpose of this report is to allow DAIHATSU & P M SULCS to determine the specific requirements of your operation and to determine the level of modifications, associated costs and priorities of your system. FUJITSU AUSTRALIA are accepting ultimate responsibility, as Prime Contractor, for the delivery and commissioning of your system. However, P M SULCS pledges it's resources and commitment to commissioning your system on time and on budget. Please acknowledge your acceptance of this report by signing in the place provided to authorize FUJITSU & P M SULCS to proceed with the task of providing the agreed solution for your Dealer and in house requirements." 244 Daihatsu especially drew attention to the penultimate paragraph. I will deal with the condition precedent issue shortly. 245 The Analysis Report itself is a lengthy document. It is divided into sections. I will deal with the text of the report more fully below. The first section was described as a "Summary". The second dealt with the "Implementation Phase". The third was headed "Analysis Results". It identified each modification to the P M Sulcs software in some detail. The cost of each modification was specified, and a provision made for it to be assigned a priority (whether "immediate" or "phased"), if it was required. 246 Mr Womack and Mr Munro were at "loggerheads" (Kratsas: T.1066) as to whether the modifications were required, and if they were, the priority which should be assigned to them. Mr Kratsas was obliged to adjudicate. The adjudication began at Daihatsu's office. It was completed later that evening at Mr Kratsas' home at Bankstown. 247 Part way through the process, some of the parties went to a Chinese restaurant at Bankstown. Recollections were uncertain as to who attended. It is unnecessary to resolve these differences. It is hardly surprising that recollections should differ on such an unimportant matter a decade later. 248 Nor do I think it is necessary to resolve where and at what time documents were signed. It is clear (and not contested by Daihatsu) that Mr Kratsas signed the following documents late on 18 April 1989, or early on 19 April (shortly after midnight): · The Analysis Report · The Programme Licence Agreement · The Software Maintenance Agreement · The P M Sulcs Terms and Conditions of Sale 249 I think it unlikely that the terms of the standard form contracts of P M Sulcs were examined in detail, or agreed paragraph by paragraph (cf Hooper: Aff. 2.1.98, para 39). The hour was late. The standard form agreements used by P M Sulcs had been furnished to Daihatsu a month earlier (Exhibit A, doc 406; supra: para 168). They were, no doubt, familiar to Daihatsu (cf Exhibit A, docs 408, 409; supra: para 169). Conversation About Payment 250 Mr Hooper gave evidence of a conversation with Mr Kratsas after the documents had been signed. The conversation was in these terms: (Hooper: Aff. 2.1.98, para 40) "Kratsas: 'I want PMS to start working immediately.' Hooper: 'Yes, we will start tomorrow.' Kratsas: 'Good.' Hooper: 'There is still the question of payment. Our licensing contract required a 50% payment on signing and the maintenance contract has to be paid in full on signing.' Kratsas: 'That's not a problem, we will pay you as soon as I receive an invoice.' Hooper: 'OK, I will submit them tomorrow.' McLean: 'As prime contractor we are pleased to be working with PMS as a software supplier. We give DAP an undertaking that this will be a very successful venture. We have appointed Greg Franks as the project manager for the project and you should liaise with him.'" 251 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 44). It is unclear, from Mr Hooper's affidavit, whether he was suggesting that the conversation took place in the presence and hearing of those who had been at the meeting at Mr Kratsas' home. His words create that impression (Hooper: Aff. 2.1.98, para 40). In this context, it may be important to determine who attended Mr Kratsas' home. Mr Hooper mentioned the following persons (Hooper: Aff. 2.1.98, para 40) "Kratsas, Womack, Docherty, McLean, Jocelyn Santa Maria (PMS Sydney), McInerney (FAL), Alan Spetch (PMS Canada) and Munro." 252 Mr Docherty was not present, nor Mr McInerney. Mr Munro was present, but had no recollection of the conversation (Munro: Aff. 30.3.98, para 19). Mr Womack could not recall attending Mr Kratsas' home. I accept, however, Mr Kratsas' evidence that he did so. Mr McLean said that he was not at the meeting. I am uncertain as to his recollection in that respect. He may or may not have been at the meeting. Mr Santa Maria from P M Sulcs was present. He provided an affidavit reproducing in exact terms the conversation set out above (Santa Maria: Aff. 2.1.98, para 7). In cross examination, however, when asked to provide his recollection, he could not recall that conversation (T.326; Daihatsu subs, para 4.76). In the end, the issue depends on an acceptance of Mr Hooper's recollection or that of Mr Kratsas. 253 In substance, Mr Hooper attributed two things to Mr Kratsas: · First, that work should begin immediately on the next phase (the specification of modifications selected by Daihatsu). · Secondly, the need for payment. 254 As to the first matter, there can be no doubt that Daihatsu wanted P M Sulcs to work with despatch. I accept that Mr Kratsas gave such a direction. As to the second matter, I believe it probable that Mr Hooper raised the question of payment. P M Sulcs was a small company. The flow of funds was important. What is less certain is Mr Kratsas' response. I cannot be satisfied, as a matter of probability, that the conversation took place in the terms alleged by Mr Hooper. However, I do think it probable that Mr Kratsas told Mr Hooper to send an invoice, without specifying the party to whom it should be sent. 8. THE AGREEMENTS BETWEEN P M SULCS AND DAIHATSU The Submissions 255 It is hardly surprising that the plaintiff and defendant viewed the documents executed on 18 April 1989 very differently. The defendant submitted that the agreements, standing alone, "did not work". There were two problems: · First, they did not deal with the conversion of the plaintiff's software from Wang VS to C. · Secondly, the Programme Licence Agreement and the Software Maintenance Agreement made perfect sense as stand alone agreements. However, they presupposed converted software which had been delivered and installed. Only then was the defendant obliged to pay. 256 These submissions were the foundation for the defendant's further submission. The parties had, in fact, addressed the issues of conversion and payment. They had done so in the Prime Contract Agreement. The defendant said this: (Daihatsu subs: para 3.1) "3.1 The objective factual matrix … highlights the significance of the (Prime Contract) Agreement of which each of Fujitsu, Sulcs and Daihatsu knew no later than 31 March 1989. And as (Sulcs written submissions) recognize none of the Sulcs/Daihatsu Agreements made any reference to the need for the Conversion. The only document which does and which thereby brings contractual harmony to the relationship is the (Prime Contract) Agreement. And even that is subject to Fujitsu and Sulcs themselves entering into an Agreement. 3.2 Daihatsu has pleaded that it was a condition precedent of each of the Licence Agreement, the (Software Maintenance) Agreement and the Sulcs/Daihatsu Agreements that Fujitsu would enter into an agreement with Sulcs pursuant to which Fujitsu would be responsible for the implementation of, inter alia, the Converted Software and that Sulcs agreed that Fujitsu, and not Daihatsu, would be liable to pay Sulcs for the licences provided pursuant to the Licence Agreement and any services provided pursuant to the (Software Maintenance) Agreement." (parenthesis added) 257 The plaintiff, however, asserted that all agreements must be read together. Read in that way, they dealt with the conversion of the plaintiff's software. They made provision for payment. They defined, in a coherent way, the relationship between the parties. There was no basis for importing any condition precedent. It was neither an express term, nor could it be implied. 258 In resolving these issues I shall briefly set out the terms of the various agreements. The Proposal 259 The plaintiff drew attention to the proposal submitted by P M Sulcs on 15 December 1989. It was the offer made by the plaintiff. The terms of the proposal have been described already (supra: para 110ff). The proposal identified the means by which Daihatsu could order software from P M Sulcs which would fulfil its requirements. The proposal, it will be remembered, defined two phases: · The analysis phase. · The implementation phase. 260 The analysis phase was essentially a refinement of the plaintiff's offer to the defendant. It was described in these words: (Exhibit A, doc 178) "A preliminary analysis study that assures both parties that all details have been covered and provides an acceptance plan indicating the milestones for the implementation of Material and Customer Control System." 261 The modules in the Material and Customer Control System were listed (Exhibit A, doc 204). The combination of modules could be varied, depending upon customer needs. 262 It will also be recalled that the proposal included a description of "customization". The software could be altered to suit the particular needs of Daihatsu (Exhibit A, doc 209). The work would be completed at "facilities in Sydney" (Exhibit A, doc 209). Customization would plainly involve delay in the delivery and installation of the software (Exhibit A, doc 210). Once installed, there would be acceptance testing (Exhibit A, doc 210). 263 The proposal was accompanied by a Project Schedule. It suggested delivery of "unmodified software" after five weeks, and completion of all phases within approximately twenty weeks (Exhibit A, doc 215 - supra: para 118). A graph was provided depicting the various phases (Exhibit A, doc 216). 264 The proposal adverted to the need for a licence of the plaintiff's intellectual property, the software. It said this: (Exhibit A, doc 220) "The P M Sulcs software package is licensed for a single CPU location and includes most rights of ownership (contract included in Appendix), but the ability to resell. All aspects of a complete system are included; object code, control tables, system manuals, user documentation and source code is available as an option. The charge for each module is due and payable as any special customization work commences on the software module." 265 The appendix to the proposal included: · The Programme Licence Agreement · The Software Maintenance Agreement · The Terms and Conditions of Sale 266 There followed (supra: para 120) what was termed a "quote". It was expressed to be valid for thirty days. The quote included a fee for the Analysis Report ($15,000), the software ($150,000), and an annual charge for maintenance of the software ($22,500). 267 Within the time limit for acceptance, Daihatsu wrote to P M Sulcs on 10 January 1989 (Exhibit A, doc 347; supra: para 156), confirming that it required the Analysis Report. The letter was subject to a qualification. The Analysis Report was ultimately commissioned on 2 March 1989. The fee paid was the $15,000 set out in the quote. The late acceptance strictly was a counter offer which was then accepted by P M Sulcs. The parties, by their conduct, plainly regarded the proposal made on 15 December 1998 as still open, and capable of acceptance, and dealt with each other on that basis (cf Carter & Harland, "Contract Law in Australia", 3 ed, 1996, paras 254, 255). The Analysis Report 268 Moving forward, one then comes to the four documents signed on 18 April 1989. Turning to the Analysis Report, which is one of those documents, I will pass over, for the moment, the letter of Mr Hooper which accompanied that report. It is, as I have said, an important letter. I will return to it in the context of the defendant's submission that it furnished an acknowledgment by Mr Hooper of the condition precedent. 269 The Analysis Report referred to the review by P M Sulcs and Daihatsu of the operations of Daihatsu, comparing those operations with the functions provided by P M Sulcs software (Exhibit A, doc 483). The report then said this: (Exhibit A, doc 483) "The next phase of the project is the Implementation Phase, in which modules are modified and installed with additional activities so that the system can go into full use. The following sections define the methodology of the project plan. It is now the responsibility of Daihatsu to accept, modify or reject the recommendations presented by P M Sulcs. If accepted or modified, Daihatsu will authorize P M Sulcs to proceed with the next phase which is the implementation of the project plan." 270 The work was to be undertaken at the facilities of P M Sulcs and Fujitsu (Exhibit A, doc 487, cl 2.2). It is implicit that there would be delay during the time that the software was being modified, and before it was capable of being installed. Ultimately, the software was to be delivered to a site designated by Daihatsu (cl 2.5). Thereafter, acceptance testing would be undertaken. 271 The Analysis Report included a Project Plan. This was the only substantial departure from the terms of the proposal placed before Daihatsu on 15 December 1988, apart from costing the proposed modifications. The Project Plan was as follows: (Exhibit A, doc 540) No. Time Activity Responsibility 1. 1 week Approve Analysis report Daihatsu 2. 4 weeks Design modifications PMS 3. 2 weeks Accept Design report Daihatsu 4. 8 weeks Customize software & complete documentation PMS 5. 1 week Install software PMS 6. 4 weeks Train staff PMS & Daihatsu 7. 1 week Complete Acceptance Test Daihatsu 7a. 1 week Convert data Daihatsu 8. Start system Daihatsu & PMS 272 The revision, I believe, reflected an appreciation of the need to convert the P M Sulcs software. A comparison between the Project Schedule in the proposal (supra: para 118) and that in the Analysis Report, reveals the following differences: · First, the new schedule omitted any reference to the installation of the P M Sulcs unmodified software. Under the original plan, the unmodified software was to be installed after five weeks. · Secondly, the installation has been postponed in the revised schedule. Whereas originally it was to take place after five weeks, on the revised schedule it would occur after fifteen weeks. 273 Repeating the phraseology of the original proposal, the Analysis Report referred to the issue of copyright in these terms: (Exhibit A, doc 542, cl 5.1) "5.1 The software package is licensed for a single CPU location and includes the rights of ownership as outlined in the contract. All aspects of a complete system are included: object code, control tables, system manuals, and user documentation. The charge for each module is due and payable as work commences on that software." 274 Rates were quoted for services that may be performed by P M Sulcs, and the quotation was said to be subject to the P M Sulcs Terms and Conditions of Sale attached (Exhibit A, doc 543, cl 5.3). The Analysis Report concluded with these words: (Exhibit A, doc 543, cl 5.4) "5.4 This analysis report defines the fixed cost for implementation of the system as has been studied by P M Sulcs in consultation with the personnel at Daihatsu. It reflects the suitability of our software system to meet your requirements as has been reviewed by your personnel to this point. …" 275 There followed an acceptance document in the following form: (Exhibit A, doc 544) " ACCEPTANCE P M SULCS & ASSOCIATES PTY LTD is authorised to proceed with the modifications as detailed above. Accepted for & on behalf of DAIHATSU AUSTRALIA PTY LTD" 276 The document was signed by Mr Kratsas on 19 April as Company Secretary for Daihatsu. The Programme Licence Agreement 277 The Programme Licence Agreement (Agreement No. PLA 0152) provided that P M Sulcs (described as "Licensor") agreed to grant Daihatsu ("Licensee"), and the Licensee to accept for valuable consideration, "non exclusive licences to use licensed programs on the following terms and conditions", which are then set out. Definitions are provided for various terms. A "licensed program" is defined as follows: (Exhibit A, doc 465) "'Licensed Program' is each program furnished by Licensor to Licensee and listed in Attachment 1 ('Schedule') incorporated in this Agreement and includes supporting materials and any related updated program or program portion furnished by Licensor or any new releases of a program provided under a valid Software Maintenance Agreement." 278 Attachment 1 is headed "Licensed Program". There is a further heading "Material and Customer Control System comprising", after which are listed 43 modules, being those in the Proposal, together with three additional modules (Items 41, 42 and 43). 279 The term "Designated Equipment" is defined as follows: "'Designated Equipment' is a single central processing unit (CPU) and its associated equipment designated in Attachment 2 and incorporated herein and also means any subsequent separate and functionally identical equipment replacing the original 'Designated Equipment'." 280 That definition repeats some of the terminology found in the Proposal (supra: para 265) and the Analysis Report (supra: para 273). Attachment 2 identified the "Designated Equipment" as the Fujitsu M760/4 (serial no 604). 281 The Licence was granted to "use" each Licensed Program on the Designated Equipment (Exhibit A, doc 466, cl 2). The Licensee agreed, however, not to use the Licensed Programs unless a valid Software Maintenance Agreement had been executed, and all charges paid (Exhibit A, doc 466, cl 5). 282 The Term of the Agreement was expressed as follows: (Exhibit A, doc 468, cl 9) "9. TERM This Agreement is effective from the date of execution by Licensor and shall continue until a point in time 25 years hence, or until terminated by Licensor in accordance with clause 10 thereof or until Licensee discontinues for a period of one hundred and eighty days or more use of the Licensed Programs or the Designated Equipment." 283 The Agreement includes a Warranty, which opens with the following words: (Exhibit A, doc 470, cl 12) "12. WARRANTY Each Licensed Program will, when delivered, conform to Licensor's current published programs specifications; however …" 284 The Agreement contains an Entire Agreement Clause in the following terms: (Exhibit A, doc 471, cl 15) "15. GENERAL The provisions of this Agreement shall prevail over the terms of any present or future purchase order or other document from Licensee relating to program licensing. Acceptance by Licensee of any Licensed Program from Licensor shall be deemed conclusive evidence of Licensee's Agreement that the license for such Licensed Program is governed by this Agreement. Subject to the provision of the P M Sulcs Computer Time-Sharing System Agreements this Agreement and all attachments hereto supercede all prior Agreements and understanding between the parties related to the subject matter and is intended by the parties as the complete and exclusive statement of the terms of the Agreement. ORAL STATEMENTS BY LICENSOR'S EMPLOYEES, REPRESENTATIVES OR PERSONS PURPORTING TO ACT ON BEHALF OF OR AS AGENTS OF LICENSOR, DO NOT CONSTITUTE WARRANTIES, SHALL NOT BE RELIED UPON BY LICENSEE AND ARE NOT PART OF THIS AGREEMENT ." 285 The scope of that clause is limited. It is confined to agreements "related to the subject matter" between the parties. The "subject matter" is the licensing of Daihatsu to use the software of P M Sulcs. 286 There is a third attachment to the Agreement headed "Software Updates". It includes the following: (Exhibit A, doc 477) "Upon execution of P M Sulcs Software Maintenance Agreement the Licensor will provide the Licensee with the latest version of the Licensed Programs in accordance with the provisions of that Agreement." The Software Maintenance Agreement 287 The companion Agreement opens with these words: (Exhibit A, doc 457) "P M Sulcs & Associates Pty Ltd (P M Sulcs or Licensor) having been constituted the Licensor of the Licensed Program(s) under the P M Sulcs Program License Agreement and Daihatsu Australia Pty Ltd, 96 Belmore road, Riverwood, NSW, 2210 (Customer) having been constituted the Licensee of the Licensed Programs to be maintained in accordance with this Software Maintenance Agreement, agree as follows: Licensee agrees to accept, for valuable consideration the sufficiency of which is hereby acknowledged, and Licensor agrees to provide, services according to the terms and conditions of this Agreement. …" 288 There followed a document headed "The Schedule". It made the following provision in respect of invoices, to which I will return in the context of issues which arose between the parties in May 1989: (Exhibit A, doc 458) "INVOICE TO (LICENSEE) DAIHATSU AUSTRALIA, 96 BELMORE ROAD, RIVERWOOD, NSW, 2210" 289 The Schedule then included the following: " COMMENCEMENT DATE: 17th April 1989 PROGRAMS INCLUDED: As per Program License Agreement no. PLA 0152. ANNUAL CHARGE: $22,500.00 (Re: Part A)" 290 The Schedule was signed by Mr Kratsas and Mr Hooper. 291 The Agreement included a general provision that it was not to be construed so as to lessen the rights and obligations of the Licensee and Licensor under the Program License Agreement (cl 1). The Term was defined as follows: (Exhibit A, doc 459, cl 2) "2. TERM This Agreement shall commence on the designated Commencement Date in the Schedule and shall continue for an initial term of one year and shall be renewable each year thereafter. The annual Renewal Date is deemed to occur on the anniversary in each year of the Commencement Date included in the Schedule." 292 Provision was then made for Payment and Charges as follows: (Exhibit A, doc 459, cl 3) "3. PAYMENT AND CHARGES The provision of services by Licensor, as detailed in this Agreement, is conditional upon the prior receipt of payment of all fees and charges as specified in this Agreement. Payment of the yearly charge, determined in accordance with the provisions of Clause 4, shall fall due on the annual renewal data (sic)." 293 Daihatsu submitted that the company was only obliged to pay the annual charge when services were provided. Services could not be provided until the software had been brought into existence. It would only be brought into existence once it had been converted and installed. Accordingly, there was no liability on the part of Daihatsu to pay P M Sulcs under this Agreement since the software did not exist. P M Sulcs submitted, however, that the annual charge was like the subscription to a club. You pay whether you use the club or not. The payment fell due on 17 April each year, being the anniversary of the commencement date identified in the Schedule. 294 On the plaintiff's case, the services to be provided in consideration of the annual charge were as follows: (P M Sulcs subs in reply, 30.4.01, para 26) "26. The services to be provided in consideration of the annual charge were: · the provision of new versions of the licensed programs, · hotline support, · supply of DPAR forms, · advice from senior personnel, · monthly newsletters, membership of a user group, · updates of Fujitsu software (eg operating software), and · maintenance contract coordination." 295 The Agreement in Part A makes provision for each of these services. In my view, the obligations under the Agreement were not postponed until delivery of the converted software. 296 The Entire Agreement Clause differs from that in the Programme Licence Agreement. It is as follows: (Exhibit A, doc 462, cl 9.2) "9.2 These Terms and Conditions and the Quote constitutes the entire Agreement between the parties for the subject matter hereof and are referred to herein as 'this Agreement'. Any prior arrangements, agreements, representations or undertakings are superseded. No modification or alteration of any clause of this Agreement will be valid, except if in writing signed by each party." 297 What do the words "the Quote" mean in that context? The Proposal document (15 December 1988), in the summary of Software and Services (Exhibit A, doc 221; supra: para 120) begins with these words: "The quote is valid for 30 days …." 298 The plaintiff made the following submission as to the meaning of that phrase in clause 9.2: (P M Sulcs subs in reply, 30.4.01, para 31) "31. Those words, fairly read in the context of the document as a whole as signed and amended by Mr Kratsas, incorporates the Proposal (ie 'the Quote'), and consequently the analysis report, and also the licence and software maintenance agreements, since they are all referred to in the proposal which is the best evidence of what the parties contemplated to be their contract. …" 299 The defendant submitted that the Proposal of 15 December 1988 had lapsed. There was no extant quote. I have rejected that view. The conduct of the parties, including their correspondence, demonstrated, I believe, that Daihatsu regarded the Proposal as open and that P M Sulcs raised no objection to their doing so. I accept the plaintiff's submission. The Terms and Conditions of Sale 300 The final document executed by Daihatsu on 18 April 1989 was the P M Sulcs Terms and Conditions of Sale. The agreement was introduced by these words (which appeared on the front-piece): (Exhibit A, doc 478) "The following are the Terms and Conditions on which P M Sulcs & Associates Pty Ltd (hereinafter called 'PMS') supplies goods or services (as defined) to a customer ('Customer')." 301 The agreement accompanied the Proposal of 15 December 1988 (as did the other standard form contracts). The Proposal, as mentioned (supra: para 266), included a "Quote" of prices for goods and services offered (supra: para 120). The Terms and Conditions of Sale repeatedly refer to "the Quote". Clause 1 included the following definitions: (Exhibit A, doc 478.1, cl 1) "1. DEFINITIONS For the purpose of this Agreement and unless the context otherwise requires: a. 'Contract Price' means, subject to Clause 2, the total price specified in the Quote for the Goods listed therein; b. 'Equipment' means the items of computer hardware sold by PMS to Customer subject to the terms and conditions herein; c. 'Goods' means Equipment and/or Software; d. 'Point of Installation' means the site or sites nominated in the Quote for the installation of Equipment; e. 'Quote' means a quotation provided in writing by PMS to the Customer for the supply of Goods by PMS to Customer and not revoked by PMS; f. 'Services' means the provision of labour; including for the purpose of but limited to training, programming services and professional advice; g. 'Software' means the computer programs licensed by PMS to Customer, subject to the terms and conditions herein; h. 'System Handover' means the satisfactory completion of installation and testing of Goods as supplied to Customer by PMS which shall be deemed to have occurred upon completion of the PMS System Acceptance Test by PMS personnel." 302 The Terms of Payment were also defined as follows: (Exhibit A, doc 478.2) "3 TERMS OF PAYMENT Goods All Goods sold or licensed are subject to the following Terms of Payment: 50% of Contract Price: Payment upon placement of order by Customer. 30% of Contract Price: Payment upon delivery of Equipment. 20% of Contract Price: Payment upon System Handover. All payments shall be made to P M Sulcs & Associates Pty Limited except where otherwise directed by PMS. Services All Services performed for Customer by PMS, or by suppliers on behalf of PMS, and which are payable by Customer in accordance with the provisions of this Agreement, shall be paid by Customer within fourteen (14) days from the date of the invoice from PMS. Other All other charges which are payable by Customer to PMS in accordance with the provisions of this Agreement shall be paid by Customer immediately upon receipt of invoice from PMS. …" 303 In the context of this clause, Daihatsu made the following submission: (Daihatsu subs: para 2.19.3) "2.19.3 Clause 3 provides, incoherently in the present circumstances that all goods sold or licenced are to be paid for, inter alia, as to 50% of the contract price upon placement of order by Customer - however that clause must refer only to hardware equipment as the provision relating to the second tranche of 30% is expressed to be payable ' upon delivery of Equipment' ." 304 However, to interpret the clause in that way is to ignore the factual matrix within which the parties were working. Fujitsu was supplying the equipment. P M Sulcs was supplying the software (cf Kratsas: T.1052, lines 19-30). This was a standard form contract, plainly drafted to deal with a variety of situations. Aspects of the standard form had no application to the arrangements between Daihatsu and P M Sulcs. Their agreement concerned goods, namely software, not machinery. 305 Clause 13 referred to the Programme Licence Agreement. It was in these terms: (Exhibit A, doc 478.7) "13. PROGRAM LICENCE AGREEMENT PMS agrees to grant to Customer a licence to use Software upon and subject to the terms and conditions of PMS's Program Licence Agreement and Customer agrees that the execution of PMS's Program Licence Agreement is a condition precedent to installation of the Software." 306 Clause 14 is important. It was as follows: "14. FUJITSU AUSTRALIA PTY LTD (FAL) Customer agrees, understands or warrants, as the case may be, as follows: (1) PMS is not an agent of FAL or any of it's related companies. (2) in entering into this Agreement with PMS, Customer is not reliant upon any representations made by FAL; (3) FAL shall in no event be liable for any damages resulting from PMS.s failure to perform obligations under this Agreement." 307 The standard contract, as printed, had WANG or WA where Fujitsu and FAL appear in this clause. The document had been amended by crossing out the name WANG (or WA) and substituting FUJITSU or FAL. These alterations were made in four places (the heading, and each of the three clauses). Mr Kratsas, when he executed the document, placed his initials in three places only. There was a small gap beside clause (2), where there are no initials. 308 The attention of Mr Kratsas was drawn to clause 14 in cross examination. The cross examination was based upon a photocopy from Exhibit A (doc 478.7). The photocopy had the three initials, as I have described. In that context, Mr Kratsas said this: (T. 1052/3) "Q. I am focusing, sir, upon the initials that appear beside clause 14 on page 478.7? A. I understand what you are focusing on, sir. The concern, as I said, I have, is that the original does not have those initials. Q. The original in the possession of Daihatsu you mean? A. Yes, and therefore I say it is more, it is likely that those initials were put there by some other means and you can use your own connotation on how they were put there. Q. No, sir. Let's be quite frank about this. What are you asserting in relation -- A. I am not asserting anything. Please use your own connotation. Because if the original doesn't have it, I have a great concern why the original wouldn't have that." 309 Mr Kratsas was then cross examined upon the terms of clause 14. The context was Daihatsu's assertion that the common understanding of all parties was that the agreement between Daihatsu and P M Sulcs was subject to a condition precedent, as reflected in the Prime Contract Agreement. Mr Kratsas said this: (T. 1053/4) "Q. Do you agree that those clauses are inconsistent with the notion of the prime contract, as you have explained the concept? A. I don't think that line, what is it, No 1, 'PMS is not an agent of FAL or any of its related companies', I don't think that would cause me any concern. I never thought they were an agent of FAL or any of its related companies. Q. What about 2? A. 'In entering into this agreement' - that would, of course, concern me because what it is saying, for all intents and purposes, that FAL is irrelevant. Q. What about 3? A. 'FAL shall in no event be liable for damages resulting from P M Sulcs' failure to perform obligations under this agreement'. That doesn't sound logical because we had an agreement with Fujitsu that they would be responsible. So how could Sulcs say that Fujitsu is not going to be responsible? How can they talk for some other company?" 310 Counsel for the plaintiff then called for the originals of the documents executed by Daihatsu on the evening of 18 April 1989. They were not, at that stage, produced. They were produced after the luncheon adjournment. Mr Kratsas was then taken once more to clause 14 in the Terms and Conditions of Sale. The examination was as follows: (T.1064) "STEVENS: Q: You are able to say by reference to the documents being within Daihatsu's documents and by looking at them, that you accept that that is your initial that appears beside clause 14? A. Clause 14, 14.1 and 14.3. You will notice 14.2 is not initialled. HIS HONOUR: Q: Do you suggest that was a deliberate omission on your part? A. That's correct. That's correct, sir. That is the clause that basically for all intents and purposes says that, 'Customer is not reliant on any representation by FAL.'" 311 The cross examination continued: (T.1064) "STEVENS: Q: Do you say that you recall consciously initialling beside clause 14, and consciously only initialling it so that it was initialled beside the heading clause 1 and clause 3? A. That's what my initial is against, those three items. So therefore I must have consciously done that. Q. You do not have any present recollection of turning your mind to it, or do you? A. Present recollection looking at that, yes. Because that clause would not make sense. Q. What you want his Honour to accept, now that you have seen your initials appearing beside it, is that you consciously accepted the amendment of clause 1 and of clause 3, but not of clause 2? A. That's correct. Q. If you did not want to accept the amendment of clause 2, why did you not rule through clause 2? A. Because I didn't." 312 Mr Kratsas acknowledged that clauses 14.2 and 14.3 were both inconsistent with his understanding of the agreement (based upon the Prime Contract) (T.1065). 313 I reject Mr Kratsas' evidence. It is absurd to suggest that he deliberately refrained from initialling clause 14.2. Clause 14.3 was initialled, and yet it was more troublesome, from the viewpoint of the defendant's case. In the hurry of a late night, where a number of documents were being executed, Mr Kratsas plainly overlooked one of the amendments to clause 14 when he subscribed his initials. His answers in cross examination were opportunistic. They do him no credit. 314 Returning to P M Sulcs' Terms and Conditions, they contained an Entire Agreement Clause in terms which incorporated "the Quote". Clause 15.2 was as follows: (Exhibit A, doc 478.7) "15.2 These Terms and Conditions and the Quote constitutes the entire agreement between the parties for the subject matter hereof and are referred to herein as 'this Agreement'. Any prior arrangements, agreements, representations or undertakings are superseded. No modification or alteration of any clause of this Agreement will be valid, except if in writing signed by each party." 315 Obligations under the agreement could not be transferred (clause 15.3). 9. CONSTRUCTION OF THE AGREEMENTS The Condition Precedent Issue 316 It will be remembered (supra: para 15) that the defendant pleaded that its liability to P M Sulcs under the various agreements was subject to a condition precedent. The condition precedent was that Fujitsu would enter into an agreement with P M Sulcs whereby: (supra: para 15) "A. (Fujitsu) would take responsibility for the computer systems to be implemented for the Defendant including, but not limited to, the Programs; and B. The Plaintiff agree that (Fujitsu) and not the Defendant would be liable to pay it for the licences provided pursuant to the (Program Licence Agreement) and for any services provided pursuant to the (Software Maintenance Agreement)." (Amended Defence para 17; parenthesis added) 317 The condition, however, was never fulfilled. P M Sulcs did not enter such an agreement with Fujitsu. Submissions by the Parties 318 The written submissions by Daihatsu suggested that the condition precedent was an express term, or alternatively, an implied term (Daihatsu subs: para 3.22). 319 The suggestion that it was an express term is dependent upon Mr Hooper's letter of 18 April 1989 (which accompanied the Analysis Report) understood in the factual matrix which existed at that time. Mr Hooper, it will be remembered, wrote to Daihatsu in terms which included the following: (Exhibit A, doc 481; supra: para 243) "FUJITSU AUSTRALIA are accepting ultimate responsibility, as Prime Contractor, for the delivery and commissioning of your system. However, P M SULCS pledges it's resources and commitment to commissioning your system on time and on budget." 320 The reference to Fujitsu being the Prime Contractor should be understood, on the defendant's case, in the context of the following facts which were mutually known: (Daihatsu subs: para 3.12) · First, the Prime Contract Agreement, and its terms, which included the conversion of the software and the payment of money (including licence fees) by Daihatsu to Fujitsu. · Second, the signing by Daihatsu of the Prime Contract Agreement. · Third, that Fujitsu appeared to accept the role of Prime Contractor, and was acting upon that basis. 321 I accept that each of these facts was known to both Daihatsu and P M Sulcs. Daihatsu submitted that in these circumstances the following conclusion should be drawn: (Daihatsu subs: para 3.19) "3.19 The letter with the Analysis Report shows that Sulcs fully accepted that Fujitsu was to be prime contractor in the sense that Sulcs would be its subcontractor as envisaged in the PC Agreement. That is what objectively the parties all mutually knew." 322 The alternative hypothesis of two contracts, one between P M Sulcs and Daihatsu and the other between Daihatsu and Fujitsu, would produce a legally chaotic relationship (Daihatsu subs: para 3.28). More than that, it would be "commercially absurd" to suggest that Fujitsu would guarantee the performance of P M Sulcs when it had no contractual arrangement with that company whereby it could ensure its performance (Daihatsu subs: para 3.61). The Daihatsu submissions said this: (Daihatsu subs: para 3.21.3) "3.21.3 … it is commercially unreal to suppose that Daihatsu: (1) would want to contract separately from Fujitsu - to do so would imperil its security - the ' guarantee ' theory is commercial nonsense and inconsistent with the objective facts. The whole idea of a prime contract is to avoid the inevitable buck passing between the hardware and software suppliers if the customer does not get what it wants; (2) got any benefit from being bound to pay Fujitsu the Licence Agreement fee of $150,000 as well as being bound to pay Sulcs the same fee all over again - ie Daihatsu would be contractually bound, to Sulcs' knowledge, by reason of its having a copy of the PC Agreement, to pay the Licence Agreement fee twice. Again, this is an absurd result; …" 323 The suggestion by Mr Hooper that Fujitsu was simply guaranteeing the system, including the software of P M Sulcs, was a "recent invention" (Daihatsu subs: para 3.65). It was also, according to the defendant, contrary to the plaintiff's pleaded case. In paragraph 10 of the Amended Statement of Claim, the plaintiff pleaded an agreement between Fujitsu and P M Sulcs, entered as a consequence of its agreement with Daihatsu. In the light of the "guarantee case" now put forward by the plaintiff, such a suggestion, according to Daihatsu, was "a knowingly false" assertion (Daihatsu subs: para 3.66). 324 The plaintiff, in response, asserted that P M Sulcs had never abandoned its contract with Daihatsu (Plaintiff's subs in reply: 22.4.01, para 41). The term "prime contractor" in the letter of 18 April should be interpreted to mean the following: (Plaintiff's subs in reply: p18, para 45) "45. We have already submitted that the parties (and especially FAL itself) did not intend FAL to be a 'prime contractor' in the sense of a head contractor, and that the term means, in the context of this case, that they were prepared to work together under their individual contracts with DAP to achieve their common objective of supplying DAP with a new computer system. In that context, 'prime contractor' means no more than 'co-ordinator' and 'agent'." The Letter of 18 April 1989 325 The letter of 18 April 1989 is unquestionably an important document. It accompanied the Analysis Report. That report was, according to the plaintiff, one of the documents giving rise to its agreement with Daihatsu. What meaning should be attributed to the term "prime contractor" in that letter? It is a term susceptible of more than one meaning. In the context of the letter, it may signify that independent pledges had been made by the parties who had contracted with Daihatsu, one for the entire system by Fujitsu, and the other for the software by P M Sulcs. 326 It may mean, on the other hand (as the defendant contended), an acceptance by P M Sulcs that its role in the project was as sub-contractor to Fujitsu, the prime contractor. 327 To resolve the ambiguity, it is permissible to have regard to the objective framework of facts within which the contract came into existence, and the presumed intention of the parties within that setting (Mason J in Codelfa (supra) at 352) (supra: para 26). Findings Already Made 328 I should restate the findings that have been made in respect of matters mutually known to P M Sulcs and Daihatsu: · First, Fujitsu did not approach Daihatsu, and thereafter introduce P M Sulcs. P M Sulcs approached Daihatsu. It established its own relationship. It thereafter introduced Fujitsu to the sale (supra: para 76; infra: para 484). · Second, Mr Hooper hand delivered the P M Sulcs proposal to Daihatsu on 15 December 1988. The proposal identified Fujitsu as the hardware supplier. Fujitsu, separately, placed its own proposal before Daihatsu the following day. It identified P M Sulcs as the software supplier which should be used (supra: paras 108, 125). · Third, Daihatsu was prepared to directly deal with software houses. It did so with Lingua 10, and did so with P M Sulcs (supra: para 57). · Fourth, the attraction to Daihatsu was primarily the software of P M Sulcs, rather than the hardware of Fujitsu. Daihatsu was prepared to accept an ICL computer (rather than a Fujitsu computer) with P M Sulcs software (supra: paras 83/88). · Fifth, at the time that the P M Sulcs proposal was hand delivered by Mr Hooper to Mr Kratsas, and in the context of being told that Fujitsu was to be prime contractor, Mr Hooper told Mr Kratsas that P M Sulcs was an independent supplier, who insisted upon dealing directly with its clients, a matter which Mr Kratsas acknowledged (supra: paras 106, 109, 224). · Sixth, Mr Kratsas (representing Daihatsu) dealt directly with Mr Hooper. He had meetings with him. He spoke to him on the telephone. He corresponded with him. He negotiated the terms of Daihatsu's arrangement with P M Sulcs, including the licence fee (supra: para 93). · Seven, on approximately 30 March 1989, Mr Hooper was shown the Prime Contract Agreement, and was aware of its terms (supra: para 214). · Eight, the Prime Contract Agreement was an agreement between Daihatsu and Fujitsu. P M Sulcs was not a party (supra: para 213). · Nine, upon being shown the Prime Contract Agreement between Daihatsu and Fujitsu, Mr Hooper again asserted the independence of P M Sulcs from Fujitsu, which was accepted by Daihatsu. P M Sulcs indicated, however, that it was prepared to receive monies payable under its agreement with Daihatsu through Fujitsu (supra: paras 213, 224). · Ten, the condition precedent asserted by the defendant was not incorporated into any written agreement between Daihatsu and P M Sulcs, nor included in correspondence from Daihatsu to P M Sulcs. · Eleven, on many occasions in the presence of Mr Hooper, Fujitsu was referred to as the "prime contractor" of Daihatsu (supra: para 225). · Twelve, on 18 April 1989, Daihatsu again dealt directly with Mr Hooper and executed four agreements with P M Sulcs (supra: para 248). · Thirteen, the terms of one such agreement (the standard Terms and Conditions of P M Sulcs), included a clause (cl 14) stating that Daihatsu, in entering its agreement with P M Sulcs, was not reliant upon any representation made by Fujitsu, and that Fujitsu would in no event be liable for any damages resulting from the failure of P M Sulcs to perform its obligations under the agreements being executed (supra: par 306). · Fourteen, the system to be supplied to Daihatsu in respect of which Fujitsu was to be prime contractor, included the software of P M Sulcs, that of Relational Technology and of Lingua 10. Fujitsu had no contractual relationships with either Relational Technology nor Lingua 10. In each case Daihatsu had contracted directly with those suppliers (supra: paras 57, 138, 163; Kratsas: T.1103). 329 Viewed within this factual matrix, I cannot accept that the contractual arrangements between P M Sulcs and Daihatsu included, as an express term, the condition precedent. 330 I do not regard the suggestion that Fujitsu should, in such circumstances, take on the role of prime contractor as commercial nonsense. I should add that I also do not accept the submission by the plaintiff that, as prime contractor, Fujitsu would simply act as agent or co-ordinator. As prime contractor, the role of Fujitsu was that defined by Daihatsu. It was intended (and understood by Daihatsu and Fujitsu) that Fujitsu would be required to assume responsibility for the proper functioning of the system, both software and hardware. By that means, Daihatsu could avoid a situation where one supplier blamed the other in circumstances where the system was not functioning. 331 I do not believe that it was "commercially unreal" that Fujitsu should, in such circumstances, be willing to shoulder that responsibility. 332 First, the sale to Daihatsu was a significant sale. It was one which Fujitsu had not been able to achieve without the assistance of P M Sulcs. 333 Secondly, it was a strategic sale (Musson: T1756). It held out the promise of a reference site, and additional sales to the users of ICL System 25 or Spares users (supra: para 139). 334 Thirdly, at the time the Prime Contract was proposed, and until the quote was received from Rapitech in early May, and evaluated, Fujitsu believed that the conversion should be straight forward. Fujitsu recognised a risk, but a manageable risk. 335 Fourthly, to accommodate that risk, Fujitsu had loaded the hardware price with an $150,000 Prime Contract fee. 336 Fifthly, Fujitsu had agreed to assist P M Sulcs in the conversion of its software to the extent of $250,000. Although no agreement had been made with P M Sulcs by the end of March 1989, it had every reason to be confident that an agreement acceptable to both could be negotiated. 