Ateco Automotive Pty Limited v Business Bytes Pty Limited Business Bytes Pty Limited v Ateco Automotive Pty Limited

CITATION : Ateco Automotive Pty Limited v Business Bytes Pty Limited Business Bytes Pty Limited v Ateco Automotive Pty Limited [2003] NSWSC 197 HEARING DATE(S) : 16-18 December 2002; 3-4 February 2003 JUDGMENT DATE : 31 March 2003

JURISDICTION: Equity Division Commercial List JUDGMENT OF : McClellan J DECISION : 50146/01 Summons dismissed; 50171/01 Verdict and judgment for plaintiff

CATCHWORDS : CONTRACT - breach of contract - contract for provision of new computer system to vehicle distributorship - system allegedly faulty - expert evidence that problems with system were confined to one area and that installation of system was poorly managed by plaintiff, particularly in failure to provide "Requirements Analysis" to defendant - damages claimed only in terms of replacing system entirely - whether system so inadequate that plaintiff received no effective benefit and was entitled to cost of replacing system entirely - whether total failure of consideration - whether defendant entitled to recovery of its fees, claimed in separate proceedings - Held: plaintiff's claim dismissed as plaintiff received significant value for work done by defendant - defendant entitled to recover fees LEGISLATION CITED : Sections 52, 82 Trade Practices Act 1974 Butterworth v Kingsway Motors [1954] 1 WLR 1286 CASES CITED : David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 McDonald v Dennings Lascelles Ltd (1938) 48 CLR 457 Rowland v Divall [1923] 2 KB 500 Ateco Automotive Pty Limited (Pltf) PARTIES : Business Bytes Pty Limited (1D) Maurice Patrick Villari (2D) FILE NUMBER(S) : SC 50146/01 50171/01 COUNSEL : G A Sirtes (Pltf) F P Donohoe (Defs) SOLICITORS : Letherbarrow Lawyers (Pltf) Lenehan & Co (Defs)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50146/01 ATECO AUTOMOTIVE PTY LIMITED v BUSINESS BYTES PTY LMITED & ANOR 50171/01 BUSINESS BYTES PTY LIMITED & ANOR v ATECO AUTOMOTIVE PTY LIMITED JUDGMENT Introduction 1 HIS HONOUR: There are two matters requiring decision. By an amended summons the plaintiff (Ateco) claims damages for breach of contract, negligence and pursuant to s 82 of the Trade Practices Act 1974. This claim arises from the work done by the first defendant (Business Bytes, "Bytes") in advising in relation to and installing a new computer system, including the necessary software for Ateco. 2 In separate proceedings, originally commenced in the District Court, Bytes sues Ateco for fees which it alleges Ateco owes to it for some of the work which it undertook in relation to the installation of the new system. The amount claimed by Bytes is $222,552. The proceedings by Ateco were only commenced after Bytes' proceedings were already under way. 3 Ateco carries on a number of businesses in related areas. During the relevant period it was the distributor of Suzuki cars and parts for New South Wales and the Australian Capital Territory, of Alfa Romeo and Citroen cars and parts for Australia, and of Warn winches and accessories and Telma retarders and Sanko wheel-carriers for Australia. Ateco also provided warehouse facilities for Proton parts and the wheel division of Bob Jane T-Marts. 4 To assist it in conducting these various businesses Ateco utilised a sophisticated system to control its inventory. That system had to allow ready access to the location of a part which a customer required and, importantly, to ensure that Ateco did not accumulate excess numbers of parts. This task was made more difficult by the fact that, for some cars, parts for an older model might be suitable for a later model. Unless this system operated to allow efficient control of the inventory, the profitability of Ateco could be seriously jeopardised. 5 The second defendant (Maurice Villari) had provided technical and other support services in relation to Ateco's computer system since about 1985. Mr Villari is the principal of Bytes. Ateco engaged Bytes from about 1993 on a regular and continuing basis to provide consultancy and other services, including technical support services in relation to the functioning of its computer system. In that role Mr Villari obtained knowledge of the business of Ateco. Although some of Ateco's staff had some proficiency with computers, Ateco did not have its own computer section or department and relied upon Bytes for almost all of its computer advice. 6 As Ateco's business developed, its need for effective computing facilities increased. It is alleged by Ateco that from July 1997 to about April 1998 executives of Ateco met with Mr Villari to discuss the possibility of Ateco's computer system, comprising its hardware and operating software, being upgraded. It is alleged by Ateco that a contract was entered into between Bytes and Ateco which contained various express and implied terms. Those terms are pleaded as follows: "(a) the first defendant would provide the plaintiff with all Services necessary to ensure that the New System would provide all operational procedures available under the Original System together with modifications previously identified by the parties; (b) the Services would be provided with due care and skill so as to ensure that the New System would be suitable for the purpose specified; (c) the first defendant would ensure that the New System would be fully operational with respect to all its functions by May 1999; (d) the Services relating to the application software together with new application software hardware and software would cost the plaintiff no more than $175,000 $180,000 to $190,000. (e) the first defendant would do all things reasonably necessary to give the plaintiff the benefit of the Contract; (f) the first defendant would devote the resources and personnel necessary to complete the tasks involved in making the New System fully operational in a timely fashion." 