337 Finally, although Fujitsu agreed to take on the role of underwriting the performance of the system as prime contractor, it kept its powder dry whilst further investigating the risks of that undertaking. It did not sign and return the Prime Contract Agreement, and it did not disclose that fact to either Daihatsu or P M Sulcs. 338 Turning to the other submissions of the defendant, the relationship which Daihatsu, through Mr Kratsas, chose to fashion with P M Sulcs and Fujitsu was less than ideal. However, that was the way in which the parties chose to deal with each other. None retained lawyers. The consequence was untidy, but such things are not unknown. 339 The suggestion that Fujitsu was guaranteeing the performance of the system was not a recent invention by Mr Hooper. His position, as I have found it, was stated in contemporaneous documents. It appeared in his fax to Maris Sulcs in Canada on 31 March 1989 (Exhibit A, doc 450.1: supra: para 218), and in his annotations to the Work Order furnished by Mr McLean on 30 March 1989 (Exhibit A, doc 409.2: supra: paras 220, 221, 222, 224). 340 To suggest that Daihatsu would be obliged to pay the licence fee and other charges twice, is to overlook P M Sulcs' acquiescence in the request made by Mr Kratsas that monies payable would be paid through Fujitsu. 341 Finally, I do not regard the pleading of the agreement between P M Sulcs and Fujitsu in the Amended Statement of Claim as inconsistent with the position which I have stated. The pleading cannot be characterised as a false assertion, and far less, a knowingly false assertion. Should a Term be Implied? 342 It was faintly argued by Daihatsu that the same matrix of facts, (supra: para 320), provided a basis for implying the condition precedent (Daihatsu subs: para 3.22.2). The test for implying a term was authoritivly stated by the Privy Council in these terms: (B P Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at pp 282.10-283.2) "Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract." 343 On the findings I have made (supra: para 328), I cannot be satisfied that such a term should be implied. The only requirement in respect of which I am satisfied is condition 4. The Agreement of 18 April 1989 344 There being no unsatisfied condition precedent, it is necessary to determine exactly what the parties agreed upon on 18 April 1989. 345 Part of the objective factual matrix was that, at the time of their agreement, the software of P M Sulcs was written for a Wang computer, not a Fujitsu computer. It was written in Wang VS Cobol and would require conversion and adaptation to run upon the Fujitsu computer selected by Daihatsu. Moreover, it was necessary to incorporate the Ingres Relational Database and the SQL commands, which would permit access to that database. The parties both knew that conversion was complex, and would take time (supra: para 122). They knew that the programmes could not be taken off the shelf and handed over. There would, inevitably, be some delay whilst these tasks were undertaken. That much was common knowledge. The construction of the agreement should be approached against that background. 346 On 15 December 1988, P M Sulcs submitted the proposal document to Daihatsu (supra: paras 106, 108). The proposal included a number of attachments, including the standard form contracts. These documents were the offer to Daihatsu. It was an offer, moreover, which foreshadowed the need for refinement of that which was being offered. An analysis should be undertaken to determine the modifications that should be made to the standard P M Sulcs software. Daihatsu then accepted the need for such an analysis. P M Sulcs was paid the cost specified in its proposal ($15,000). 347 The analysis having been undertaken, a report was provided to Daihatsu on 18 April 1989. It was plainly intended that the report should be read in conjunction with the original proposal. It was, as foreshadowed, a refinement of that proposal. The refinement, in substance, dealt with two issues: · First, it identified the modifications to the standard P M Sulcs modules which were necessary, assigning a cost and priority to such modifications. · Second, it amended the Project Schedule, and hence the time for delivery. Whereas the original proposal referred to the installation after five weeks of unmodified software (supra: para 118), by 18 April 1989 it was recognised that all software required alteration. It required conversion to the UNIX operating system and C language, and, in some cases, modification. The amended Project Schedule made a significant adjustment to the time for installation. Installation would take place after week 15 (rather than five). The time for completion was extended from 26 to 30 weeks. These adjustments, in my view, were a recognition of the need for the conversion process, and the time it would take. 348 The proposal, as refined by the Analysis Report, together with the three standard form contacts, in my view, constituted the offer made by P M Sulcs to Daihatsu. The documents should be read together. They were presented as part of the same offer. They related to different aspects of the same subject matter, namely the sale of the P M Sulcs software to Daihatsu. They were executed at the same time. Objectively, the parties intended that they be regarded as the one "package". That was the quote. Daihatsu accepted that quote. Mr Kratsas subscribed his signature, as Company Secretary, to the four documents which were presented to him that evening. That became the order by Daihatsu for the P M Sulcs software. The Objections of Daihatsu 349 Daihatsu raised a number of objections to such a construction. I have dealt with some of them already. It is suggested that the Programme Licence Agreement and the Software Maintenance Agreement should be read together, but without reference to the Terms and Conditions of Sale, or other documents. Daihatsu pointed to the Entire Agreement Clauses in each contract. 350 However, that clause in the Programme Licence Agreement was circumscribed by its terms. The wording of that clause prevented reference to other documents or agreements "related to the same subject matter" between the parties. The subject matter was the licensing of Daihatsu to use the software of P M Sulcs. That limitation, in my view, did not close off the use of other documents in understanding the bargain that had been struck by the parties. It was permissible to look to the Terms and Conditions of Sale to determine the terms of payment in respect of the licence. The software amounted to "goods", as defined by the Terms and Conditions of Sale. By clause 3 all goods licensed were subject to payment of 50% of the contract price upon placement of the order. The contract price was specified in the proposal document of 15 December 1988 (Exhibit A, doc 220). Once the agreements were signed on 18 April 1989, Daihatsu was required to pay 50% of the licence fee. 351 The Entire Agreement Clause in the Software Maintenance Agreement was significantly broader than that in the Programme Licence Agreement. It included not only the terms of that agreement, but also the "quote". The quote, in my view, included the Terms and Conditions of Sale. The annual fee of $22,500 could not be described as "services" as defined by clause 3 of the Terms and Conditions of Sale. However, they came within the description "other" charges in clause 3, and were payable immediately upon receipt of an invoice. The Requirement of Presently Existing Software 352 The other substantial objection of Daihatsu to the construction which I have suggested, was expressed in these terms, referring to the Programme Licence Agreement (Daihatsu subs: para 2.15) "2.15.1 the definition of ' Licenced Program' was expressly stated to be 'each program furnished ' by Sulcs to Daihatsu listed in the schedule. As at 18 April 1989 no such program existed because the Conversion had not occurred. The Licence Agreement could only have been referring to a program which was to be brought into existence in the future - a feat which has never occurred; 2.15.2 cl 2 recited that Sulcs had the right to grant the licence and then granted non exclusive licence to use each Licenced Program on each particular Designated Equipment, which was the M760. Again there was no presently existing subject matter to which this clause applied." 353 The defendant argued there could be no obligation to pay until delivery. That argument was linked to the submission by Daihatsu that the Entire Agreement Clause prevented reference to the Terms and Conditions of Sale in determining when the obligation to make payment arose. Having determined the latter question adversely to Daihatsu, the present argument is less significant. 354 The definition of "Licence Programme" under the Programme Licence Agreement is wider than simply the software. It "includes supporting material", as you would expect, since the licence is designed to protect the intellectual property (cf Autodesk Inc v Dyason (1992) 173 CLR 330, per Mason CJ, Brennan and Deane JJ at 335-336). Here, once the agreement was signed on 18 April 1989, the supporting material, including the Operating Manual in respect of the Material and Customer Control System, was made available to Daihatsu (Womack: T.1275; Exhibit A, docs 1041, 1056). They were needed by Daihatsu (and specifically by Mr Womack) to address the next stage, that is the design specification. The Licence Programme was, in that sense, furnished. 355 But more than that, the programmes were furnished when P M Sulcs appropriated a copy of its software (in Wang VS) for modification, as directed by Daihatsu once the agreement was signed on 18 April 1989. Immediately after the settlement, Mr Hooper gave Mr Santa Maria a direction in the following terms: (Hooper: Aff. 2.1.98, para 40) "Hooper: 'I want you to make a copy of the MCS software and label it 'DAP', then start work modifying the screen layouts so that the design specification can be finished as soon as possible. I don't want any delays in the schedule as DAP is anxious to have the project finished and their dealers on-line.'" 356 I believe, therefore, that the agreement should be construed in the way that I have outlined. 10. THE BREAKDOWN OF RELATIONS Issues 357 Having executed the agreements on 18 April 1989, P M Sulcs began work on the specification for the modifications to the software. 358 Within six weeks there was a rupture in relations. A meeting took place on 5 June 1989 between Daihatsu, Fujitsu and P M Sulcs. It began the process which ended on 4 July 1989 with the termination by Daihatsu of its contract with P M Sulcs. 359 I will now deal with the events which led to that meeting, namely: · First, the issue of payment. · Second, the design specification for the modifications. · Third, the further investigation of the conversion of the P M Sulcs software. · Finally, a meeting between P M Sulcs and Fujitsu on 23 May 1989. Payment of P M Sulcs 360 I have described the meeting in which the Analysis Report and other contractual documents were signed (supra: para 246-248). It began on 18 April 1989, and concluded after midnight. The Analysis Report was correctly dated 19 April 1989. 361 Mr Hooper alleged that later the same day, 19 April 1989, he sent two invoices to Daihatsu. They were sent following his conversation with Mr Kratsas (supra: para 250ff). Mr Kratsas had invited him to submit invoices. It will be remembered that Mr Kratsas denied that conversation. However, I have given my view that it probably took place, although Mr Kratsas may not have specified the party to whom the invoices were to be sent (supra: para 254). 362 The first invoice, addressed to Daihatsu, was dated17 April 1989 (Exhibit A, doc 456; Exhibit 3). It included these words: "Part Payment of 50% Program Licence for Material Control & Purchase Order Modules as per Program Licence Agreement PLA.0152 dated 17th April, 1989. $75,000.00" 363 The second, also addressed to Daihatsu, was dated 18 April 1989 (Exhibit A, doc 639; Exhibit 3). It was as follows: "Software Maintenance as per Software Maintenance Agreement Contract SAMO152 dated 17th April 1989. $22,500,00 " 364 Mr Hooper said that, having sent the invoices, he met Mr Kratsas on 8 May 1989 (Hooper: Aff. 3.1.98, para 43/44). He raised with him that P M Sulcs had not been paid. Mr Kratsas, according to Mr Hooper, then asked him to resubmit the invoices to Fujitsu. He would ensure that they were paid. Mr Hooper attributed to Mr Kratsas these words: (Hooper: Aff. 2.1.98, para 44) "That is how we have organised the financing of the purchase of your software. Also, I want to be able to hold FAL responsible for your work. If I pay you direct, I can only hold PMS accountable for any problems." 365 Mr Kratsas denied that conversation. He denied having received invoices from P M Sulcs. The first time the invoices from P M Sulcs came to his notice was when they were sent by Mr Hooper to Daihatsu under cover of his letter of 12 June 1989 (Kratsas: Aff. 31.3.98, para 46). Mr Hooper never complained that Daihatsu had failed to make payment (Kratsas: T.1077, 1089). Nor would he have expected him to have done so. The contractual arrangements required that P M Sulcs should look to the Prime Contractor, Fujitsu, for payment (Kratsas: T.1090). 366 Mr Kratsas acknowledged, however, that Mr Hooper told him of P M Sulcs' cash flow problems in May 1989 (Kratsas: T.1089). He was also told that Fujitsu was withholding payment. According to Mr Kratsas, Mr Hooper asked him to put pressure on Fujitsu. He declined to do so (T.1206). He did, however, speak to Mr Docherty. He was told by Mr Docherty that there were problems with the availability of a suitable conversion tool, and the ability of P M Sulcs to finance the conversion (Kratsas: T.1206). It was in this context that the meeting of 5 June 1989 was convened (Kratsas: T.1206). 367 Returning to Mr Hooper's account, he said that, having spoken to Mr Kratsas, he then spoke to Mr McLean of Fujitsu. Mr McLean was aware of the issue. He reminded Mr Hooper of the need for an agreement between Fujitsu and P M Sulcs. Mr McLean also repeated that money would only be paid by instalments. 368 Responding to Mr Hooper's affidavit, Mr McLean remembered speaking to Mr Kratsas in the following terms: (McLean: Aff. 2.4.98, para 17(c)) "If you are prepared to release money to Fujitsu, Fujitsu will release part of that money to Sulcs to get this project kicked off." 369 Mr McLean agreed that he raised many times with Mr Hooper the need for a contract between Fujitsu and P M Sulcs, and that payments would only be made by instalments. He said, however, that Mr Hooper insisted upon being paid up front. He refused to enter an agreement upon any other basis. As to the last assertion, I have dealt with similar evidence from Mr McLean previously (supra: para 202). I believe that Mr McLean is mistaken in that recollection, for the reasons previously given. P M Sulcs was prepared, from an early stage, to accept instalments, as contemplated by the Work Order drafted by Mr McLean (Exhibit A, doc 409.1; supra: para 198). 370 Having spoken to Mr McLean, Mr Hooper said that he then recast his invoices. They were directed to Fujitsu. Two were backdated. The first (dated 18 April 1989) dealt with the licence fee (Exhibit A, doc 640). Although the invoice referred to the Prime Contract Agreement, the amount claimed ($50,000) reflected the payment schedule drawn up by Mr McLean on 30 March 1989 (Exhibit A, doc 409.1; supra: para 198). 371 The second invoice was dated 1 May 1989 (Exhibit A, doc 1004). It was for $40,000. It represented four weeks work at $10,000 per week, again reflecting the weekly payments suggested by the Work Order. 372 The third invoice was dated 12 May 1989 (Exhibit A, doc 1031). It claimed $20,000 for a further two weeks work (at $10,000 per week). 373 Soon after these invoices were dispatched, Fujitsu sent an invoice dated 18 May 1989 to Daihatsu claiming $1,235,271. The amount claimed included the cost of the Fujitsu computer (which had since been delivered and accepted), and the two instalments which were payable in respect of the licence fee (each of $75,000) (Exhibit A, doc 1031.1). Daihatsu later asked that Fujitsu resubmit these invoices to the ANZ Bank, through whom it had arranged lease finance. 374 On 15 May 1989, Mr Hooper again met with Mr McLean. Mr McLean once more insisted that Fujitsu required a document by which Fujitsu could accept, on P M Sulcs' behalf, payments from Daihatsu. Mr McLean had no recollection of having had such a conversation, although he thought it possible. They had many discussions about the need for an agreement. 375 The following day, according to Mr Hooper, he met Mr Brydie and Mr McLean. Mr Brydie was unhappy about the absence of a contract between P M Sulcs and Fujitsu. A mechanism was required in order that Fujitsu could pay P M Sulcs. Mr Brydie directed that Mr Hooper and Mr McLean meet again, and resolve their differences. Mr Brydie, responding to Mr Hooper's affidavit, could not recall that meeting. He acknowledged that it was possible that he met with Mr Hooper (Brydie: Aff. 31.3.98, para 11). Mr McLean, likewise, could not remember having attended such a meeting. He denied aspects of the conversation, as recounted by Mr Hooper, concerning matters which I do not regard as material (McLean: Aff. 2.4.98, para 19). 376 By 1 June 1989 Mr Hooper claimed to have had enough. Having not been paid by Fujitsu, he again looked to Daihatsu. On 1 June 1989 he sent an invoice to Daihatsu for $45,000. The amount was calculated by reference to the work performed in developing the design specification (Exhibit A, doc 1040). Mr Kratsas, as with the previous invoices, stated that he did not receive that invoice until some time shortly after 12 June 1989 (Kratsas: Aff. 31.3.98, para 50). Did P M Sulcs Demand Payment from Daihatsu? 377 I accept the account of Mr Hooper. I believe it highly likely that P M Sulcs demanded payment from Daihatsu, and sent invoices, as Mr Hooper described. I reject Mr Kratsas' account that no demand was made upon Daihatsu before Mr Hooper sent his letter of 12 June 1989 (enclosing a copy of such invoices). 378 There are a number of reasons why I have taken this view. First, the denial of Mr Kratsas was linked to his assertion that there was a Prime Contract in which P M Sulcs was the subcontractor to Fujitsu. If P M Sulcs were a subcontractor, without any direct relationship with Daihatsu, why would it look to Daihatsu for payment? I have rejected that contention (supra: para 328). P M Sulcs dealt directly with Daihatsu. There was every reason, unless deflected, why it would look to Daihatsu for payment on the view that I have formed as to the relationship between the parties. 379 Secondly, reinforcing my view, it will be noticed that P M Sulcs sent Daihatsu its invoice for $15,000 for the Analysis Report (Exhibit A, doc 221; supra: para 164). Further, the terms of the Software Maintenance Agreement identified the party to whom invoices were to be sent. It identified Daihatsu at its Riverwood plant (supra: para 288). 380 Thirdly, according to the agreement between P M Sulcs and Daihatsu on 18 April 1989, P M Sulcs was entitled to payment of 50% of the licence fee ($75,000), and, indeed, the annual maintenance charge as well ($22,500). Hence Mr Hooper, whether because of his contract with Daihatsu, or because of his knowledge of the arrangements between Fujitsu and Daihatsu, believed that P M Sulcs was entitled to immediate payment. 381 Fourthly, P M Sulcs was a small company. It survived largely with the assistance of its Canadian parent. It is common ground that Mr Hooper disclosed to Mr Kratsas that the company had a problem with cash flow. Mr McInerney of Fujitsu recalled that Mr Hooper was chasing payment (McInerney: T.1480). It would be surprising if it were otherwise. Mr Docherty provided further corroboration. At the meeting on 5 June 1989, Mr Hooper insisted that Daihatsu pay P M Sulcs in accordance with its contract (Docherty: T.1244). It was Mr Docherty's belief that Mr Hooper had previously requested payment from Daihatsu (Docherty: T.1244). What Was Said in Opposition to Such a Finding? 382 Daihatsu invited the inference that the invoices were created in June 1989, and backdated. The submissions questioned whether Mr Hooper had sent invoices to Fujitsu, since the invoices were date stamped by Fujitsu 29 May 1989 (Daihatsu subs: para 4.52, 4.53). However, the more likely explanation is that, in the absence of a Work Order, the invoices did not have an obvious home. 383 However that may be, I am satisfied that Mr Hooper did send invoices to Fujitsu, and did so at the suggestion of Mr Kratsas. 384 The Daihatsu written submissions drew attention to what they termed "odd features" concerning the invoices supposedly sent to Daihatsu. First, those in April had different dates (17 and 18 April 1989). This was consistent, on Daihatsu's submission, with their fabrication on a later date, Mr Hooper having forgotten the date upon which the contract was made. 385 Secondly, attention was drawn to the fact that the copy on Mr Hooper's file was, in fact, a signed original. 386 Thirdly, Mr Hooper did not write to Daihatsu confirming Mr Kratsas' request that the invoices be sent to Fujitsu. 387 I do not find these arguments persuasive. Many documents were generated on 17 April 1989 (when the Analysis Report was completed and first submitted). The invoice bearing that date was more than likely created in anticipation of an agreement. Had the invoices been fabricated, why would one be dated 17 April and another 18 April? You would have expected both to have had the same date, being the incorrectly remembered contract date. Modifications to the Software 388 The instructions to begin work on the design specification for the modifications to the P M Sulcs software were given once the agreements were signed on 18 April 1989 (supra: paras 253-257). Mr Santa Maria, the Technical Services Manager of P M Sulcs, undertook the work. He was assisted by two programmers (Santa Maria: Aff. 2.1.98, para 9). 389 Where software is being modified there is a danger of what is termed "scope creep". P M Sulcs was required to frame a specification for the modifications requested, and classified by Daihatsu as "immediate". Daihatsu then had two weeks within which to consider and accept the specification (Exhibit A, doc 540 Project Schedule; supra: para 271). Once, the specification was available, it was submitted to Mr Greg Franks, the National Parts Manager of Daihatsu, and Mr Womack, previously a consultant and by then the Electronic Data Processing Manager of Daihatsu. In response to the specification, Daihatsu was obliged to observe the procedures laid down in the Analysis Report. It could, of course, question the adequacy of the specification. However, where it sought to go beyond the scope of the modifications identified and agreed, it was required to use a form known as a Data Processing Action Request ("DPAR"). Indeed, the Analysis Report said this: (Exhibit A, doc 482) "In order to complete this project in an orderly fashion it is necessary to establish a well defined set of guidelines, check points and responsibilities. It must be clear who is to deliver what, and when. P M Sulcs uses a standard, industry accepted project model. This is to ensure a clear and unambiguous set of steps for a successful project. The proof of its use is the many successful installations that P M Sulcs can use as references. We have included our Data Processing Action Request form in the Project Plan along with instructions for its use. We insist on its use for communication between the two firms on all changes requested (after Design Approval) or any problems found. The form permits a hierarchy of authorization, a facility for estimating the means by which performance can be evaluated." 390 The reasons for this procedure are obvious. Additional work plainly costs money and takes time. More than that, expanding the scope affected Fujitsu, as Prime Contractor. It was in Fujitsu's interests to confine the contract, so that its responsibility as Prime Contractor would end sooner rather than later. 391 Within Daihatsu there were differing views between Mr Franks and Mr Womack as to the modifications required (Santa Maria: Aff. 2.1.98, para 10; Hooper: Aff. 2.1.98, para 42; Womack: Aff. 30.3.98, para 41). It will be remembered that at the time the Analysis Report was presented on 18 April 1989, Mr Womack and Mr Franks could not agree. Mr Kratsas was required to "adjudicate" upon their differences (supra: para 246). 392 On 6 May 1989, Mr Santa Maria sent Mr Womack a draft specification for some of the modifications (Exhibit A, doc 1008). On 17 May 1989 the complete draft specification was provided (Exhibit A, doc 645) (Hooper: T.164). On 24 May 1989 Mr Santa Maria met Mr Womack to review the specification. The next day Mr Santa Maria sent a fax to Canada which included the following comment upon that meeting (referring to Mr Womack by his Christian name, Richard): (Exhibit A, doc 1034C.2) "9. Daihatsu as per usual, are still hagling (sic) over the modifications (while Richard is off trying to re-design our system). We have been having continuous discussions/explanations with them." 393 More formally, Mr Santa Maria wrote to Mr Womack on 30 May 1989, reminding him of the review procedure. He said this: (Exhibit A, doc 1035) "The Analysis Report identified DAP 's Immediate Modification requirements to the standard package and the optional Phased modifications. Only the Immediate Modifications are to be implemented as part of the initial installation and are to form part of the PRIME CONTRACT . Immediate modifications identified by PMS and DAP did not include major cosmetic reconstruction of the current software's screens/reports other than the specific functional modifications requested by DAP to screens/reports described in the Analysis Report. Any major cosmetic reconstruction will extend the Project and will require the approval of the PRIME CONTRACTOR. Any new modifications or request for modifications outside the Analysis Report are to follow the guidelines specified as per the Analysis Report. ie via Data Processing Action Request ( DPAR ) forms. These DPAR s will be analysed by PMS and PMS will quote DAP on the development cost prior to requesting the approval of the PRIME CONTRACTOR." 394 Mr Santa Maria then dealt with Mr Womack's suggestions, one by one. In some cases he simply provided information, clarifying aspects not understood by Daihatsu. In other cases, he indicated his view that the request was new. It would require the completion of a DPAR form. In one or two cases, Mr Santa Maria acknowledged that the suggestion would be incorporated in the design. 395 Mr Womack unashamedly saw his role as that of obtaining as much as he could, on behalf of Daihatsu, for the price which had been agreed (Womack: T.1283). If his requests travelled beyond the modification agreed, it was a matter for negotiation, and adjustment to the time and cost schedule (Womack: T.1283). 396 At first, that approach seemed to me reasonable. Daihatsu was, after all, the customer. Provided Daihatsu was prepared to be reasonable on price, and any implications as to time, it surely had the right to add to or subtract from the system purchased. However, upon further reflection, I can see that there are limits, especially where, as in this case, a third party was involved. 397 Mr Womack responded to Mr Santa Maria on 1 June 1989 (Exhibit A, doc 1041). He was prepared to adopt the procedure of the DPARs, as P M Sulcs insisted, although without prejudice to his claim that some, at least, of the matters raised were not new. Mr Santa Maria wrote back to Mr Womack on 2 June 1989. He enclosed a number of amended pages to the specification. He asked that Mr Hooper be provided with these sheets, signed off as accepted by Daihatsu, by Monday 5 June 1989 (Exhibit A, doc 1059). 398 Mr Womack said that he told Mr Santa Maria on 30 May 1989 that there were aspects of the specification he was not happy with. He would not, therefore, "sign off" (Womack: Aff. 30.3.98, para 46). Mr Womack added that any work done by P M Sulcs was at their own risk (Womack: Aff. 30.3.98, para 48). Mr Santa Maria could not recall that conversation. He did recall, however, Mr Womack saying words to the following effect: (Santa Maria: Aff. 12.2.99, para 3(h)) "The Design Specification is approved but I won't sign it off. I have been told not to sign anything until the problems with Fujitsu are resolved." 399 Was the design specification complete at the beginning of June 1989, such that it was unreasonable for Daihatsu to withhold approval? 400 It was certainly the position of P M Sulcs that the specification had been completed. Indeed, it suspected Mr Womack's motives. It believed that he was withholding consent for reasons which had nothing to do with the specification, but were related to the problems that had arisen with respect of Fujitsu. 401 It appears that Fujitsu regarded the specification as complete. Mr Docherty gave the following evidence (referring to the Systems Engineering Manager from Fujitsu, Mr Franks): (Docherty: T.1244) "Q. As at June 1989, was it your understanding that P M Sulcs had completed the design specification, and were about to start programming? A. Prior to the meeting of the 5th? Q. Yes? A. In fact, I think it was - yes, yes I had been told that by Greg Franks." 402 A letter was sent on the letterhead of Daihatsu dated 2 June 1989. It purported to be signed by Mr Kratsas. It included the following sentence, referring to the plaintiff: (Exhibit A, doc 1078) "They have completed the design specification and are about to start programming." 403 The letter was attacked by Daihatsu as a fraud. Unravelling that issue in the present context would be a distraction. I will return to that submission shortly. In the present context the letter may be ignored. It is not determinative. It simply asserted that P M Sulcs had completed the design specification and was about to begin programming. That was an accurate statement. The letter did not say that Daihatsu had accepted that the specification was complete. 404 I should say that I do not believe that Mr Womack's motives were otherwise than honourable. I should add that he was, nonetheless, ambitious for the system which was being purchased by his employer. He was also, by nature, cautious. When he gave evidence he said that parts of the specification were complete, and ready to sign off (Womack: T.1284). I am inclined to the view that that is what he said to Mr Santa Maria. In respect of other aspects, Mr Womack had misgivings. Many of the misgivings sprang from his need for reassurance that the system would deliver. They were the ruminations of "a nervous customer" (Musson: T.1892). Others were cosmetic, such as the screen layout (Exhibit A, doc 1042). Still others were outside the scope of the modifications identified by the Analysis Report. 405 I accept, as a matter of probability, that P M Sulcs had completed, or substantially completed, the specification, by the beginning of June 1989. The draft document, perhaps with minor exceptions, was ready to sign off. P M Sulcs was in a position to go to the next stage. Conversion of Software 406 I have indicated previously (supra: para 233) that the quotation from Rapitech for the conversion of the plaintiff's software was not produced by either party. It is not in evidence. However, there can be no question that it was adverse to P M Sulcs. Mr Santa Maria responded to a fax from Mr LaVerne Peters in Canada on 25 May 1989 in these terms: (Exhibit A, doc 1034C.1) "5. Rapitech's quote stinks. We are looking at locally developing the conversion utility. (Cobol-C-SQL) Talks are underway and will keep you in touch." 407 Dr Woodruff spoke to Mr Franks, the Systems Engineering Manager of Fujitsu, at the end of April 1989. Mr Franks' affidavit included his recollection of the conversation, and was in these terms: (Franks: Aff. 1.4.98, para 17) "The module that was sent to me was not typical of the Sulcs software. It was a very simple module. I have now looked at the software as a whole and have done some more tests. They indicate a lower conversion rate. This means that there is a lot of code that has to be converted manually. I estimate that the cost of the conversion will be around $1.00 per line of code." 408 That conversation set off "alarm bells" in Mr Franks' mind (Franks: T.1380). The cost per line was an index of the degree to which the code required manual adjustment after conversion. Mr Franks said this: (Franks: T.1395) "A. … I was looking at what are the costs of the conversion, and are there any unexpected technical risks in there that would change the numbers, or make it technically less viable to do the work involved." 409 Mr Franks added: (Franks: T.1395) "A. … In my own mind I had been working with numbers, or looking that this may be able to be done with numbers below 50 cents per line. I have a clear recollection that when I was told it was $1 a line, that that was really blown out a lot from my expectation, and the … Q. Where did you get the 50 cents from? Was that a going rate in Australia for doing a line? A. No, below 50 cents was really based on the idea that we had got a very good conversion rate on the module that had been sent over. Q. You got? A. A very good conversion rate on the module that had been sent over. $1 a line would have been reasonable in general for conversions. But the hope and expectation was that in this environment, with this code, we were going to get very good conversion, and therefore the costs of that conversion would be much lower than is perhaps usual, and therefore we would be looking in the below 50 cents per line area as a net cost of doing this." 410 Mr Franks reported to the Northern Region Manager, Mr Docherty, in these terms: (Franks: Aff. 1.4.98, para 19) "The Rapitech conversion tool is not as effective as we thought. The conversion is going to take longer and cost much more than what we thought. It looks like its not going to be viable." 411 At about the same time Mr Brydie (who was responsible for contracts) reported to Mr Docherty by memorandum dated 3 May 1989. The memorandum set out Fujitsu's outlay as a consequence of the Daihatsu contract (Exhibit A, doc 1005). It attached the Contract Summary Form, known as the PCS. Mr Brydie added a handwritten postscript to his memorandum in these terms: (Exhibit A, doc 1006) "P.S. Neil, since this was put in for typing, I have become aware of potential problems in our prime/sub contracting for the PMS software. i.e. a key component (Rapitech) of the project is no longer certain in terms of schedule or price. In addition, what were originally expected to be minor time and materials modifications could now extend the original schedule up to an extra 16 weeks. I have arranged a meeting with Charles McJury for 11.30 am Friday to brief him. I believe the project should be reviewed again and our exposures considered before we sign sub contracts with PMS. Regards, Jim" 412 Mr Docherty also spoke to Mr McLean, who provided a report along similar lines in late April 1989 (Docherty: Aff. 7.4.98, para 19). By early May therefore, Mr Docherty viewed the matter in the following light: (Docherty: Aff. 7.4.98, para 20) "20. … I had become aware that that conversion would be significantly more expensive and would take significantly longer than originally anticipated." 413 Fujitsu did not act at once. Meetings continued between Fujitsu personnel and Mr Hooper, as I have described (supra: paras 367, 374, 375). Meanwhile, as foreshadowed by Mr Santa Maria when reporting to Canada, P M Sulcs explored alternatives to Rapitech. On 11 May 1989 it received a quotation from Paradyne, submitted by Dr Tim Lamberton (Exhibit A, doc 1026). The quotation identified the objective in these terms: (Exhibit A, doc 1029) "The prime objective of this assignment is to produce within a fifteen (15) week time scale, a functional Wang VS Cobol to 'C' converter. This product to then produce circa 90%+ clean 'C' source code which will mirror the original application." 414 Dr Lamberton proposed to work on the project himself with a colleague, Eugene Doma. He said this: (Exhibit A, doc 1029) "It is proposed that only two senior staff members handle this project to enable the deadlines to be met and assignment cost remain close to budget expectations. It is proposed that Mr Eugene Doma and myself conduct the conversion exercise and where required call in various expertise if and when required. This will enable both Eugene and myself, as we have worked together for over ten years, to have the needed interaction to produce a suitable system within the prescribed schedule." 415 Dr Lamberton stated that he would require the assistance of Mr Santa Maria (who had expertise in respect of Cobol), and accommodation and facilities at Fujitsu. The strategy which he outlined was described in these words: (Exhibit A, doc 1029) "The proposed strategy for this conversion will be similar to those implemented into our previous conversion exercises; namely the Dataflex to 'C' Converter and the Data General Business Basic to 'C' Converter. It is proposed to convert existing Cobol source code into subroutine or functional levels of 'C' code which can subsequently be optimized. This procedure call for a multi-pass conversion of the Cobol to produce effective interpretation of existing Cobol interactivity." 416 The quote was for $114,000. Dr Lamberton added the following: (Exhibit A, doc 1030) "Paradyne has made available its most senior personnel to enable this project to meet its desired target and it is hoped that commencement of this assignment on May 29, 1989 will enable us to provide the converter by September 1st." 417 The quote was expressed to be open for thirty days. 418 Meanwhile, Mr McLean, at the urging of Mr Brydie, produced yet another Work Order. P M Sulcs submitted clauses which would be acceptable to it, concerning matters in contention (Exhibit A, doc 1034AAA). 419 On 18 May 1989, Dr Lamberton wrote directly to Fujitsu. He enclosed a copy of a project plan which identified the tasks to be undertaken in each of the fifteen weeks of the project. The letter added: (Exhibit A, doc 1032) "The indicated week numbers are from the commencement of the project. Naturally a decision to proceed has to be made as a matter of urgency if the intended completion date, as indicated to us, is to be met. We hope that this information meets the needs of your management and look forward to a favourable decision." Meeting on 23 May at Fujitsu 420 Mr Hooper described a meeting on 23 May 1989 with Mr Docherty, then acting State Manager for Fujitsu. Mr McLean was present. Indeed, Mr McLean brought to the meeting a cash flow which he had prepared. It reflected, with one amendment, the payment schedule in the various draft Work Orders (Exhibit A, doc 409.1; supra: para 198). The amendment was the replacement of Rapitech and Sticky Software (and the payments attributable to them amounting to $52,000) with the payment of Paradyne ($114,000), such monies to be advanced in three instalments (Exhibit A, doc 1034.1; Exhibit 1). 421 Mr Hooper provided an account of his discussion with Mr Docherty in his affidavit. In substance he alleged the following: (Hooper: Aff. 2.1.98, para 51) · Mr Docherty referred to the modifications and the demands of Mr Womack which had been reported to him by Mr Franks. The modifications should be confined to those which were essential to the system. · Mr Docherty expressed concern at Fujitsu's "exposure". He believed that P M Sulcs should be paid at the end of the project, once the software had been converted, rather than throughout. · Mr Hooper protested in strong terms. Such an arrangement was unacceptable to P M Sulcs. In evidence, Mr Hooper described Fujitsu's conduct as "treacherous" (Hooper: T.107) 422 Mr Docherty could not recall such a conversation (Docherty: Aff. 7.4.98, para 21). Mr McLean appeared to acknowledge that there was such a meeting (McLean: Aff. 2.4.98, para 21(a)). However, he denied that the conversation proceeded in the manner described by Mr Hooper. Rather, Mr Hooper again insisted upon being paid "up front" (McLean: Aff. 2.4.98, para 21(b)). As stated, I believe Mr McLean is mistaken in that recollection (supra: para 202). 423 Mr Hooper, therefore, suggested that there was a fundamental shift in the attitude of Fujitsu to payment. That suggestion was challenged by Daihatsu. To determine whether such a shift occurred, it is instructive to look at what Mr Hooper said occurred immediately thereafter. He went to the office of Daihatsu. He spoke to Mr Kratsas. It is again convenient to distil the substance of his conversation, rather go to the lengthy account provided by his affidavit. In substance he said that the following occurred: · He complained that Mr Womack was endeavouring to expand the scope of the design specification, thereby creating problems with Fujitsu. · That Fujitsu, having secured the order for the computer from Daihatsu, wished to "pull out" of its commitment to "porting" the P M Sulcs software. · Mr Hooper said that he was extremely alarmed at not having been paid. 424 Mr Kratsas denied that conversation (Kratsas: Aff. 31.3.98, para 47). He did, however, remember a conversation which touched upon some of the same issues. Earlier in the month, he had spoken to Mr Docherty. During the course of the conversation, Mr Docherty made the following comment: (Kratsas: Aff. 31.3.98, para 47) "We have problems. Sulcs have got no money. Sulcs is trying to get Fujitsu to finance the conversion of the software from Cobol to C. We don't want to be involved. It is going to be very expensive and we don't know if it will work. We can't reach an agreement with Sulcs." 425 A short time later he spoke to Mr Hooper. He attributed to Mr Hooper these words: (Kratsas: Aff. 31.3.98, para 47) "… Can you personally intervene on my behalf to see if you can make Fujitsu come to an agreement with us regarding the payment and financing of the conversion of the software?" 426 Mr Kratsas said that he would make enquiries concerning the problem. He spoke to Mr Docherty once more. He was again told "there were major problems with the conversion" (Kratsas: Aff. 31.3.98, para 47). Other Documents Dealing with the Fujitsu Meeting 427 On 25 May 1989, the day after the meeting, Mr Hooper sent a fax to Canada, which included the following paragraph: (Exhibit A, doc 1034.2) "The only problem I'm having is that after agreeing to a verbal contract with us at Daihatsu for FAL to pay us our $250,000 commission at $10,000/week, they are trying to back out of it because Daihatsu are trying to renegotiate everything with them after the contract has started and after Fujitsu have installed their computer at Daihatsu." 428 The rupture with Fujitsu led to the meeting on 5 June 1989, as mentioned. The issues separating Fujitsu and Sulcs were again canvassed. The Minutes of that meeting, prepared by Fujitsu, identified the problem in Fujitsu's mind. They were the "financial aspects" and "technical viability" of the conversion of the software (Exhibit A, doc 1081). The Minutes then recorded the following: (Exhibit A, doc 1081) "4. J.H. stated that problem was of Fujitsu making as they would not provide funding to his company. N.D. refuted Fujitsu liability to fund P M Sulcs. …" 429 The same day Mr Hooper again reported to Canada. He did so, responding to a fax sent by Mr Maris Sulcs on 29 May 1989 (Exhibit A, doc 1034D.1). Mr Sulcs asked a series of questions, including (Exhibit A, doc 1034D.1(6)) "(6) Is the deal in place with Fujitsu - and if so can we see the contract? What is the status of the conversion, and how much are we talking about? Has there been any payments of money, and if so when can I expect to receive some of it?" 430 Mr Hooper answered that question in the following way: (Exhibit A, doc 1084.2) "No - Fujitsu would not sign a contract with us without it including the supply of the conversion tool, also we had to resolve who was going to supply it before they would themselves sign a contract with us or invoice Leon or make any payments to us." 431 Mr Hooper then dealt with Rapitech's quote, in these words: "Rapitech's quote was total rubbish, (their main business is the selling of their tool to hardware vendors and then charging them to make it work on each job, Fujitsu would not purchase a corporate licence so Rapitech jacked the price up to $300,000 ++++++ for the two modules only) …." 432 Mr Hooper went on to outline the circumstances in which Paradyne was invited to quote, suggesting that an opportunity was lost because of the dithering of Fujitsu. He said this: "… so we sourced a local firm who submitted a reasonable proposal ($114,000) and who checked out technically and commercially. They had a time window which required a commitment within two weeks from the date of their submission. Fujitsu took to (sic) long to make a decision even though their lower managment (sic) fully supported accepting the proposal. Therefore, the opportunity passed and Fujitsu then settled on an objection that they didn't like the cash flow anyhow. So, they asked that P M Sulcs accept a change in our payments to accommodate the tool development requirements up front in the project with the assurance that we would be paid at the back end of the project. I pointed out that the project has started and a cash flow change was not possible also that there was no proposal to accept because by that time the local firm had withdrawn due to accepting other work. All of Fujitsu management staff then went on a one week holiday to Tahiti for their end of year sales achievers conference so there was nothing that could be done. This was the last week of May so I set up a meeting with Leon. Leon called a meeting which was held yesterday with Fujitsu & ourselves." 433 On 7 June 1989, Fujitsu wrote to P M Sulcs, returning the three invoices which had been sent by the plaintiff. The letter added: (Exhibit A, doc 1085) "You are well aware that due to the lack of a conversion process and the cost varying from what was budgeted by Fujitsu and P M Sulcs, no agreement exists between our two organisations to proceed with the installation of the P M Sulcs software at Daihatsu." 