7 It is also alleged that Bytes owed Ateco a duty of care relating to the advice which it gave with respect to the appropriate system and the cost of its installation. 8 The new system known as AS/400 hardware, AS/400 operating software and IMAS/400 application software was available in about July 1998 although it was not effectively delivered to Ateco's premises until the beginning of 1999. The change-over to the new system was not effected until the beginning of December 1999 and it was accessed by Ateco from 7 December 1999. It is common ground that many problems were experienced when the new system was activated. 9 Ateco acquired the franchise for KIA motor vehicles commencing from 1 March 2000. Although consideration was given to acquiring the software system known as "IDS" used by KIA Motors Australia Pty Limited to control the vehicle and parts inventory for KIA, it was decided to adapt the new system which Bytes had installed. Ateco alleges that although it was represented by Bytes that the KIA franchise could be accommodated in the system by 1 March 2000 this did not occur. 10 Later in 2000 Ateco also acquired a new warehouse in Perth which necessitated further adaptation of its computer system. In about June 2000 Bytes allegedly gave advice that the new system could be adapted to accommodate the Perth warehouse with effect from 1 August 2000. Again, Ateco alleges that this did not occur. 11 The allegations of breach which Ateco makes in its summons are as follows: "The New System was not, at any time after it was installed by the first defendant at the plaintiff's premises, fully operational. The New System was not, at any time after it was installed by Bytes at Ateco's premises, operational so as to perform all the functions that the Original System performed. The IMAS 400 application software and modifications cost Ateco an amount greatly in excess of $175,000. Particulars In addition to the amount of $130,678 paid to Intrinsic Solutions and Dialogue Information Technology for hardware and the amount of $24,935 paid to Intrinsic Solutions for software, Ateco paid Bytes the amount of $724,000 (net of GST) for the Services between April 1999 and February 2001. In addition, Bytes has claimed an additional amount of $222,552 (including GST) and has commenced proceedings in the District Court of NSW for that amount 12 It is further alleged that Bytes: (a) did not provide Ateco with Services necessary to ensure that the New System would provide all operating procedures available under the Original System together with modifications previously identified by the parties; (b) did not provide the Services with due care and skill so as to ensure that the New System would be suitable for the purpose specified by Ateco; (c) did not ensure that the New System was fully operational by May 1999 or at any time before Ateco determined the Contract; (d) did not do all things reasonably necessary to give Ateco the benefit of the Contract; (e) did not devote the resources and personnel necessary to complete the tasks involved in making the New System fully operational in a timely fashion; (f) did not ensure that the KIA franchise was incorporated into the New System by 1 March 2000; (g) did not ensure that the New System was adapted so that the Business could operate a Perth warehouse with effect from 1 August 2000. 13 It is further alleged that the New System was not, insofar as it incorporated IMAS 400 application software, the application software operating system which was best suited to the Ateco business. 14 Ateco alleges that Bytes breached the duty of care owed to Ateco in that it: "(a) failed to provide accurate advice to the plaintiff as to the application software which would best suit the Business; (b) failed to provide an accurate estimate of the cost of implementing the New System, including the cost of the Services; (c) failed to provide an accurate estimate of the time for implementing the New System to a stage where it was fully operational; (d) failed to provide proper training to Ateco's staff at times Ateco made its staff available for that purpose or at all; (e) failed to make itself available to obtain appropriate specifications from Ateco as to the features Ateco's Parts Department required incorporated into the New System; (f) failed to exercise due skill and care in implementing the changeover to the New System; (g) failed to ensure the New System met Ateco's reasonable requirements for an efficient and effective Operating System for the business." 15 Breaches of s 52 of the Trade Practices Act are pleaded in conventional terms. 16 Ultimately Ateco terminated its arrangements with Bytes. This finally happened in February 2001. Ateco acquired a new hardware and software package which allegedly cost a total of $967,355. Ateco particularises its damages as follows: "1. Moneys paid to Bytes for its services between April 1999 and February 2001 - $724,000 (net of GST). 2. Moneys paid to Intrinsic Solutions for software between July 1998 and April 1000 - $28,190. 3. Lost opportunity to purchase for $50,000 IDS software from KIA Motors Australia Pty Limited resulting in the loss of a saving in respect of a replacement IDS system purchased in January 2001, estimated at $400,000. 4. Loss of revenue from Proton Cars Australia Pty Ltd for warehouse rental and associated services, at the rate of $30,000 per month for at least three months . 5. Loss of productivity, as to which further particulars will be provided later. (None have been provided) 6. Moneys paid to IDS Enterprise Systems Pty Ltd in respect of time spent familiarising themselves and software support after Business Bytes ceased to provide its services in February 2001 to May 2001; $29,780." 17 Accordingly, Ateco does not assert that it received no benefit whatsoever from the work undertaken by Bytes. However, it is alleged that the system provided by Bytes was so inadequate that Ateco received no effective benefit and the system had to be entirely replaced. No claim was articulated for any loss of profit due to the inadequate system or for the cost of modifying or upgrading the system. The facts 18 The evidence tendered by both parties requires consideration of dealings between the parties over an extended period on a continuous basis. Although I have considered all of the written and oral material it is necessary only to relate the essential facts in these reasons. The existing computer system and the need for change 19 Mr Mallos is now the Information Technology Manager for Ateco. He holds a Bachelor of Business Degree from the New South Wales Institute of Technology and joined Ateco in 1985 as the Financial Controller. He had responsibility for Ateco's computer requirements. 20 He described the computer equipment which Ateco had in 1995 as being comprised of a mixture of software which was used together with IBM Advanced 36 computer hardware SSP (Release 7.2). 21 When Mr Mallos joined Ateco, Bytes was responsible for the maintenance of Ateco's computer system. If there was a problem with the system employees of Ateco would sometimes contact Mr Mallos who would contact Bytes. However, at times employees would contact Mr Villari directly. Sometimes a problem with the system required a modification to be made. If this was necessary minor modifications were approved by Ateco's Financial Controller. Large modifications had to be approved by Mr Neville Crichton who is the Governing Director of Ateco. 22 When Mr Mallos joined Ateco a conservative approach was taken to computers. Ateco had only five or six PCs within Ateco at that time. Apparently no-one at Ateco had any formal training in computers. Mr Mallos had an understanding of computer science but he did not have a great amount of practical experience. He had no experience with the IMAS system. 23 Mr Mallos gave evidence that there were two matters which motivated Ateco to replace its computer system. The first was that even though the hardware and operating software were Y2K compliant, the modified and customised application software was not. Sometime in 1997 Mr Villari alerted officers of Ateco, including Mr Mallos, to the Y2K problem. In July 1997 Mr Villari provided a written proposal to Ateco for the re-writing of its existing application software to make it Y2K compliant. 24 According to Mr Mallos the second reason for seeking to change the computer system was that Ateco obtained the franchise to import Alfa Romeo cars and parts throughout Australia. This occurred in late 1997. It was a condition of obtaining the franchise that the existing Alfa Romeo and Fiat parts dealers' facilities (Alfa Romeo is owned by Fiat) would not be compromised. One of the existing Fiat parts dealers facilities was that the dealer could dial directly into the computer system and order parts online. This was not possible on the Ateco system in 1997. 25 As a result of consideration of these matters, Mr Villari advised Ateco to buy a new hardware platform. He suggested that the platform would have expandability and scalability as Ateco grew and developed its business. Mr Villari put his recommendations in writing in a letter dated 13 January 1998. That letter reads as follows: "The purpose of the following letter is to encourage you to consider upgrading your current computer system to enable you to run the OS/400 operating system as well as your current SSP Release 7.2. Although the upgrade to a new platform is not an immediate need, it is however, an opportunity to think ahead a few years. Your current Hardware/Software (IBM AS/400 Advanced 36 with customised software) is effective for the majority of your immediate and foreseeable future requirements. However, given Ateco's business dynamics and some of your newest requirements, I feel this is an opportune time to discuss and consider some new technology that can help you better achieve your business goals. Like Ateco, the computer industry never stands still and the current trend for companies is communications and connectivity with suppliers and customers alike to reduce the amounts of repetitive transaction entry required. Most of the current business issues with communications are integrated into the newer operating systems like OS/400. They are much more difficult and costly on the older operating systems like SSP Release 7.2. Another important factor is capacity, the older system can only support a maximum of 4GB (you currently have 2GB) whilst OS/400 only limit is what physically fits in the 'box'. The 4GB limit will be suffice your company for the foreseeable future, but will eventually become an intolerable limitation. Given the level of system activity scheduled for your system this year, it would be more efficient to do all development for the new operating system, so that we may take advantage of the newer technology and provide your company with a better and longer term solution. The following is summary of the scheduled activities for this year: Parts: Location modifications Alfa/Fiat modifications Proton modifications Alfa/Fiat dealer communications Year 2000 modifications New Vehicles: Alfa modifications Year 2000 modifications Ateco Equipment: Year 2000 modifications The Year 2000 modifications are a major project that all companies world-wide have to address this year or face enormous business disruption. In a previous communication I explained the reasons for the Y2K conversion. Given the number of projects over the following months, I feel it is a great opportunity to introduce a more modern hardware platform. Please let me know when you wish to discuss the details, so that we can better plan future development." 