434 On 9 June 1989, Mr Hooper wrote to Daihatsu. The letter was intended to refute the suggestion by Fujitsu that there was no conversion tool available. Mr Hooper canvassed many of the same issues. The Rapitech quote had been unacceptable, so that Paradyne was identified as a supplier. Mr Hooper then said this, referring to Paradyne: (Exhibit A, doc 1091) "Their proposal was accepted by P M Sulcs and to my knowledge, it was recommended by all of the Fujitsu staff involved in the Daihatsu project that it be signed off as accepted by Mr Neil Docherty. However, this local proposal had a restriction that it had to be accepted by the 19th of May, 1989 in order for the conversion to be completed by September 1989. Unfortunately, Mr Neil Docherty had not deligated (sic) the acceptence (sic) of the proposal to his management staff and as he was doing three jobs within Fujitsu namely; the N.S.W. Mgrs job, the Northern Reagonal (sic) Mgrs job and acting General Mgr Sales he was not available to review the proposal with us untill (sic) Tuesday 23rd of May, 1989. Four days after the local proposal had been withdrawn!!" 435 The letter continued: "During the meeting with Mr Docherty on 23rd of May, 1989 it was pointed out to him that the local proposal had been withdrawn on the 19th of May, 1989 and as a result the project would be extended at additional cost due to having to re-schedule resources. Mr Docherty then suggested that P M Sulcs accept an adjustment to the contract, which was ready for signing, to the affect (sic) that P M Sulcs finance the cost of the delay by (a) not receiving any funds until a revised schedule was in place and the tool was ready for use. P M Sulcs rejected this change in our agreement thus far with Fujitsu and will not enter into an agreement with Fujitsu while Mr Docherty's ultimatum is in place." 436 P M Sulcs, meanwhile, had found a replacement supplier (Pacific Engineering Systems). The delivery, however, of the tool would be delayed until 18 November 1989. 437 The final document, also created by Mr Hooper, was directed to Fujitsu. It responded to Fujitsu's letter of 7 June, 1989, returning the invoices. Mr Hooper wrote on 20 June 1989 and said this: (Exhibit A, doc 1162) "The problem that exists is one of your creation in that you deligated (sic) the responsibility to Mr Maclaine & Mr McInerney, (refer your letter of 10th March, 1989), who negotiated an arrangement between P M Sulcs, Daihatsu and Fujitsu and after this was in place and the project was in it's sixth (6) week you then insisted, without accepting your managers advice, that the cash flow be rearranged to the effect that P M Sulcs go without any money until week twenty (20) of the project. This delay in payments was not then and is not now acceptable to P M Sulcs as we are required to provide services to yourselves and Daihatsu during the entire duration of this project which necessitates the minimum payments that been previously agreed." Daihatsu's Submissions 438 As mentioned, Daihatsu made a sustained attack upon Mr Hooper in respect of issues arising out of his conference with Mr Docherty on 23 May 1989. The broad position taken in cross examination, and repeated in submissions, appeared to involve three propositions: · First, that P M Sulcs never had an agreement with Fujitsu to fund the conversion. Assertions by Mr Hooper to the contrary were based upon "verbals", and should be rejected. There was, accordingly, no shift in Fujitsu's position. · Secondly, Mr McLean should be accepted in his assertion that Mr Hooper was unable to reach agreement with Fujitsu because he insisted on payment up front. · Thirdly, that Mr Hooper lied when he asserted that Paradyne had ceased to be available on 19 May 1989. He did so in order to blame Fujitsu for his own failure to secure a conversion tool, or a supplier who would provide such a tool. 439 Let me deal with the second argument at once. I have already determined that Mr McLean was mistaken in his recollection (supra: para 202). The evidence is overwhelming that Mr Hooper was happy to receive payments progressively. 440 Returning to the first argument, I have also dealt with aspects of it (supra: para 178ff). Before the meeting on 23 May 1989, Fujitsu was prepared to advance money to P M Sulcs. It had, through various Work Orders, indicated its preparedness to pay $10,000 each week for a number of weeks, and to advance money to Rapitech and Sticky Software (Exhibit A, doc 409.1; supra: para 198). 441 Two issues remain: · First, did Fujitsu shift its ground in respect of that undertaking on 23 May 1989? · Secondly, did Mr Hooper lie concerning the availability of Paradyne? Was There a Shift in Fujitsu's Position? 442 There can be little doubt that Fujitsu changed its position on funding on 23 May 1989. I say this for a number of reasons. 443 First, P M Sulcs was seeking a commitment from Fujitsu which involved yet more money. It had originally planned to use the Rapitech tool ($35,000), and that of Sticky Software ($17,000). The Work Orders were fashioned on that basis (Exhibit A, doc 409.1). P M Sulcs now planned to use Paradyne ($114,000). The revised cash flow prepared by Mr McLean reflected the larger amount. The issues were discussed in a context less optimistic than had previously been the case. The Rapitech quote had been adverse. The modifications were proving troublesome. Arguably, Fujitsu no longer needed P M Sulcs. It had delivered its computer to Daihatsu. The computer had been installed and accepted (Exhibit A, doc 642; supra: para 238). 444 Secondly, the common refrain in Mr Hooper's correspondence was that Fujitsu had reneged on its promise to assist in the conversion. The conversation between Mr Kratsas and Mr Hooper supports that view. Although Mr Kratsas thought that his conversation occurred before 23 May, I think it likely that it took place after Mr Hooper's meeting with Mr Docherty, as Mr Hooper described. 445 Thirdly, there can be no doubt as to the position Fujitsu finally took on the question of funding the conversion. Mr Docherty, in his affidavit, acknowledged that he told Mr Hooper (amongst other things) the following: (Docherty: Aff. 7.4.98, para 10(a)) "Fujitsu will contribute $250,000 to assist with the conversion of the Sulcs software so that the Sulcs software can run on Fujitsu hardware. … However, that amount will only be paid by Fujitsu after the software is successfully converted so that it can run on Fujitsu hardware." 446 When providing that recollection, Mr Docherty gave the impression that Fujitsu had adopted a consistent position throughout. It is plain from contemporaneous documents that it did not. Fujitsu's attitude to the conversion evolved. Before 23 May 1989, it was prepared to provide assistance from the outset, and progressively over the life of the project. On 23 May that changed. Funding would be withheld until the software had been successfully converted. 447 Mr Docherty's evidence implicitly acknowledged that shift. He said this: (Docherty: T.1244) "Q. One of the issues there was that payment to P M Sulcs may be deferred until the end of the project? A. Until the conversion process had been completed, and therefore the proof that the software was running on a Fujitsu environment could be shown to be correct. HIS HONOUR: Q. Sorry, you are agreeing with that? A. No, I'm saying that there was a plan that was trying to be established which would allow some money to be paid upon deliverables for the conversion process. So not hold it up right to the very end, but that some payment would be made according to some sort of deliverables, and that that may meet Mr Hooper's cash flow requirements." 448 Mr Hooper, in his letter of 20 June 1989 (supra: para 437), identified the change very precisely. He said this: (Exhibit A, doc 1162) "… the project was in its sixth (6) week you then insisted, without accepting your managers advice, that the cash flow be rearranged to the effect that P M Sulcs go without any money until week twenty (20) of the project." 449 If one goes to the cash flow prepared by Mr McLean (Exhibit 1), week 19 was to be the final payment to Paradyne. By week 20, therefore, the conversion should have been complete. Fujitsu was proposing to withhold payment until that time. P M Sulcs, therefore, would be required to fund the conversion themselves. The risk would be that of P M Sulcs. It would not be that of Fujitsu. 450 From the viewpoint of P M Sulcs, such a shift was treacherous. The Availability of Paradyne 451 Mr Hooper wrote to Daihatsu on 9 June 1989 stating that the Paradyne quote had to be accepted by 19 May 1989 for the conversion to be completed by September 1989 (Exhibit A, doc 1091; supra: para 434). Daihatsu alleged that this statement was a lie (credit Mr Hooper para 1.2). The foundation for the allegation was as follows. Paradyne lodged its quote on 11 May 1989 (Exhibit A, doc 1026). The quote was expressed to be valid for 30 days (Exhibit A, doc 1030). It foreshadowed commencement on 29 May 1989 and completion by 1 September 1989. Further, Paradyne wrote a letter to Fujitsu on 18 May 1989 which included these words: (Exhibit A, doc 1032) "Naturally a decision to proceed has to be made as a matter of urgency if the intended completion date, as indicated to us, is to be met." 452 Dr Lamberton gave the following evidence in the context of that letter: (Lamberton: T.365/6) "Q. May we take it if there was a deadline of the next day you would have written that down in the letter so that Mr McLean would be told for example - Well you have got to tell me by tomorrow otherwise I won't be able to do it by the 1st September? A. Yes. Q. So that you were allowing Fujitsu a reasonable time to assess your proposal and Sulcs the same? A. A lot of discussions had been going on prior to that, so, I feel assured he knew exactly what the position was, as far as time frames. Q. And you were available to take up the work if you were told on the 23rd May for example, can you start now so we can keep looking towards that 1 September deadline? A. Yes." 453 There were, moreover, contradictions in Mr Hooper's correspondence concerning the availability of Paradyne. Whereas Mr Hooper told Daihatsu on 9 June 1989 that Dr Lamberton ceased to be available on 19 May, he told Mr Maris Sulcs in Canada on 5 June that the quote was only open for two weeks after it had been submitted. Since it was submitted on 11 May 1989, it was therefore open until 25 May 1989. It was open at the time of the meeting with Mr Docherty on 23 May, contrary to the discussion as related by Mr Hooper. 454 There certainly are odd features arising from the correspondence concerning this issue. However, after a decade, I am hesitant to conclude that Dr Lamberton's recollection is more reliable than contemporaneous correspondence. 455 Dr Lamberton was in demand for his services. He gave the following evidence: (Lamberton: T.370) "HIS HONOUR: Q. Do you have any recollection of your commitments at that time - ten years ago - just in terms of the demands that Treasury were making upon you at that time? A. Yes, we did some work for Mr Percy Allen, development of an Executive Information System. As well as, we did work for, I am not sure exactly at the time or not, we were the last DP audit for the Victorian Safety Council. HIS HONOUR: Q. But for the purpose of giving evidence today did you look at diaries? A. I wouldn't have diaries from ten years ago sir, I am sorry. HIS HONOUR: Q. I am just wondering in order for this to be helpful Mr Rares, since there is an issue on this, I shouldn't like it to be left in that form. HIS HONOUR: Q. Dr Lamberton, do you have any recollection now as you sit there as to the interaction between your commitments to Treasury in the month of May of 1989 and the potential work which was on offer from Sulcs, and, the clash potential, if there was one, between those two things? A. I cannot recall exactly the circumstances sir. There was talk between Treasury and a company Agius which I was subcontracted to. I was potentially subcontracted to another company which had sold the Executive Information System to Treasury, for which I was forwarded - I was a potential consultancy for. That went back to about April of that year, but I can't be one hundred percent sure on the timing. I knew that there was a potential conflict coming up so I have always told Mr Hooper exactly what my circumstances were, and that is why I took the steps to cover my position and the potential of the success of that particular project with Pacific Engineering." 456 Dr Lamberton stated that his evidence that he was available on 23 May was not a recollection. It was an inference drawn from the text of his letter of 18 May (Lamberton: T.371). He added: (T.371) "Q. Do you have any precise recollection as to dates as to when you went off stream? A. No I don't, I am sorry, it would have been in June." 457 Mr Hooper, on the other hand, said this: (Hooper: T.226) "A. … I may have in my mind, when writing these letters, something that was said to me by Mr Lamberton but not put in writing, and that was that he was pressing to have a decision as at 19 May because he had to make a decision about what he was doing about his own arrangements." 458 Mr Hooper added: (T.226) "Q. You have been telling his Honour earlier this afternoon that he extended it to 24 May, didn't you? A. As I keep on saying to you, Mr Rares, the quotation was open for some period of time. It was the schedule and delivery built into that quotation that it expired. The amount, Mr Lamberton''s willingness to do the work remained consistent for quite some months after that." 459 Mr Hooper may have been lying. Mistake is less likely, given his description of the discussion at the meeting of 23 May. It is, however, difficult to see a rational motive for having lied. Mr Hooper's motive cannot have been that he wished to attribute blame to Fujitsu for the loss of Dr Lamberton's services. He need not have lied to have done that. The reversal by Fujitsu on funding made it awkward for Mr Hooper to retain Dr Lamberton's services until that issue had been sorted out. It had certainly not been sorted out by the end of May when, on any view, Dr Lamberton became unavailable. 460 On this material, I am not satisfied that Mr Hooper was lying. 11. TERMINATION OF THE CONTRACT Calling a Meeting 461 Mr Kratsas called a meeting to sort out the differences between Fujitsu and P M Sulcs. The meeting was fixed for Monday 5 June 1989. A letter was produced by Fujitsu on subpoena, dated (Friday) 2 June 1989 (Exhibit A, doc 1078). Daihatsu branded that letter as "not authentic" (Daihatsu subs: para 6.136). Not to mince words, the suggestion was that it was a forgery, fabricated some time after the event, and presumably planted in the documents of Fujitsu. 462 The text of the letter was as follows: (Exhibit A, doc 1078) "Dear Neil FAL PRIME CONTRACT AGREEMENT 30 MARCH 1989 Sulcs insists DAP pays per the DAP /Sulcs and DAP/FAL contracts. They have completed the design specification and are about to start programming. If FAL as DAP 's Prime Contractor, can provide a replacement software supplier to Sulcs and deliver the system we contracted Sulcs to supply, then we should terminate Sulcs if they won't agree to deferring our payments to them until the end of the project. FAL is to chair the Sulcs meeting on Monday as DAP 's Prime Contractor. Yours faithfully DAIHATSU AUSTRALIA PTY LTD L KRATSAS Company Secretary" 463 Above the words "L Kratsas, Company Secretary" a signature appeared which resembled that of Mr Kratsas. Mr Kratsas, however, denied that it was his signature (Kratsas: Aff. 23.8.00, para 22(a)). Mr Kratsas said that he had not seen the letter until these proceedings. He did not compose the letter. 464 The letter is relatively unimportant. It says nothing much that is controversial. However, it shares with another letter, which is important (dated 27 June 1989 from Daihatsu to Pyramid) (Exhibit A, doc 1165), a particular characteristic. Both letters used a particular Daihatsu letterhead. At the foot of each, is a list of the branch offices of Daihatsu. In both cases the Western Australian branch office is included, namely: "W A REGIONAL OFFICE, 72 CANNING HIGHWAY, VICTORIA PARK …" 465 That address, according to Daihatsu, is the clue to the fraud. As at June 1989, there was no Western Australian office at that address. The Daihatsu submission said this: (Daihatsu subs: para 6.144) "A classic mistake of people who create unauthentic documents is that details, such as the non-existence of a phone number or an address, does not appear to be material to the creator. Only later does the slip attract attention as here." 466 A document filed with the National Companies and Securities Commission records the principal office of Daihatsu in Western Australia in July 1988 as 9th Floor, 81 St Georges Terrace, Perth, being the office of its W A solicitors. There was, according to Mr Kratsas, a dealer in Daihatsu motor vehicles in Western Australia (Northbrook Pty Limited trading as Western Daihatsu), but not a branch office (Kratsas: Aff. 23.8.00, para 18). Western Daihatsu traded from the address 72 Canning Highway, Victoria Park. Mr Shimura and Mr Kratsas negotiated the purchase of those premises on 2 August 1989. Mr Kratsas' affidavit annexes a copy of Minutes of a Meeting in Sydney on 2 August 1989 recording the detail of that transaction. The purchase was confidential (Kratsas: T.898). He gave no instructions to prepare letterheads recording the Western Australian regional office before 2 August 1989 (Kratsas: T.898). Daihatsu commenced conducting its business from the Western Australian office on 1 September 1989. 467 The letter of 2 June 1989 was marked for the attention of Mr Docherty. Mr Docherty gave evidence in November 1999. He was called out of order because he was about to go overseas. He was shown the letter of 2 June 1989 in chief. The examination was in these terms: (Docherty: T.426) " RARES : Q. Could you look at exhibit 4, which is a document being obtained out of a file produced by Fujitsu on subpoena in these proceedings?" 468 There was an objection to that question. The objection was apparently not pressed. The transcript then records the following: (Docherty: T.427) " RARES: Mr Docherty, prior to seeing that document the other day, have you ever seen that document before? A. No, I haven't." 469 Mr Docherty's evidence could not be completed before his departure. He returned in September 2000, when his cross examination resumed. He was again taken to the letter of 2 June 1989 (Exhibit A, doc 1078). He gave the following evidence: (Docherty: T.1245) "Q. You might just pause and have a look at that letter for the moment? A. Yes, it is on 2 June. It says, 'As far as that prime contractor can provide a replacement software supplier to Sulcs, and deliver the system we contracted Sulcs to supply, then we should terminate Sulcs if they won't agree to deferring our payment to them until the end of the project.' Q. Independently of that letter, do you have any recollection of the position? A. Yes, I do. I think that that letter reflects Daihatsu's position at that time, that payment for the software before the conversion was completed, and the budget for the conversion was locked in place, was something they felt very uncomfortable with, as did Fujitsu." 470 Mr Docherty was then reminded of his previous testimony. He said this: (Docherty: T.1245) "Q. I think you have said previously you don't have a specific recollection of having seen the letter, a copy of which appears at page 1078, dated 2 June 1989. Is that right, or do you now have some recollection of having seen it? A. I remember the contents of this letter, but - and I believe this to be the catalyst for the meeting of 5 June." 471 Mr Hooper was neither the sender nor the recipient of the letter. The suggestion now made by the defendant was put to him, and he responded as follows: (Hooper: T.276) "HIS HONOUR: I think in fairness you can say, making the two assumptions that have been put to you, that is to say that there was no West Australian office before August 1989 and secondly that there was no stationery created in anticipation of such an office as at that date, do you know anything about the creation of either letters that have been shown to you 1078 or 1165? A. No, your Honour, I know nothing about those two documents other than what has been shown to me after the subpoenas have been examined." The Submissions of Daihatsu on the Letter of 2 June 1989 472 The submissions of Daihatsu that the letter was a fraud rested upon the following: · First, Daihatsu obviously relied upon the denial by Mr Kratsas. · Secondly, the stationary was not created until after 2 August 1989. There are illustrations in the evidence of letters sent after 2 June 1989 and before 2 August where the Western Australian address does not appear. There is correspondence after September where it does appear (Kratsas: Aff. 23.8.00, para 23, annexures E and F). · Thirdly, the document produced by Fujitsu was a photocopy. It did not have the imprint of the fax machine (Daihatsu subs: para 6.136). · Fourthly, Mr Docherty's evidence was contradictory. He was plainly confused, and in any event did not attribute the words in the letter directly to Mr Kratsas (Docherty: T.1246, line 4). · Finally, a careful reading of the letter will show that it is "incomprehensible" (Daihatsu subs: para 6.136.5). This may explain why Mr Docherty was confused. The Contents of the Letter of 2 June 1989 473 Daihatsu made the following submission (Daihatsu subs: para 6.145) "… when one considers the terms of the 2 June letter itself, it makes no sense." 474 That submission is, in some respects, odd. Why would someone fabricate a letter which was incomprehensible, and then take the trouble of planting it amongst the papers of Fujitsu? It cannot be to suggest that the Western Australian stationary was already in use in June 1989, since the Daihatsu hypothesis is that the forger did not appreciate the problem. 475 Ignoring that issue for the moment (and I will return to it), it is instructive to examine the letter sentence by sentence, as Daihatsu has done in its submissions. The first sentence was as follows: "Sulcs insists DAP pays per the DAP /Sulcs and DAP/FAL contracts." 476 In respect to that sentence, Daihatsu made the following submissions: (Daihatsu subs: para 6.146) "How could that be? If it is recording a demand that Daihatsu pays $75,000 to Sulcs and a further $75,000 to Fujitsu for each of the 2 agreements so provides, then Sulcs insistence is a flagrant breach of contract. On the other hand, if it is referring to the Sulcs/Daihatsu Agreement what is the meaning of the reference to the Prime Contract under which Daihatsu would pay Fujitsu?" 477 The meaning appears to me plain enough. It is the only aspect which may be favourable to the plaintiff, and embarrassing to the defendant, such that it might furnish a rational motive for fabrication. The sentence suggested two things: · First, a demand for payment by P M Sulcs addressed to Daihatsu. That is contrary to the position taken by Mr Kratsas, although I have found that such demands were made (supra: para 377). · Secondly, the existence of two sets of arrangements, one between Daihatsu and P M Sulcs, and the other between Daihatsu and Fujitsu. 478 The objective facts were that Daihatsu executed a number of agreements with P M Sulcs (supra: para 248), and a number of agreements with Fujitsu, including the Prime Contract (supra: paras 206, 214). The words used in the letter, on this aspect, are not, therefore, adverse to Daihatsu. Its pleaded case acknowledged that each of these agreements was signed. Daihatsu asserted, however, that the P M Sulcs agreements were subject to a condition precedent. The letter of 2 June 1989 does not compromise that position. Indeed, it will be noticed that Mr Docherty, when writing to Mr Kratsas on 30 June 1989, recorded the same objective facts, when he said this: (Exhibit A, doc 1177) "… Our understanding of the Prime Contract Agreement made between DAIHATSU and FUJITSU dated 30th March 1989 is that FUJITSU agrees to Prime Contract the conversion of those standard modules of the P M SULCS software defined in appendix A of the document. The responsibility for supply, modification, implementation, ongoing support and maintenance of the P M SULCS software is subject to separate agreements between DAIHATSU and P M SULCS directly." 479 Passing to the next sentence in the letter, it was as follows: (Exhibit A, doc 1078) "They have completed the design specification and are about to start programming." 480 Again, that sentence is capable of being viewed as simply recording the objective facts. P M Sulcs had completed the design specification. Daihatsu was, at that moment, considering that specification. Mr Santa Maria had told Mr Womack that they intended to begin programming. Mr Womack had responded by saying that P M Sulcs did so at its own risk (supra: para 398). The letter of 2 June 1989 does not accept that the design specification was complete. It does not acknowledge that it was appropriate for P M Sulcs to start programming. The letter, as such, was hardly a "verbal" of Daihatsu. 481 The next paragraph of the letter of 2 June was in these terms: (Exhibit A, doc 1078) "If FAL as DAP 's Prime Contractor, can provide a replacement software supplier to Sulcs and deliver the system we contracted Sulcs to supply, then we should terminate Sulcs if they won't agree to deferring our payments to them until the end of the project." 482 The submissions of Daihatsu described that paragraph as "bizarre" (Daihatsu subs: para 6.149). Mr Kratsas, it says, was not aware until the meeting (that is, until 5 June) that Fujitsu wished to defer payments. However, Mr Hooper had already told Mr Kratsas after his meeting with Fujitsu on 23 May 1989, of the shift in Fujitsu's position (supra: paras 423/426). That was something well known to Mr Kratsas on 2 June 1989. Moreover, at the meeting on 5 June 1989, the Minutes prepared by Fujitsu (and accepted by Mr Kratsas) (Kratsas: Aff. 31.3.98, para 51(a)) recorded Mr Kratsas as having given the following direction: (Exhibit A, doc 1081) "3. L.K. directed Fujitsu to provide an alternative solution to Daihatsu in the event that P M Sulcs problems not resolved by 13th June, 1989." 483 This paragraph in the letter of 2 June 1989 appears rather, to reflect matters important to Mr Kratsas at that time. The first was to fix Fujitsu with responsibility, as Prime Contractor, for delivery of the system. The second was to ensure that Fujitsu accepted, as part of that responsibility, that it should make payments to the software provider, rather than Daihatsu. Finally, the paragraph was designed to ensure that Fujitsu clearly understood the problem. It had the obligation, as Prime Contractor, to find equivalent software to that provided by P M Sulcs. 484 Mr Docherty, as the recipient of this letter, was well aware of the history. He knew that Daihatsu had been attracted to P M Sulcs (supra: para 76). He appreciated that it was P M Sulcs who introduced Fujitsu to the deal with Daihatsu (supra: para 76ff). Indeed, in later correspondence, Mr Kratsas reminded Fujitsu of that history. On 7 July 1989 he wrote to Fujitsu in these terms: (Exhibit A, doc 1186) "Fujitsu offered Daihatsu a Data Processing 'solution', incorporating both hardware AND software. Daihatsu has previously rejected a Fujitsu 'hardware only' proposal, as Daihatsu has no staff to create the systems it needs, and therefore could not have used the computer. The fact that a conversion of the software was involved, was explained, but was merely a process necessary for Fujitsu to reach the point where they could offer Daihatsu a means of using the computer. In support of this position, Daihatsu has consistently refused to pay for such a conversion as confirmed by you on 20 January 1989 it was our understanding that P M Sulcs and Fujitsu were jointly funding it as a strategic marketing activity." 485 Replacing P M Sulcs with software with the same functionality, and acceptable to Daihatsu, was a formidable task. Mr Docherty, no doubt, appreciated the difficulty. It was a task which in fact took a number of months. A new software house, DIS, was ultimately found, and an agreement executed on 27 November 1989 (Exhibit A, doc 1224). Although Fujitsu had delivered its computer on 5 April 1989, and the computer had been accepted by Daihatsu on 2 May 1989 (Exhibit A, doc 642), its contract with Daihatsu was linked to the delivery of a system, hardware and software (supra: paras 207 and 213). Mr Kratsas' letter, therefore, was capable of being viewed as applying pressure to Fujitsu. Fujitsu was obliged to either face up to the task of replacing P M Sulcs, or bend a little. 486 The last paragraph of the letter of 2 June 1989 was unexceptional. It said this: (Exhibit A, doc 1078) "FAL is to chair the Sulcs meeting on Monday as DAP 's Prime Contractor." 487 I come back to the question which I posed at the outset. The letter, to my mind, makes perfect sense if it were written by Mr Kratsas to Fujitsu. However, it would be very strange indeed, were the letter created by the plaintiff. What advantage was there to the plaintiff in the fabrication of this letter? 488 One can readily see the importance of the letter of 2 June 1989 to the defendant. It the letter of 2 June 1989 is authentic, although it had the Western Australian address, it may suggest that the letter of 27 June 1989 was also authentic. On that assumption, the letterhead, with that address, was in circulation. Was this the reason for the attack on the letter of 2 June 1989? 489 On the evidence before me to this point, I should have no hesitation in finding, as a matter of probability, that the letter of 2 June 1989 is authentic. The letterheads must have been created in anticipation of the purchase, despite what Mr Kratsas said. However, for the moment, I will not make that finding. I will revisit the issue once I have examined the letter of 27 June 1989. The Meeting on 5 June 1989 490 The parties met on 5 June 1989 at Daihatsu's premises. Before the meeting began, Mr Kratsas spoke to Mr Docherty. He was told that there was little hope that P M Sulcs could complete the project (Kratsas: T.1087). There were major problems with the conversion and P M Sulcs did not have the financial backing to see the project through. It wanted Fujitsu to "bank-roll" the company, which it was not prepared to do (Kratsas: T.1087). 491 The parties then assembled to discuss their differences. Mr Kratsas and Mr Womack were present on behalf of Daihatsu. Mr Hooper represented P M Sulcs. Messrs Docherty, McInerney and McLean attended on behalf of Fujitsu. Mr McLean prepared Minutes after the meeting (Exhibit A, doc 1081). As mentioned, Mr Kratsas accepted the Minutes as an accurate record of the discussion (Kratsas: Aff. 31.3.98, para 51(a)). Mr Hooper challenged certain statements (Hooper: T.65). However, submissions made on his behalf accepted that the Minutes were broadly accurate (Plaintiff's subs: para 77). The Minutes were as follows: (Exhibit A, doc 1081) "1. L.K. informed J.H. that after discussion with Fujitsu, as his Prime Contractor, re uncertainty of the financial aspects and technical viability and other problems identified with the conversion of the P M Sulcs software, P M Sulcs are to immediately cease all work on project until problems resolved to Fujitsu satisfaction. 2. L.K. stated that J.H. had one week to resolve problem re finance and cash flow with Fujitsu, (Tuesday 13th June, 1989). If not resolved by that date services of P M Sulcs would terminate. 3. L.K. directed Fujitsu to provide an alternative solution to Daihatsu in the event that P M Sulcs problems not resolved by 13th June, 1989. 4. J.H. stated that problem was of Fujitsu making as they would not provide funding to his company. N.D. refuted Fujitsu liability to fund P M Sulcs. The conversion project timeframe and costing by P M Sulcs sub-contractors and potential sub-contractors had varied so much from the P M Sulcs original estimate that Fujitsu believed the risk of funds and investment of time would not be viable. Alternative cash flows had been investigated and J.H. had been requested to consider SECF Funding methods. J.H. had rejected alternatives suggested but was asked again to be considered. 5. Considerable discussion between J.H. and the meeting regarding his disagreement with Fujitsu however no resolution was achieved. 6. L.K. closed the meeting by reiterating his earlier directives." 492 According to Mr Hooper, after the meeting broke up, the Fujitsu representatives left the building. Mr Hooper remained behind. Mr Docherty provided some support for that suggestion. He said this: (Docherty: T.1246) "Q. After the meeting, do you recall that Mr Hooper stayed on with Mr Kratsas, and you and the other Fujitsu people left? A. I know that I left with Mr McInerney. I thought Mr McLean may have stayed, but certainly I know that I left and others were left still with Mr Kratsas and Daihatsu." 493 Mr Hooper stated that he then had a further conversation with Mr Kratsas, in the presence of Mr Womack. The conversation, according to Mr Hooper, was in these terms: (Hooper: Aff. 2.1.98, para 56) "Hooper: 'What was that all about? I thought you were going to talk to the Japanese and sort all this out with FAL.' Kratsas: 'All I said in there was for FAL's benefit. We agree with you. FAL are causing this problem. I want to put pressure on them to sort this out with you, so you will be paid as FAL agreed from the start. I'll work on this through my channels and via the Japanese. You should work with Docherty to see if you can straighten this out with him.' Hooper: 'We have to sort out what my staff will have to work on. The way I see it is they can either work on this project or do nothing because we don't have any other work for them. The only other alternative is that I can let them go.' Kratsas: 'I don't want you to let your programmers go. I want the work continued and done as soon as possible, this problem with FAL will all be settled in the next week. I still want you to meet your delivery schedule.' Hooper: 'You do understand my people will still be working on the project.' Kratsas: 'Yes.'" 494 Mr Kratsas denied having met Mr Hooper after the meeting. He denied having spoken to Mr Hooper in these terms (Kratsas: Aff. 31.3.98, para 52). The problem was not the concern of the Japanese parent company. He had no "channels" through which he might apply pressure to Fujitsu (Kratsas: Aff. 31.3.98, para 52). 495 Mr Womack said that he could not recall the conversation described by Mr Hooper (Womack: Aff. 30.3.98, para 53). 496 It will be remembered that Mr Hooper received a fax from Mr Maris Sulcs of P M Sulcs Canada, on 29 May 1989. The fax posed a series of questions (Exhibit A, doc 1034D.1). I have referred to it already (supra: para 429). Mr Hooper responded to the fax on 6 June 1989, that is the day after the meeting. His response included a description of the meeting. He then added these words: (Exhibit A, doc 1084.3) "I had a further private discussion with Leon after the meeting to discuss possible next steps and to discuss the lack of payment to us thus far. To be fair to Leon he has been very supportive to us regarding the problem with Fujitsu but he wants to be able to hold Fujitsu responsible for all money paid to us to insure that the conversion is a success. Therefore, Leon will not pay money directly to us unless he is forced to by further pressure from us, (namely threat of legal action)." 497 Mr Hooper said that he was to meet Fujitsu the following day with a new proposal from Pacific Engineering Systems, a replacement company for Paradyne. However, he did not expect resolution at that conference. The proposal by Pacific Engineering was more costly ($122,000) and would take longer (20 weeks) than the proposal of Paradyne (Exhibit A, doc 1088.1). 498 Mr Hooper then added: (Exhibit A, doc 1084.3) "I feel the best way of resolving his intransigence, other than finance the initial $100,000 until the tool is proven as he has suggested, is to insist Leon pay up as per the contract so that Leon will put pressure on him to resolve this problem fairly with regard to our cash requirements." 499 At the end of the fax, Mr Hooper returned to his private discussion with Mr Kratsas. He said this: (Exhibit A, doc 1084.4) " PYRAMID have purchased a corporate licence from Rapitech. During the private discussions with Leon I mentioned that it was a shame that FUJITSU didn't own a corporate licence for Rapitech as did PYRAMID . Leons reply was that if things don't get sorted out with FUJITSU then he has no love of FUJITSU and would be happy to talk to PYRAMID about supplying equipment and release 6 of INGRES . Which ever way this goes it looks as if we could have TWO new sites to do a really good job on the conversion." 500 This communication by Mr Hooper the day after the meeting is strong contemporaneous evidence that there was a private discussion. Again, it is convenient to suspend judgment on these issues until the whole story has been laid out. The Different Cases 501 The events following the meeting are complicated or straight forward, depending upon one's perspective. From the viewpoint of the defendant, they were straight forward. The plaintiff was given a breathing space. It needed to reach agreement with Fujitsu. That involved demonstrating that it had the capacity, technically and financially, to convert the software. P M Sulcs, however, was not able to do so. It did not make peace with Fujitsu. The contract was therefore brought to an end by Daihatsu on 4 July 1989. 502 The plaintiff, on the other hand, suggested that the events were complicated. Mr Kratsas had a public face, which he showed to Fujitsu, and a private face, which he revealed to P M Sulcs. He said one thing in correspondence. He said quite another in private discussions with Mr Hooper. 503 The presentation of this material presents some difficulty. An understanding of what occurred is likely to be assisted by a chronological description of events as they unfolded. However, insight is also provided by examining issues. I will, therefore, begin with a chronological account. I will then reassemble much of the same evidence as it relates to particular issues. Events Immediately Following the Meeting 504 If Mr Hooper met Fujitsu the next day, as planned (supra: para 497), his attempt to reach agreement came to nothing. Fujitsu, as mentioned, wrote to P M Sulcs on 7 June 1989 (Exhibit A, doc 1085; supra: para 433), returning the invoices submitted by P M Sulcs. The letter stated that "no agreement exists between our two organisations" (Exhibit A, doc 1085). 505 Mr Santa Maria, meanwhile, continued to work on the project. He had the assistance of two programmers. On 8 June 1989 he wrote to Canada, describing aspects of that work, and seeking its assistance. He was working on the modifications, and designing a structure for the Ingres database (Exhibit A, doc 1089.1). He again wrote to Mr Womack and complained about Daihatsu's failure to sign off the design specification (Exhibit A, docs 1089, 1122). 506 On 8 June 1989 Mr Hooper claimed that he met Mr Kratsas. According to Mr Hooper, Mr Kratsas said that he was unhappy with Fujitsu, and intended to terminate its contract. He invited suggestions from Mr Hooper as to an alternate hardware supplier. Mr Hooper suggested Pyramid (Hooper: Aff. 2.1.98, para 59). 507 Mr Kratsas responded to that affidavit. His response did not include a denial of having met Mr Hooper (Kratsas: Aff. 31.3.98, para 53). He denied, however, having the conversation attributed to him. He added the following: (Kratsas: Aff. 31.3.98, para 53) "… At no stage after Fujitsu was selected as the prime contractor was I or Daihatsu looking for another hardware supplier." 508 On 9 June 1989 Mr Hooper wrote to Daihatsu providing a long explanation concerning the conversion of the P M Sulcs software, and his dealings with Mr Docherty on funding (Exhibit A, doc 1090). I have referred to that letter already (supra: para 434). The letter ended with these words: (Exhibit A, doc 1091) "Therefore, as Daihatsu's hardware supplier is acting in what we consider an unreasonable manner P M Sulcs is not prepared to accept any further delay in payments by Daihatsu under the contracts between our two organisations." 509 That letter was followed by another dated 12 June 1989 sent to Daihatsu, again complaining of late payment. P M Sulcs reminded Daihatsu of its obligations under the contract. The letter ended with a threat, as follows: (Exhibit A, doc 1149) "… P M Sulcs must insist that the outstanding payments, refer invoices attached, be made directly to P M Sulcs and received at our North Sydney offices by 3.00 pm on Friday 16th June, 1989 or these debts will be considered as grossly overdue and therefore be passed to our independent Debt Collection Service for collection at Daihatsu's cost." 510 Mr Hooper asserted that three days later, 15 June 1989, he spoke to Mr Kratsas on the telephone. He attributed to Mr Kratsas these words: (Hooper: Aff. 2.1.98, para 61) "I'm going on with our contracts with PMS but I won't pay you until I sort out which hardware I'm going to use." 511 Mr Kratsas acknowledged that after the meeting on 5 June 1989, he may have spoken to Mr Hooper on the telephone (Kratsas: T.1127). However, he denied the conversation to which I have just referred. Mr Kratsas added: (Kratsas: Aff. 31.3.98, para 56) "At no stage did I or Daihatsu contemplate changing the suppliers of hardware." 512 On 20 June 1998, Mr Kratsas wrote to Mr Docherty of Fujitsu. The letter opened with these words: (Exhibit A, doc 1163) "This is to inform you that Richard Womack received a phone message on 19 June 1989 to contact Mr Joce Santa-Maria of P M Sulcs office. In line with our agreement with yourself, we did not reply. This morning Tuesday, 20 June 1989, Mr John Hooper of P M Sulcs phoned Richard Womack at his home and stated that - 1. Joce was continuing to produce the system modifications as outlined in the Analysis Report of 10 March 1989 (altered to April), regardless of the fact that Daihatsu Australia have not signed the detailed specifications of these modifications. 2. In the event Sulcs were not paid for this work, he would put the matter in the hands of a Debt Collector." 513 The letter continued: "You will recall that in the meeting convened by your Company in our offices on 5 June 1989, your Company informed Sulcs that in the event they, Sulcs, did not come forward with a positive resolution to the problem under discussion by Monday, 12 June 1989 (Public Holiday default to 13 June), negotiations on the development and supply of Systems Software was finished. Daihatsu Australia fully supported your approach in this matter. To date we have not received confirmation of the Minutes of the meeting of the 5 June 1989." 514 There followed a paragraph which echoed the letter of 2 June 1989 (Exhibit A, doc 1078; supra: para 481). Mr Kratsas demanded action from Fujitsu as Daihatsu's Prime Contractor. He said this: (Exhibit A, doc 1163) "In view of this latest approach from Sulcs, following on the invoice for charges already passed to you, we seek your confirmation as the prime contractor in this matter to formally advise Mr John Hooper of P M Sulcs & Associates Pty Ltd to immediately cease all work on the software development, as we at Daihatsu Australia have already informed you that we accept no responsibility in this matter, as far back as the meeting of 5 June 1989." 515 The letter ended with these words: "Please acknowledge your adherence to our request for assistance at your earliest convenience. We believe it is unfair to have P M Sulcs or any Company placed in a situation where uncertainty may cause some disadvantage." 516 Notwithstanding the strong terms of that letter, and its reference to a pact of silence between Daihatsu and Fujitsu, there was evidence that Mr Kratsas met Mr Hooper for lunch on the day following, 21 June 1989. According to Mr Hooper the meeting took place at The Black Stump Restaurant. Mr Hooper did not refer to the meeting in his initial lengthy affidavit (Hooper: Aff. 2.1.98). However, there was a reference to it in Mr Hooper's letter to Mr Kratsas of 5 July 1989. Mr Hooper wrote on that occasion to Mr Kratsas in these terms: (Exhibit A, doc 1181) "You are aware from our meetings last month and from our lunch on the 21/6/89 that we have been working during the month of June to meet our Contract while we waited for you to resolve our objection to Fujitsu's refusal to pass on the time and materials payments to us as they fall due under our contract with Daihatsu." 517 When Mr Hooper gave evidence, it was not put to him that the luncheon had not taken place, and that the letter of 7 July was fiction. Indeed, as the plaintiff's submissions point out, Mr Hooper was cross examined upon the basis that the luncheon had occurred (Hooper: T.113) (Plaintiff's subs: para 80). Mr Kratsas, when he gave evidence much later, denied having met Mr Hooper for lunch (Kratsas: T.1125). I think it likely that the lunch did take place. My view is reinforced by later events, which I will describe (infra: para 562ff). 518 P M Sulcs was clearly short of funds. Mr Hooper reported to Canada upon various matters (not including Daihatsu). There was a postscript in these terms: (Exhibit A, doc 1164.6) "P.S. If Daihatsu doesn't pay the invoices outstanding by June 30th I will have to ask that you transfer $10,000 to us so we can meet our end of month." 