26 There were also discussions about the possible cost involved in acquiring the new system. Mr Mallos and Mr Villari spoke about the cost of the IBM AS/400 hardware system which was about $80,000. However, the equipment ultimately acquired was more sophisticated and accordingly more expensive. 27 There was another discussion in which it was suggested that the cost of the software might be around $25,000. However, Mr Villari also indicated that the cost of modifications and conversion to the application software could be around $150,000 with additional costs for bringing the dealers online. 28 Mr Villari described the prospective benefits of a new system as: "1. The most apparent benefit in the purchase of an IBM AS/400 system, is the advancement in software technology that it offers. However, this sort of benefit is very difficult to quantify in currency terms. 2. Most of your connectivity issues with terminals, PCs and printers will be either resolved or simplified. 3. Operations and System support will be simplified with the ability to remotely operate the system and schedule operations. 4. Security in OS/400 is vastly improved, by giving you greater control on who can access the system and what they can do once they are in. 5. System modifications will be simplified by the programming utilities and relational database utilities built into the operating system. 6. Recovery is built into the operating system instead of relying on third party programs. 7. Dealer/Customer connectivity is enhanced to modern telecommunication standards. 8. All system activities can be integrated and scheduled." The new system is acquired 29 By February 1998 Ateco had decided to accept Mr Villari's advice and buy a new hardware platform for its computer system. This decision having been made, Mr Villari confirmed to Mr Mallos that it would be necessary to obtain new software. Mr Villari indicated: "If you get knew IMAS 400 application software you will have expandability and scalability so you can have other franchises with minimal disruption. You will also have flexibility because it will be easier to build on and add things like internet trading. It would be more reliable and require less program and maintenance than the current system." 30 When asked whether this might cost more Mr Villari replied: "It wont cost that much more. If you get the new application software, you will need to get a large capacity machine so the cost of the new hardware and operating system will be a little bit higher. The cost of the new IMAS 400 application software will be around $25,000. The cost of modifications and conversions to the application software will be around $150,000 plus the cost of putting the dealers on-line. That will depend on which way we do it. We still need to decide on this." 31 Mr Villari gave evidence which I accept, that he added the comment that "it is impossible to give a confident prediction of costs until the requirements analysis is done and I know precisely what is required." 32 Mr Villari was not himself an agent for IBM. However, he contacted Intrinsic Solutions, who were, and that firm also advised Ateco as to the size of computer hardware which would meet Ateco's needs. 33 There is a dispute between Mr Villari and Mr Mallos as to the advice Mr Villari gave as to when the new system would be ready to operate. Mr Villari says that he gave advice that if the hardware was obtained by May 1998 the system could be ready by December. As it happened the new equipment was not available until August 1998 which inevitably delayed its implementation. 34 There were other problems. Although the basic equipment was available, Mr Villari gave evidence that Ateco delayed determining the web server which would be utilised. Without a web server the dealers could not be placed online. 35 There were also problems with the physical location of the computer hardware and an issue as to where it should be located during the lengthy period required to commission it. Ultimately it was decided that it would be prepared at Bytes' premises and then returned to Ateco. Further time was lost. Mr Villari described the problem in these words:

"The difficulty is that Ateco did not order the IBM AS/400 for another 4 months in June 1998 and did not order the communications until 8 months later in October 1998. The IBM AS/400 Model 170 was not available to me until August 1998. I did not receive the vital Advanced Business Link hardware and software essential to the dealers online operations until December 1998. Ateco as deposed to above had decided not to upgrade the old system as it had decided to replace it. Their actions to become Year 2000 compliant in an ordererly manner were already too late." The need for a Requirements Analysis 36 It is evident that before a computer system can be designed and implemented, it is necessary to identify the tasks which it is required to perform. This is known in the industry as a Requirements Analysis. Although Mr Villari had a detailed knowledge of the Ateco operation he repeatedly said to executives of the company that, before he could cost and then implement a new system, a detailed Requirements Analysis for the whole operation including the newly acquired elements had to be undertaken. Apparently he was met with the reply, on more than one occasion, that the system only had to be able to perform in the same manner as the existing system. As a consequence the need for a Requirements Analysis was not addressed. 37 I accept Mr Villari's evidence. The failure to undertake a Requirements Analysis meant that Mr Villari could not give an accurate estimate of the likely cost of the system which, as the costs increased, became an increasing problem. It also had the consequence that the installation of the system was far less efficient, causing delay and difficulty in achieving the desired outcomes. The conversation of March 1999 38 Critical to an understanding of the relationship between Ateco and Bytes, the role which Bytes was expected to undertake and the need for a Requirements Analysis is a conversation which occurred in March 1999. It is important to understand that Mr Villari had not dealt with Mr Crichton until 1998, his prior dealings being with other executives particularly Mr Mallos. 39 Mr Crichton gave evidence. He has a forceful personality and demonstrated considerable impatience in the witness box. He was inclined to argue with the cross-examiner and on a number of occasions was intent on giving evidence which answered a question he had not been asked. 40 During March 1999 Mr Crichton requested a meeting with Messrs Villari, Mallos and Ms Streeter of Ateco. There were obvious difficulties emerging in simultaneously maintaining the existing computer system and implementing a new one. Time spent on the existing system was obviously time lost for the development of the new one. 41 Mr Villari gives the following account of part of the meeting: "During March 1999 I was requested by Neville to attend a meeting. At the meeting were Neville, John Linda Streeter ('Linda') and myself. Linda said, 'We need more system development on the current system'. I said, 'I am working on the new system. If changes are done on the current system then they will have to be done on the new system when it is implemented. It will push implementation of the new system further into the future. It is a waste of money to do it twice.' Neville said to me, 'It is my money and I spend it whatever way I like. I own this f….. company and I am your customer. You are supposed to do what I f….. ask you to do. I want you to do what Linda has asked.' I think at this point Linda left the meeting. I said, 'You have again delayed implementation of the new system. These modifications to the old system will take a lot of time.' Neville said, 'You can do both at the same time.' I said, 'We have not even started the requirements analysis and design specifications. We do not know the quantity of work required to implement the new system. We are running out of time.' Neville said, 'My people will do all that.' I said, 'I know the expertise required for this task and I don't believe that your people can carry it out as well as I can.' Neville said, 'I could not give a f…. what you can do. I want my people to do it, not you.' Neville turned and said to John, 'John this is your baby. You take care of it.' I said, 'It is up to you. I will wait for you to supply the requirements analysis. Following that meeting I met separately with Linda and she set out her requirements for modifications to the old system which I carried out. I never received the requirements analysis for the new system. I said to John on each day on which he was at Ateco's premises since that meeting 'John I need the requirements analysis.' John said, 'I am working on it .' 42 Mr Crichton was cross-examined about this conversation. He denied saying that Ateco's personnel should carry out the Requirements Analysis. The following exchange with counsel also occurred: "Q. Mr Villari said: 'I'm working on the new system. If changes are done on the current system they will have to be done again on the new system when it is implemented. It will push implementation of the new system further into the future. It will be a waste of money to do it twice.' Do you remember him saying words to this effect in March 1999? A. We discussed -- Q. Do you remember him saying those words? A. Not those specific words. Q. Do you deny that they were said? A. I'm not denying that they were said. Q. And do you remember replying words to the effect that it was your money and you would spend it any way you liked? A. I can tell you I've never made a statement like that. And as for the 'F' word throughout, that is totally incorrect. That is not the way I conduct meetings. Q. You didn't say that in your affidavit in reply, did you? You didn't mention that you didn't use those words, did you? A. No, I didn't do that. Q. You had the opportunity to do that, didn't you? Didn't you? A. I have responded. You can see my response. Q. I'm saying you had the opportunity in your response to say that you didn't use those words? A. I had that opportunity. Q. And you didn't take that opportunity? A. Correct Q. I suggest that you did use those words? A. Well, that is your words. You weren't at the meeting, I was and I said I didn't use those words." 43 I do not accept Mr Crichton's evidence and prefer the evidence of Mr Villari. That evidence is supported by Mr Mallos who was also questioned about this exchange in the following terms: "Q. In that meeting that we referred to in March 1999-- A. May 1999 or March 1999?

DONOHOE: Q. March 99, paragraph 168 of Mr Villari's affidavit. Do you agree with me that Mr Crichton did not give Mr Villari the opportunity to explain his statement "I know the expertise required for this task and I don't believe that your people can carry out it out as well as I can." Do you remember that statement? A. I remember words similar to that, yes.

Q. Do you remember Mr Crichton saying words to the effect "I don't care what you think, my people will do it"? A. Yeah, I remember those words as well.

Q. In fact, you remember them as they were stated in Mr Villari's affidavit, don't you? A. Neville's reply was probably that. Maurice's, I couldn't tell you if it was exactly that. But Neville's was probably exactly that.

Q. I suggest to you that that didn't give Mr Villari any opportunity to explain to Mr Crichton just what was involved in the preparation of the requirements analysis? A. Yes.

HIS HONOUR: Q. Which reply do you say was certainly Neville's reply? A. The one that says "I could not give a ... what you can do and what my people can do".

Q. You have a recollection? A. That was pretty clear, word for word what Neville's reply, Mr Crichton's reply was, yeah." Significant problems emerge - the need for a Requirements Analysis and training 44 Mr Crichton admitted when cross-examined that he may not have understood the content of a Requirements Analysis. I am satisfied that this was true of both Mr Crichton and other officers of Ateco. The evidence of Mr Mallos was that all he wanted from the new system was that it do the same things as the old. He does not appear to have turned his mind to the demands which the rapid growth of Ateco would place on the computer system and failed to appreciate that detailed consideration was required of the future tasks to be undertaken. I am satisfied that his attitude was in part because of a reluctance to contemplate and accept change. 45 There is considerable evidence relating to the problems which emerged. They are illustrated by a conversation which occurred between officers of Ateco, including Mr Mallos and Mr Villari on 18 May 1999. There is a dispute about some of the matters said. However, I am satisfied that at least the following exchange occurred with Mr Villari saying: "… I say that I attended the meeting and the words set out therein were not said by me. I said words to the effect 'It is essential that you let me have your requirements for the new system. We are already too late for Year 2000 implementation.' Graeme said words to the effect 'All I want is what is on the old system.' I said, 'As I have said Graeme, we are moving to a new system. It will replace the old system but it will do them in different ways. I need you to carry out training and analysis urgently.' Graeme said, 'We are running a business. We do not have time for that.' Ken said in words to the effect 'Graeme we have to be reasonable. They have to know what we want.' I said words to the effect 'The old system is not Year 2000 compliant and will not be made so. We have to move to the new system. Neville was very definite in March that you would do the work.' Graeme said, 'Neville never told me that.' I said, 'You had better ask him.' I said to Graeme on one occasion shortly after that meeting 'Can we do anything about the list of requirements.' Graeme said, 'I want you to give us the same as the old system had.' I said, 'That is like telling me to fit an HJ Holden engine into a new Mercedes. It is just not possible because the designs are different.' During at least two meetings where Graeme and John were both present I said to Graeme, 'You have to give me a detailed Requirements Analysis.' On each occasion Graeme said words to the effect, 'I cannot see the necessity for it. We want what is on the old system.' On each occasion I said to John, 'You understand why I have to have it.' John each time said to Graeme words to the effect, 'It is necessary Graeme. We have to get it done.'" 46 It is apparent that there was confusion within Ateco. Some of the executives continued to seek modifications to the existing system when Mr Villari understood that he was to be applying resources towards the development of the new system. There was also confusion within Ateco as to the timeliness of delivery of the new system and the likely cost. I am satisfied that an appropriate budget was never prepared and communicated to Mr Villari. No doubt the rapid growth of Ateco was causing problems. By December 1999 arrangements had been made to acquire the KIA franchise. Ateco was developing quickly but I doubt whether, at least in some areas, its management was adapting effectively to the growth. 