519 At the same time Mr Hooper approached Dun & Bradstreet (Exhibit 2). Mr Hooper said that he did so on the instructions of his Canadian parent (Hooper: T.112). He was aware that such a step would inflame Mr Kratsas (Hooper: T.112). However, it was in line with the strategy which he had identified (supra: para 498; Exhibit A, doc 1084.3) of putting pressure on Daihatsu, so that Daihatsu might, in turn, put pressure on Fujitsu, or perhaps jettison Fujitsu. Dun & Bradstreet wrote to Daihatsu demanding payment, as instructed (Exhibit A, doc 1165.1). Correspondence with Pyramid 520 Amongst the subpoenaed material was a letter of 27 June 1989 on the letterhead of Daihatsu. It purported to have been sent by Mr Kratsas, although it was not signed. The full text of the letter was as follows: (Exhibit A, doc1165) " TO: LIONEL SINGER PYRAMID TECHNOLOGY AUSTRALIA PTY LTD FROM: LEON KRATSAS DAIHATSU AUSTRALIA PTY LTD THIS IS TO CONFIRM THAT WE ARE ANXIOUS TO SELECT AN ALTERNATE COMPUTER EQUIPMENT SUPPLIER FOR OUR DAP/SULCS SYSTEM. PLEASE PROVIDE YOUR RECOMMENDATIONS AND SYSTEM PRICING. AS DISCUSSED, YOUR PROPOSAL WILL INCLUDE A JOINT MARKETING COMMISSION WHERE PYRAMID TECHNOLOGY AUSTRALIA P/L WILL PAY DAP $30,000 ON ALL DAP/SULCS/PYRAMID INSTALLATIONS AFTER THE SULCS SOFTWARE IS INSTALLED AT DAP. BOND MOTOR CORPORATION CAN BE THE FIRST SALE." 521 As with the letter of 2 June 1989 (supra: para 464), the address of the Western Australian regional office was recorded at the foot of the letter, namely: (Exhibit A, doc 1165) "W A REGIONAL OFFICE, 72 CANNING HIGHWAY, VICTORIA PARK …" 522 Daihatsu suggested that, like the letter of 2 June 1989, it was a forgery (Daihatsu reply: 30.4.01, para 8). There was, in June 1989, no Western Australian regional office. The premises were not acquired until 2 August 1989. The regional office did not begin operations until 1 September 1989. The letter had been fabricated, using stationary only available after the date which it bears (supra: para 472ff). Mr Kratsas denied having written the letter or directing that it be sent (Kratsas: Aff. 31.3.98, para 53). There was no copy of that letter (or that of 2 June 1989) in the records of Daihatsu (Kratsas: Aff. 23.8.00, para 22(b)). 523 Mr Kratsas acknowledged, however, that he had been contacted by Pyramid. He said this: (Kratsas: Aff. 31.3.98, para 53) " … at some time I was contacted by a representative of Pyramid Technology Australia Pty Limited ('Pyramid') who advised me that he contacted me at the suggestion of Mr Hooper. At no time did I ask Mr Hooper to arrange for Pyramid to contact us or agreed that he should contact Pyramid. …" 524 Mr Cliff Smith, the Major Accounts Manager of Pyramid, wrote to Mr Kratsas on 29 June 1989. His letter opened with these words: (Exhibit A, doc 1166) "Following our telephone conversation on Tuesday 27th and by way of background for our meeting next week I believe that it is worthwhile to summarise our involvement with P M Sulcs to date and the possible benefit that could accrue to Daihatsu." 525 There followed a description of Pyramid's involvement with P M Sulcs. Mr Smith added the following in relation to the conversion: (Exhibit A, doc 1166) "We have thoroughly investigated the porting of the P M Sulcs software from Wang VS to Pyramid UNIX and are confident in the timetable for availability including integration with the Oracle database system, whose SQL interface is very similar to that of Ingres." 526 Pyramid would accept "prime vendor responsibility" which presumably was the role of prime contractor. The letter provided the author's opinion that the P M Sulcs software was the "best of the breed". It said this: (Exhibit A, doc 1166) "We believe that the P M Sulcs software represents the best available solution for the key automotive area of materials control and, as the leading supplier of mid-to-large scale UNIX systems in Australia we will be promoting that product vigorously. We are therefore in a position to supply Daihatsu with a working Sulcs system, modified to your requirements as established during the analysis carried out this year, within your originally anticipated timetable and within the original cost." 527 The letter ended with these words: (Exhibit A, doc 1167) "I understand your position in respect of current negotiations with Fujitsu but I would urge that this alternative approach, which appears to meet your original objectives so well, be given serious consideration. I look forward to meeting you next week and discussing the matter further on that occasion." 528 Daihatsu, in its submissions, suggested that it was odd that Mr Smith had not referred to Mr Kratsas' fax of 27 June 1989. You would have expected him to have done so, "if it were real" (Daihatsu subs: 30.4.01, para 9). The submission added (Daihatsu subs: 30.4.04, para 10) "Mr Smith was not called by Sulcs and no explanation for his absence has been given - nor was anyone else from Pyramid called to show that Mr Kratsas was still treating with Sulcs in a way relevant to its claim as pleaded. Pyramid was based in Sydney." 529 Is it reasonable to suppose that P M Sulcs should have called Mr Smith, or someone from Pyramid? Was it, on the other hand, an issue more directly concerning Daihatsu? P M Sulcs, of course, has the onus. However, the issue concerning the true relationship between Daihatsu and P M Sulcs touched both parties. A number of documents suggested contact between Pyramid and Daihatsu, including the document to which I have just referred (supra: para 499; infra: para 562). Daihatsu made serious allegations in respect of one such document, the letter of 27 June 1989 (Exhibit A, doc 1165), namely that it was a forgery. Mr Smith (or Pyramid) was available to both parties. It certainly would have assisted me to have heard from Pyramid. However, the parties chose not to call Mr Smith or anyone from Pyramid. In the circumstances, I do not believe it appropriate to draw an inference against either party. 530 Again let me pass by this issue, without resolving it. I will return to it once all the evidence has been assembled. Work Relevant to the Contract 531 Work continued on the modifications throughout June 1989. The quantum meruit action covers the period to the end of June. Although some work was done thereafter (according to correspondence), no claim is made on the quantum meruit for such work. On 30 June 1989 P M Sulcs again sent Daihatsu a copy of unpaid invoices. In addition, it submitted an invoice for work performed in June. The invoice specified the names of those who had done that work, their hours and hourly rate. The total, after discount, was $49,498.50. That sum forms part of the quantum meruit claim (Exhibit A, doc 1171). 532 On 23 June 1989 Softway Pty Ltd provided a quote for the conversion of the Wang VS code to C language. It described the undertaking as a "complex and difficult task" (Exhibit A, doc 1164.2). Various options were canvassed. One was a full translator. Softway estimated that a full translator would take "eight elapsed months" and cost $140,000. A partial translator would be less efficient. It would take six elapsed months and cost $104,000. A third approach was to use an existing translator. The feasibility of that approach would depend upon testing sample code, which could be done quickly. If it were feasible, it could be done in time to meet the deadline of 14 weeks. Termination of P M Sulcs 533 On 30 June 1989, Fujitsu responded to Daihatsu's urging and wrote to P M Sulcs in these terms: (Exhibit A, doc 1176) "I refer to recent correspondence between your company and our client, Daihatsu Australia Pty Ltd. Our client has requested that we, as their Prime Contractor, formally advise you to immediately cease all work on their behalf. They further advise that at the meeting held in their offices on the 5th of June 1989 they issued your organisation with a clear directive to cease all work and therefore will assume no responsibility for any work done after that date. At the same meeting you were informed jointly by Daihatsu and Fujitsu that unless you were able to resolve with Fujitsu the problems associated with the financing of the conversion of your software package by Tuesday, 13th June 1989 the services of your company would terminate (copy of the Fujitsu internal minutes of that meeting is attached for your information). Whilst it is unfortunate that you have failed to resolve the problem under discussion we feel that you must regard the wish of the client as final and we advise you strongly against proceeding further with any work associated with the modification or otherwise of your software on behalf of Daihatsu. As you would appreciate, any agreements concluded between your company and Daihatsu were entered into on the basis that Fujitsu would formalise a relationship with your company which would enable it to accept prime responsibility for the required modification and conversion of your software. Regrettably, our companies have failed to establish any such relationship. Since Fujitsu and your company have not been able to agree on an ongoing agreement to establish your software under Fujitsu UTS/M and UNIX we have found it necessary to investigate an alternative software supplier to meet the needs of our client." 534 The same day, Fujitsu wrote to Daihatsu, enclosing a copy of the letter. The covering letter (Exhibit A, doc 1177) included Fujitsu's understanding of the contractual arrangements. I have referred to the passage already (supra: para 478). For convenience I repeat what was said: (Exhibit A, doc 1177) "Our understanding of the Prime Contract Agreement made between Daihatsu and Fujitsu dated 30th March 1989 is that Fujitsu agrees to Prime Contract the conversion of those standard modules of the P M Sulcs software defined in appendix A of the document. The responsibility for supply, modification, implementation, ongoing support and maintenance of the P M Sulcs software is subject to separate agreements between Daihatsu and P M Sulcs directly." 535 Mr Docherty then dealt with the modifications which were required. Under the Prime Contract Agreement (Exhibit A, doc 448; supra: para 213) they had to be agreed between Daihatsu, Fujitsu, and P M Sulcs. There had been no such agreement. 536 The letter from Mr Docherty ended with these words: (Exhibit A, 1177) "I join you in your outrage at the clumsy and agressive (sic) stance being taken by P M Sulcs, however, I am unable to confirm that we are in fact completely absolved from any responsibility to the Sulcs organisation. We do offer complete support in jointly resolving the problem at hand and seek your ongoing assistance in this matter." 537 On 4 July 1989, Daihatsu wrote to P M Sulcs terminating the contract. The letter said this: (Exhibit A, doc 1180) "With regard to the Licensing Agreement covering the supply and development of the P M Sulcs Software Package. We hereby confirm that in view of the inability of you and Fujitsu to arrive at an agreement whereby Fujitsu Australia is the Prime Contractor in this matter - allied to your failure to provide a positive resolution to the problem by the 12 June 1989, as defined by Fujitsu and supported by us in our meeting with you on 5 June 1989, that any contractual obligation by Fujitsu and Daihatsu Australia is null and void." 538 Mr Hooper stated that, upon receipt of the letter, he telephoned Mr Kratsas. He recounted the conversation as follows: (Hooper: Aff. 2.1.98, para 67) "Hooper: 'I received your facsimile, what is that all about?' Kratsas: 'I had to send it to you because FAL are putting pressure on me through our Japanese Director. You know that they are organising another software company to come in here?' Hooper: 'Yes, McLean told me. As far as PMS is concerned we have valid contracts with DAP and we are going to honour them. …'" 539 According to Mr Hooper, Mr Kratsas affirmed his interest in the P M Sulcs software. Mr Hooper attributed to Mr Kratsas the following words (which Mr Kratsas denied): (Hooper: Aff. 2.1.98, para 67) " … we have to take an 'official' position to support FAL. I'll be back to you in a week or so, in the meantime, help Pyramid to size a computer with the capacity to meet our needs so that they can replace FAL as DAP's computer supplier." 540 Meanwhile, on 5 July 1989, Mr Hooper responded to Fujitsu's letter of 30 June 1989 (supra: para 533), which he described as "self serving and inaccurate". Mr Hooper added: (Exhibit A, doc 1182) "Furthermore, we reject your invention that there was a formal direction by Daihatsu on June 5th that we cease work as no such directive was given, either formally or informally. At all times Daihatsu has encouraged us to proceed with our work as a matter of urgency as they urgently needed to replace their existing system with our system, this was restated by Leon during our second meeting with him on June 5th and in all subsequent discussions to date." 541 Mr Hooper set out his account of the meeting of 5 June 1989. He then added: (Exhibit A, ref 1183) "It is very interesting that you and I discussed these specific issues in detail on the phone last week where you agreed that no direction has been given to us to stop work yet, we now receive a letter from you stating the complete opposite together with a letter from Leon claiming our agreements with Daihatsu to be null and void while he is still encouraging us privately to complete the project with or without Fujitsu. It is clear that the Japanese management of Daihatsu and Fujitsu are now dictating a new policy designed to squeeze us into accepting a change in the rules in mid play and to play you and I off against one another to suit their own ends. I am sorry it has got to this as it is totally unnecessary." 542 Mr Hooper emphatically denied that it was a term of the P M Sulcs agreement with Daihatsu that his company was to be engaged "as some sort of sub contractor". 543 Mr Hooper then added the following, relevant to Pyramid: "As mentioned above we have received a letter from Daihatsu attempting to void our agreements with them (which we reject) while at the same time Mr Leon Kratsas is urging us to deliver a solution on an alternate hardware suppliers equipment. Under the circumstances, we view your claims to be Daihatsu agents as precarious at most and certainly irrelevant to our contractual relationship directly with Daihatsu. I hope this stand-off is resolved quickly so that we can all complete our contractual obligations to Daihatsu without further frustration." 544 Mr Kratsas was clearly disturbed by Fujitsu's reference in their letter of 30 June 1989 to the separate contractual arrangements between P M Sulcs and Daihatsu (supra: para 534). He wrote to Fujitsu on 7 July 1989 in these terms: (Exhibit A, doc 1186) "With reference to your letter, there appears to be some difference of understanding on the scope of the Prime Contract. It only covered the conversion of the P M Sulcs software by implication, in that the responsibility was for a 'software system, running under Ingres on Daihatsu's Fujitsu computer, capable of processing Daihatsu's day-to-day business'. Fujitsu offered Daihatsu a Data Processing 'solution', incorporating both hardware AND software. Daihatsu has previously rejected a Fujitsu 'hardware only' proposal, as Daihatsu has no staff to create the systems it needs, and therefore could not have used the computer. The fact that a conversion of the software was involved, was explained, but was merely a process necessary for Fujitsu to reach the point where they could offer Daihatsu a means of using the computer. In support of this position, Daihatsu has consistently refused to pay for such a conversion as confirmed by you on 20 January 1989 it was our understanding that P M Sulcs and Fujitsu were jointly funding it as a strategic marketing activity. The responsibility for the supply of modifications, as being necessary to create a system 'running Daihatsu's business', is obviously included in such a Prime Contract definition. This appears to be acknowledged by the Sulcs document you quote '… modifications to be agreed between DAIHATSU, FAL and P M SULCS .' The fact that Fujitsu did not agree to these modifications shows that the agreement for work on the modification was not consumated (sic) by the three parties concerned, and that 'therefore no liability for costs' have been incurred by either Daihatsu or Fujitsu. We assume that you will support this position. As far as Daihatsu is concerned, the scope of the Prime Contract with Fujitsu has not changed. It is still to provide an operational system for Daihatsu's business. Please would you confirm this." 545 Mr Kratsas ended his letter as follows: "In the light of recent events, it is probably a good thing that this contract did not exist." 546 On 14 July 1989 Mr Hooper wrote to Daihatsu (addressing his letter "Dear Leon"). The letter opened with these words: (Exhibit A, doc 1187.1) "Pyramid Technology Australia has copied me their letter to you dated 13th July 1989 and I feel that it is appropriate to clear the air regarding our involvement with Pyramid Technology Australia so that you can proceed with the evaluation of their computer solutions." 547 Pyramid's letter to Daihatsu of 13 July 1989 was not tendered. Mr Hooper's letter continued: "P M Sulcs have a solid commitment to UNIX and open systems. This has the advantage over proprietary operating system software suppliers in that it affords you, the customer, a choice of a large selection of hardware vendors on which to run our software. As a result of this commitment to hardware independance (sic) we have recently tendered your software to a number of clients on multiple hardware solutions. This has presented the opportunity to objectively evaluate the different hardware vendors on an equal basis. Pyramid Technology Australia have demonstrated that they have the most functional and cost effective solution for companies of Daihatsu Australia's size and larger. As a result, we support your consideration of their computer hardware and confirm that we have no objection to Pyramid Technology Australia as your Prime Contractor. Therefore if this is an opportunity for our two companies to resolve the delays in the project by the two of us meeting with Pyramid Technology Australia during the next few days I will instruct Dun & Bradstreet to stop the court proceeding that they have been preparing to so that we can resolve the problems and proceed the project without the unpleasantness that has been forced upon us both. I look forward to hearing from you directly or via Pyramid so that we can resolve this as soon as possible." 548 Dun & Bradstreet, meanwhile (on 17 July 1989), confirmed that it would assist P M Sulcs in the recovery of its debt from Daihatsu (Exhibit A, doc 1187.2). 549 On 18 July 1989, Mr Hooper wrote to Mr Singer of Pyramid. He said this: (Exhibit A, doc 1188) "I feel that it is appropriate that I confirm the direction in which P M Sulcs would like the relationship between our two companies to develop and to discuss the two major opportunities that currently exist so as to facilitate discussion of any specific issues that require further agreement." 550 One of the opportunities was Daihatsu, which was described in these terms: (Exhibit A, doc 1189) "The Daihatsu Australia sale is conditional on a $100,000.00 commission being paid to P M Sulcs on the sale of the Pyramid processor (equivalent to a Fujitsu M760 model 4) and the support of our terms of trade as above. It is planned that we initially install the same software at Daihatsu as we plan to install at Bond, namely a COBOL/SQL solution. We will then upgrade COBOL/SQL solution to a C/SQL solution late next year. This will require Daihatsu to pay $150,000.00 for this upgrade which will be paid 50% in February, 1989 and 50% on installation/acceptance. I believe that Daihatsu will accept this arrangement as they have agreed to pay the following amounts for the software which is in excess of the time & material services that they have contracted for separately: Commission within Hardware $100,000.00 P M Sulcs License fee $150,000.00 Conversion fee to C (upgrade fee) $150,000.00" 551 Pyramid responded on 8 August 1989. It agreed to the proposed terms, subject to a proviso (Exhibit A, doc 1216). Mr Hooper wrote back the same day, accepting the proviso: (Exhibit A, doc 1218). 552 One gathers that Pyramid operated with Cobol 85 (MicroFocus Cobol). Mr Santa Maria conducted a trial of the conversion of P M Sulcs software to Cobol 85 (the equivalent of the first stage in the conversion process planned in the Daihatsu transaction) (supra: para 96). On 9 August 1989, he wrote to Mr LaVerne Peters in Canada, reporting as follows: (Exhibit A, doc 1219AA.1) "We are currently in possession of a Pyramid workstation and modem so that we can work on the conversion of our VS Cobol to Cobol 85 under UNIX . To date, Pyramid's Cobol 85 under UNIX seems relatively clean in conversion, we'll keep in touch as to its progress. We are working on MCENTADD as our sample code for conversion." 553 In the same communication, Mr Santa Maria referred to work being done for Daihatsu. He said this: (Exhibit A, doc 1219AA.1) " DETCO is going to get the latest version of the P M Sulcs software (the BCT version we are currently working on for Daihatsu) on the VS10000. We are intending to implement the Daihatsu version of the software for DETCO by the 1st of September 1989." 554 Mr Peters responded the same day (9 August 1989) answering Mr Santa Maria's questions, and adding the following comment: (Exhibit A, doc 1219AA.2) "At this point, I was not aware that work was continuing on Daihatsu due (to) the Fujitsu/Conversion problems. … Are we still of (sic) speaking terms with either Daihatsu or Fujitsu? What is the status of the conversion? Are they still going to C?" 555 On 11 August 1989 Mr Santa Maria wrote again to Mr LaVerne Peters. The fax is expressed to be from "Mr Joce Santa Maria (& Mr John Hooper)". Mr Hooper was aware of the fax. He approved of its content (Hooper: T. 173/174). The fax said this: (Exhibit A, doc 1219A.1) "To protect our legal position with Daihatsu and to do 'billable work', John has instructed me to complete the Immediate Modifications as if there isn't a problem with the project so that we can say that we have fulfilled our side of the contract." 556 The fax complained that the version of MC2 software provided by Canada was "full of bugs". It sought clarification on the latest version of the software. 557 In the same letter, Mr Santa Maria stated his view concerning the P M Sulcs software. He said this: (Exhibit A, doc 1219A.1) "I have always regarded that our software is second to none." 558 Mr Santa Maria added: (Exhibit A, doc 1219A.2) "I have great aspirations in our software being the Rolls Royce of application software, but to achieve this requires that I have a clean version as the foundation for our new product." 559 Mr Santa Maria referred to the approach which had been adopted by Mr Hooper: "John's push into UNIX and open systems is the way to go, we currently have every major hardware and software vendor including IBM interested in introducing us into deals and to have us run on their platform or complement their software (eg 4th generation database or Financials etc). With UNIX 's 'open systems' policy, porting across systems is not an issue as long as you have ported to an existing UNIX platform. I believe that this is a gateway for the future and success for PMS worldwide. Being the 'open systems' application solution in a tender with Database and hardware independence means that the vendors compete for our favour and not the other way around." 560 This communication was followed by a series of faxes between Mr LaVerne Peters and Mr Santa Maria concerning the version of the software supplied by Canada, and responsibility for "bugs". 561 On 15 September 1989, Mr Maris Sulcs wrote to Mr Hooper from Canada reporting on a UNIX conversion test which was encouraging (Exhibit 18). On 29 November 1989, P M Sulcs Canada wrote saying that it had now won its first UNIX account. It was committed to UNIX (Exhibit 18). On 16 January 1990, it wrote again to Mr Hooper, this time reporting as follows: (Exhibit 18) "The UNIX conversion is hung up a bit - we need the diskette we sent to you and it has not arrived as yet. Since we are about to sign our second UNIX client, it has to work now." Lunch with Pyramid in November 1989 562 On 28 November 1989, Mr Hooper sent a fax to Mr Kratsas at Daihatsu. Mr Garry Jackson, Managing Director of Pyramid Australia, was provided with a copy. The fax was in these terms: (Exhibit A, doc 1238) "Dear Leon, This is just to confirm once again our meeting time of 9.15 am, Thursday November 30th, 1989 at your offices at 96 Belmore Road, Riverwood, with Mr Garry Jackson and myself. I look forward to what I am sure will be a most fructuous and rewarding meeting. Regards, John Hooper" 563 There was a further document on Daihatsu letterhead dated 29 November 1989. It was addressed as follows: (Exhibit A, doc 1240) "TO: MR JOHN HOOPER P M SULCS FROM: MR L. KRATSAS" 564 The document was unsigned. It carried the following message: (Exhibit A, doc 1240) "DEAR JOHN THIS IS TO ADVISE YOU THAT UNFORTUNATELY THE MEETING SCHEDULED FOR THURSDAY 9.15 AM ON 30 NOVEMBER WILL HAVE TO BE CANCELLED. WOULD YOU PLEASE ADVISE MR GARRY JACKSON." 565 The cancellation by Daihatsu was sent to Mr Hooper by fax. The imprint of the fax machine appeared on the document. When Mr Kratsas' was cross examined, his attention was drawn to these markings. He responded as follows: (Kratsas: T.1138/9) "Q. You were aware that the Daihatsu facsimile machine had a means of abbreviating the day of the week to a three letter … A. Sir, I'm not an expert on a fax machine. You may have nothing better to do with your life than look at what the fax machine does. Definitely I do. Q. Are you able to explain to his Honour how that facsimile came to be sent from the Daihatsu Australia facsimile number addressed to Mr Hooper on the 29th November 1989? A. No I am not. Q. As far as you are concerned is the content of that facsimile absolutely false? A. It's absolute bullshit. HIS HONOUR : Q. Does that mean it's false? A. It's false sir. A lot of hogwash. Q. There never was an arrangement for a meeting in the first place? A. There was never arrangement. The last person at that point of time I would like to see would have been Hooper. Think of it from a plausible point of view sir. This whacker got Dun & Bradstreet on us. The whole thing had collapsed and I've got to talk to this whacker?" 566 Mr Kratsas added: (T.1139) " STEVENS : Q. But business is business, isn't that the approach you adopted in 1989? A. Business is business; not from the point of view once he's taken Dun and Bradstreet action and all this other hogwash." 567 There were parallels, according to the plaintiff, between Mr Kratsas' conduct in January 1989, and his conduct between June and November 1989. In January 1989, Mr Kratsas was dealing with ICL. At the same time he was negotiating with Fujitsu and P M Sulcs (supra: para 151ff). Mr Kratsas was asked the following: (Kratsas: T.1139) " STEVENS : Q. It's not the case that you were stringing Mr Hooper along from July to November 1989 until you were able to sign a deal with DIS and Fujitsu? A. It's not the case sir I was stringing anybody along. Q. But you had been stringing ICL along earlier that year hadn't you? A. That's hogwash sir." 568 Mr Kratsas was then asked the following questions concerning the fax from Daihatsu to P M Sulcs of 29 November 1989 (Exhibit A, doc 1240): (Kratsas: T.1140) " HIS HONOUR: Q. … , so I understand your position in relation to document 1240, you said that that is completely false and that there were never any arrangements for a meeting? A. That's correct. Q. Do you have any idea how a document in those terms came to be sent to Mr Hooper, or do you suggest that that document is false or what is your position? A. I suggest sir that I have never sent that document. Not only I suggest, I know it has never been sent by myself and that's all I can comment on. I don't like to conjecture what may or may not have happened. Q. But did you give any instructions to anyone, your secretary … A. No. Q. … or anyone at all to send a document in those terms? A. No sir." 569 Counsel for Daihatsu returned to the issue the next day, in re-examination. He addressed the following question to Mr Kratsas: (T.1202) "Q. I think your evidence was that to the effect that you hadn't had anything to do with seeing or knowing either of those two pieces of correspondence; is that right? A. That's correct, yes. Q. Have you reflected about the matter as to having looked at the original fax which is exhibit K on the waxy paper that you were shown yesterday that now appears at page 1240? A. Yes, I can recall that. Q. And have you reflected about whether as you understand how your office operates or otherwise, those documents may not have come to your attention? HIS HONOUR : Q. I think you should not lead on this. In fact to be frank, I think if there are any corrections to any evidence, before you, anyone starts I think a witness should be invited in very general terms to say whether there is anything in respect of the evidence so far which, on reflection, they believe to be inaccurate." 570 The re-examination continued: (T.1202/3) "Q. Mr Kratsas is there anything about your evidence concerning these two items of correspondence that appear at pages 1238 and 1240 of the bundle in volume 3 which you wish to correct or explain to his Honour? A. Yes your Honour. Although I don't recollect the documents whatsoever, it is possible that I have seen those documents before, and it is also possible and likely that my secretary may have advised me, you have an appointment with John Hooper on whatever this date was - November 30, and I have advised my secretary please cancel it. Q. Is there anything about the way you kept your diary or your diary was kept? A. The normal way my diary is kept is, it's kept by my secretary, my secretary puts appointments in there. Then she checks with me whether that's fine. I may tell her, no, please I'm busy I can't do that or get her to ring up the person and set another date or whatever. Q. Do you have any policy about your availability to persons who seek to make appointments with you through your secretary that were operative at that time? A. I try to meet all the people that Tania my secretary puts down. There is no reason for me not to meet them, it's not always possible of course." 571 Mr Kratsas explained how he came to give contrary evidence the day before. He said this: (Kratsas: T.1203) "Q. Are you able to explain to his Honour how it is that you came to give your explanations about those two items of correspondence in your evidence yesterday? A. The reason I came about that, I thought it was very strange that I would be agreeing to a meeting with John Hooper. At this time, which is 28 November there is a lot of water gone under the bridge since the June meeting, there is Dun and Bradstreet that have come in, there are letters of demand from Sulcs, there is threats from Sulcs in one of the letters that he is taking legal action against us or he contemplates taking legal action against us. We have at about the same time an agreement with DIS or roundabout that time the agreement with DIS and Fujitsu as the prime contractors is being consummated. So I find it very strange that I would contemplate a meeting like that." 572 The following questions were asked by way of clarification: (T.1203) " HIS HONOUR : Q. Just so I understand that, are you saying that you accept now that, you have no recollection of it, that you did make arrangements to meet Mr Hooper for lunch, or are you saying that someone made those arrangements on your behalf? A. I don't believe I made the arrangements. Now my secretary could have made the arrangements but you are asking me to remember something back on 28 November 1989. I think that's a very big ask, to ask anybody to remember the circumstances of 28 November 1989. Whether I was instrumental or making the arrangements or whether John rang me and I agreed or John had spoken to Tania and Tania had set a date - Tania is my secretary - I think there is no way that I could remember that. HIS HONOUR: Is she still your secretary? A. Yes, yes." 573 Mr Kratsas' secretary did not give evidence. 574 Before the re-examination, counsel for Daihatsu had exercised his right to see Mr Kratsas (T. 1213). The fax from Daihatsu to P M Sulcs of 29 November 1989 was plainly authentic. It had the characteristic imprint of the Daihatsu fax machine. The position of Mr Kratsas in cross examination was indefensible, as he recognised the next day. However, his explanation in re-examination, was unconvincing. I cannot accept that Mr Kratsas' secretary, in November 1989, was so ignorant of his position in relation to P M Sulcs and Mr Hooper that, without consent, she made arrangements for Mr Hooper and Pyramid so see Mr Kratsas. The more likely explanation is that Mr Kratsas made those arrangements himself. That is so starkly at odds with the impression Mr Kratsas sought to give in his testimony (namely, isolation from, and indifference to, P M Sulcs) that I cannot accept that testimony. I reject Mr Kratsas' assertion of unswerving fidelity to Fujitsu after the meeting of 5 June 1989 (supra: para 511). I believe it probable that Mr Kratsas kept his options open, seriously examining the use of Pyramid in conjunction with P M Sulcs. I will elaborate upon that view shortly. Daihatsu Dealings with ICL 575 Before that elaboration, I should refer to a further episode. It provided insight into Mr Kratsas. Mr Kratsas, in cross examination, was confronted with a letter of 1 February 1989 sent to ICL. The letter was awkward. It had a signature which resembled his signature. Yet it was inconsistent with his testimony. The cross examination was as follows: (Kratsas: T.1003) " STEVENS : Q. You agree that your signature appears on the second page of that document? A. No, I don't agree that that is my signature. Q. Is this another document, or a copy of a document which purports to have been signed by you, which wasn't signed by you? A. I said, sir, that I don't believe that that's my signature. Q. Are you quite sure of that, sir? Take another moment and look closely at the document? A. I said I don't believe it is my signature." 576 Again the letter had the Daihatsu fax imprint. Mr Kratsas' attention was drawn to that aspect: (T.1004) " HIS HONOUR : Q. the imprint on the top in the general format of the hieroglyphics at the top of the two fax pages, is that not familiar to you? A. No, the thing of concern to me, looking at this document, is that it says, 'From Daihatsu Aust.' I find that difficult that any of our people would use that terminology. Q. Looking over the page again at the signature? A. That appears not to be my signature." 577 Mr Kratsas was thereafter reminded of his previous testimony where he identified his signature (given at T.906): (Kratsas: T.1005) "Q. That is the same document that you are looking at now which yesterday you acknowledged was your signature. What has happened between yesterday and today that you no longer recognise that as your signature? A. Sir, what I am saying, and I will repeat myself again, I do not recognise my signature on that document." 578 The cross examination continued: (T.1020) "Q. I suggest to you that the reason you no longer accept the signature as being yours which appears on the copy document at page 354, is because if that be your statement, it is inconsistent with the fax, as you have put to his Honour over yesterday and today. And it is for that reason that you no longer accept you having signed that letter? A. That is not the reason, sir. As I said, I do not recognise my signature there. Furthermore, this letter, or this fax, whatever it may be, pertains - purports to say things that were physically impossible at that point of time. Q. You say further to his Honour that it was contrary to your understanding that you would have ever written the letter containing the matters which these two pages do? A. In regard to those items that we discussed, yes." 579 Mr Kratsas then gave the following evidence: (T.1020/21) "Q. You do not accept, and you deny that you were the author of this letter, or that you approved this letter? A. That's correct. HIS HONOUR : Q. Do you deny that it is your signature? A. I don't believe it is my signature, sir. STEVENS : Q. Do you go further and deny it? A. Yes, I would deny that. Q. Notwithstanding that on oath yesterday you acknowledged it to be your signature? A. I made a mistake. Q. Another mistake? A. I'm human, and you gods may not make mistakes. HIS HONOUR : Q. I think when you were asked earlier this afternoon whether it was your signature, you insisted that you did not recognise it as your signature? A. Yes. Q. A moment ago you said that you deny that it is your signature? A. I prefer to stay with recognise, to be quite candid, to be honest, your Honour. Q. What does that mean? That you harbour some doubt that it may be your signature? A. It may be my signature, but I do not recognise it. In as far as the letter is concerned, it definitely has absolutely nothing to do with me." 580 Counsel for Daihatsu returned to the issue in re-examination (T.1178/81). Mr Kratsas gave a long explanation. The following questions encapsulate what he said: (Kratsas: T.1181) " HIS HONOUR : Q. Just so I am clear on this, as I understand what you have said, having been taken to document 352.25, that is, the ICL fax of 30 January, and document 353/354, that is the document which purports to be a fax from Daihatsu under your signature to ICL, what you have said, as I understand it, and you correct me if I am wrong, is that you have reflected upon the matter, having looked at the ICL document and having thought about it, and you now accept, first, that you wrote the letter which is document 353/354. Do you accept that? A. I don't believe I have written it, because there's too much detail about that. So I would imagine that our - that Richard Womack has actually written that because there's far too much detail with me to be au fait with the detail of the machinery. Q. It would be your expectation that you saw it and approved it? A. Yes, it would be my expectation. Q. In the light of that, do you have any further comment in respect of the signature which appears on page 354? A. My comment in regard to the signatory (as said) (sic), it does not appear to be my signatory. I still believe that's the case. RARES : Q. In having given the answers that you gave in cross examination as to the perception you had as to the authenticity of the letter at 353, have you, in the answers you have just been giving, now come to a different view about that? A. Not come to a different view. I believe that I would have seen this document. I believe that we were responding to the document from ICL, which is on page 352.25 and that furthermore, there would be no reason for, as I say, to reject the document of 352.25 where ICL is saying that they can deliver a system by this time." The Two Competing Hypotheses 581 I have already stated my view (supra: para 574). I believe that Daihatsu continued to treat with P M Sulcs privately after 5 June 1989, offering encouragement and the prospect of engagement. I have reached this view for a number of reasons. 582 First, I prefer the evidence of Mr Hooper to that of Mr Kratsas. Mr Kratsas spoke from an entrenched position, rather than recollection. He was opportunistic (supra: para 313). Where there was a pretext for doing so (such as a signature which was not quite his usual signature or the absence of a signature), he denied an association with documents which were awkward. 583 Secondly, it was both rational and plausible that Mr Kratsas should have kept his options open. He had been attempting to replace the Daihatsu computer system since 1987. He had examined and rejected the Fujitsu hardware. Indeed, Mr Kratsas reminded Fujitsu of that fact in his letter of 7 July 1989 (supra: para 544). Mr Kratsas had eventually selected Fujitsu because it was promoted by P M Sulcs as a suitable platform for its software. However, the attraction was not the Fujitsu hardware. It was the P M Sulcs software (supra: paras 83/88). In June 1989, therefore, Mr Kratsas was confronted with the prospect of not having the software which had attracted him, and which was suitable to the needs of Daihatsu, and being left with hardware which he had rejected. The hardware, unlike the software, was to some degree, interchangeable (supra: para 80). Mr Kratsas, no doubt, recognised that finding an adequate replacement for the P M Sulcs software would not be easy. Even were a replacement found, delay was inevitable. It was sensible, in these circumstances, that Mr Kratsas should have kept his options open. Nothing was going to happen straight away. Mr Kratsas could afford to wait and see what developed. That approach was consistent with his attitude in a situation, not altogether dissimilar, concerning ICL at the beginning of 1989 (supra: paras 83/151). 584 Thirdly, the evidence established, as a matter of probability, that Mr Kratsas explored the possibility of replacing Fujitsu with Pyramid, retaining the P M Sulcs software. Ultimately, Mr Kratsas rejected that option. On 27 November 1989 he signed a contract with Fujitsu and the replacement software supplier, DIS (Exhibit A, doc 1224). However, he kept his options open until the end. It was only after the contract had been signed, that Mr Kratsas cancelled the meeting which had been arranged with Mr Hooper and the Managing Director of Pyramid for 30 November 1989. 585 The fax from Mr Hooper to Maris Sulcs in Canada, sent on 6 June 1989, the day after the meeting, spoke of a private meeting with Mr Kratsas. Mr Kratsas was described as "supportive" (supra: para 496). He was "happy to talk to Pyramid" (supra: para 499). 586 One then comes to the fax from Mr Kratsas to Pyramid of 27 June 1989 (Exhibit A, doc 1165). This was this document which Daihatsu attacked as a forgery. It will be remembered that the basis of the attack was the address of the Western Australian office. The premises for the Western Australian office had not been purchased until 2 August 1989 (supra: para 472). 587 However, the purchase of the office is not determinative. The issue turns, rather, upon the production of Daihatsu letterheads recording that address. Mr Kratsas said that he gave no direction to produce such letterheads before 2 August 1989, and that the purchase was known to only a few persons. No evidence was called concerning the printing of the letterhead. 588 It will be remembered that there was a further and earlier letter with the same letterhead, that of 2 June 1989 (Exhibit A, doc 1078; supra: para 489). Having reviewed the evidence, I expressed the tentative view that the letter of 2 June 1989 (Exhibit A, doc 1078) was authentic (supra: para 489). Nothing in the evidence which followed suggested, to my mind, that that conclusion was wrong. I believe it probable that the 2 June 1989 letter was authentic. It follows that the letterhead with the Western Australian regional office was in circulation on 27 June 1989. I believe that, as a matter of probability, the fax to Pyramid of 27 June 1989 was also authentic. Pyramid wrote to Daihatsu two days after that letter, on 29 June 1989 (Exhibit A, doc 1166). The author of the letter, Mr Smith, referred to a telephone conversation with Mr Kratsas on the same day as the impugned fax, that is 27 June 1989. Mr Smith's letter was written to provide "background for our meeting next week". I would not have expected Mr Kratsas to have made arrangements with Mr Smith unless he were contemplating, as a possibility, the retention of P M Sulcs and the replacement of Fujitsu. 589 Since Pyramid was not called, and Mr Kratsas' diaries were not produced, there is no evidence as to whether the meeting took place. However, there was evidence that Daihatsu evinced enough interest in P M Sulcs to foster a continuing belief, on the part of that company, that Daihatsu was willing to continue its association. Mr Hooper wrote to Fujitsu on 5 July 1989 (Exhibit A, doc 1182; supra: para 540) "At all times Daihatsu has encouraged us to proceed with our work as a matter of urgency as they urgently needed to replace their existing system with our system, this was restated by Leon during our second meeting with him on June 5th and in all subsequent discussions to date." 590 Mr Hooper added: (Exhibit A, doc 1183; supra: para 543) "As mentioned above we have received a letter from Daihatsu attempting to void our agreements with them (which we reject) while at the same time Mr Leon Kratsas is urging us to deliver a solution on an alternate hardware suppliers equipment." 591 On 13 July 1989, Pyramid again wrote to Daihatsu, with a copy to P M Sulcs (a document not tendered), prompting P M Sulcs to write to Mr Kratsas on 14 July 1989 (Exhibit A, doc 1187.1; supra: para 546ff). That letter, in turn, led to an exchange of correspondence between P M Sulcs and Pyramid, agreeing upon commission in the event of a sale to Daihatsu. I recognise that salesmen, like gamblers, are eternally optimistic. However, I cannot believe that such correspondence and contact would have persisted without some encouragement from Daihatsu. The meeting arranged for 30 November 1989 (which was then cancelled) is consistent with such encouragement. 592 Mr Kratsas, it must be recognised, was in a difficult position. He desperately wanted, on behalf of Daihatsu, an adequate system. If Fujitsu were not able to provide, within a reasonable period, a satisfactory alternative to P M Sulcs, he may need P M Sulcs. At the same time, Mr Kratsas was required to deal with the threat of legal action by P M Sulcs, and its insistent demands for payment. I am persuaded, as a matter of probability, that Mr Kratsas, in these circumstances, chose to take a hard line in correspondence, and a soft line in private discussion with Mr Hooper. The contrast between the stern tone of his letter to Fujitsu of 20 June 1989 (Exhibit A, doc 1163; supra: para 512ff), reaffirming the pact of silence between Daihatsu and Fujitsu, and Mr Kratsas having lunch the next day with Mr Hooper (supra: para 516), furnishes a dramatic illustration. I believe that Mr Hooper was encouraged to live in hope, and that hope was not entirely misplaced. 593 There was, of course, the danger that Mr Hooper would disclose to Fujitsu his private discussions with Mr Kratsas. That, indeed, occurred in the letter of 5 July 1989 (supra: para 540). From the viewpoint of Daihatsu, however, such disclosures were not necessarily a bad thing. They added to the uncertainty of Fujitsu, and the urgent need for Fujitsu to solve Daihatsu's problem. Ready, Willing and Able 594 Having dealt with the circumstances in which Daihatsu terminated its contract with P M Sulcs, I am now in a position to consider whether that termination was justified. P M Sulcs asserted that at all times it was ready, willing and able to fulfil its agreement with Daihatsu. Daihatsu has denied that assertion. P M Sulcs, of course, bears the onus. 595 I will now examine three issues identified by Daihatsu in which it can be demonstrated (according to Daihatsu) that P M Sulcs was not ready, willing and able to perform its various promises. The three issues are: (supra: para 15) · First, the conversion issue. · Secondly, the licence issue. · Thirdly, the finance issue. 12. CONVERSION OF THE SOFTWARE The Task 596 The task has already been defined (supra: paras 11 and 15). The P M Sulcs software was written in the Cobol language used by Wang. It was written for the operating system of that computer (Wang VS). It had to be converted to the C language, using the operating system known as UNIX. Daihatsu required a Relational Database, where data could be retrieved by SQL command (Structured Query Language). 597 No one doubted that the task was complex. But was it impossible, or impracticable? Before going to the evidence, it may be an advantage to describe more fully the nature of the task. The Conversion of Computer Languages 598 The function of a computer language has already been described (supra: para 8ff). Cobol is an acronym for COmmon Business Oriented Language. It is a language which (unlike certain other computer languages) resembles English. It was specifically designed for business application. It is adept at displaying numbers and text and therefore ideal for producing reports (Rosenberg: Aff. 29.11.00, para 5.1.14). 599 Computer languages, like natural languages, have a vocabulary and syntax. The designers of each language have produced a manual defining the rules of grammar, or the syntax, which the languages observe. 600 The C language is another high level language. It is a very concise language. It has only 64 words and a number of symbols. Professor Rosenberg provided a useful illustration of the differences between these two languages in the following simplified example (Rosenberg: Aff. 29.11.00, para 7.2). In Cobol the source code for a particular command would be written in the following way: " MULTIPLY RATE BY HOURS GIVING SALARY " 601 That would translate into an equivalent C code command written as follows: "salary = rate*hours" 602 The conversion task is the more difficult because words and symbols in a computer language may be combined in arbitrary ways. There is the danger that the conversion will be stilted, and there will be a loss of efficiency in the new language. Problems in the Conversion which was Contemplated 603 The conversion under contemplation involved problems additional to the usual problems of translation. The first arose from the difference between the Wang work stations and terminals used under UNIX. The Wang system used intelligent work stations, capable of significant independent operation. They could send or receive a screen to or from the Wang VS computer. The UNIX terminals had, by comparison, little intelligence. They were designed to send and receive a character at a time. A specific module known as a "screen handler" was required, effectively, to simulate the Wang work station in the UNIX environment. 604 The second major complexity arose in the context of information retrieval. The Wang system used ISAM files. ISAM is an acronym for Index Sequential Access Mode. The index provided a path to each file. It permitted both sequential and random access. Professor Rosenberg said this: (Rosenberg: Aff. 29.11.00, para 5.3.2.16) "It is common in COBOL programs to have many files and to write code which follows links between files …. These links may form arbitrarily long paths." 605 The Wang system can, in lay terms, be likened to a chain. It is necessary to pass along the chain to retrieve information (Musson: T.1765). The approach in a Relational Database was different. Professor Rosenberg described that method in these words: (Rosenberg: Aff. 29.11.00, para 5.5.1) "… Instead of defining individual files for each category of data (i.e. an employee file and a department file), the programmer defines all of the files as a single structure. This is called the database schema . The schema effectively defines all of the files for the system and all the relationships." 606 Again Professor Rosenberg provided a useful illustration of the difference between the Wang (ISAM) system and the Relational Database System (RDBMS): (Aff. 29.11.00, para 5.5.2) "Recall that in the example above using COBOL and ISAM files, in order to print the name of the department in which an employee worked, the programmer had to write a sequence of code to first retrieve the employee record and then use the department code from the record to retrieve the department record so that the name could be printed. Using an RDBMS it is possible to make a single request to the database system asking the department name for a given employee to be printed. Since the RDBMS knows from its schema that the employee record is related to the department record it is able to automatically undertake the procedure which had to be programmed in the original example." 607 The request for information from the Relational Database is called a "query". There is a standard database query language, called SQL (Structured Query Language). Access to the database is more direct. Significantly less code must be written by the programmer (Rosenberg: Aff. 29.11.00, para 5.5.3). The Conversion Process 608 Mr Musson described the conversion process in these words: (Musson: T.1765) "A. As a general rule, when one converted software from one language to another, one stripped out those parts that were specific to that language and/or specific to the hardware upon which it ran. So, for example, most software written in a proprietary code or Wang VS COBOL had a way of sending information to its screens and that was peculiar to the Wang. It was very advanced for its time. So that part of the software …. The screen handling part of the software would not translate and there was no point in trying to; so one stripped out, converted out; you put a character in front of the line of code referred to the screen handler and took it out. Similarly, with input and output. You didn't attempt to convert. You knew before you started that a conversion would be difficult, probably impossible, and at the end inefficient. Q. Sorry, input and output … A. Printing, say. And thirdly, file handling tended to vary. So, for example, you had, to my knowledge, ignoring relational matters, at least three different ways of writing information into a file. So that was taken out as well. Now, one then had a body of software with gaps in. The software was converted, I am speaking in general terms, and then the gaps filled." 609 The quote from Rapitech on 2 December 1988 (Exhibit A, doc 125) (supra: para 99) identified those parts of the Wang programme which were to be stripped away before conversion (a process referred to as "commenting out"). Differing Views from Experts 610 A number of experts were called. There were significant differences in the views expressed. Dr Tim Lamberton of Paradyne (who, in May 1989, provided a quote to P M Sulcs for the job of converting the software) (supra: para 413), said this: (Lamberton: Aff. 28.7.98, para 5) "5. Although Sulcs did not accept Paradyne's quotation, it is my professional opinion based on my experience that the said conversion was highly likely to be successfully completed within the specified time and for the amount quoted." 611 Mr Santa Maria, employed as the Technical Services Manager of P M Sulcs, said this: (Santa Maria: T.284) "A. … Then whatever functionality that we had in COBOL 85 and COBOL 75 had to work in C. It was a relatively simple process of getting the applications done. It was not rocket science." 612 Mr Musson, retained by the plaintiff, offered the following view, when cross examined: (Musson: T.1764) "A. … when I am moving from one dialect of COBOL to another - if you understand the term, dialect - it is not something to be undertaken lightly, but it is not difficult in the sense I think you are suggesting. Q. But C is not a dialect of COBOL . You know that, don't you. C is a completely different language, isn't it? A. I hope so, yes. Q. And moving from Wang VS COBOL to C is a very difficult, technical exercise, isn't it? A. It is a difficult exercise, but if by that you mean it is impossible, certainly not." 613 Mr Molloy, retained by Daihatsu, said this: (Molloy: Aff. 25.6.98, para 29) "In my opinion, it is highly unlikely that a suitable proven, tested automated tool was generally available in the late 1980s for the conversion of Wang VS COBOL to Unix C and thus it is unreasonable to assume that a conversion would have necessarily be (sic) undertaken and that the conversion would have been technically successful and economically feasible." 614 Professor Rosenberg, the Dean of the Faculty of Information Technology at Monash University, expressed the following view: (Rosenberg: Aff. 29.11.00, para 9.8) "It is my opinion that with the exception of the conversion from the use of ISAM files to the use of the Ingres RDBMS over which I have serious reservations, the proposed automatic conversion was theoretically possible in 1989. However, regardless of whether it was possible, automatic conversion was not a practical option. All of the issues identified above would mean that the conversion could not take place within a reasonable time scale and there would be serious concerns about the reliability, efficiency and maintainability of the resultant converted system." 615 Unquestionably, the conversion would be complex. It was not, as Mr Musson said, something to be undertaken lightly. Nonetheless, one can "over egg the pudding". There have been many successful conversions of software. Professor Rosenberg, in cross examination, said this: (Rosenberg: T.2041) "Q. Indeed, it is the case that conversions of the sort that we are talking about in these proceedings are undertaken regularly in industry conversions from one platform to another? A. Conversions from one platform to another, yes. Q. A conversion from Cobol to 'C' running under UNIX is the sort of conversion that has been done many times since the early 1980s, would you agree? A. I wouldn't necessarily agree with that, no. Do you mean automatic conversions or rewrite? Q. No, automatic conversions? A. They would - they were certainly done, yes." 616 Later Professor Rosenberg provided the following evidence: (Rosenberg: T.2057/8) " HANCOCK : Q. And of course it takes a long time to write a program from scratch, doesn't it? A. Yes. Q. That has been your experience? A. To completely develop a new application from scratch, yes. Q. So if you have got a changing environment, one way to get an application running under your particular operating system, for instance, Unix, is to go and find one that is running under another system and adapt it or convert it? A. Yes. Q. And that is what was happening in the late 80s and early 1990s? A. There were certainly people doing that sort of thing, yes. Q. And there were commercial people out there who made it their business to undertake these sorts of conversions? A. Yes." 617 Professor Rosenberg added: (T.2058) "Q. Did you ever have anything to do with commercial converters of software? A. No." 618 Mr Musson, on the other hand, was involved in that process. In 1985 he set up and ran the Software Industry Development Centre in the United Kingdom, on behalf of ICL (Musson: Aff. 7.4.98, p16). The Centre was directly involved in the porting of software. Similar centres were established in Australia and in South Africa. Mr Musson's CV states that the UK centre ported more than four hundred software packages to UNIX in a two year period. Mr Musson said this: (Musson: T.1763) "Q. You had never done a conversion from Wang VS COBOL into C? A. Let me be very clear. We did Wang VS - Wang VS COBOL to Microfocus COBOL was done quite commonly. COBOL , Microfocus COBOL to C was done, I have had that demonstrated to me very convincingly and I have no reason whatsoever to think there was any procedural problem of any kind, Mr Rares." 619 So the issue is not whether conversion is possible. It very often is. The issue is whether the conversion which P M Sulcs was bound to undertake could be done, and done on time. 620 In forming a view, I am hampered by the course taken by this litigation. The case, for one reason or another, stopped and started a number of times. The hearings occupied almost fifty days. The case began in November 1999. It came to an end on 30 April 2001. Dr Lamberton was called on 11 November 1999. Professor Rosenberg did not provide his affidavit until 6 November 2000, having been retained in October 2000. Professor Rosenberg's view, therefore, was not put to Dr Lamberton. Indeed, I had the impression after Dr Lambertson's cross examination that the conversion issue had largely disappeared from the case. I said as much to Counsel for the defendant (T.478ff). I was told, however, that it was still very much an issue. And so it became. 621 The plaintiff, in these circumstances, has submitted that the defendant ought not to be permitted to suggest that the automated conversion strategy of Dr Lamberton was "flawed". That suggestion was never made to Dr Lamberton. He was eminently well qualified to respond to it. The defendant left it to "the very last minute" to respond to this issue. It did so, even though it was an important issue, and one obvious from the outset. My attention was drawn to Hunt J in Allied Pastoral Holdings Pty Limited v Commissioner of Taxation [1983] 1 NSWLR 1 at 24D. If the defendant wished to pursue such a case, it was obliged, in fairness, to have Dr Lamberton recalled. It did not seek to do so. It, therefore, should not be heard to make such a submission (Plaintiff's subs in reply: 22.4.01, paras 82/91). 622 Unquestionably my task is more difficult because of the circumstances described by the plaintiff. There is an element of unfairness to the plaintiff and Dr Lamberton in the way in which the matter has unfolded. Nonetheless, the way in which the case evolved was not the responsibility of the defendant. I believe it was open to either party to insist that Dr Lamberton be recalled. I therefore believe the issues raised by Professor Rosenberg must be regarded as being before me. 623 Let me move to what I believe are some of the more important issues of concern to Professor Rosenberg. Could the Conversion be Achieved? 624 One of the specific problems which needed to be addressed was the requirement for a screen handler to simulate the Wang work station in the UNIX environment (supra: para 602). Professor Rosenberg described this as a "complex piece of software to develop". He elaborated as follows: (Rosenberg: Aff. 29.11.00, para 7.5.4) "… the Unix terminals are far more primitive than the Wang workstations and a significant piece of software would be required on the Unix computer to 'simulate' the intelligence of the Wang workstation. This would allow the converted program to still think that it is operating with Wang workstations, but in fact, these are being simulated using the new software." 625 Professor Rosenberg referred to the fax sent from Mr LaVerne Peters to Mr Maris Sulcs on 13 April 1989 (Exhibit A, doc 455.3) in which it was suggested that a "tech Whiz from Fujitsu" was dealing with this aspect. Professor Rosenberg added: (Rosenberg: Aff. 29.11.00, para 7.5.5) "… I would consider the development of the screen handler to be a quite complex task. I have been involved in projects which have required the development of similar products and, in order to produce a reliable result, many person months of work has been required. I also have concerns about the performance of the simulator in terms of speed of display of information. As indicated earlier, the screens on the target system operate much more slowly than those on the original Wang system." 626 Others did not see the same complexity. Mr Santa Maria, a person with considerable practical experience, said this: (Santa Maria: T.297) "A. … If the screen handler was taken out of the program itself, which is what we suggested, right, it was not a difficult task to do, it just meant that you built a separate program which everyone could call to, like you were doing in the Wang also, to have these sub routines that you could go and grab the screen and bring it in, basically what would happen is that it would take up less space and the programs would run a lot quicker, and in referring to this particular memo, where Laverne had come down from Canada to have a look at the application, we had sent a copy of our application over to Sticky Software, and we ran the application - they ran the application and we had a look at it as well, prior to this meeting, and the screens popped up. That was the first pass through. We checked the codes, with the rest of the analysts that we had on call. We looked at how long it was going to take, what was involved and it looked all right. That was for a very small program, and it looked great." 627 The reference by Mr Santa Maria to Sticky Software is a reference to the conversion tool for what has been termed "the first stage of the conversion process". It will be remembered that there were two stages to the conversion, although arguably they could be accomplished in the one step. They were: (supra: para 96) · First, the conversion of the Wang VS code (the Wang dialect of the Cobol language) to standard Cobol (sometimes referred to as ANSI standard Cobol or MicroFocus Cobol). · Secondly, the conversion of ANSI Standard Cobol to the C language. 628 Mr Musson gave the following evidence: (Musson: T.1765/6) "Q. … So, for example, let me take the web on which information was written on to a screen. There were commercially available screen handlers that you could buy. You could actually buy the software, the type of software that worked in, say, in the Unix environment and, say, painted a graphics screen or character screen, whatever you chose. These were off the shelf modules. You may have to twist them a bit to fit, but that was not difficult." 629 The quote from Sticky Software for the conversion included the sum of $5000 for the screen handler, presumably the cost of an available programme (Exhibit A, doc 128A). Dr Lamberton did not see the screen handler as a problem. He said this: (Lamberton: T.354) "Q. And in order to be able to use the program in the C language you would have to write a new part of the program for a screen handler? A. We already had one of those, sir, it was a program we developed some years before in a project we did for Liberty Life of which I was a director of. We built a screen converter which we already had in our possession. Q. What year did you do that? A. Which one? Q. Liberty Life? A. We started that in 1986. Q. Was that a conversion from Wang VS COBOL into C language? A. No, it was a data flex, which is a four generation language. With that type of program we could take a snapshot of the screen major and lock in behind that C image and create the C program, because of the interactive screen IO, input output." 630 I prefer the evidence of Mr Santa Maria, Mr Musson and Dr Lamberton, to that of Professor Rosenberg. The screen handler was not, as a matter of probability, an impediment to conversion. 631 Moving to the issue of the Relational Database, Professor Rosenberg said this: (Rosenberg: Aff. 29.11.00, para 7.6.2) "As indicated earlier, relational databases such as Ingres operate in a fundamentally different manner to ISAM files. … As shown above, the code of the system uses indexes to follow paths between the various files. With a relational database, these relationships are handled automatically by the database system." 632 Professor Rosenberg added: (para 7.6.3 and 7.6.4) "7.6.3 It would be possible to effectively 'simulate' ISAM files with the relational database by asking the database to perform each of the individual index operations separately. However, this would be very inefficient and would not be taking advantage of the power of a database. I would not consider this to be an acceptable approach to the conversion. 7.6.4 It is my opinion that undertaking the automatic conversion of the software in such a way that it avoids the 'simulation' approach would be extremely difficult. I am not sure that it is even possible. The difficulty lies in the fact that several lines of the original code (looking up a series of indexes) would need to be converted into a single SQL query. There are very significant complexities in such a task. I note again that this whole issue is not mentioned in any of the available documentation." 633 When giving evidence, Professor Rosenberg said this: (Rosenberg: T.2034/5) "A. … The difficulty is conversion from a number of linked statements of that form into a single statement. SQL is quite a complex problem. It is again this issue of being able to have the conversion system understand what was meant by that whole sequence and then generate an SQL statement that is equivalent. Because of the indefinite number of statements there, it is quite a complex problem to solve. HIS HONOUR : Q. Just so I understand that, is that at the stage of conversion, as opposed to adding it later? A. That's right. Here I was talking about totally automatic conversion. If there was an attempt to automatically convert, then I am not sure it would be possible to do that conversion. Q. If one were adding it later, converted what was there, having taken out the file aspect of it with the intention of adding the Ingres subsequently, what then? A. That is certainly possible. It is not a problem." 634 Mr Franks, the Systems Engineering Manager of Fujitsu, did not see this aspect as a problem. He gave the following evidence: (Franks: T.1390) "Q. Is this right, that you would have to reprogramme the application software to enable it to respond and then to respond in an optimum way to the Ingres database management system? A. Yes. It depends on the cleverness of your automation because you can, you could theoretically automate it to read the original and produce SQL as the result in the revised C code, but it is difficult to do because there are differences in the way the two work, so it may not be practical to make that conversion because of the complexities, and there are a couple of ways around it. You could then set up a piece of code that you manually write, which has SQL in it, which is referred to by the automated procedure and effectively replaces that original request so the original line of code gets replaced with a call to another piece of code, which has been manually written to perform what the original line of code wanted it to do." 635 Dr Lamberton intended to add the SQL commands after the code had been converted (Lamberton: T.363). Mr Musson said this: (Musson: T.1766) "Q. … Most relational databases come with a SQL front end, the way in. So if this is software written with SQL commands, I can have different databases from different manufacturers and I can plug one to the other with relatively little difficulty, because the combination, the handing over of information, one to the other, on the database of my choice, the software is taken care of by the standard SQL command language." 636 Elsewhere, Mr Musson gave the following evidence: (Musson: T.1906) "A. … The question about the Ingres database, if we have software with SQL international statements, which is a way of getting into the database, it is generally true that most databases had a SQL interface and there might have been very slight differences, but to all intents and purposes if you decided to put another database on the back, say Oracle made you a better offer, my belief is that at the time of which we are speaking, that would not have been technically difficult. It would not have taken any significant amount of time to have done that." 637 Professor Rosenberg saw no evidence that the technical issues concerning the Relational Database had been addressed (Rosenberg: Aff. 29.11.00, para 7.6.4). However, I believe that Dr Lamberton had considered this aspect. His design strategy included: (Exhibit A, doc 1033) "Define Objectives as they relate to the I/O structure, SQL statement definition, Entity and Attribute relationships as they relate to RDBMS's, screen handlers and program divisions including copy maps." 638 The design strategy included a number of other references to the Relational Database, and its incorporation into the system. Dr Lamberton had been involved in a number of conversions. In his quote to P M Sulcs on 11 May 1989, he said this: (Exhibit A, doc 1029) "The proposed strategy for this conversion will be similar to those implemented into our previous conversion exercises; namely the Dataflex to 'C' Converter and the Data General Business Basic to 'C' Converter." 639 Relational Databases were a significant technological advance in the storage and retrieval of information. It is likely that the conversions undertaken by Dr Lamberton involved Relational Databases. Whether that be right or wrong, I have little doubt, reading the strategy document, that Dr Lamberton had confronted the issue before. 640 The quote from Pacific Engineering also included a project plan. The plan identified the following phase in the project: (Exhibit A, doc 1088.3) Phase Action People "5. Produce Embedded SQL routines DGM/KFH - test interactive screen I/O with SQL - test data integrity and screen I/O interface P M Sulcs to accept screen & I/O compatibility on completion Testing & Report" 641 Mr Hooper also gave the following evidence: (Hooper: T.1668) "A. … There was a great deal of discussion between ourselves and Ingres regarding the database mapping, how the database should be mapped with Ingres." 642 I accept, as a probability, that the conversion of the P M Sulcs software was technically achievable. The real issue is whether it could be done within a reasonable time. The Time Required to Convert the Software 643 Dr Lamberton's company, Paradyne, provided a quotation to deliver a conversion tool within three months (29 May 1989 to 1 September 1989) for $144,000 (Exhibit A, doc 1030). Dr Lamberton gave evidence that it was highly likely that the conversion could have been completed on time, and within budget (Lamberton: Aff. 28.7.98, para 5). 644 I believe that Dr Lamberton was in a position to make a realistic appraisal. He was the Australian distributor for the conversion tool of Rapitech. He had, as mentioned, successfully built two other conversion tools commercially, namely the Dataflex to C converter and the Data General Business Basic to C converter (Exhibit A, doc 1029). He had, according to the plaintiff's submissions, academic qualifications to rival those of Professor Rosenberg (Plaintiff's subs in reply: 22.4.01, para 84.1). 645 Mr Franks, the Systems Engineer from Fujitsu, was required to make a technical appraisal of each system before it went to a client. It was his responsibility to form a view as to whether, from a technical viewpoint, the system was a reasonable business risk (Franks: T.1375). Mr Franks dealt with Dr Woodruff, the representative from Rapitech who came to Australia in April 1989 (supra: para 229). Having received a quote of $1 per line of code from Rapitech, Mr Franks formed an adverse view of the P M Sulcs conversion project (supra: para 410). His expectation as to the likely cost of the project had been formed upon the basis of the sample of code converted by Rapitech in December 1988. He had hoped that the quote may have been 50 cents a line (Franks: T.1395) (supra: para 409). The amount of $1 per line suggested a more difficult conversion, with a greater level of manual adjustment (supra: para 409). Nonetheless, Mr Franks said this: (Franks: T.1381) "Q. Did you form any view as to the risk in whether there would be an ability to do the job at a figure of $1 a line, as opposed to it costing more or less than that at the end of the day? A. I thought that it would be a reasonable business risk that $1 a line would do the job. So there is some risk that it would go over, but not undue risk." 646 He added, commenting upon Rapitech: (Franks: T.1381) "A. … I think that they could do the job and had the skills, but it would just be a lot more expensive than what we had been thinking that we might be able to do it for." 647 The system, once converted, would have to be retested. That would be "a few weeks work for a few people" (Franks: T.1384). 648 The cost per line was an index of the amount of manual intervention required (Franks: T.1396). Mr Franks provided a range. He said this: (T.1396) "A. … If it is, you know, if we are getting below 50 cents a line in terms of the cost of doing the work, then that means it is an easy conversion that is going very well. If it is up several dollars a line, or something like that, then it means it is a difficult conversion that is requiring a lot of effort to make it work." 649 Mr Franks also gave the following evidence: (Franks: T.1395) "A. … $1 a line would have been reasonable in general for conversions." 650 Professor Rosenberg took a different view. He believed that the time scale in the Paradyne quote (15 weeks) was quite unrealistic (Rosenberg: Aff. 29.11.00, para 8.4.1). The proposed 90% conversion would take at least forty weeks, and quite possibly longer (para 8.1.4). The manual modification which would follow (to deal with the 10% unconverted code) would also take time and be very costly (para 8.1.5). The quotation from Pacific Engineering suggested a time scale of twenty weeks. That was still quite unrealistic (para 8.2). There was, moreover, no evidence that Pacific Engineering had experience in the development of a conversion tool, although it would be assisted by Dr Tim Lamberton (Rosenberg: Aff. 29.11.00, para 8.2.2). Professor Rosenberg's estimate as to time was as follows: (Rosenberg: Aff. 29.11.00, para 9.8) "It is my opinion that, as a result of the identified issues automatic conversion could not have taken place in a time scale of under one calendar year and would probably take considerably longer than this, regardless of the number of people involved." 651 When cross examined, Professor Rosenberg was asked about his experience. He said this: (Rosenberg: T.2064) "Q. Because you have never worked in this commercial area, have you? A. In the Wang - in the commercial area? Q. Yes? A. No. Q. Your experience in Wang has been quite considerable in writing programming code in Wang Cobol back in the early to mid - 1980s? A. Yes. Q. I think you said you worked in the real world for one company in 1982-83? A. Is that correct. Q. Am I reasonably accurate about that? A. Yes. Q. You provide consulting services, have provided consulting services from time to time? A. Yes. Q. But your experience apart from that has been in the academic world? A. Yes." 652 That experience was the subject of comment by other witnesses. Mr Musson said this: (Musson: T.1864) "A. … Professor Rosenberg again has no qualifications except for a short period spent I think as an undergraduate working in a program house." 653 Mr Musson added: (Musson: T.1865/6) "RARES: Q. Did you read in paragraph 2.3 of his report that he said he had lead several research projects which involved language conversion translation? Did you read that? A. Yes, I did, yes. Q. You say that's got no bearing on his capacity to give expert evidence about the translation? A. He has led them. He is very senior academic. He has got Phd students who attend to - offer to do things. He doesn't say that he actually carried them out. He said, 'I have lead' and that is exactly what I would expect a person in his position to do. I certainly wouldn't expect him to take off his coat and be looking at the codes. We are talking about research projects which are done without regard in general to times and possibly not to cost because the costs would be absorbed by the university or sponsors. We are talking about something done commercially under commercial professors (sic) with commercial professional people involved at all times, not PhD students or undergraduates." 654 Daihatsu responded to these criticisms in its submissions. In a paper dealing with "The Problems of Conversion", Professor Rosenberg was described as "not a mere academic". The submission refers to his considerable CV and his practical experience. Professor Rosenberg, unlike Mr Musson, had examined the code which had been converted using the Rapitech tool. It was not, in his view, well written C code. 655 I accept that Professor Rosenberg could never be described as a "mere academic". He had relevant practical experience, though far less than Dr Lamberton, Mr Musson, Mr Franks and Mr Santa Maria. Professor Rosenberg provided a wonderfully lucid account of the problem in the paper attached to his affidavit. However, I believe his view on the difficulties involved in conversion had been coloured by his experience in supervising the research projects which he described in the following evidence: (Rosenberg: T.2074) "Q. When you were engaged in the projects which you have described, of writing conversions from the Pasquale and Leibniz language, those projects, first of all, that took several years to develop? A. The overall project, yes. Developing the conversion programme wasn't the entire period. Q. Was that a project, was the development of a conversion programme - first of all, were the two converters developed as parts of the one project? A. No, they were separate projects. Q. And in each project, the development of the conversion tool was a part of a larger project? A. Yes. Q. And each project, I think, according to your report, took several years? A. The overall project, yes. Q. Each overall project? A. Yes. Q. And the conversion tool was developed intermittently? A. No, it was a fairly solid phase of the overall project. Q. And those projects were funded by the university? A. Both of those projects were funded partly by the university and the Australian Research Council. Q. And by a grant? A. Yes." 656 Mr Molloy, the other expert qualified by the defendant, also came under attack. Mr Musson said this: (Musson: T.1864) "A. Oh, I read Mr Molloy's opinion but as I think I mentioned before, Mr Molloy is a chartered accountant not a programmer. He is not a computer person at all. I mentioned that Mr Molloy's view was from the helicopter rather than on the ground. So, he is here expressing an opinion which so far as I can see has no experience of writing software. He is an expert in many fields, I may say. He has covered many, many things. He has a handsome CV but none of it is the writing of software." 657 I believe that Dr Lamberton was in a unique position to make a realistic assessment. He combined both academic achievement and practical experience. I prefer the evidence of Dr Lamberton and Mr Musson. I believe that, as a matter of probability, the estimates provided by Dr Lamberton are more likely than those provided by Professor Rosenberg. 658 However, production of the conversion tool was but part of the process of converting the software. Once the conversion tool had done its job, the software still required manual adjustment, and supplementation. Mr Hooper estimated that the cost of that procedure could be $200,000 (Hooper: T.208). The defendant submitted that, at $40 an hour, that amounted to thirty man months (Daihatsu subs: para 5.102). However, I do not believe it is appropriate to approach Mr Hooper's estimate in that way. The hourly rates of Mr Santa Maria, and the programmers with whom he worked, were considerably in excess of the $40. The invoice sent by P M Sulcs to Daihatsu on 30 June 1989 specified the hourly rates of those involved as follows: (Exhibit A, doc 1171) Services Consultant Consultant … Mr Santa Maria @ $187.50/hr Project Mgr … Mr Santa Maria @ $150.00/hr Project Leader Mrs Karolyn Tse @ $150.00/hr Analyst … Miss Judy Lau @ $100.00/hr Programmer … Mrs Emma Co @ $62.50/hr 659 Whatever the basis of Mr Hooper's estimate, plainly considerable work was required. However, much of that work could be undertaken in tandem with work on the conversion (Santa Maria: T.291). The various diagrams prepared, representing the time scale for each phase illustrated the overlapping nature of each phase (Exhibit A, doc 128A, 455A). 660 Could the time frame contemplated by the project schedule (which formed part of the Analysis Report) (supra: para 271) be met? Had there been acceptance of the Paradyne quote, so that Dr Lamberton began work on 29 May, as planned, then the project schedule, or something closely approximating that schedule, may well have been achieved. 661 Had Daihatsu paid P M Sulcs the monies which, in my view, should have been paid under the agreements signed on 18 April 1989, then I believe it likely that the Paradyne quote would have been accepted, and that Paradyne would have begun its work as planned. 662 However, none of that occurred, for the reasons set out above. The quote of Pacific Engineering Systems International Pty Limited ("Pacific Engineering") presupposed a conversion tool within twenty weeks (Exhibit A, doc 1088.1). The Pacific Engineering quote was to be a joint enterprise between Dr Tim Lamberton, as Project Manager, and Mr McGuckin. No commencement date was specified. However, Mr Hooper wrote to Daihatsu on 9 June 1989, again seeking payment of outstanding invoices. His letter included these words: (Exhibit A, doc 1091) "… P M Sulcs has obtained a new proposal from the local tool supplier which schedules the tool completion by the 18th of November, 1989 if they are authorised to commence on 3rd July, 1989." 663 Mr Hooper, on the question of delivery, made the following remark to Mr Maris Sulcs in Canada in his fax of 6 June 1989: (Exhibit A, doc 1084.2) "In legal terms P M Sulcs' contractual obligation was to deliver a system in the future whenever that may be." 664 That was an incautious remark, which Mr Hooper lived to regret, when cross examined. There plainly was an obligation to deliver and install the converted software in a timely way. Mr Hooper made various attempts to explain the remark, none very convincing (cf Daihatsu subs on Mr Hooper's credit, para 1.9 to 1.12). He acknowledged, however, that Mr Kratsas expected the system by late 1989, and he believed that could be done (Hooper: T.115). 665 I do not believe it can be said that P M Sulcs evinced an intention not to be bound by the contract (cf Fullager J in Carr v J A Berriman Pty Limited (1953) 89 CLR 327 at 351; Deane and Dawson JJ in Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Limited (1989) 166 CLR 623 at 658-659). Indeed, Mr Hooper saw very clearly that the future of P M Sulcs was dependent upon his contract with Daihatsu. P M Sulcs had burnt its bridges with Wang (Hooper: Aff. 2.1.98, para 67 and Aff. 15.11.99, para 19). P M Sulcs was committed to the success of the project. If there had been waiver of the right to immediate payment in May 1989 (cf Daihatsu's subs: para 6.36.4) (when Mr Hooper, at Mr Kratsas' urging, agreed to look to Fujitsu for payment, upon the basis that Daihatsu would make arrangements with Fujitsu), Mr Hooper again insisted upon adherence to the conditions of payment in June. Had Daihatsu paid, I believe it probable that Pacific Engineering would have been retained. Had that occurred, I think it probable that conversion would have been achieved in broadly the time frame of twenty weeks or a little more. 666 Now, delivery, according to that time frame, significantly departed from the Project Schedule in the Analysis Report. However, in determining the point at which a party may be said to have evinced an intention not to be bound, one must, I believe, have regard to the subject matter of the contract, and the presumed intention of the parties (Carter & Harland: Contract Law of Australia 3ed, p679 para 1950ff). There was no express term which made time of the essence. Nor do I believe it reasonable to construe the references to time as though time were of the essence. The Project Schedule was based upon time estimates for the accomplishment of particular phases of a complex task. Mr Kratsas gave the following evidence, which I believe to be the common understanding of both parties: (Kratsas: T.1045/6) "A. … Keep in mind, sir, that there were discussions on schedules from December, probably earlier than that. Like all schedules in computers, I have never seen one that actually is actually consummated, or actually becomes fact. Unfortunately in the computer industry, their definition of time versus the definition of time for most of us mortals, are very different." 667 Time schedules are like barristers' estimates of the length of a case. One hopes and expects them to be accurate. However, it must be recognised that one is dealing with an estimate of something which is inexact. (For instance, the estimate for the hearing of this case was three weeks). I accept, as a probability, that making the assumptions which I have identified, namely payment by Daihatsu and retention of Pacific Engineering, the system was capable of being delivered, and would have been delivered in late 1989, as Mr Kratsas hoped and expected. 668 These observations are made subject to the finance issue, which I will consider below. 669 Before leaving the issue of conversion, however, I should deal with one submission by Daihatsu which had some attraction. The submission was as follows: (Daihatsu subs: para 5.151) "… But, if it were truly the position that the Conversion was not seen as difficult or risky in 1989, why, if it were truly ready, willing and able did Sulcs not finance it, save the deal and move on to the millions or billions of dollars of glory it now claims or once claimed? Because, one might think, Fujitsu and Sulcs baulked for the reason that Conversion was fraught with expense and difficulty. Each voted with its feet not to proceed, because of the risks and because neither was ready, willing or able to carry out any obligation owed to Daihatsu in contract to supply the Converted Software." 670 The question was in fact put to Mr Hooper, and he responded in the following way: (Hooper: T.74/75) "Q. And you are now suing Daihatsu claiming economic loss of $230-odd million plus interest in this case because you say you did not have the opportunity of converting this software into a C language and having a reference site, is that right? A. That is correct. Q. Is that because there was nothing about your particular programme that really made it commercially worthwhile to go ahead and take the commercial risk at the end of 1989 of converting it to C language that you did not do that conversion? A. There were a lot of things about our programme that meant we should have done that and we ought to have done but without a reference site and with the knowledge of the market place that we had effectively been locked out of Daihatsu, our reputation was sullied and it was very difficult to interest any large company that would have a reference site to get involved with your company. This is merely - you are now talking six to nine months after we were locked out and all our competitors were quite happy to tell everybody about that. …" 671 I accept Mr Hooper's explanation. 13. THE LICENCE ISSUE The Presentation of the Licence Issue 672 The plaintiff's Statement of Claim asserted "an Agreement with the defendant to grant and accept a non-exclusive Licence to the Material and Customer Control Computer System" (para 3). The plaintiff further alleged that it "was ready, willing and able to, or did, after 17 April 1989, licence the defendant" (para 4). 673 The defendant admitted having "entered into the Programme Licence Agreement" with the plaintiff. The response to paragraph 4 was in these terms: (Amended Defence) "3. As to paragraph 4 of the Amended Statement of Claim, the Defendant: (a) denies the matters alleged in that paragraph; (b) says that, pursuant to the terms of the PLA, the Plaintiff was required to provide the Defendant with a licence to use certain programs for use on certain equipment made by Fujitsu Limited (the 'Programs'); (c) says that at no material time was the Plaintiff ready, willing and able to provide the said licence to the Defendant; and (d) says that at no material times did the Programs exist." 674 In further response to paras 3 to 18, the defendant asserted "that the plaintiff was wholly unable to perform its obligations under each of the Program Licence Agreement and Software Maintenance Agreement" (para 18). 675 In these circumstances, the plaintiff made the following submission: (Plaintiff's subs in reply: 22.4.01) "55 By conceding that it did enter into the licence agreement, DAP has extinguished the 'ready, willing and able' issue raised by PMS. The issue that it now seeks to agitate is raised by its own Defence , namely that the software did not exist, and thus PMS 'was never willing to provide the required licence'. As will be explained below, this amounts to an allegation of defective performance, not to lack of readiness and ability to perform. 56 Since it has admitted that PMS did, in fact, enter into the licence agreement, DAP cannot now be heard to say that these allegations (in paragraphs 3(c) and (d) of the Defence) operate as a simple joinder of issue on the allegation in paragraph 4 of the Statement of Claim. Furthermore, as we submit below, DAP has picked up these same allegations in paragraphs 18-21 which raise an alternative defence which it undeniably must prove. 57 In short, DAP now impugns the licence granted by PMS. It concedes the existence of the licence agreement, but then positively alleges that it was ineffective to grant the rights that PMS was obliged to grant under its contract to supply the MCS Software to DAP." 676 The defendant challenged that analysis. It had joined issue with the plaintiff's assertion that it was ready, willing and able. The words of Isaacs J in Maynard v Goode (1925-26) 37 CLR 529 were therefore apposite. Isaacs J said this: (at 540/541) "… Every plaintiff suing at law on a special contract must aver, and, if the averment be denied, must prove, that he has performed or has been excused from performing all things precedent, and that he is ready and willing - which includes ability - to perform all things concurrent or subsequent which the contract binds him to perform ( Cohen & Co v Ockerby & Co (1917) 24 CLR 288 at 298)." 677 The plaintiff drew attention to the reference by Isaacs J to "a special contract". This was not a special contract. The defendant, by way of rejoinder, referred to a number of cases where the rule had been applied more widely (Daihatsu subs: Conspectus 24.4.01, para 40). 678 I do not believe this case turns upon the onus of proof. I will shortly go to the evidence. I am prepared to approach that evidence upon the basis that the plaintiff has the onus of proving that it was ready, willing and able. Being "able" meant that the plaintiff needed to demonstrate that it was in a position to confer a Software Licence to the MC2 software as it purported to do on 18 April 1989. That, in turn, gave rise to a number of issues. Who owned the software? Had the owner or owners conferred authority upon P M Sulcs to grant such a licence? The Evidence of Mr Hooper 679 Counsel for the plaintiff complained, with some justification, that the defendant had failed to comply with Pt15 r13(2) of the Supreme Court Rules. That Rule requires a defendant to plead specifically any matter which made the plaintiff's claim "not maintainable, where the plaintiff may otherwise be taken by surprise" (Plaintiff's subs: 22.4.01, para 62). The defendant, for its part, was incredulous that the plaintiff had not appreciated the issue, given that there were Federal Court proceedings by the plaintiff against another party, where the issue had been raised (Daihatsu subs: para 5.121). I will refer to the Federal Court proceedings below. 