47 Mr Villari described his problems in these terms: "No training was carried out by Ateco personnel with the new system so that no progress was made on the requirements list. Training was necessary to raise issues in the use and operation of the new system which could be addressed before implementation. These issues required analysis in order to prepare the Requirements List. Analysis demonstrated how much work a modification required. This affected the decision as to whether a modification should be placed on the Requirements list. Systems analysis in my experience is a skill which requires a tertiary education course of about one year of intensive training. To gain proficiency requires many hours of practical work after undergoing the course. I knew from enquiry that none of the Ateco personnel had qualification or training in systems analysis and could not carry out the task of preparing the Requirements Lists as Neville wished. I had loaded Sample Company on the system and it was ready for use to enable testing by February 1999. No one at Ateco accessed it for testing until October 1999 by which time it was too late. No Requirements List was ever prepared. John was the IT Manager. I raised the matter of Year 2000 compliance with him and with Neville on numerous occasions. It was first raised with John at a meeting during February 1997. This meeting was with Ken and John. John said words to effect: 'It is next on the list'. When no action was taken I wrote to Ateco on 14 July 1997. At a meeting on 18 May 1999 at which Neville, John and Graeme Hatton ('Graeme') were present Neville said words to the effect, 'The new system is to be ready between July and September this year. The deadline is 1 October'. I said to him, 'I informed you that to be Year 2000 compliant by 1 January 2000 the work had to be started on the new system during 1998. You have set me an impossible deadline. The system cannot be ready by 1 October. I will do the best I can'. Shortly after that meeting Neville said to me, 'You will have to bring in more people to work on our system. It has to be ready for 1 January 2000'. I said, 'That will be difficult. We have to service our other customers'. He said, 'You will have to employ more people'. I decided to let our smaller customers go and to put in the effort to have Ateco ready for 1 January 2000. I also employed other contractors to work on their system which was an unprofitable exercise for Bytes. I only worked on one other customer apart from Ateco to make it Year 2000 compliant and lost the other business. Early in August 1999 Neville said to me 'You know the dead line to make the system operational is 1 October. I said 'I have told you that is not possible' Neville said 'You are not to say that to any of my people because I want to keep pressure on them.' My staff generally worked twelve-hour days, seven days a week including public holidays and only because of this managed to meet the deadline. The new system which was Year 2000 compliant was implemented before 1 January 2000. The implementation took place on 6 December 1999. Because ultimately the highest priority set by Ateco was Year 2000 Compliance there were many other issues not resolved. 48 I accept this evidence. 49 During this period Mr Villari believed it necessary to correspond with Ateco. He wrote on 28 October 1999 in the following terms: "The following letter is in response to your request for an update on our efforts to go live on the new system, by the 1st of November, 1999. Yesterday, John Mallos and I had a lengthy conversation regarding the project status and although a lot of progress has been made by all parties towards the final target, we feel that going live on November 1st would be a risk to the efficiency of the operation. Although our considered opinion is to delay the implementation, we both concurred on the issue of maintaining the momentum created, so that we ensure a smooth transition by the following month. Yesterday afternoon, we also had a review meeting with Parts (Graeme Hatton, Ross Hoskins and David Joisce) to discuss and review their perspective. They also agreed that the implementation date is too early for a smooth transition. Although the majority of the Distribution issues are resolved, there still is a plethora of smaller details and enhancements that have not been looked at in any detail and could cause unacceptable inefficiencies for the operation. As a footnote, I would like to thank John, David and Ross for their cooperation and effort and I hope that they will continue to work with us in the same way. I realize that you will be disappointed at the result, but I assure you, we gave it full consideration and maximum effort before arriving at the above recommendation. I again thank you for your patience and support." 50 Shortly after writing the letter of 28 October 1999 Mr Villari spoke with Mr Crichton. Mr Villari says the following occurred: "… My letter of 28 October 1999 demonstrates that the meeting of 27 October 1999 supplied the first list of requirements which were supplied to me orally and not in a proper manner. My response was to set out the requirements in memo form and put them to John as IT Manager for his response. My letter also raised the matters to be attended to, to enable me to carry out my task. This was only a month before implementation. Shortly after I wrote the letter I spoke to Neville. I said, 'It will not be possible to achieve all the objectives. Some of the modifications cannot be completed in time. This is because you did not carry out the Requirements Analysis as we agreed in March this year.' John was present at this discussion. Neville said to John 'Is he trying to snow me. I should get one of my mates to work him over'. I said, 'I don't see how that would help. I need your cooperation and if I don't get it I cannot achieve Year 2000 compliance in time. I do not appreciate threats.'" 51 I accept this evidence. 52 During the latter part of 1999 the preparation for Y2K issues became increasingly critical. The difficulties created by the directions given by Mr Crichton and the lack of training of Ateco's staff were having significant consequences. 