680 The issue surfaced, or at least, achieved some prominence, part way through the case. On day 11, Mr Hooper provided a supplementary affidavit. That affidavit included the following: (Hooper: Aff. 15.11.99, para 8) "To the best of my knowledge, in 1984 PMSC granted to PMS an exclusive licence in writing to PMS to distribute the MCS Software in Australia, New Zealand and Asia and the Pacific. The Plaintiff does not have a copy of that document. The Plaintiff conducted no significant business other than the provision of the MCS software and services to customers using that software." 681 The defendant objected to the plaintiff relying upon that affidavit (T.467). The affidavit also exhibited the surviving financial records of P M Sulcs, and provided an explanation for the absence of certain records. This material made it pointless to proceed with the plaintiff's case on damages. The affidavits filed by experts had not been framed with that material in mind. 682 The issue then arose whether the defendant's witnesses on liability should be called before the plaintiff had completed its case on damages. The defendant resisted such a course. Amongst other things, Mr Rares SC, appearing for Daihatsu, foreshadowed a letter of request directed to the Canadian courts "to flush out" certain documents. Mr Rares said this: (T.476) " RARES : Yes, but what we are now talking about is being able to go to Canada and get evidence of, perhaps, the whole picture of the relationship of which only some has now been available to us on critical events, at the relevant time, not just about licenses and whatever, but if we are going to issue a letter of request we no doubt want to make it comprehensive to catch other matters …" 683 On 17 November 1999, I refused the plaintiff's application to use the remaining time set aside for the case in dealing with the defendant's witnesses on liability (Judgment No. 1: 17.11.99). The case was then adjourned until February 2000. By reason of my involvement in another trial, it could not proceed at that time. It ultimately resumed on 14 August 2000. Upon its resumption, an application was foreshadowed by the plaintiff to call secondary evidence from Mr Hooper in relation to Head Licence Agreement (said to have been executed by P M Sulcs Canada in favour of P M Sulcs, the New South Wales company). 684 In support of that application, the plaintiff relied upon a series of letters between Oliveri Attorneys, acting for P M Sulcs, and Canada. On 1 December 1999, the solicitors directed a letter to P M Sulcs Limited, Canada, making a request in these terms: (Exhibit E) "The existence of this Head License Agreements is confirmed by correspondence between yourselves and Baker & McKenzie (Sydney) during the mid 1980's however, an extensive search of our clients' files and those of Baker & McKenzie (Sydney) have failed to locate a copy of same. As you were a controlling director and your firm held a 50% shareholding in PMS during this period, would you please be so kind as to search your records for a copy of the Head License Agreement and fax a copy to the writer as soon as possible at Fax No: 011 612 93317027." 685 Mr Maris Sulcs wrote back on 1 December 1999, as follows: (Exhibit E) "We acknowledge receipt of your FAX . The document you have requested is in an off site archive and will take several days to retrieve." 686 P M Sulcs Canada then consulted lawyers. They adopted a different approach. They wrote back the same day (1 December 1999), refusing the request for information until certain royalty payments, said to be outstanding, had been paid. 687 Correspondence then passed back and forth. Clarification of the claim for royalty payments was sought, and at the same time, the Canadian solicitors were pressed for the production of the Head License Agreement. Ultimately, a demand was made by the solicitors for P M Sulcs Canada for $75,000, after which "we have instructions to forward the document in question to you" (Exhibit E: letter 14.12.99). Oliveri Attorneys responded, but their letter was ignored. 688 The plaintiff's solicitors also wrote to the other shareholder, Cullen Detroit Diesel-Allison British Columbia Ltd. The request was framed in identical terms. The company responded on 17 December 1999 as follows: (Exhibit E) "At this time it is difficult and expensive for us to locate a document that was possibly written 16 years ago and most likely (if it ever existed) stored at least 10 years ago. Without reasonable compensation for this search, we are not interested in looking for a document that may or may not exist." 689 A further letter asking for the urgent production of the Head Licence Agreement, sent on 21 December 1999, was ignored. 690 Against this background, application was made for the admission of secondary evidence from Mr Hooper concerning the terms of the Head Licence Agreement, which he claimed to have seen. I gave judgement on 22 August 2000 (Judgment No. 3) permitting such evidence. 691 Mr Hooper was then called. It will be remembered that he began with P M Sulcs, as its Manager, in April 1987. He said that shortly after his commencement, he saw the Head Licence Agreement. He read it for perhaps ten or fifteen minutes (Hooper: T.775) on one occasion only (T.771). He described the circumstances in which it came to his attention in these words: (Hooper: T.771/2) "A. … Mr Maris Sulcs was giving me instructions as to my job and tasks ahead, one of which was the licensing of the Tutt Bryant Industries trading as Detco in a sublicence agreement and Mr Sulcs showed me the sublicence agreement that had been entered into between the plaintiff and CLAE Engines Pty Limited which is a company that Detco had just purchased and wanted to assign the licence to themselves and the agreement the (sic) come apart. On reading the document it was titled a sublicence and I asked Mr Sulcs whether (there) was a head licence and he said to me yes there was and I asked whether I could see it and he said yes and he had a file. He opened the file and showed me a document which I read. Q. And that document was between which parties? A. The two parties were P M Sulcs & Associates Limited of Burnaby, Canada, and P M Sulcs & Associates Pty Limited. Q. Do you recall whether or not the document was signed by any parties? A. The document was signed and dated. Q. And you recall what date the document bore? A. March 1984. I don't recall the day in March but it was March 1984." 692 Mr Hooper added: (T.772) "Q. Do you recall what names were used to identify the signatures of the persons who had obtained or signed the document? A. Yes the same parties had sign (sic) for P M Sulcs & Associates Pty Limited, the Australian company, and P M Sulcs Limited, the Canadian. The two parties were Maris Sulcs and Peter Sulcs and both of them witnessed each other and the common seals of P M Sulcs New South Wales Pty Limited, P M Sulcs & Associates Pty Limited and P M Sulcs & Associates Limited were affixed near the signatures." 693 Mr Hooper recalled the following terms: (T.773) "Q. And dealing with each of those, what do you recall? A. I recall that the territory was Australia and New Zealand and other countries as agreed between the licensee or licensor. But the term was 50 years from the date of execution and the payment or payments to be made I recall related to tax and charges that the licensor may be charged, would have to be paid for by the licensee." 694 The software was identified as follows: (T.773) "Q. And in what way was the software identified, what were the words as you recall? A. The material and customer control system, purchase orders, accounts payable with the receivable job costs, fixed assets, general ledger." 695 Mr Hooper said that he had made a search for the document, but was unable to find it (Hooper: T.786). He had, however, located a number of documents which related to the licence issue. These became Exhibit D. Exhibit D included a subpoena addressed to the solicitors for P M Sulcs, Baker & McKenzie. The subpoena required the production of, amongst other things, the following: (Exhibit D, p99) "1. All documents evidencing or recording the terms of a licence entered into in about 1984 between P M Sulcs & Associates Limited and P M Sulcs & Associates Pty Limited in respect of the distribution of MCS Software in any or all of Australia, New Zealand, Asia and the Pacific." 696 Baker & McKenzie produced an unexecuted document headed "Licence Agreement for use of PMS Software". The agreement was in the name of "P M Sulcs & Associates Limited (PMS)", a reference to the Canadian parent of the plaintiff. Provision was made for the insertion of the name of another party, and the computer software to be licensed. The document produced did not identify the software. However, it included the following: (Exhibit D, p 103) "13. The Licensed Software and the original and any copies thereof, in whole or in part, and all trade secret, copyright, patent and other intellectual and proprietary rights therein, are and remain the valuable property of PMS." 697 By clause 34, PMS warranted that it had developed, owned or possessed all rights and interest in the licensed software. 698 When giving evidence, Mr Hooper was invited, by reference to the document, to indicate whether particular issues were dealt with in the document he saw. No objection was taken to that course, although Daihatsu in its submissions, referred to his responses as being "assisted" (Daihatsu subs: Credit of Mr Hooper, para 4.1). By this means, Mr Hooper recalled that a number of topics were dealt with in the Head Licence. 699 Mr Hooper's evidence was described by Daihatsu as "remarkable" (Daihatsu subs: para 5.123). Elsewhere it was said to be "just unbelievable" (para 5.127). The inference should be drawn, according to the Daihatsu submissions, that Mr Hooper had "made up the story to bolster a case which he knew to be false" (para 5.136). 700 Before dealing with the arguments of Daihatsu in support of these submissions, I should refer to the evidence. Was there a Head Licence? 701 Peter Sulcs of P M Sulcs Canada came to Sydney in December 1983 to investigate the establishment of an outlet in this country. On 21 December 1983 he wrote to the Canadian consul in these terms: (Exhibit D, p1) "… We identify a significant market as well as a lack of sophisticated products to meet the users' needs." 702 Mr Sulcs added: "… Accordingly, P M Sulcs will be establishing its own software sales and support organization directly. …" 703 A company, P M Sulcs & Associates Pty Limited, was to be established, with the shareholding divided as follows: (Exhibit D, p2) "Ownership is to exist fifty (50) percent PMS Enterprises Ltd and fifty (50) percent Cullen Detroit Diesel Allison Ltd, both here in Canada. The directors should total four: Peter Sulcs, Maris Sulcs, Allen Cullen and Robert Cullen." 704 Baker & McKenzie, solicitors, were retained. On 3 February 1984 a memorandum was sent by that firm to P M Sulcs Canada. It dealt with the incorporation of P M Sulcs & Associates Pty Limited and certain draft licence agreements which had been furnished. The memorandum included these words: (Exhibit D, p28) "(A) We are now reviewing the license and sub-licence agreements which you forwarded to the consulate and will provide our comments shortly. It would help in relation to our review if you would outline the following for us: …" 705 There followed a number of specific enquiries. The letter concluded with these words: "We have considerable experience in relation to matters similar to your own and would be happy to assist you in any way we can. One area which springs to mind is that of setting up the most tax effective structure but this can be discussed at a later stage." 706 On 10 February 1984, Baker & McKenzier provided advice to P M Sulcs by letter. The advice included the following: (Exhibit D, p35) "We have reviewed the agreements in terms of their conformity to Australian law and practice. Although a detailed discussion should await our meeting with Mr Sulcs, we have set out below our preliminary comments. (i) The Head License From our telephone conversation, we understand that the Head License is to be entered into between P M Sulcs & Associates Ltd and the Australian company, P M Sulcs & Associates Pty Ltd. We have reviewed this Head License to ensure that its provisions correspond to those in the Sub-License so that there is no inconsistency between the two, and no unintended liability of the local newly-incorporated company. (ii) The Sub-License The Sub-License is of more immediate concern having regard to the negotiations now taking place between yourselves and Clae Engine Pty Ltd." 707 Clae Engine Pty Ltd was negotiating the purchase of software and a licence to use that software. On 3 February 1984, the solicitors for Clae Engine Pty Ltd wrote to Baker & McKenzie in these terms: (Exhibit D, p30) "1. As the agreement is a sublicense I would be grateful to receive a copy of the head agreement. 2. I request the insertion of the following clauses. a) PMS warrants that it has full power and authority to grant the rights granted by this agreement to the Sublicensee with respect to the sublicensed software by reason of prior agreement with (Head Licensor's name) and that the licence to and use by the customer (including the copying thereof) will not in any way constitute an infringement or other violation of any copyright …" 708 One of the documents located by Mr Hooper was a copy of the Sublicence Agreement between P M Sulcs & Associates Pty Limited (the Australian company) and Clae Engine Pty Ltd, dated 27 March 1984. The agreement included the following recital: (Exhibit D, p54) "A. PMS owns or licenses from other parties certain proprietary computer software." 709 The agreement included a schedule in which the software modules were identified, as well as the licensor. Amongst the modules being purchased by Clae Engine Pty Ltd was the Material Control System. P M Sulcs & Associates Limited (the Canadian company) was named as Licensor (Exhibit D, p69). 710 Also amongst the documents produced by Mr Hooper, were certain notes headed "Comments on PMS Head Licence Agreement" (Exhibit D, p6), and a memorandum of fees (dated April 11, 1984) from Baker & McKenzie. The latter included a description of the services provided by that firm in these words: (Exhibit D, p84) "Review of licensing agreements, conferences and telephone conferences with Maris Sulcs, Rocky Cassaniti, Clae solicitors concerning same; redrafting of agreements; conferences with Maris Sulcs concerning setting up business in Australia from corporate and tax perspectives; …" 711 The expenses of setting up P M Sulcs in Australia were shared by P M Sulcs Limited and Cullen Detroit Diesel Allison Limited (Exhibit D, p86). 712 A number of things emerge from this material. First, P M Sulcs Canada, was, as you would expect, conscious of the copyright issue when it established its Sydney office. Secondly, it sought and received expert advice. Although the documentation is incomplete, the account of Baker & McKenzie would suggest that the licence issue was addressed. The documents also suggest that the Head Licence was between P M Sulcs Limited (Canada) and the plaintiff, as Mr Hooper deposed. 713 The actions of P M Sulcs thereafter are certainly consistent with its having the authority of the copyright owner to licence the use of software. It insisted upon the execution of confidentiality agreements by those who had access to that software (supra: para 34). The standard form contracts which it used included a recital that it owned, or had licensed, the software (supra: paras 38, 41). It provided prospective customers with a corporate profile of both P M Sulcs Canada and Cullen Detroit Diesel Allison Limited (supra: para 102). It circulated a client list and pamphlets concerning the MC2 software produced in Canada (supra: para 111). 714 Both the plaintiff (Plaintiff's subs: p54, para 15) and the defendant (Daihatsu subs: para 5.116) refer to "implying a licence". I do not believe, however, that it is a matter of implying a licence (cf S Ricketson, Law of Intellectual Property: Copyright, Designs and Confidential Information (2nd ed), para 14.435-14.440). Rather, the issue is whether I am satisfied that P M Sulcs had the authority of the copyright owner to grant the licence which it purported to grant to Daihatsu. Satisfaction would ordinarily arise upon the production of the Head Licence Agreement. Here, proof depends upon either an acceptance of Mr Hooper's evidence, or upon inference that there was in existence an appropriate Head Licence, or the two in combination. In respect of the latter, the plaintiff pointed to the following circumstances supporting such an inference: (Plaintiff's subs: p54, para 15) "15.1 PMS was a wholly owned subsidiary of its Canadian parent at the time, and had no other business than licensing the MCS software. 15.2 There is nothing in the correspondence in May 1989 to Mr Hooper from Mr Maris Sulcs in Canada which shows any concern about the right of PMS to enter into contractual relations with DAP or to convert the software. In fact, Mr Sulcs wanted to know whether DAP had made any payments and wanted to know 'when can I expect to receive some of it?' 15.3 Mr Hooper was the CEO of PMS, and reported regularly to Canada. 15.4 PMS had licensed the Wang version of its software to several companies in Australia. 15.5 Mr Alan Spetch and Mr Laverne Peters came from Canada to Australia in April 1989 specifically for the purpose of advancing the contract with DAP." The Daihatsu Submissions 715 The Daihatsu submissions drew attention to the Copyright Act, 1968. They said this: (Daihatsu subs: para 5.118) "5.118 Ownership of copyrights is specifically dealt with in the Copyright Act 1968 (s35). It is an essential matter that needs to be proved by a plaintiff when suing for infringement (s115). Further, an exclusive licensee, upon proof that it has such a licence, is able to maintain proceedings (ss118-125; see the definition of 'exclusive licence' in s10 of the Copyright Act 1968 ). Although these proceedings are not concerned with copyright infringement, it is just as imperative for Sulcs to establish its entitlement to sue." (footnotes added) 716 The attack upon Mr Hooper's evidence was made upon a number of bases. First, it was part of a general attack in which Mr Hooper was described as "a liar", "slippery" and "unreliable". I do not, however, share that view. I do not believe the evidence suggests that Mr Hooper was a liar, slippery or generally unreliable. 717 Secondly, it was said that, after 13 years, and having seen the document for no more than 10 or 15 minutes, the "photographic accuracy" of Mr Hooper's evidence was "just unbelievable". Again, I find an element of hyperbole in that submission. Mr Hooper's recollection was hardly photographic. The details he could remember were spare. 718 Thirdly, Daihatsu suggested that the evidence of Mr Hooper should be rejected in the light of material emerging from the Federal Court proceedings, to which reference has been made. I will therefore now deal with those proceedings. The Federal Court Proceedings 719 P M Sulcs made an application to the Federal Court on 29 April 1997 that a number of parties, including Detroit Diesel-Allison Australia Pty Limited ("Detroit Diesel"), be restrained from infringing its copyright in certain computer programmes. The programmes included the Material Control System (Exhibit 10). 720 A Statement of Claim was thereafter filed. P M Sulcs Canada was named as fifth respondent. The Statement of Claim made the same assertion as made by Mr Hooper in these proceedings, namely, that the owner of the copyright was P M Sulcs Canada (para 5). The Statement of Claim then included the following: (Exhibit 10, Statement of Claim para 6) "6. By an agreement in writing made on or about 26 April 1990 the fifth respondent, as owner of the said copyright, authorised the applicant as licensee, to the exclusion of all other persons, to grant licenses for the use of the said computer programs, and other rights in relation thereto, in Australia and in other countries. In the premises the applicant is the exclusive licensee of the said copyright." 721 Particulars were furnished. They made no reference to the Head Licence Agreement described by Mr Hooper. 722 The Defence of Detroit Diesel, having made certain admissions, which are not material, denied paras 5 and 6. The following was also alleged: (Exhibit 10, Defence para 24) "24 In further answer to the whole of the statement of claim the First Respondent says: (a) that by software licensing agreement made 31 March 1990 between P M Sulcs & Associates Limited, the Fifth Respondent, and Cullen Detroit Diesel/Allison Limited ('CDDA') those parties agreed that CDDA has the exclusive rights to sell the computer programs referred to in the agreement to Detroit Diesel distributors and that the Fifth Respondent is excluded from selling the computer programs to Detroit Diesel distributors. (b) that the First Respondent is, and the Second Respondent was, prior to the sale of its business undertaking to the First Respondent, a Detroit Diesel distributor. …" 723 P M Sulcs was not, according to the respondent, an exclusive licensee of the copyright. 724 Mr Hooper filed an affidavit in the proceedings, dated 28 July 1997. He exhibited a number of documents to the affidavit. These documents were tendered by Daihatsu (Exhibit 7). They included the correspondence between Mr Hooper and P M Sulcs Canada, culminating in the agreement by P M Sulcs Canada and Cullen Detroit Diesel-Allison Limited (Canada) to sell the shareholding of the Australian company to Mr Hooper and his private company, Bedor Limited (registered in Hong Kong). 725 It is apparent from this material that there was disagreement between the two shareholders of the Australian company concerning the wash up of the Australian venture. On 26 February 1990, Mr Maris Sulcs wrote to Mr Hooper in these terms: (Exhibit 7, p126) "Consider this. Cullen owes me a fair amount of money concerning Pty. Given a number of items they and I have to resolve, I could have full ownership of Pty by the end of the week. …" 726 "Pty" is a reference to P M Sulcs Pty Limited, the New South Wales company. 727 Mr Sulcs then set out a proposal. The correspondence passed back and forth with proposals and counter proposals. Mr Hooper wrote on 27 February 1990 with a proposal which included the following: (Exhibit 7, p128) "The Australian company has the exclusive distribution rights to market and modify the Canadian companies software & products in countries outside Canada, United States of America, Europe etc until the year 2010." 728 The Canadian company was to receive a 15% royalty payment (Exhibit 7, p128) under Mr Hooper's proposal. 729 On 19 March 1990, Mr Maris Sulcs again wrote to Mr Hooper. His letter included the following: (Exhibit 7, p134) "There is the smell of blood and the negotiations are not going too quickly with CDDA. Your rush to come here has not helped." 730 On 31 March 1990 two agreements were executed. The first was an agreement between P M Sulcs & Associates Limited and Cullen Detroit Diesel-Allison Ltd. It was in these terms: (Exhibit 7, p370) " AGREEMENT between P M SULCS & ASSOCIATES LTD and CULLEN DETROIT DIESEL/ALLISON LIMITED (and/or successor company or successor owners) regarding use of computer software dated and effective March 31, 1990. CULLEN DETROIT DIESEL/ALLISON LIMITED (CDDA) agrees to allow P M SULCS & ASSOCIATES LTD (PMS) unlimited unrestricted usage of its proprietary computer software known as "Material Control System". The only exception to this unlimited unrestricted usage is any Detroit Diesel distributor. PMS shall not have rights to sell this CDDA software to this select group of companies. CDDA will provide to PMS the source code for their current version of this "Material Control System" software. PMS agrees in return to allow CDDA the same unlimited unrestricted usage of its proprietary computer software presently operating at CDDA . This unlimited unrestricted usage by CDDA will be within the same specific group of companies that PMS may not sell to. CDDA will only sell this PMS software to Detroit Diesel distributors. This software includes: General Ledger Fixed Assets Accounts Payable Accounts Receivable Payroll Purchasing General Ledger Report Writer CDDA agrees that in consideration for signing this agreement that they relinquish to PMS their claim to ownership of the computer software product known as 'Job Costing'. PMS agrees that resultantly CDDA have the same unlimited unrestricted usage of this Job Costing software to Detroit Diesel distributors as outlined previously for the other specified PMS software." 731 On the same day an agreement was executed between the following parties for the sale of P M Sulcs & Associates Pty Limited (the New South Wales company): (Exhibit 7, p356) " BETWEEN P M SULCS & ASSOCIATES LTD a company incorporated in the Province of British Columbia in Canada of Suite 201, 4240 Manor Street, Burnaby, Canada ('the First Vendor'). AND CULLEN DETROIT DIESEL/ALLISON LTD a company incorporated in the Province of British Columbia in Canada of 9300 - 192nd Street, Surrey, Canada ('the Second Vendor'). AND BEDOR LIMITED a company incorporated in Hong Kong of Suite 702, Tower 1, Admiralty Center, 18 Harcourt Road, Hong Kong ('the Purchaser). AND P M SULCS & ASSOCIATES PTY LIMITED a company incorporated in New South Wales, Australia whose registered office is Unit 2, 220 Willoughby Road, Crows Nest, New South Wales, Australia ('the Company'). AND ALLEN CULLEN of 5640 Larson Place, West Vancouver, British Columbia, Canada. AND ROBERT CULLEN of 1424 Bramwell Road, West Vancouver, British Columbia, Canada. AND MARIS SULCS of 3910 Bedwell Bay Road, Belcarra, British Columbia, Canada. AND PETERIS SULCS of 16 Cranleigh Court, Islington, Ontario, Canada." 732 The agreement contemplated the execution of a further agreement, a Distribution Licence Agreement. It said this: (Exhibit 7, p359) "5.4 Any income derived from the sale of Licensed Programs a defined in the Distribution License Agreement between First Vendor and Purchaser through any party shall be subject to all the conditions covered in 5.1, 5.2 and 5.3." 733 The Distribution Licence Agreement between P M Sulcs & Associates Limited (P M Sulcs Canada) and Bedor Limited was executed on 26 April 1990 (Exhibit 7, p261ff). It granted Bedor Limited an exclusive licence in Australia, New Zealand, Singapore, Papua New Guinea and Hong Kong in respect of certain identified software, including the Material Management System (Exhibit 7, p278). 734 Broadly, the arguments, or the more significant arguments of Daihatsu, were as follows: · First, where Mr Hooper provided particulars in the Statement of Claim justifying his claim that he had an exclusive licence to the software, he referred to the 1990 agreement. He did not refer to the Head Licence Agreement of 1984. · Secondly, the execution by Cullen Detroit Diesel-Allison Limited and P M Sulcs Canada of the agreement of 31 March 1991 was an acknowledgment that neither was in a position to unilaterally grant P M Sulcs a licence (Daihatsu subs: para 5.138). · Thirdly, Mr Hooper's evidence that no royalty was payable was convenient to his claim for damages (and should be discounted by reason of his obvious self interest). Further, it was inconsistent with contemporaneous documentation (Exhibit D, p90). · Fourthly, Mr Hooper was purchasing the shareholding in P M Sulcs (the Australian company). On his account, P M Sulcs had a Head Licence. Why, then, was it necessary to execute the agreement of 31 March 1990, and the Distribution Licence Agreement on 26 April 1990? These agreements, according to Daihatsu, underline "the extreme improbability of Mr Hooper's evidence" (Daihatsu subs: para 5.134). 735 Daihatsu said this: (Daihatsu subs: para 5.140) "5.140 The ownership of copyright in a complex literary work, such as 350,000 lines of a computer program like the MCC System, is not able to be established by presumptions or 'common sense' intuitive assertions, quite apart from the obvious dispute as to the ownership which the Canadian parents of Sulcs appear to have had." 736 However, I am not persuaded. P M Sulcs Canada developed software for Cullen Detroit Diesel-Allison between 1979 and 1982 (Hooper: Aff. 15.11.99, para 7). Cullen Detroit Diesel-Allison became a reference and demonstration site for the MC2 software. P M Sulcs Canada continued to market that software, as the pamphlet shows (Exhibit A, doc 254ff). Jointly, the two Canadian companies set up the New South Wales subsidiary. As set out above, the copyright issue was addressed. I have no doubt that there was a head licence. I believe it highly likely that it was with P M Sulcs Limited (Canada), as deposed by Mr Hooper. One infers that, at the time the Canadian shareholders disengaged from Australia, differences emerged between them as to the rights of Cullen Detroit Diesel-Allison Limited, Canada, in respect of the system which operated in its plants. Specifically, issues arose as to the rights of Cullen Detroit Diesel-Allison Limited to permit related companies to use the version of the software which had evolved within its plants. That, however, is a different issue. 737 I am conscious of the words of McLelland J in Maks v Maks (1986) 6 NSWLR 34 where he said, in a rather different context (concerned with s23C of the Conveyancing Act, 1919), these words: (at 36) "… where the original writing is not produced and secondary evidence is relied on, there must be clear and convincing proof not only of the existence, but also of the relevant contents, of the writing, of the same order as the proof required to establish an entitlement to the rectification of a written instrument." (See also Burchett J in The Film Investment Corporation of New Zealand v Golden Editions Pty Limited (1994) AIPC 91-052.) 738 I accept the evidence of Mr Hooper that he saw a Head Licence Agreement between P M Sulcs Canada and P M Sulcs Australia. Even without that evidence, I would infer that there was a Head Licence Agreement from the copyright owner, and that P M Sulcs had the authority to grant Daihatsu the non-exclusive licence. 739 I should not, at this point however, reach a final view in respect of the assertion by Mr Hooper that no royalty was payable. I will return to that issue in the context of damages. 740 I have previously dealt with the suggestion that a valid licence required that the converted software be in existence (supra: para 354). I do not accept that suggestion. Upon execution of the licence, Daihatsu was provided with the manuals (supra: para 354). It therefore had, in hard copy, the intellectual property. The software would follow, once converted, as the parties understood (supra: para 345). 14. THE FINANCE ISSUE The Issue Restated 741 The issue has already been identified (supra: para 15). There are, in fact, two issues which may be conveniently considered together: · First, there is the question of P M Sulcs' ability to fund the conversion, having lost the support of Fujitsu. I have indicated that I will approach the issue of the plaintiff's readiness, willingness and ability to complete the contract on the basis that the plaintiff has the onus (supra: para 678). · Secondly, was Daihatsu, in the circumstances, justified in terminating the agreement with P M Sulcs, as it purported to do on 4 July 1989? The onus is upon the defendant to prove that it was entitled to terminate (Amended Defence: paras 20 and 21). The right to terminate was not given by the agreement. There was, at that point, no breach by P M Sulcs. The time had not yet arrived to install the converted software. The justification for the termination, therefore, rested upon an assertion by the defendant that P M Sulcs had repudiated its obligation under the agreement, in that it was already apparent that it could not perform the contract when it became obliged to do so. In short, Daihatsu's contention must be that, as at 4 July 1989, it was already apparent that P M Sulcs was wholly and finally disabled from performing its obligations (Roadshow Entertainment Pty Limited v ACN.053006269 Pty Limited (1997) 42 NSWLR 462 at 480/81). The Evidence Concerning Finance 742 Mr Lonergan, an expert Chartered Accountant retained by Daihatsu, undertook an analysis of the plaintiff's financial position. The annual financial statements between 1984 and 1989 revealed the following (disregarding the Daihatsu sale): (Lonergan: Aff. 28.11.00, report p50, para 197) 1984 1985 1986 1987 1988 1989 $000 $000 $000 $000 $000 $000 Revenue 44 107 922 329 314 173 Costs (57) (200) (815) (554) (368) (267) Net (loss) profit (13) (93) 107 (225) (54) (94) Deficiency of share-holders' funds (13) (106) (7) (233) (289) (382) 743 The company had survived with the assistance of its shareholders, P M Sulcs Canada and Cullen Detroit Diesel-Allison Limited (also of Canada). The conversion was expected to cost approximately $350,000. Of that, the sum of approximately $120,000 was to be paid to an external contractor (whether Pacific Engineering or Paradyne), and the remaining work would be performed by P M Sulcs. 744 Before the meeting with Fujitsu on 23 May 1989 (supra: para 420ff), P M Sulcs expected to fund the conversion as follows: · Using $97,500 it expected to receive from Daihatsu (being $75,000 which was half the Licence Fee, and $22,500 payable under the Software Maintenance Agreement) (supra: para 350/351); and · $250,000 it expected to receive progressively from Fujitsu (supra: para 205). 745 In addition, P M Sulcs expected to receive money for the modifications once the software had been converted, modified and installed (approximately $81,000 for the initial phase). 746 As set out above, Fujitsu having, on 23 May 1989, revised the basis upon which it would advance $250,000 to P M Sulcs, a meeting was called for 5 June 1989. It will be remembered that the agreement between the parties included a Project Plan (supra: para 271). The Project Plan assigned responsibility for the various activities which were to be undertaken. At that point in time, P M Sulcs had complied with the terms of the agreement. The Design Specification for the modifications had been delivered (Phase 2). It remained for Daihatsu to give its approval (Phase 3). 747 P M Sales was not, at that time, obliged to deliver the converted software. Was it, nonetheless, reasonable to infer from the words or conduct of the plaintiff, or from the circumstances, that it was unable to perform the contract? Is that the only reasonable inference that can be drawn in the circumstances (cf Carter & Harland, Contract Law in Australia, 3 ed, p672 para 1942)? 748 It is not suggested that Mr Hooper, on behalf of P M Sulcs, said, in terms, that P M Sulcs would not, or could not, perform the contract. Mr Hooper's position, at the meeting, appears to have been, first, an assertion that Fujitsu had unilaterally altered its arrangements on funding (as, indeed, I believe it had); secondly, an insistence that they restore the previous arrangement, which Fujitsu refused to do; and thirdly, an insistence that Daihatsu pay the monies payable under the Programme Licence Agreement and the Software Maintenance Agreement totalling almost $100,000. That does not appear to me to be an acknowledgment of an inability to deliver. 749 Nonetheless, there was evidence that Daihatsu and Fujitsu believed P M Sulcs to be impecunious. Mr McLean, from Fujitsu, attributed to Mr Kratsas the following words, said to have been spoken in early 1989: (McLean: Aff. 2.4.98, para 9(a)) "9. …. (a) at some time in early 1989 I had a conversation with Mr Leon Kratsas of Daihatsu during which he said words to the following effect: 'I don't have confidence that if Daihatsu pays Sulcs for the Sulcs Software that Sulcs will deliver that software. I am concerned that Sulcs is not financially viable and that the conversion of the Sulcs Software will not be successful. As a result I want Fujitsu to be liable to pay Sulcs for its software and for Daihatsu to be liable to make all payments in relation to the new parts system to Fujitsu.'" 750 That statement reflected Mr McLean's view. However, I am not persuaded that Mr Kratsas spoke quite in those terms. I accept that Mr Kratsas well knew that P M Sulcs was a small company, the subsidiary of Canadian parents. I also accept that Mr Kratsas appreciated that cash flow would be important to a company the size of P M Sulcs. I do not accept that he believed that P M Sulcs was not financially viable. I do accept, nonetheless, that Daihatsu's insistence, in negotiations with Fujitsu, that Fujitsu should be prime contractor was in part motivated by the need to balance the relatively insubstantial nature of P M Sulcs with a significant corporation, which would stand behind the system. 751 What, then, is the basis upon which it is suggested that P M Sulcs could not deliver, such that an anticipated breach of contract justified termination by Daihatsu? As mentioned, the time had not yet arrived to install the converted software. The suggestion appears to derive from the withdrawal of funding from Fujitsu and the failure to retain, to that point in time, a contractor to carry out the conversion. The latter, in the context of the former, appears to have been the basis for doubting P M Sulcs' ability to see the project through. 752 Mr Hooper gave the following evidence, referring to the meeting of 5 June 1989: (Hooper: T.147) "Q. There were far too many problems with the conversion process as you did it to allow it to be operating well in a short time? A. No, it wasn't the conversion. It was the software that was at issue. The issue at that time was the meeting, was payment. That was the only thing holding up our process. We needed to get paid so we could pay others. I wasn't going to enter into an agreement to pay Lamberton on a handshake knowing full well I couldn't fulfil that. I wasn't going to put myself in that position. I needed to get payment from Fujitsu. My parent company in Canada would have funded the balance and we would complete. In actual fact, I received a lot of money from my company to the end of the year which if we had got the money from Leon Kratsas at the end of '89 we would have bought the conversion tools; pressure would have been off and everyone would have been happy except for Fujitsu; they would not have been happy." 753 The plaintiff suggested that, if Daihatsu had paid the $97,500 which was outstanding, then the shareholders in Canada would have made good the shortfall (T.232, lines 54 to 56). The Canadian Evidence 754 The defendant, in its submissions, points to the fact that no evidence has been called from the shareholders in Canada, either P M Sulcs Canada or Cullen Detroit Diesel-Allison. Such evidence, it suggests, would not have assisted the plaintiff (Daihatsu subs: para 5.50). However, in Ghazal v GIO (1992) 29 NSWLR 336, Kirby P said this: (at 343) "The rule in Jones v Dunkel is one of common sense reasoning. It provides that an unexplained failure by a party to call a witness may, in appropriate circumstances, lead to an inference that the uncalled evidence would not have assisted the case of the party who might be expected to call the witness. It is important to note that this is a facility. It is not an obligation in the reasoning of the decision-maker; cf Café v Aust Portland Cement Pty Ltd (1965) 83 WN (Pt1) (NSW) 280, 287 … The rule has no application if the failure to call the witness is satisfactorily explained or readily understood." 755 Here, the failure of the plaintiff to call evidence from Canada can, I believe, be readily understood. The defendant made application for security for costs before this litigation began. An order was made, an ultimately security was provided. At the time that was done the estimate was three weeks. Once it became clear that the trial would take considerably longer, a fresh application for further security was made by Daihatsu. That application was determined by me (Judgment No. 2: 22.8.00). I refused to order security, substantially because such an order would, unfairly in the circumstances, bring to trial to a halt. The plaintiff simply had no funds to provide security. In the circumstances, I do not believe it is appropriate to drawn an inference that evidence of those in Canada would not have helped the plaintiff. 756 I might add that I do not draw such an inference against the defendant either, although I regard those in Canada as available to both parties. The passing of time, and the circumstances of the sale of P M Sulcs, meant that the Canadian shareholders were, in my view, available to whomsoever had the money or inclination to talk to them. The Course of Events if Daihatsu had Paid 757 What, as a matter of probability, would have happened had Daihatsu paid the outstanding invoices ($97,500)? I think it probable that the shareholders in Canada would have funded the balance of the conversion costs. I say this for a number of reasons. 758 First, the investment by the Canadians in P M Sulcs was significant, as the discrepancy in shareholders' funds demonstrates (supra: para 742). 759 Secondly, the contract with Daihatsu represented a very significant opportunity for P M Sulcs. It would yield immediate benefits, and, through a reference site, the promise of substantial benefits in the future. It would, at last, from the viewpoint of the Canadians, establish a presence for its software in this country. 760 Thirdly, it is apparent from correspondence between Australia and Canada in the latter part of 1989 that P M Sulcs Canada, perhaps less clearly than Mr Hooper, recognised the attraction of UNIX, and the limitations of Wang. The agreement with Daihatsu offered the opportunity to make the transition. 761 Fourthly, the Canadians advanced significant funds to P M Sulcs in the months that followed, whilst the matter was awaiting resolution, and in order to sustain the company. Between 30 June 1989 and 27 December 1989 it provided $139,601 (Exhibit Q). 762 And had Daihatsu paid P M Sulcs the money to which it was entitled (instead of keeping its options open), then I also believe it likely that Fujitsu would have softened its stand on funding, by at least making a contribution to the conversion before completion. Such a finding is necessarily more speculative, although I still believe it probable. I think it probable because the sale was plainly important to Fujitsu (as demonstrated by its willingness to pay $250,000 to P M Sulcs, although after the conversion). It was strategic (cf Musson: T.1756). It was a large sale to an important company. It would also establish a reference site for Fujitsu, as contemplated in the marketing arrangement agreed on 16 March 1989 (Exhibit A, doc 403; supra: para 139). Fujitsu, without P M Sulcs, was vulnerable to replacement by Daihatsu, and certainly was so regarded by Mr Kratsas (supra: paras 574, 581 to 593). 763 Whether that be right or wrong, I think it probable that Fujitsu and P M Sulcs would have re-established a reasonable working relationship, once Fujitsu saw that Daihatsu was committed to the retention of P M Sulcs. Fujitsu's contract with Daihatsu obliged it to do so (supra: para 212ff) 764 I have already observed that, had Daihatsu paid the money which was outstanding, P M Sulcs would have retained Paradyne or Pacific Engineering (supra: paras 661 and 665). Had that occurred, I think it probable the conversion would have been achieved, and the software installed late in 1989 (supra: para 665ff). 765 It is my view, therefore, that the plaintiff was ready, willing and able to perform the contract. Termination by the Defendant 766 The defendant was not justified, in my view, in terminating the agreement. P M Sulcs had not expressly nor impliedly refused to perform the agreement. Nor do I believe it was reasonable for Daihatsu to view the events of June 1989 as signifying that the plaintiff was finally and totally disabled from performing the agreement, and that it was repudiating its obligations under the agreement. 767 It plainly would have been a serious breach had P M Sulcs not been able to convert the software. It should also be said that the conversion would clearly take some time, such that P M Sulcs needed to begin preparation well ahead of the time for installation. Nonetheless, as mentioned, the only basis for the view taken by Daihatsu was that P M Sulcs could no longer look to Fujitsu to finance the conversion, or part of the conversion, and had not yet retained a company to undertake the conversion. However, for the reasons given, I believe the conversion was achievable, financially and technically. The altered position of Fujitsu was unquestionably a serious blow to P M Sulcs, but it did not deprive it of the ability to complete the task. The task could still be accomplished, although a contractor had not yet been retained. 768 The termination was therefore not justified. It was a repudiation of the agreement. The repudiation, at first, was not accepted by P M Sulcs. Ultimately, once it was apparent that Daihatsu did not regard itself as bound, the repudiation was accepted. The plaintiff then commenced this action. 769 I believe the plaintiff has established a breach by Daihatsu of the agreement made on 18 April 1989. It is entitled to a verdict. I will now turn to the question of damages. 15. DAMAGES The Plaintiff's Claim 770 The plaintiff identified a number of claims. Each was said to have been caused by the defendant's breach. The losses or damage, according to the plaintiff, flowed naturally from the defendant's breach, or were such as may reasonably be supposed to have been in the contemplation of both parties. They were therefore not too remote. The claims may be grouped as follows: · First, there were claims for specific amounts payable under the agreements with Daihatsu, namely: · The Licence Fee ($150,000). · The fee payable under the Software Maintenance Agreement ($22,500). · Secondly, there was a claim for work done in reliance upon the agreements, which work was wasted. The amounts claimed were embodied in invoices sent to Daihatsu at the beginning and end of June 1989 (supra: para 376 and 531), namely: · 1/6/89 $45,000 · 30/6/89 $49,499 $94,499 ====== · Thirdly, there was a claim for the loss of the chance to establish a successful reference site. Such a site, on the plaintiff's case, would have generated significant sales of the converted software. P M Sulcs, therefore lost the income from those sales. Indeed, it lost more than that. It lost the chance to create a company of repute, which had the momentum of a successful software package. 771 I will deal with each issue in turn. Money Payable Under the Agreement 772 Daihatsu had agreed to purchase the software of P M Sulcs, known as the Material Customer and Control System, and a licence to use that software. The only reference to the amount payable in respect of that purchase is in the Proposal submitted by P M Sulcs to Daihatsu on 15 December 1988 (supra: para 120). The fee, described as a "one off charge", was $150,000. By the Terms and Conditions of Sale (executed 18 April 1989) (supra: para 300), fifty percent of the contract price was payable to Daihatsu "upon placement of the order" (supra: para 302). Daihatsu was, on 18 April 1989, therefore, obliged to pay P M Sulcs $75,000. However, it did not do so. Daihatsu was also liable for the remaining instalment of $75,000 upon installation of the software and its satisfactory operation. The plaintiff claimed the entire Licence Fee of $150,000. 773 The proposal also included an annual charge for the software of $22,500 (supra: para 120). The Software Maintenance Agreement (executed by Daihatsu on 18 April 1989) included a reference to that payment, in Schedule 1 (supra: para 289), in these terms: "Annual Charge $22,500 (re Part A)" 774 Part A of the Software Maintenance Agreement identified a number of services to be provided by P M Sulcs to the licensee (Daihatsu) (supra: paras 294/295). Daihatsu, at the time of termination, had not paid P M Sulcs the $22,500 fee. 775 Under the Software Maintenance Agreement, Daihatsu was obliged to pay the Software Maintenance Fee each year upon the anniversary of the contract ("the commencement date"), identified in Schedule 1 as 17 April 1989 (supra: para 285). That sum ($22,500), on the plaintiff's case, was payable for the likely duration of the contract (seven years). 776 The plaintiff recognised, however, that the annual maintenance charge was subject to a proposal made by Mr Hooper by letter addressed to Mr Kratsas on 30 December 1988 (Exhibit A: doc 346; supra: para 130). In consideration of Daihatsu making its premises available as a reference site, no annual charge would be made, provided that four sales were made in the first thirty months. Whatever the status of the "agreement" between P M Sulcs and Daihatsu in December 1988 (supra: para 149), I believe it likely that, but for Daihatsu's repudiation, Daihatsu would have become a reference site for the converted software. There were benefits to both Daihatsu and P M Sulcs in such an arrangement. It plainly was in the contemplation of both parties. Any agreement negotiated (if one needed to be made) would, no doubt, have included the concession identified in the letter of 30 December 1989. Since, on the plaintiff's case, substantially more than four sales would have been made within the first thirty months, the claim, on this aspect, was confined to the amount payable in the first year ($22,500). The submission by the plaintiff (Plaintiff's subs: p76, para 17) also suggested that a further sum of $7,000 should be added, although the basis was not entirely clear. For my part, I believe the claim, insofar as it can be made, is one for $22,500. On the view I have formed of the agreement, Daihatsu was liable to pay P M Sulcs that sum, but had not done so (supra: para 351). The issue is whether, the contract having been brought to an end, that sum is recoverable as a loss caused by the defendant's breach (and one which is not too remote)? The Argument of Daihatsu 777 The defendant submitted that the plaintiff's right to recover damages for breach of contract was limited in various ways. The guiding principle was, of course, that damages must be confined to that sum which placed the plaintiff in the position it would have occupied had the breach not occurred (Daihatsu sub's: para 8.9). Daihatsu pointed to certain further limitations, the first being a reminder of the rule in remoteness in Hadley v Baxendale (1854) 9 EX 341 at 354; 156 ER 145 at 151. It said this: (Daihatsu subs: para 8.10) "First, there is the limitation on recoverability based on what was in the reasonable contemplation of the parties as sufficiently likely to be loss flowing naturally from the breach ( Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at p 667.2-9). Secondly, there is the principle identified in the speech of Viscount Haldane LC in British Westinghouse Electric Manufacturing Company Ltd v Underground Electric Railways of London Ltd: ([1912] AC 673 at p 689.7-8 (applied in Gull v Saunders & Stuart (1913) 17 CLR 82 at p 89.3-4)). 'But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.'" 778 Here, the plaintiff did not convert the software. It was spared the expense of doing so. It, therefore, suffered no damage according to Daihatsu. Since the converted software was never delivered, there was nothing to maintain under the Software Maintenance Agreement (Daihatsu subs: Executive Summary, para 10). 779 Daihatsu, in its submission, thereafter turned to the specific agreements executed by Mr Kratsas on 18 April 1989. Dealing with the Licence Agreement, it was, on the defendant's case, wholly executory (Daihatsu subs: para 8.16). The second instalment ($75,000), moreover, had not fallen due at the time of termination (Daihatsu subs: para 8.14). Had Daihatsu paid P M Sulcs it would have been entitled to recover that payment (even though it was in breach) under the principle identified by Dixon J in McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 476/78. In circumstances where an amount had not been paid which, had it been paid, would have been refundable, no claim could be made (Dixon J at p479). 780 Daihatsu's submission in respect of the Software Maintenance Agreement, and the annual fee of $22,500, was along similar lines. The Agreement was wholly executory (Daihatsu subs: para 8.29). It presupposed the delivery of the converted software which, once delivered, would then be maintained. That had not occurred. Had Daihatsu paid that sum, on the same principle, that payment would have been recoverable. Accordingly, it was not payable to the plaintiff, as part of its loss. The Debate on Principle 781 The plaintiff responded by suggesting that the principle in McDonald v Dennys Lascelles Limited was confined to instalments contracts for the purchase of land (Plaintiff's Reply on Damages 23/4/01: p1). The Agreements, in this case, in any event, were not executory. They were effective upon signing. Daihatsu immediately received substantial benefits. 782 Daihatsu's rejoinder drew attention to the authorities in which McDonald v Dennys Lascelles Limited had been applied (Rover International Limited v Cannon Film Sales Limited [1989] 1 WLR 912; Baltic Shipping Co v Dillon (1993) 176 CLR 344, per Mason CJ at 351, per Gaudron J at 385/386 and per McHugh J at 389/90). The principle was one of general application. No benefits, substantial or otherwise, had been conferred upon the defendant upon execution of the Agreements. The subject matter of the Agreements, the converted software, did not exist (Daihatsu's Reply on Damages 24/4/01: pp1-2). No services were provided under the Software Maintenance Agreement (Daihatsu subs 26/4/01: p3). Daihatsu specifically relied upon the words of Kerr LJ in Rover International v Cannon Films Sales Limited where his Lordship said the following: (at 932) "Thus, it is clear from Palmer v Temple (9 Ad & E 508), and the judgment of Dixon J in McDonald v Dennys Lascelles Ltd (48 CLR 457), that the principle that advance payments made on account of the price are recoverable applies even where the contract relates to a specific piece of land which the vendor must either acquire or retain in order to perform the contract. The fact that he is bound to the contract in that way does not alter the character of the payment being in the nature of an advance for a consideration to be provided in the future." Are the Fees Recoverable? 783 It is worth repeating what Dixon J said in McDonald v Dennys Lascelles Limited. He said this: (at 476/478) "When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected … But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach … It does not, however, necessarily follow from these principles that when, under an executory contract for the sale of property, the price or part of it is paid or payable in advance, the seller may both retain what he has received, or recover overdue instalments, and at the same time treat himself as relieved from the obligation of transferring the property to the buyer. When a contract stipulates for payment of part of the purchase money in advance, the purchaser relying only on the vendor's promise to give him a conveyance, the vendor is entitled to enforce payment before the time has arrived for conveying the land; yet his title to retain the money has been considered not to be absolute but conditional upon the subsequent completion of the contract. 'The very idea of payment falls to the ground when both have treated the bargain as at an end; and from that moment the vendor holds the money advanced to the use of the purchaser' ( Palmer v Temple (1839) 9 Ad & E 520, 521) … It is now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract ( Mayson v Clouet [1924] AC 980) …" 784 Dixon J added: (at 479) "It appears to me inevitably to follow from the principles upon which instalments paid are recoverable that an unpaid overdue instalment ceases to be payable by the purchasers when the contract is discharged." 785 I accept that the principle is one of general application. I have already indicated my view that the first instalment of the Licence Fee ($75,000) was payable upon entry into the Agreement (18 April 1989) (supra: para 350). It remained unpaid at the time of Daihatsu's repudiation (4 July 1989), and P M Sulcs' acceptance of that repudiation. No express provision was included in the Agreement to deal with that circumstance. The approach which I should adopt, in these circumstances, is encapsulated in the following statement (which includes the principle identified in McDonald v Dennys Lascelles Limited) by Carter & Harland, Contract Law of Australia, 3 ed, page 838, para 2228: "… the court must decide what the parties, as reasonable persons, impliedly agreed on the matter. The court will have regard to the terms of the contract, the performance rendered by the plaintiff and the extent to which the plaintiff is discharged by termination. As Dixon J explained in McDonald v Dennys Lascelles Ltd , the right must have 'unconditionally' accrued to the plaintiff from the 'partial execution' of the contract." 786 Here the Licence Agreement, in my view, made a distinction between the first and second instalments. The first instalment was to be paid at once (supra: para 350). The Agreement was not executory. Obligations under the Agreement were not dependant upon the delivery of the converted software (supra: paras 353ff). Rather, there was to be a progressive delivery. The hard copy of the valuable intellectual property was to be made available at once (which duly occurred). The software would follow, once converted and modified, as both parties clearly understood (supra: paras 122, 270). I believe, therefore, that, upon execution of the Agreement, there was an unconditional right to $75,000 which accrued to the plaintiff from the part performance of the Agreement. 787 The position in respect of the second instalment ($75,000) is, I believe, different. By implication, the second instalment was to be paid upon system hand-over. The obligation to pay, therefore, was dependent upon the conversion and delivery of the software, and its installation at Daihatsu. Whereas the first instalment was a loss caused directly by the defendant's breach, and a loss within the contemplation of both parties, the second instalment cannot be so regarded. 788 The plaintiff had, at the moment of repudiation by Daihatsu, performed its obligations under the Agreements. It had delivered the draft specification. It was in the process of arranging conversion. The repudiation by the defendant, however, relieved it of the obligation to arrange that conversion (Carter & Harland, page 705, para 1985). Daihatsu knew that P M Sulcs was a small company (supra: para 750). It knew that the money payable under the Agreements was important to its cash flow (supra: para 750). It knew that the conversion process was complex and expensive (supra: para 482). Yet it refused to pay the money outstanding, and spoke (at the meeting of 5 June 1989) (supra: para 491) of replacing P M Sulcs with another supplier. It would be unreasonable to expect P M Sulcs, in these circumstances, until the repudiation was withdrawn (which never occurred) to make arrangements to convert the software. I believe, in the circumstances, that the award should include the $75,000 in respect of the unpaid first instalment. 789 The Software Maintenance Agreement made a distinction between the annual fee ($22,500), payable immediately, and charges made for services provided during the currency of the Agreement. Again, for reasons explained, I do not accept that the Agreement was executory, wholly dependent upon the delivery of the converted software (supra: para 294/5). Benefits were available to the defendant under the Agreement, although it may be an exaggeration to describe such benefits as "substantial". Nonetheless, this was the bargain which Daihatsu struck. The parties under the Software Maintenance Agreement contemplated an unconditional up-front fee, payable upon execution of the contract. I believe it is appropriate to include the unpaid $22,500 fee in the award. The Modifications 790 Having made the Agreement on 18 April 1989, the plaintiff set to work at once. On 17 May 1989, P M Sulcs furnished Daihatsu with a draft design specification. It pressed Daihatsu for its approval, which had not been given on 5 June 1989 when the parties met (supra: para 397). Since time was short, and with the encouragement of Mr Kratsas, P M Sulcs continued to work, executing the modifications, in anticipation of approval. It rendered invoices to Daihatsu on 1 June 1989 ($45,000) and 30 June 1989 ($49,599) specifying the hours worked. On the plaintiff's case the sum of $94,599 should be included in its award. 791 The defendant responded that the plaintiff was, in any event, confined to $81,500 for the Phase 1 modifications. Indeed, these modifications were not made. All that P M Sulcs had done was produce a draft design specification. It had then been directed to cease work on 5 June 1989 (Daihatsu subs: paras 8.32 to 8.36). No attempt had been made to establish a reliance loss (Daihatsu subs: para 8.33). If the invoices were genuine, P M Sulcs had already overrun the amount it could have expected to receive for the entire modifications. That rather suggested, according to Daihatsu, that the plaintiff had made a bargain with little or no profit margin (Daihatsu subs: para 8.5). Repudiation had therefore spared the plaintiff a "huge loss" (Daihatsu subs: para 8.11). Since there was no profit in performing the Agreement, there was no loss to the plaintiff (Daihatsu subs: para 8.12). 792 I should made a number of observations, repeating in part, findings already made. First, I accept that P M Sulcs performed the work set out in the invoices. Secondly, I also accept that the hourly rates charged were reasonable according to industry standards at the time. The defendant, in the context of the quantum meruit claim, made that concession (T.671 line 16 and T.44 line 50). The hourly rates, however, were the charge-out rates of P M Sulcs for employees of differing qualifications and experience. I infer that they included a margin for profit to P M Sulcs. 793 Thirdly, I accept that Mr Kratsas, after the meeting on 5 June 1989, gave instructions to Mr Hooper to continue work, whilst the contractual difficulties were sorted out. 794 Fourthly, it is not, in my view, accurate to suggest that the plaintiff simply produced a draft specification of the modifications. The specification was provided to Daihatsu on 17 May 1989 (supra: para 392). Work continued thereafter. The evidence is spare as to the work actually done. I infer, as a matter of probability, nonetheless, that the modifications had been substantially completed by the time of repudiation. 795 Finally, so far as the submission by the defendant that the contract was unprofitable, and that repudiation spared P M Sulcs a "huge loss", that is an issue in respect of which the defendant carried the onus (cf Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64, per Deane J at 127). I am not persuaded that this was so. 796 Whatever the level of profit to P M Sulcs in respect of modifications, there was expenditure in reliance upon the contract being performed. It was wasted effort. That waste was the direct consequence of the defendant's breach. It is reasonable to view that loss as flowing directly from that breach. The plaintiff, however, should not be better off by reason of the contract's termination, than had the contract been performed. The award should be confined to the amount to which the plaintiff was entitled for Phase 1 modifications, namely $81,500. The Loss of the Chance 797 One then comes to the third aspect of the plaintiff's claim, the loss of the chance (supra: para 767). The plaintiff asserts that, within the contemplation of both parties, was the establishment of a reference site once the software had been converted and installed (Plaintiff's Submissions on Damages in Reply 23/4/01: para 13.2). The repudiation by Daihatsu put an end to that prospect. The plaintiff thereby lost the chance of displaying its converted software at a reference site. The plaintiff's submission said this: (Plaintiff's subs: p78) "The substance of the claim is that, as a consequence of DAP's repudiation of the contracts, PMS has lost the chance to make sales of the software to other organisations in Australia." 798 The defendant, in its submission, did not mince words. It said this: (Daihatsu Submissions, Executive Summary: para 11) "11. Sulcs' claim for loss of a chance is hopeless. Sulcs adduced no evidence to prove that: (a) it (is) was actually in a position where it lost a chance to enter into other contracts; (b) the chance, if it existed, was capable of being acted upon by Sulcs; and (c) the value of the alleged chance." 799 It was the defendant's position that the plaintiff suffered no loss; that if there was loss, it was not caused by the defendant's breach; and even if it were caused, it was too remote. 800 I have dealt with many of these issues in the context of the defendant's assertion that the plaintiff was not ready, willing and able (Chapters 12, 13 and 14). I accept that it is probable that, by reason of the defendant's breach, P M Sulcs lost the chance to establish a successful reference site from which it could have displayed its converted software to prospective customers. 801 I take this view even assuming there was no Reference Site Agreement (supra: para 152). But for the repudiation, a reference site would have been established by Daihatsu on the terms set out by Mr Hooper in his letter of 30 December 1988 (supra: paras 130/131). Arrangements for access would have been worked out at that time. A reference site had clear advantages for both Daihatsu and P M Sulcs. The loss of the chance flowed naturally from the defendant's repudiation, and was a loss within the contemplation of both parties (Commonwealth of Australia v Amann Aviation Pty Limited (supra) per Mason CJ and Dawson J at 90/92, 94; Brennan J at 103/4; cf Deane J at 130/131). The Authorities on Valuing the Chance 802 How, then, should the chance be valued? A distinction is made between events past (that is, before the breach or repudiation), and events future (those which cannot now occur because of the breach or repudiation). In Malec v J C Hutton (1990) 169 CLR 638, Deane, Gaudron, McHugh JJ said this: (at 642) "When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than 1 per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded. See Mallet v McMonagle (1970) AC 166, at p 174; Davies v Taylor (1974) AC 207, at pp 212, 219; McIntosh v Williams (1979) 2 NSWLR 543, at pp 550-551. The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place." 803 The issue was revisited in Sellars v Adelaide Petroleum (1994) 179 CLR 332, where the majority (Mason CJ, Dawson, Toohey & Gaudron JJ) made the following observation: (at 355) "Notwithstanding the observations of this Court in Norwest , we consider that acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued. The principle recognized in Malec was based on a consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. Once that is accepted, there is no secure foundation for confining the principle to cases of any particular kind. On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable. The conclusion which we have reached on this question finds support in other considerations. The approach results in fair compensation whereas the all or nothing outcome produced by the civil standard of proof would result in the vast majority of cases in over-compensation or under-compensation to an applicant who has been deprived of a commercial opportunity. Furthermore, it is an approach which conforms to the long-standing practice of taking into account contingencies in the assessment of damages." 804 Brennan J expressed a similar view: (at 364) "As a matter of common experience, opportunities to acquire commercial benefits are frequently valuable in themselves, not only when they will probably fructify in a financial return but also when they offer a substantial prospect of a financial return. The volatility of the market for speculative shares testifies to both the valuable character of commercial opportunities and the difficulty of assessing the value of opportunities which are subject to serious contingencies. Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire or of avoiding a detriment that the plaintiff sought to avoid, the opportunity can be held to be valuable." 805 See also Commonwealth of Australia v Amann Aviation Pty Limited (supra) per Deane J at 118/121, 124, 125. 806 Let me now turn to the evidence. The Issues Relevant to the Loss 807 The plaintiff, in its submissions, identified three issues (adapting Plaintiff's Submissions in Reply 24/4/01: p14, para 29): · First, what was the event that might have occurred? Here, it was the making of sales of converted software from the reference site. · Secondly, what was the value of that event, had it occurred? · Thirdly, what was the likelihood of the event occurring? 808 The plaintiff suggested that the third issue was one for the Court alone. I will return to that submission shortly. 809 Two experts, both Chartered Accountants, gave evidence of the value of the lost chance. Mr Alan Weeks was called by the plaintiff. Mr Wayne Lonergan was called by Daihatsu. Mr Weeks made a number of assumptions for the purposes of forming his opinion of value. Mr Lonergan was critical of many of these assumptions, which he believed were unrealistic. The main areas of difference appeared to be these: · First, Mr Weeks accepted, uncritically, according to Mr Lonergan, the assessment of Mr Hooper that the package could be sold for $350,000, and that it was "the best of the breed". · Secondly, Mr Weeks also accepted a level of sales per year which was extremely optimistic. · Thirdly, Mr Weeks accepted, again uncritically according to Mr Lonergan, that $250,000 commission would be earned for the sale of hardware with each software package sold. · Fourthly, Mr Weeks made no allowance for the payment of a royalty by P M Sulcs to P M Sulcs Canada. · Fifthly, Mr Weeks made the completely unwarranted assumption (according to Mr Lonergan) that the profit level on each maintenance contract would be 90% of the fees earned. · Sixthly, Mr Weeks assumed an artificially low number of hours (according to Mr Lonergan) in carrying out modifications (and therefore a correspondingly low cost to P M Sulcs in performing that work). · Seventhly, Mr Weeks made no allowance for research and development although all companies which he examined, which he thought comparable to P M Sulcs, routinely spent 15% to 25% of their earnings in that area. 810 There were other aspects raised by Mr Lonergan, including the cost of conversion of each sale (which Mr Lonergan was instructed to assume would be $200,000). 811 Mr Weeks adopted, as an appropriate basis for valuation, future maintainable earnings. Making the assumptions identified, and using that methodology, the value of the chance lost to P M Sulcs was estimated to be in the range of $42.1 million to $45.6 million. In reaching that conclusion, Mr Weeks adopted a two stage approach (Weeks: Aff. 2.11.00, p6): · Stage 1 involved an estimate of the profits that P M Sulcs would have earned during a period (termed the "Forecast Period") 1989 to 1993 (estimated to be $14,097,993). · Stage 2 was an estimate of the value of P M Sulcs (upon the basis of future maintainable earnings), assuming it had achieved the level of earnings calculated in Stage 1 ($28 million to $31.5 million). · The two amounts were then aggregated, providing a valuation of the loss of chance at the figure identified, namely, $42.1 million to $45.6 million. 812 Mr Lonergan was highly critical of Mr Weeks' method. It was, in his opinion, quite inappropriate for the following, amongst other, reasons: · First, the use of future maintainable earnings presupposed a product which went on in perpetuity. The software, however, had a limited life. · Secondly, there was double counting of the same loss. Mr Weeks had included the profit lost for the forecast years ended 30 June 1993, as well as the valuation of the business. 813 In my view the criticisms were well founded. The software was a product with a limited life (say, seven years). Aggregating the loss of profits for a number of years and the value of the business, assessed at the end of the forecast period, gave an inflated value. Expert Joint Report 814 Having furnished reports, Mr Weeks and Mr Lonergan then met in the hope of narrowing their differences. They produced a joint statement of 14 December 2000, which was in these terms: (Exhibit S) "Mr Lonergan and Mr Weeks met on 13 December 2000, and as a result of that meeting the matters set out in this statement were agreed. 1. Each expert was given different instructions as to the definition of the loss: (a) Mr Weeks was instructed to calculate the number of dollars lost (b) Mr Lonergan was instructed to assess the value of the loss of the chance as at 30 June 1989. 2. Mr Weeks undertook to seek further instruction as to the definition of the loss that should be used. 3. Mr Weeks agreed that if he was instructed to assess the value of the loss of the chance as at 30 June 1989, as set out in Mr Lonergan's report, then the methodology adopted by Mr Lonergan would be an appropriate methodology. 4. The experts both agree that in valuation theory all valuations are the present value of future cash flows. In the case of 'perpetual' life businesses the application of a capitalised earnings methodology is merely a surrogate for a discounted cash flow (DCF) methodology. To the extent that the cash flows are not in perpetuity the capitalised earnings methodology may not act as a precise surrogate. The experts have received different instructions as to the life of the software and this has impacted their choice of methodology. 5. Mr Weeks agreed that if the cash flows had a relatively short life, the correct methodology to assess their value at any given date, would be a DCF calculation. 6. Mr Weeks undertook to prepare a calculation of the loss, using the assumptions in his report, using a DCF methodology so that this would be comparable to the calculations prepared by Mr Lonergan. 7. Mr Weeks undertook, as part of the DCF calculation, to consider whether or not he agreed with the discount rate set out in Mr Lonergan's report of 35%. 8. Mr Weeks agreed that if it was the cae that the value of the Fujitsu hardware bought with each sale of the software was less than $1 million then the commission income included in the DCF calculation would need to be reduced accordingly." 815 Mr Weeks, as contemplated by that statement, undertook fresh calculations, using the discounted cash flow method. In making those calculations, Mr Weeks gave consideration to the appropriate discount rate. Whereas the rate used by Mr Lonergan was 35%, Mr Weeks believed that 21% was appropriate. The value of the chance lost to P M Sulcs upon this basis was $17.1 million. If an allowance were made for research and development the value would fall to between $15.6 million and $16.5 million, depending upon the level of research and development expenditure (Weeks' reports 19.2.01; 21.2.01: Exhibit W). 816 These adjustments did not appease Mr Lonergan (Lonergan report 23.4.01: Exhibit 36): · First, the difference in valuation underlined the inflated nature of Mr Weeks' first valuation. Mr Lonergan would have expected Mr Weeks to have addressed that issue, and attempted to reconcile the remarkably different results. · Secondly, the fresh valuation relied upon the same assumptions that had been used in reaching the first valuation. The assumptions, in Mr Lonergan's opinion, were unrealistic. Inevitably, the valuation was, therefore, also unrealistic. · Thirdly, there was no warrant for adopting a discount rate of 21%. That is a rate appropriate for a fully diversified share portfolio (Lonergan report 23.4.01, p17, para 42). Here the risk was significantly greater than that. A conventional figure of 35% should be adopted. 817 Making these adjustments, and performing certain calculations based upon assumptions which Mr Lonergan regarded as "more realistic", Mr Lonergan saw no reason to alter his view. The valuation of the chance lost to Sulcs was "nil" (Lonergan report 23.4.01, p48). 818 Mr Lonergan added the following: (Lonergan report 23.4.01, p48, par 125) "125. I note that as a cross check for reasonableness of my assessed value of the loss of chance of nil, that the shareholders of Sulcs were not prepared at the relevant time to advance even as little as $100,000 to support Sulcs." 819 Mr Lonergan made a similar comment in his first report (Lonergan report 28.11.00, p82, para 302). However, I am not persuaded that this is a reasonable cross check. I have touched upon this aspect already (supra: para 670). The Canadians, like Mr Hooper, were faced with a company, Daihatsu, which, in breach of the Agreement, would not pay $97,500, thereby demonstrating commitment to the Agreement. Instead, Daihatsu spoke of replacing P M Sulcs, and ultimately repudiated the contract. The real test of P M Sulcs Canada's attitude to the value of the chance which its subsidiary had created would have arisen had Daihatsu demonstrated its commitment, and paid the money. Had they done that, I am confident (as I have stated) that P M Sulcs Canada would have funded the conversion (supra: para 757). 820 Let me turn to the evidence concerning the assumptions which may be regarded as critical. How Good was the Plaintiff's Product? 821 How good was the plaintiff's software? The issue is obviously important. It is relevant to two key variables: · First, the price which the software could expect to command in the market place. · Secondly, the number of sales likely to have been made. 822 Mr Hooper gave evidence that the P M Sulcs package now, MC2, was the "best of the breed" (Hooper: T.1702, 1709). Mr Weeks, in making his valuation, included that assumption. The assumption made by Mr Weeks was expressed in these words: (Weeks: Aff. 7.11.00, p39) "14. The flexibility of the Base PMS System (ie flexible enough to be a component part of any 'integrated enterprise planning' system in the Unix environment) was the key to having this market leading position. The market leading position of the Base PMS System was due to: · Its flexibility · Its ability to run on the Unix environment · Its ability to deal with large transaction volumes and large inventories at multiple branches with consolidation at regional, state and national levels." 823 Daihatsu challenged that assumption, asserting that Mr Hooper was the only witness to so describe the software (Daihatsu subs: Mr Hooper's Credit p19, para 5.2). Mr Musson, the plaintiff's expert in marketing, did not feel himself able to express a view as to whether P M Sulcs could be described as the "best of the breed" (Musson: T.1829/1830). 824 What, then, was the evidence as to the capability of the P M Sulcs package, and its place in the market? Mr Hooper gave evidence as to the functionality of the MC2 software and its flexibility. Contrary to the assumptions made by Mr Molloy, an expert retained by Daihatsu, it could be adapted for use in a wide variety of industries, not simply the motor vehicle spare parts industry. It was capable of being used in the food industry, the pharmaceutical industry, and other industries concerned with resource planning and distribution. 825 Mr Hooper produced, late in the hearing, and partly in answer to the evidence of Mr Molloy, a document which described more fully the functionality of the MC2 software (Exhibit V). Daihatsu attacked the provenance of that document, pointing to the cover sheet which had an ACN number, suggesting that it was brought into existence much later than Mr Hooper deposed (Daihatsu subs: Credit of Mr Hooper para 5.6ff and Exhibit 32). 826 However, I found the attack upon Exhibit V, and Mr Hooper's evidence, unpersuasive. I also found the evidence of Mr Molloy as to limitations of the MC2 package unconvincing. I accept that the software was flexible, and capable of adaptation and use within a number of industries. The client list of the Canadian parent supported that view (Exhibit A: docs 181/185). 827 There was also a deal of evidence which supported Mr Hooper's assertion as to the quality of the software: · First, the P M Sulcs software was developed in Canada between 1979 and 1982. It had undergone refinement in the years that followed. · Secondly, Mr Maris Sulcs plainly regarded it as superior to any competition in Australia when he made his decision, at the end of 1983, to establish a subsidiary in Australia (supra: para 703). · Thirdly, that view was shared by Daihatsu. It will be remembered that Mr Womack made a survey of suitable software. MC2 was selected, having made that survey. Mr Kratsas' attempt in evidence to downplay the merit of his selection was unconvincing. · Fourthly, Mr Santa Maria, the Technical Services Manager, described the P M Sulcs software in August 1989 as the "Rolls Royce of application software" (supra: para 558). It is perhaps not unusual for people to believe in their product. Nonetheless, Mr Santa Maria was a person well qualified to make a judgment. · Finally, Pyramid wrote to Mr Kratsas on 29 June 1989 aligning itself with P M Sulcs whose software it described as "the best available solution for the key automotive area of material control …" (supra: para 526). 828 Daihatsu pointed to a number of matters which were said to cast doubt upon the claims made by Mr Hooper: · First, an important guide to the future is performance in the past. The performance of P M Sulcs was poor. Quite apart from a history of losses, it had made few sales in Australia, and then only to "captive clients", that is, companies associated with its Canadian parent (Daihatsu subs: para 8.170). · Secondly, P M Sulcs Canada, once it converted its software to run on the IBM platform in 1990, did not promote its product in Australia (Daihatsu subs: para 8.170). · Thirdly, sales were made to companies on the ICL System 25 list, where inventory control was a requirement, and a Wang computer was used. Yet the package selected was not that of P M Sulcs (Francois: Aff. 4.12.00). 829 These matters, without great charity, can be explained. P M Sulcs needed to establish a presence in the Australian market. That process was accelerated, no doubt, with the appointment of Mr Hooper in April 1987. However, the association between P M Sulcs and Wang was, before 1989, a significant disadvantage (supra: para 49). The advantage which the contract with Daihatsu offered was the opportunity to convert to Unix and establish a reference site. By 1990, once P M Sulcs Canada had converted its software to the IBM platform, its fingers had been burnt in Australia, including by the debacle concerning Daihatsu. It is hardly surprising that it held back. 830 I accept, as a matter of probability, that Mr Hooper's confidence in the P M Sulcs software was not misplaced. It could accurately be described, in my view, as amongst the "best of the breed". 831 However, that does not furnish a complete answer to the question. What competition would P M Sulcs have faced, and what price could it have commanded? Unquestionably there was competition, especially from IBM, as Mr Hooper acknowledged. Mr Mills, a Director of a software company, IDS, gave evidence. His company was established in 1988 in association with IBM. It had a software package known as "Parts", dealing with the distribution of motor vehicle parts. Mr Mills identified a number of competitors who marketed comparable software at that time, principally the Dealerman package (which was also IBM). Since 1995 the Parts software had been the largest selling package servicing the motor vehicle distribution market (Mills: T.2001). 832 Mr Molloy, a consultant in information technology, identified companies which he regarded as possible competition to the P M Sulcs software, had it been converted (Molloy: Aff. 6.12.00, para 4). However, I am satisfied, through the cross examination of Mr Molloy, that many of the packages nominated were not comparable. Daihatsu introduced into evidence a manual produced by the Australian Production and Inventory Control Society dated February 1989 (Exhibit 19). The manual was known as MPRII, Buyers' Guide. It listed available software in the manufacturing and distribution area. Mr Hooper, Mr Musson, and others were taken to it. They were questioned concerning the functionality of particular packages, and whether they represented competition to the plaintiff's software, were it converted. However, I accept the evidence of Mr Musson (and that of Mr Hooper to the same effect) when he said this: (Musson: T.1816) "I have already mentioned some of the issues that seem to me to go above and beyond the MRP2. MRP2, as I have said earlier, is a manufacturing system. It is not intended for distribution of the sorts of goods we are speaking of. …. So comparing manufacturing software that has an express functionality specifically for people who manufacture things with software which is intended for the purpose which Daihatsu had in mind, which was a distribution of already manufactured products, is no - is not a way, in my experience, of this determining the competition." 833 In the end, I was left with the firm impression that there were some, although few, packages which may be regarded as real competition to P M Sulcs. All were packages on proprietary systems, such as IBM. The unique attraction which the P M Sulcs package promised, after conversion, was that it would operate upon a Unix system, that is, an open system. I should perhaps digress, and deal more fully with that aspect, since the timing of the plaintiff's proposed entry into the market place is an important aspect of the evaluation of the chance which it says that it lost. The Unix Market 834 The Unix operating system had a number of advantages (cf Weeks: Aff. 7.11.00, p5, para 4.4): · First, Unix could be used on a number of different computers. It therefore offered a choice of hardware. That choice created competition between hardware suppliers, which affected price. · Secondly, Unix also offered high performance. It was an efficient system. Indeed, that efficiency was one of the attractions to Mr Kratsas (T.1151). · Thirdly, Unix allowed a large number of terminals to be connected to the one computer. It was, therefore, ideal for a distribution network. · Fourthly, Unix could be linked to a Relational Database. 835 Mr Musson, the marketing expert retained by the plaintiff, gave evidence concerning changes in the market in the late 1980s. He identified three trends which were worldwide (Musson: Aff. 6.11.00, p16ff): · First, there was a move to Unix, away from the proprietary systems (such as IBM and Wang). The move was, in part, driven by price. The Unix systems (including hardware) were significantly cheaper than a mainframe proprietary system of similar power (Musson: Aff. 6.11.00, p13). · Secondly, there was a shift from the development of software in-house to packaged software, suitably modified to accommodate the customer's specific requirements. · Thirdly, there was a move to Relational Databases as a means of data storage and retrieval. More data could be stored and accessed more speedily. 836 The system which P M Sulcs was contracted to supply Daihatsu offered both Unix and a Relational Database. On the assumption that the conversion was successful, Mr Musson offered the following opinion: (Musson: Aff. 6.11.00, p19/20, para 23) "23. The design of the Plaintiff's software and its ability to inter-work with other Unix-based Open Systems packages via a RDBMS would allow a customer to combine the Plaintiff's software and other 'best of breed' packages into one integrated system. By 1993 it became so common that a clear trend was identified in the computer systems market by the Gartner Research Group where customers world-wide were specifically requesting Open systems packages for integration via a RDBMS." 837 Mr Musson, in a later affidavit, identified the primary variables which, in his experience, affected the sale of software. He said this, incorporating (in my belief, reasonably) aspects of the evidence: (Musson: Aff. 20.11.00, p10, para 21(c)) "21(c) … i. The demand for the Plaintiff's software products and services. It is generally true that Australian organisations quickly adopted Unix. However, as there was no Unix-based materials control software available until after 1993, it is reasonable to assume that there would have been a strong and unsatisfied demand for the Plaintiff's software products running under Unix and also its services. ii. The size and timing of specific sales. The natural end of the system life of the proprietary computer systems ICL System 25, IBM/System 36 and IBM/System 38 computer systems resulted in a high frequency from 1989 to about 1993 of new purchases of computer systems; iii. The level of product and price competition that the Plaintiff would encounter. There was no effective product competition for the Plaintiff's software within the Unix market within Australia; iv. The timing of new product introductions and product enhancements by the Plaintiff or its competitors. The Plaintiff's entry into the Unix market in mid 1989 was well timed due to the unsatisfied demand for Open system software such as the Plaintiff's and the lack of effective competition which did not enter the market until approximately after 1993; v. Market acceptance for new products. There was a high acceptance for new products within the Australian market; vi. Changes in pricing policies by the Plaintiff or its competitions. Because of the competitive market for Unix hardware, proprietary systems were between 40% and 60% more expensive than a similar Open system on which the Plaintiff's MSC software could have operated." 838 Mr Molloy, an expert computer consultant retained by Daihatsu, believed that Mr Musson had overstated the attraction of Unix. Mr Mills, in charge of a software company concerned with motor vehicle parts distribution, observed that distributors in that sector were somewhat slow to adopt Unix. 839 However, I prefer the evidence of Mr Musson. Mr Mills' company was linked to IBM. The slowness of industry in the motor vehicle sector to move to Unix may, in part, have been the consequence of the absence of a suitable Unix product. I am persuaded that, in 1989, for reasons which can be readily understood, Unix offered significant advantages. Software written for Unix was therefore attractive. The Likely Sale Price 840 On the basis of instructions from Mr Hooper, Mr Weeks assumed sale revenue of approximately $700,000 per sale, made up as follows: (Lonergan: Aff. 29.11.00, p29, para 96) "(a) licence fee of $350,000 (b) a referral fee of $250,000 paid to Sulcs by Fujitsu (c) training fee of $8,000 (d) project management fee of $5,000 (e) initial modification fee of $80,000 (f) for 50% of sales, a phased modification fee of $30,000." 841 These amounts, apart from the Licence Fee (which was $150,000) derived from the Agreements between P M Sulcs and Daihatsu, and the arrangements with Fujitsu. 842 Daihatsu challenged the plaintiff's assertions. First, there was no basis upon which it could be realistically assumed that P M Sulcs would have sold its software for $350,000. It never made a sale at that price. The figure was simply a number Mr Hooper had selected. It had no relevance to the market, and what the market might pay (Daihatsu subs: para 8.189). There was no evidence from Canada as to the market price of the same software in that market. 843 Secondly, the only hard evidence of sales actually made, suggested a much lower figure. The Licence Fee agreed with Daihatsu was $150,000. The fee agreed with LNC Industries was $187,000 (Lonergan: Aff. 29.11.00, p29, para 98). The sale proposed to Hyundai was for $150,000. 844 Mr Hooper sought to explain each of these sales by their particular circumstances. The Daihatsu sale offered the inducement of a reference site. LNC was a related company. The proposal to Hyundai was made at a time of difficulty for P M Sulcs in order to induce a speedy sale and thereby assist the plaintiff's cash flow. 845 Mr Musson thought the fee of $350,000 was "low". However, Mr Mills, of IDS, said this: (Mills: Aff. 8.12.00, para 25(d)) "25(d) Mr Musson asserts that, if the Plaintiff's Software Licence was quoted at $350,000, that price was low. I do not agree with that assertion, at least insofar as it relates to software sold in Australia. In my view, in 1989, the upper range of the price of software such as the Parts Software and the Plaintiff's MCS Software for Distributors was $200,000. I note that Mr Musson was based principally in the United Kingdom. Since 1996, IDS has competed on the European market against software vendors located in the United Kingdom. In addition, since about 1998, I, on behalf of IDS, have sold IDS Software in the United Kingdom. I have observed that software prices in the United Kingdom are much higher than those in Australia. I cannot explain why this is the case." 846 The package sold by IDS ("Parts") was priced at $150,000 (Mills: T.2008). However, comparisons between the sale price of IDS software, and that proposed by P M Sulcs, cannot readily be made. The modifications necessary to an IDS package would ordinarily cost between $200,000 and $300,000 (Mills: T.2009). That is significantly more than the modifications contemplated by P M Sulcs in respect of the Daihatsu software ($80,000 to $110,000). That may suggest that the P M Sulcs package had a breadth of functionality (as asserted by Mr Hooper) not present in IDS. 847 Mr Lonergan, as part of his report, amended the assumptions of Mr Weeks to what he termed "more realistic assumptions" (Lonergan: Aff. 29.11.00, p77, para 288). He emphasised, however, that he should not be taken as endorsing the reasonableness of the assumptions so amended. In the context of the sale price, Mr Lonergan suggested an assumption of $150,000 with no referral fee from the hardware supplier (para 291(a)). 848 Before dealing with that suggestion, I should refer to the evidence concerning the payment of a Referral Fee. Mr Musson gave evidence that, where a software house introduced a sale, it was, and is, commonplace for the hardware supplier to pay a commission: (Musson: Aff. 6.11.00, p15, para 15) "15. The reason for payment of these commissions in the 1980s was that hardware companies were then seeking to secure customers of Open Unix systems. However, as noted later, Unix is a standardised operating system, so Unix systems from different vendors were and still are all much the same. Hardware companies were thus seeking forms of differentiation in the marketplace. One successful method of achieving differentiation was to supply high quality market-specific software running on the company's Unix systems. Thus, hardware companies like Fujitsu developed relationships with software houses such as the Plaintiff. In the United Kingdom, ICL entered into at least thirty such agreements. To my knowledge, ICL Australia entered into similar agreements. The success of these relationships in developing the ICL Unix business lay behind my establishment of 'Open Software World'." 849 Mr Molloy gave evidence that, in most cases where a company is contemplating changing its software, it is also ready to change its hardware. Hardware sales, therefore, more often than not, accompany the sale of software. 850 Here, both Fujitsu and Pyramid were prepared to pay P M Sulcs a commission on the Daihatsu sale, if it could be secured (supra: paras 176ff and 550ff). 851 However, it is unrealistic to assume a commission on every sale. Some sales may not involve hardware. Even where hardware is involved, the sale may come through the hardware supplier or the reference site. Moreover, not every sale (as Daihatsu pointed out in its submissions) will involve a computer valued at $1 million (being the amount necessary to attract the sales commission assumed by Mr Weeks, namely $250,000) (Daihatsu subs: para 8.114.4). 852 Returning to Mr Lonergan's "more realistic assumption" of a sales price of $150,000 with no Referral Fee, in my view such an assumption understates the likely revenue from each sale. On the other hand, I believe that a Licence Fee of $350,000 and a Referral Fee of $250,000 on each sale (as assumed by Mr Weeks) significantly overstates the likely revenue. I have accepted that the P M Sulcs package could be described as amongst the "best of breed". I have also accepted that there was no significant competition, and that such competition as there was did not offer the advantages of Unix or a Relational Database. In these circumstances, a sale price of $250,000 seems to me to be reasonable. Commission would have been earned on some sales, but not others. An average commission of, say, $50,000 per sale, appears to me reasonable, perhaps conservative. The Likely Number of Sales 853 The likely number of sales during the assumed life of the software (say, seven years) is obviously critical to an assessment of the revenue that may have been lost. Mr Musson, called by the plaintiff, provided an analysis in which he identified three potential markets for the plaintiff's software, namely: · First, those companies who, like Daihatsu, use the obsolete ICL System 25 and/or the Spares software package. · Secondly, the wholesale market. · Thirdly, that aspect of the manufacturing market which is concerned with the distribution (as opposed to the manufacture) of manufactured goods (Musson: Aff. 3.3.99, para 1). The ICL List 854 By 1989, the ICL System 25 was coming to the end of its life. There was no comparable replacement system available (Musson: Aff. 6.11.00, p24, para 34). Companies who had used that system were, therefore, potential targets for both a new computer and suitable software. 855 Mr Hooper gave evidence that a former salesman from ICL, who now worked for Fujitsu, Mr Warren Blood, had provided him with a list of companies using the ICL System 25 or Spares software (Exhibit A: doc 118). Mr Blood stated to Mr Hooper at the time the list was provided that these companies would provide ideal targets for the converted software. 856 Mr Blood was not called. Daihatsu suggested that I should infer that his evidence would not have assisted the plaintiff. However, I regard Mr Blood as having been available to both parties. Daihatsu called many witnesses from Fujitsu. For reasons which neither party explained, Mr Blood was not called by either. No inference should be drawn one way or the other. However, little or no weight can be attributed to the expression of opinion by Mr Blood. 857 Mr Musson conducted a survey of companies on the list. He described his methodology and the outcome in Appendes to his affidavit of 6 November 2000. As you would expect, after ten years, the survey was of limited value. Mr Musson identified 60 organisations (Musson: Aff. 6.11.00, p25, para 36). Of these, 44 could not be contacted, either because the company no longer existed, or had changed its name, or had merged with some other organisation. Mr Musson identified 29 of the companies as "very large, multi-divisional companies who would have been prospects for multiple copies of the plaintiff's software" (Musson: Aff. 6.11.00, p25, para 36). He regarded all but three of the companies on the list as prospects and the likely ratio of success greater in the case of larger organisations. 858 Daihatsu was highly critical of Mr Musson's evidence. It submitted that the survey was worthless. Mr Musson had not asked basic questions, including whether the organisations had used the Spares software (Daihatsu subs: para 8.180). 859 Ms Rachel Francois, a solicitor for the defendant, conducted a further survey, contacting many of the organisations to which Mr Musson had spoken. Of these, seventeen provided information (Francois: Aff. 4.12.00, para 5). Not one had confirmed having used the Spares software. Indeed, few (two or three) confirmed that the ICL System 25 had been in operation. 860 The findings of Ms Francois were put to Mr Musson in cross examination. He asserted that Ms Francois' survey had, indeed, confirmed the validity of his approach (T.1769). He had used the ICL System 25/Spares list as a surrogate for companies involved in distribution and resource planning (T.1768). Ms Francois, through her survey, had confirmed that most, if not all, companies on the list, to whom she had been able to speak, used such software. Mr Musson said that his intention had been to discover the market for inventory control software on "rapidly fading hardware" (T.1769). 861 Mr Lonergan conveniently summarised Mr Musson's opinion, based upon this material: (Lonergan: Aff. 29.11.00, p24, para 85) "(a) out of 86 identified ICL/spares users, there were 31 smaller companies and 29 larger organisations (b) 3 sales could have been made to the smaller companies, and 6 to the larger organisations." The Wholesale Market 862 Mr Musson consulted statistics published by the Australian Bureau of Statistics on Industry Performance. The statistics included the number of businesses which held stocks for specific industries or trade, and which supplied retail outlets. There were between 35,000 and 37,000 such businesses in the period 1990 to 1994. They varied in size. Since potential sales involved hardware costing approximately $1 million and software of $350,000, Mr Musson focused upon businesses described by these statistics as "large wholesaling businesses", of which there were more than 170 during the same period. 863 Based upon this material, Mr Musson provided the following opinion (Musson: Aff. 6.11.00, para 38ff). · That, for the purposes of identifying prospects, he would disregard the 35,000 to 37,000 organisations, although some may have been prospects. · Likewise, he would disregard the potential for overseas sales, although there was that potential, more especially because the plaintiff was the subsidiary of Canadian parents. · Of the 173 large Australian wholesaling organisations, Mr Musson believed that 50% would represent prospects for the P M Sulcs software. · Each prospect could be expected to renew its software on average every seven years. · He believed that one in six prospects could, in that period, be converted to a sale. The Manufacturing Market 864 Mr Musson also regarded the distribution aspect of manufacturing as a potential source of sales. He set out, in his affidavit, the statistics. There were between 46,000 and 48,000 manufacturing businesses in Australia in 1990 to 1994. They varied in size. The average revenue for such businesses in the period 1991 to 1992 was $3,915,000. Some, therefore, were certainly large enough to need distribution and inventory control software such as that provided by P M Sulcs in the package MC2 (Musson: Aff. 6.11.00, p29, para 44). Nonetheless, to ensure that the estimate was conservative, Mr Musson said that he would disregard such organisations. Instead, as with wholesaling, he would confine his attention to those organisations classified by the Bureau as large manufacturing organisations. Upon that basis, Mr Musson expressed the following view (Musson: Aff. 6.11.00, p29, para 45). · The average number of large manufacturing organisations during the period was 695 businesses. · Of these, 30%, in Mr Musson's experience, would represent prospects for the sale of P M Sulcs software. · Each prospect could be expected to renew its software every seven years. · Of the prospects, one in six could be converted to sales. 865 In summary, Mr Musson viewed the prospective sales as follows: (Musson: Aff. 6.11.00, pp38-39, para 62) Year Sales 1990 10 1991 11 1992 6 1993 6 1994 6 1995 6 1996 6 1997 6 1998 6 Total 63 866 The breakdown of sales, according to source, is conveniently summarised by Mr Lonergan in his report as follows: (Lonergan: Aff. 29.11.00, p23, para 84) Year Wholesale Manufacturing System 25 Total 1990 2 4 4 10 1991 2 4 5 11 1992 2 4 6 1993-98 2 4 6 The Submissions of Daihatsu 867 Mr Musson's evidence was attacked, first, because it was said that he lacked expertise, and secondly, because it was said that he was an advocate. The plaintiff, in its submissions, made similar accusations against experts retained by the defendants. 868 Let me deal with the issue of advocacy first. Mr Musson's attention was drawn to the Code defining the obligations of the experts when giving evidence (Musson: Aff. 6.11.00, p5). He denied that he had embraced the plaintiff's cause, and was an advocate for P M Sulcs. I accept that denial. I believe Mr Musson attempted to give dispassionate evidence, endeavouring, according to his lights, to provide an opinion which was conservative rather than extravagant. 869 The more substantial question is the question of expertise. There can be no doubt (having watched Mr Musson in cross examination over many days), that Mr Musson has a deep understanding and knowledge of the computer industry. It has been his life for 38 years. He has held many positions, as set out in his curriculum vitae, and his affidavits. Those positions have involved marketing experience at every level in many countries. His primary area of interest was the financial sector. However, his expertise extended well beyond that sector. As he explained in his evidence, companies whose primary need may have been financial software, invariably had other needs. And so it was that he became familiar with many industries, and the software which they use. I accept that Mr Musson had relevant experience in respect of each of the industries which were potentially targets for the P M Sulcs software. I am also persuaded that Mr Musson's expertise extends well beyond the United Kingdom. Specifically, he was able, in my view, to express opinions concerning Australia. He explained, and I accept, that the computer industry is a worldwide industry (Musson: Aff. 6.11.00, p11, para 11). He has been involved in the Australian industry, as he described in the following passage, taken from his affidavit: (Musson: Aff. 6.11.00, p9, para 7) "7. From 1981 to 1985, I assisted the Australian ICL Trader Point Manager (responsible for sales through software houses) as a consultant, spending periods of three to six weeks here per year working with software houses. In 1985/86, I assisted ICL Australia in the setting up of a Unix porting centre in Melbourne, based on the UK centre which I designed and managed. This Centre assisted software houses to convert their software to Unix. From 1986 to 1995, I visited Australia yearly to assist ICL and later Fujitsu in their sales of systems into the Australian Financial Services market, working with Australian software houses." 870 Since 1995 Mr Musson has lived in Australia, acting as a computer consultant. He is also completing a higher degree at the School of Management at Macquarie University. 871 In respect of the estimates provided by Mr Musson, Mr Lonergan made a number of criticisms. He said this: (Lonergan: Aff. 29.11.00, p24, para 86) "86. In respect of the wholesale and manufacturing markets Mr Musson makes no detailed analysis of the individual companies or their software requirements and has simply assumed that because these companies exist, then sales of the software must follow. In my opinion this is not a proper or sufficient analysis for the purposes of the preparation of an estimate of future cash flows. In particular, Mr Musson includes no analysis of the existence of competing products, nor of the potential impact of technological changes." 872 Mr Lonergan drew attention to the investment required to install a computer which would run the plaintiff's software (say, $1.5 million) (Lonergan: Aff. 29.11.00, p25, para 90). He added: (Lonergan: Aff. 29.11.00, p25, para 92) "92. In my opinion, Mr Musson presents no reasonable analysis to support the volume of sales that he assumes. In my experience as a valuer, such an analysis would not be sufficiently thorough for the purposes of support for a prospectus or for the purpose of attracting investment in the development of the software. therefore, Mr Weeks' calculation is not based on any reasonable analysis of the likely sales volume." 873 The submission made on behalf of Daihatsu drew attention to an article by Professor Warren Pengilley, "Misuse of Marketing Power and Problems of Decision Makers and their Advisers" (Commercial Law Quarterly, vol 13, no 3, September 2000). The article, written in the context of s46 of the Trade Practices Act, 1974 (Cth), identifies the issues to be analysed before forming a view about the potential "market" for a product (Daihatsu subs: para 8.108). No such analysis was undertaken by Mr Musson. Nor was their evidence dealing with many such issues. The plaintiff in reply said this: (Plaintiff's subs 23.4.00: para 19) "19. The concept of a 'market' as it is known to Part IV of the Trade Practices Act is of very little relevance in determining the value of the opportunity lost to PMS to make sales of the converted software. Part IV is concerned with the regulation of power and influence within a particular market. In evaluating whether an entity has the ability to influence a market, the geographical, temporal and commercial limits of that market are obviously of great importance. In the present case, the Court is concerned to know whether, on the balance of probabilities, there would have been willing purchasers for the converted PCS software within Australia and overseas ('a world-wide market') in the years after 1989." 874 Obviously, this is not a Trade Practice action. However, it has to be said that the evidence as to future sales is very general indeed. I accept that Mr Musson, through his background in marketing, is indeed skilled in identifying potential customers for software with particular functionality. However, necessarily, the next step (providing a reliable estimate of the ratio of prospects to converted sales), is more speculative. The material gathered by Mr Musson appears to me relevant. However, the survey based upon the ICL System 25 list was predictably inconclusive, after a decade. I accept that, in 1989, the ICL list came from a reliable and knowledgeable source (Mr Blood) and was, as its title suggested, a list of organisations which had used the ICL System 25 or the Spares software which were each obsolete by that time. However I approach with some caution the estimates provided by Mr Musson. I do not regard them as "pure speculation", as suggested by Daihatsu. Persons skilled in marketing in the computer industry have, I believe, a better appreciation of the chance of a successful sale, than those without that experience. However, the variation between witnesses as to the ratio between prospects and sales underlines the uncertain nature of such estimates. Mr Mills said that for every one hundred letters or "cold calls", as he termed them, one may get ten responses. From the ten responses one sale may be made (Mills: T.2004). That evidence, according to Daihatsu, suggested a ratio of 100:1, rather than 6:1. 875 Mr Musson, however, in his analysis, had, I believe, undertaken a process of refinement which took the identification of prospects beyond that of a "cold call". Moreover, I generally prefer the evidence of Mr Musson to those witnesses who offered a different view. 876 Having said that, I believe Mr Musson's estimate is optimistic, although not entirely unrealistic. 877 I have referred already to an alternative approach suggested by Mr Lonergan, the expert retained by Daihatsu (supra: para 847). It was an approach based upon what Mr Lonergan termed "more realistic assumptions" than those made by Mr Weeks (which, in turn, were based upon those provided by Mr Musson). The alternative, in effect, halved the number of sales predicted by Mr Musson, and reduced the period during which sales were likely to be made to seven years (being the life of the software), rather than ten years. 878 The alternative, "more realistic" schedule of Mr Lonergan was as follows (see Lonergan: Aff. 29.11.00, p77, para 291(b); appendix E1): Year Sales 1990 7 1991 7 1992 4 1993 4 1994 4 1995 4 1996 4 879 I accept that formulation as more realistic than that offered by Mr Musson. Even so, it may be optimistic. However, I believe it provides a reasonable basis for approaching the earnings that may have flowed to P M Sulcs had the defendant not repudiated the contract. I say that for two reasons. First, it should be remembered that part of the lost chance, according to the plaintiff, was an ability, through the sale of its product, to create a reputation. That reputation would then serve the company, if it had the prudence to invest in the creation of further products, in marketing those products. A generous approach to future sales incorporates such intangibles. 880 Secondly, the uncertainty in assessing future sales can be accommodated in the discount rate which is applied. Mr Lonergan said this: (Lonergan: Aff. 29.11.00, p25, para 93) "93. In essence, although Mr Musson purports to conduct a marketing analysis, it is normal commercial practice and normal valuation practice to consider a range of possible outcomes and to apply a profitability factor to such outcomes rather than assume that Mr Musson's estimate was certain. An alternative way of allowing for the uncertainties inherent in any such forecast is to increase the discount rate to allow for the uncertainties. Mr Weeks has neither allowed for such probabilities nor even used, let alone adjusted, his discount rate." Payment of Royalties 881 Mr Weeks, in his analysis, assumed that no royalties were payable by P M Sulcs (Australia) to the Canadian parent. He did so on instructions. Mr Hooper, it will be remembered, gave evidence that the head Licence between P M Sulcs Canada and the Australian subsidiary did not make provision for the payment of royalties (Hooper: T.773/4; supra: paras 693, 734, 739). 882 Daihatsu, in its submissions, was highly critical of Mr Hooper's evidence on this subject (Daihatsu subs Credit of Mr Hooper: para 4 to 4.3). Although I have accepted that Mr Hooper did, indeed, see the Head Licence, I believe, as a matter of probability, that his recollection is wrong when he said that it made no provision for royalties. I believe it likely that such a provision was made, although plainly, during the period before the Daihatsu sale, no royalties were paid. I accept that the adjustment made by Mr Lonergan in Appendix E1, adding 15% of the Licence Fee in respect of royalties, is an appropriate adjustment. Maintenance Profits 883 It will also be remembered that a licensee of the P M Sulcs software was invited to execute a Software Maintenance Agreement. Mr Weeks, on instructions, assumed that the cost incurred in respect of maintenance represented 10% of the fee charged. 884 That assumption was also challenged by Mr Lonergan. It was not supported by analysis. In his many years of experience, he had never encountered profitability for that item at that level (Lonergan: Aff. 29.11.00, p33, para 125). 885 Mr Weeks acknowedged that he had never heard of a margin that high (Weeks: T.2108). Mr Mills gave evidence that IDS made a profit on maintenance of between 25% and 30%. 886 Mr Lonergan had come across examples of profitability for this service of 50%. In the alternative scenario which he prepared (Appendix E1), he adopted as a "more realistic assumption" a profit of 50% of the fee earned. I believe that approach is reasonable. Research and Development 887 Mr Weeks, in his analysis, was concerned to discover the net loss to P M Sulcs. He therefore determined, in some detail, the overheads which would have been incurred in generating sales. He did not, however, include any sum for Research and Development. Mr Weeks said this: (Weeks: Aff. 7.11.00, p13, para 2.1) "2.1 Research and development costs are incurred for existing products in the areas of broader product support, upgraded versions of software, changing customer requirements, and the need to adapt product versions for expansion into each country. Research and development ('R & D') investment may also be required for quality assurance, product testing and acquisitions of additional businesses." 888 Mr Weeks added: (Weeks: Aff. 7.11.00, p13, para 2.2) "2.2 I am instructed that the PMS software had no R & D requirements and this was accepted as reasonable for the following reasons: 2.2.1 The MCS software product is a mature product and has already undergone significant development. 2.2.2 Each modification resulting from a sale represented a development of the product (ever evolving). 2.2.3 The software required few changes for international operation, as functionality for different taxation regimes and currency differences were already incorporated into the software. 2.2.4 Quality assurance and product testing had already been conducted in the early stages of the software development. 2.2.5 The model assumes sales only of the MCS product. No consideration is given to the possibility of sales of new software products or the costs of developing or acquiring them." 889 Mr Weeks, as mentioned, valued the loss of the chance using future maintainable earnings. In estimating value, Mr Weeks identified a number of corporations involved in the sale of software, and examined their trading results. Such results were then compared with a financial model of the estimated profits of P M Sulcs during the forecast period (Weeks: Aff. 7.11.00, p54ff - Annexure F). Each company examined included expenses for Research and Development (see also Exhibits 23, 26 and 28). 890 Mr Lonergan, in his commentary upon Mr Weeks, was critical of Mr Weeks having omitted Research and Development (Lonergan: Aff. 29.11.00, p40, para 153(o)). At the time Mr Weeks gave evidence, I gave my preliminary impression, which was that it was unrealistic to omit Research and Development as an overhead, since it was routinely incurred. This prompted Mr Weeks to prepare a further report, which included Research and Development at 18% (Exhibit W). A Sensitivity Analysis was undertaken using rates from 10% to 21%. The results were not significantly different because of income tax concessions attracted for Research and Development in Mr Weeks' opinion. Mr Lonergan, however, in a report of 23 April 2001, challenged the taxation assumptions, and other aspects of Mr Weeks' further analysis (Exhibit 36). 891 Having reflected further on this issue, I am now persuaded that the better approach, in assessing the loss to the plaintiff caused by the defendant's breach, is to omit Research and Development as an overhead. In broad terms, Research and Development has two objectives. The first is a recognition that the company's product has a limited life. It must be replaced if the company is to remain in business. Research and Development, therefore, is a prudent earmarking of present day profits to secure future earnings. 892 The second objective is the maintenance of the product which is presently being marketed. To secure the years of life potentially available (in this case seven years), the product cannot remain static. It requires revision, fine tuning and enhancement, lest its life be cut short. 893 Here, each sale, and the modifications associated with each sale, provided an opportunity for refinement and improvement. The overheads assumed in respect of each sale, and the undertaking of modifications, would, in my view, meet the second objective. 894 As to the first objective, in determining the value of the chance the plaintiff lost, I believe it better to concentrate upon the product which, on the assumptions made, was about to be converted and already existed, and had a probable life of seven years. Research and Development aimed at creating future earnings is more problematical. It is, in my view, more remote from the defendant's breach. On reflection, I believe it should be excluded because its inclusion, without also including future earnings (which it is designed to secure), seems to me unfair. Conversion Costs on Later Sales 895 Daihatsu, in its submissions, criticised Mr Weeks for having made no allowance for the conversion costs associated with each later sale. It said this: (Daihatsu subs: para 8.157) "For every sale, Sulcs proposed first to make the modifications in the Wang VS Cobol version of the software into 'C'. This would mean that for every sale it was necessary to undertake the conversion using the Paradyne tool. As that would only result in a 90% conversion, the balance of the conversion would have to be undertaken at a cost of at least $200,000 and would take 30 person months. Even if less time were involved after some experience were obtained, there necessarily would be substantial work and cost involved with risks of latest bugs and yet further work and costs." 896 This aspect was not adequately explored during the hearings. Although there was certainly reference to the difficulties in modifying software, and the language in which modifications could be made, no witness gave evidence, in terms, which suggested that the work required in respect of each sale would be similar to that necessary in the first conversion for the Daihatsu sale. The plaintiff, in its submissions in reply, said this: (Plaintiff's Subs in Reply on Damages 23.4.01: para 23.8) "Mr Hooper's evidence at T.97 and T.208 is to the effect that the additional work to complete the DAP conversion would have cost up to $200,000 in PMS personnel time. In other words, that would have been the cost to achieve the initial conversion. Later customers would have had the benefit of that initial conversion, and consequently the additional costs would have mostly be(en) concerned with modifications for the new customers." 897 The need for manual conversion was created by the inability of the tool to carry out the entire job. The reference to 90% was simply a reference to the guarantee provided by Dr Lamberton in respect of the tool he was required to develop. Having developed the tool, and with fine tuning and experience, no doubt it could be adjusted to improve upon that figure. There are references in the evidence to a conversion rate of 93%, and even 99% in respect of some modules. Whatever the tool accomplished, I infer that the specific tasks required to complete the job manually would have been identified after the first conversion, and documented, such that the conversion could more readily be undertaken. 898 Nonetheless, I believe it is reasonable to assume some cost to P M Sulcs associated with the need for manual conversion in respect of each sale. I believe a reasonable allowance (doing the best I can) is $50,000 per sale, including all additional costs associated with the carrying out of such work. I will assume that sum as a fixed amount throughout the life of the software. Mr Lonergan's Alternative Scenario 899 I have referred already to the alternative formulation by Mr Lonergan (Appendix E1), based upon what he termed "more realistic assumptions". Mr Lonergan, in fact, identified two alternative scenarios (Appendix E1 and E2), although it appears to me that Appendix E2 is extreme. The first scenario (Appendix E1) adopted Mr Weeks' assumptions, modified as follows: (Lonergan: Aff. 29.11.00, p77, para 291) "291 In this Scenario I have adopted Mr Weeks' assumptions except that I have: (a) included a sales price of $150,000 and no referral fee (b) reduced the level of sales to two thirds those projected by Mr Weeks. That is, seven sales in 1990 and 1991, and four in all subsequent years. I have reduced operating costs by 25% to account for the reduced level of sales (c) included a royalty rate of 15% of the sales price (d) assumed that the hours needed for modification work are double those estimated, with no additional income recoverable from the customer. This reduces the profit on each sale through modifications from $54,400 to $28,800 (e) increased maintenance costs to 50% of maintenance income (as opposed to 10% assumed by Mr Weeks) (f) reduced the 'maintenance renewal rate' to 75%, ie only 75% of maintenance contracts are renewed annually instead of the 95% as assumed by Mr Weeks (g) inflated maintenance at CPI rather than 10% per annum (h) included an abnormal item of $350,000 in 1990 instead of $114,000 as included by Mr Weeks. I am asked to assume that the cost of converting the software would have been at least $350,000 (i) included operating costs in the years after 1996 at 50% of the 1996 level forecast by Mr Weeks." 900 These assumptions appear to me reasonable, subject to the following: · First, the sale price, in accordance with my findings, should be increased from $150,000 to $250,000, with an average referral fee of $50,000 per sale, making total income per sale of $300,000 (Assumption (a)). · Secondly, I believe Assumption (i) is not appropriate. If the product is assumed to have a limited life of seven years, it is not, in my view, reasonable to assume no income for the six years remaining (see Appendix E1), and yet a continuation of overheads of 50% of their former level simply to service maintenance contracts. I appreciate that maintenance contracts would continue. However, if the company had no product (because it had, imprudently, not invested in developing a replacement), then one would assume some other arrangement would be made for the contracts which remained. The company would merge, or it would sell the maintenance aspect of its business, or, more likely, obtain some other source of income. · Thirdly, the conversion costs on each sale are assumed to be $50,000. 901 I reproduce below, the following tables: · Table 1, being Appendix E from Mr Lonergan's report of 29 November 2000 (reproducing Mr Week's tables), which I have modified to include only years 1990 to 1996. · Table 2, being Appendix E1, which is the Cash Flow Forecast based upon Mr Weeks' assumptions, as modified by Mr Lonergan (again, only for the years I regard as relevant, 1990 to 1996). · Table 3, being Appendix E1, which has been modified by me to adjust for the higher revenue which I believe probable (again, for the years 1990 to 1996), adding the costs of conversion on each sale (held constant), and the royalty payments. 902 These calculations must be carefully checked by the parties, and are subject to the Slip Rule. CALCULATIONS MADE BY MR WEEKS TABLE 1 Year ended 30 June 1990 1991 1992 1993 1994 1995 1996 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Sales Income Income per sale License fee 376 388 391 399 406 425 436 Other 282 282 282 282 282 282 282 Modifications 86 89 89 91 93 97 100 ____ ____ ____ ____ ____ ____ _____ 744 758 763 772 781 805 818 Total Income 3346 7583 7249 4631 4687 4827 4909 Cost per sale Cost of sale (5) (5) (5) (5) (5) (6) (6) Modifications (27) (28) (29) (29) (30) (31) (32) Sales commission and marketing (16) (17) (17) (17) (17) (18) (19) Royalty cost 0 0 0 0 0 0 0 ____ ____ ____ ____ ____ ____ _____ (48) (50) (50) (51) (52) (55) (56) (218) (500) (480) (309) (314) (329) (338) Maintenance Income Per contract 56 58 59 60 61 64 65 Less costs (6) (6) (6) (6) (6) (6) (7) ____ _____ ____ ____ ____ ____ _____ 51 52 53 54 55 57 59 Total Maintenance Income 228 747 1219 1502 1783 2117 2417 Total Gross Profit 3356 7830 7988 5824 6155 6615 6988 Operating Costs (668) (884) (973) (984) (1142) (1387) (1729) Abnormal item (114) ____ ____ ____ ____ ____ ____ _____ Net profit before tax 2574 6946 7015 4840 5013 5228 5259 Tax (1004) (2709) (2736) (1888) (1955) (2039) (2051) ____ ____ ____ ____ ____ ____ _____ 1570 4237 4279 2953 3058 3189 3208 Net profit after tax _____ ____ _____ --_____ _____ _____ _____ CALCULATIONS MADE BY MR LONERGAN TABLE 2 Year ended 30 June 1990 1991 1992 1993 1994 1995 1996 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Sales Income Income per sale License fee 161 166 168 171 174 182 187 Other 14 14 14 14 14 14 14 Modifications 86 89 89 91 93 97 100 ____ _____ _____ _____ _____ ____ _____ 261 269 271 276 281 293 301 Total Income 1825 1880 1085 1103 1123 1173 1202 Cost per sale Cost of sale (5) (5) (5) (5) (5) (6) (6) Modifications (55) (57) (57) (58) (59) (62) (64) Sales commission and marketing (16) (17) (17) (17) (17) (18) (19) Royalty cost (24) (25) (25) (26) (26) (27) (28) ____ _____ _____ _____ _____ ____ _____ (100) (103) (104) (106) (108) (113) (116) Total Cost (700) (723) (417) (425) (433) (453) (465) Maintenance Income Per contract 24 25 25 26 26 27 28 Less costs (12) (12) (13) (13) (13) (14) (14) _____ ____ ____ ____ ____ ____ ____ 12 12 13 13 13 14 14 Total Maintenance Income 84 153 166 178 188 202 212 Total Gross Profit 1209 1310 833 857 879 923 949 Operating Costs (501) (663) (730) (738) (752) (787) (808) Abnormal item (350) ____ ____ ____ ____ ____ ____ _____ Net profit before tax 358 647 104 119 127 135 142 Tax (140) (252) (40) (46) (49) (53) (55) ____ ____ ____ ____ ____ ____ _____ Net profit after tax 219 395 63 72 77 83 86 ____ ____ ____ _____ _____ _____ _____ MODIFICATION OF MR LONERGAN'S CALCULATIONS- TABLE 3 Year ended 30 June 1990 1991 1992 1993 1994 1995 1996 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Sales Income Income per sale License fee Referral 261 266 268 271 274 282 287 50 50 50 50 50 50 50 Other 14 14 14 14 14 14 14 Modifications 86 89 89 91 93 97 100 ____ ____ ____ ____ ____ ____ ___ 411 419 421 426 431 443 451 Total Income 2877 2933 1684 1704 1724 1772 1804 Cost per sale Cost of sale (5) (5) (5) (5) (5) (6) (6) Modifications (55) (57) (57) (58) (59) (62) (64) Sales commission and marketing (16) (17) (17) (17) (17) (18) (19) Royalty cost (39) (40) (40) (41) (41) (42) (43) Conversion (50) (50) (50) (50) (50) (50) (50) _____ _____ ____ _____ ____ ____ ____ (165) (169) (169) (171) (172) (178) (182) (1155) (1183) (676) (684) (688) (712) (728) Maintenance Income Per contract 24 25 25 26 26 27 28 Less costs (12) (12) (13) (13) (13) (14) (14) _____ ____ ____ ____ ____ ____ ____ 12 12 13 13 13 14 14 Total Maintenance Income 84 153 166 178 188 202 212 Total Gross Profit 1806 1903 1174 1198 1224 1262 1288 Operating Costs (501) (663) (730) (738) (752) (787) (808) Abnormal item (350) ____ ____ ____ _____ ____ ____ ____ Net profit before tax 955 1240 444 460 472 475 480 Tax (363) (471) (169) (175) (179) (181) (182) ____ ____ ____ ____ ____ ____ ____ Net profit after tax 592 769 275 285 293 294 298 ____ ____ ____ ____ ____ ____ ____ The Discount Rate 903 Mr Lonergan provided a detailed and erudite account for the need for discounting, and the appropriate rate (Lonergan: Report. 28.11.00, p56ff). The objective of the discount rate was identified in these words: (Lonergan: Report. 28.11.00, p64, para 242) "242. In considering what discount rate should be used, the overall objective of the discounting exercise must be borne in mind. The overall aim is to convert a stream of projected (but nevertheless hypothetical) net cash flows, occurring over a long period of time, into a single lump sum at a single date. The act of conversion of the net cash flow stream into a single cash lump sum is therefore to ascribe an equivalent value as at 30 June 1989 to those net cash flows, so that the single lump sum reflected all future net cash flows but allowed for the different time periods of receipt and the risks of receipt." 904 Mr Lonergan stated that, in determining the value of the project, the cash flow should be discounted at the cost of capital. The method normally used to determine the cost of capital, and hence the discount rate, is the weighted average cost of capital (Lonergan: Report 28.11.00, p65, para 245). Mr Lonergan set out the issues which should be addressed in calculating the appropriate discount rate, namely: (para 268) (a) the cost of equity, (b) the cost of debt, (c) the debt/equity ratio. 905 The cost of equity rests upon the following fundamental assumptions: (Lonergan: Report 28.11.00, p70, para 269) "(a) an investor will always be willing to make an investment into risk free securities, such as long term Government bonds (b) if however the investor is prepared to invest in a riskier investment than the risk free Government bonds, because of the higher potential returns that are expected to be generated from the higher risk investment, the investor will require a higher rate of return than generated by the Government bonds. That is, a premium will be required by the investor in accepting this higher level of risk. (c) the rate of return required will vary depending upon the extent that the specific investment is riskier (or less risky) than an average investment in the market." 906 Having dealt with each aspect, Mr Lonergan determined that the appropriate discount rate would be not less than 35% (Lonergan: Report 28.11.00, p74, para 280). Applying that rate to the earnings based upon assumptions which Mr Lonergan regarded as "more realistic", Mr Lonergan stated that the value of the lost chance to P M Sulcs was nil (Lonergan: Report 28.11.00, p81, para 300). 907 Mr Weeks, as mentioned (supra: para 814), prepared an alternative calculation based upon the same methodology as Mr Lonergan (discounted cash flow) (Exhibit W). The discount rate Mr Weeks thought appropriate was 21%. He said this: (Weeks: Report 19.2.00, p2, Exhibit W) "Based on your instructions that the level of sales and sales prices to be adopted would have been achieved, then, in effect, the risk of non-achievement of the expected cash flows is virtually nil. On this basis, the appropriate discount rate to apply would, in my opinion, be approximately 21%, comprising the risk free rate of 13.5% plus the general risk premium of 7%." 908 Mr Lonergan regarded that rate as "far too low" (Exhibit 36, p7, para 20(b)). He said this: (Exhibit 36, p17, para 43) "43. Mr Weeks states that he has been instructed that the risk of non-achievement of the cash flows is virtually nil; that is the receipt of these cash flows was risk free. If this was really the case and the cash flows were certain, then the appropriate discount rate to use would be the risk free rate and not 21%. This is because a stream of certain cash flows would be essentially risk free, whereas the rate chosen by Mr Weeks is consistent with a fully diversified share portfolio where the cash flows are by no means certain, have a higher degree or risk and therefore a higher discount rate. The argument is in my opinion academic since the cash flows are not risk free (even if sales were certain, which they were not) and therefore the use of the risk free rate would not be appropriate, but the fact that Mr Weeks does not use it when he asserts that the cash flows are risk free, betrays a lack of understanding of the use of such discount rates." Submissions on the Discount Rate 909 I have referred already (supra: para 806) to one aspect of the plaintiff's submissions. The following was said: (Plaintiff's Subs in Reply on Damages, 23.4.00: pp14/15, paras 29/30) "29. We respectfully submit that Mr Weeks' is the correct approach according to the principles described by the High Court in Sellars v Adelaide Petroleum and Malec . There are three steps to valuing the chance: 29.1 First, identify the event that might have occurred. Here, it was the making of sales of the converted software. 29.2 Second, value the event as if it had occurred. Mr Weeks values it at about $40 million. 29.3 Third, assess the likelihood that the event would have occurred. This task is for the court alone. 30. Mr Lonergan falters because he does not confine himself to the second task, and undertakes the first (by considering the likelihood of the conversion being achieved) and the third (by factoring that contingency into his discount rate)." 910 The only risk acknowledged by the plaintiff (although in the context of a commentary on the discounted cash flow methodology of Mr Lonergan) was the risk that the conversion of the software would not be successful. That risk was low, and adequately provided for (in the submissions of the plaintiff) by the additional 7% adopted by Mr Weeks (Plaintiff's subs: p87, para 20). Presumably, the plaintiff would suggest that I should discount the plaintiff's net earnings by no more than 21%. 911 The defendant, however, urged Mr Lonergan's "cautious view". It was, in the defendant's submission, based upon "vast commercial experience of the capital and stock markets", and also "a conventional view of the mathematical law of probability" (Daihatsu Subs in Reply on Damages, 26.4.01: para 28) (cf G v H (1994) 181 CLR 387 at 398). The submission made by Daihatsu added this: (para 29) "29. Here, there were many chances successfully to be realised before commercial success was in prospect. These included: 29.1 finding a conversion tool that got a good result at a price which was acceptable and then completing the production of the tool to specification. 29.2 Sulcs repairing its shattered relationship with Fujitsu and actually doing a deal for the provision of $250,000 or finding from a source, of which there is no evidence, the money to finance the whole process of conversion. 29.3 Sulcs' board agreeing to go ahead on the basis of the 2 steps above. 29.4 successfully doing the conversion itself and embedding the SQL commands. 29.5 getting the 'bugs' out of the MCC System software in both the Wang VS and C versions. 29.6 getting the Converted Software onto the M760, weathering the inherent problems of that machine and then adapting to its replacement. 29.7 Sulcs surviving financially during this process, including any setbacks. 29.8 Daihatsu being happy at the end of this process to be a reference site. 29.9 purchasers agreeing within a time in which Sulcs remained financially solvent to buy the Converted Software and doing so at any particular price or prices." 912 I accept the defendant's submission, and would add, the inherent uncertainty as to the level of sales which would have been achieved had P M Sulcs been able to take advantage of the chance which it had (supra: para 880). 913 The discount rate, as applied in a valuation based upon a discounted cash flow methodology, provides some guidance in determining the prospects of success had the plaintiff been permitted to exploit the chance which it lost. In my assessment, the appropriate discount, reflecting the plaintiff's prospects of successfully achieving the earnings set out in Table 3 is 40%. In other words, I assess the plaintiff's prospects of earning the stream of income in Table 3 as 60%. Applying that rate, the loss of the chance should be valued at $1,683,600. 914 The verdict of the plaintiff, therefore, should be as follows: · Licence Fee $75,000 · Maintenance Fee $22,500 · Modifications $81,500 · Loss of Chance $1,683,600 $1,862,600 ORDERS 915 For these reasons, I therefore make the following orders: 1. There should be a verdict for the plaintiff in the sum of $1,862,600, plus costs and interest. 2. I will reserve for submission (in the absence of agreement) the precise orders which should be made in respect of costs and interest. 3. The matter should come back before me at a time convenient to the parties, within 14 days, for submissions on outstanding matters. The parties have liberty to approach my Associate to fix a time. ***** Last Modified: 08/02/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.