53 Ultimately Ateco's data was loaded from the old system to the new system late in November and the IMAS/400 application software "went live" and commenced handling the spare parts operation of Ateco early in December. As Mr Villari said, although the system was Y2K compliant, there were many unresolved problems which were soon to appear. The acquisition of the KIA franchise 54 About December 1999 Ateco decided to take on the franchise for KIA motor vehicles. The takeover date was identified as 1 March 2000. Again, Mr Villari gives evidence, which I accept, that there were difficulties implementing the modifications for the KIA franchise because Ateco again did not provide a Requirements Analysis. 55 Mr Villari determined that without the Analysis the position would be impossible and he unilaterally decided to obtain information from staff who had come from KIA and do the best he could to have the system operational for the KIA franchise by 1 March 2000. 56 It was necessary to apply considerable resources to bring the KIA enterprise into the system. However, this was achieved within the required time, although problems remained. Adaptation for GST 57 The next imposition on the development and operation of the computer system was the necessity to adapt to GST. This required Mr Villari to meet the deadline of 1 July 2000. GST compliance became Mr Villari's first priority; problems with the system, and there were many in the spare parts area, had to come second. The Perth warehouse 58 In late June 2000 Ateco decided to establish a Perth warehouse. By this time the relationship between Ateco and Bytes had become strained. However, on this occasion Bytes did prepare a Requirements Analysis.

59 I have already referred to the fact that the development of a Requirements Analysis for the new system is one of the critical issues in this matter. I am satisfied that Mr Villari constantly requested instructions to carry it out - there would have been a cost involved - but was denied the opportunity. Ateco says that because Mr Villari had been involved with Ateco for many years and presumably knew its systems a Requirements Analysis was unnecessary. 60 New equipment and software also carried with it a need to train Ateco's staff to use and operate it within the business. Mr Villari gave evidence that he repeatedly pointed out the need for training but his advice was either ignored or inadequate resources were applied. The consequence was that when the new system was installed, people who were required to use it could not benefit from the improved technology. I accept his evidence. The requirements of the computer system 61 Mr Lynne is the Group Parts and Service Manager of Ateco. He was appointed to the position on 29 May 2000. He is experienced in the automotive parts industry and gave evidence of the essential attributes required of a computer system relating to the control of a spare parts business. Those attributes are: - Different Types of Orders A parts management system should be able to distinguish between different types of orders. There are three types of orders in Ateco and in the parts business generally. First, there are VOR orders. This is the most urgent type of order. VOR stands for 'vehicle off road'. A VOR order is an order for a part where the vehicle cannot be used until the customer gets the part. Second, there are daily orders. A daily orders is an order for a part where the order needs to be filled within a day but there is no vehicle that is off the road waiting for it. Third, there are stock orders. These are orders for stock which a customer does not require for a particular vehicle, but to ensure that the customer has sufficient stock available on their shelves to meet general service or smash requirements from their own service workshop or from their customers. A stock order is made at set times during a month, and there is a discount on the list price. This is to encourage customers to hold stock on their shelves, and to encourage customers to provide good service to end-users by having stock available. A parts computer system should allocate stock depending on the priority of the type of order - supersessions A parts management system in the automotive industry should have a supersession system. One of the features of the parts automotive industry is that a line item may be superseded by one or more different line items. The previous line items may be referred to as parent line items, and the latter line items may be referred to as child line items. There may be one or more child line items for each parent line item. There may be one or more parent line items for each child line item. As a minimum the child line item must fit and operate in the same way as the parent line item. A parts computer system must be able to recognise that a child line item is able to satisfy any order for a corresponding parent line item, and a parent line item is able to satisfy any order for a corresponding child line item. When an order is received, the computer system should supply parts based on the supersession rules of corresponding parent line items and corresponding child line items. Stock should also be allocated allocating the oldest line item to the order. If there is an order for a child line item and an older corresponding parent line item is in stock, the system should allocate the parent line item before the newer child line item is allocated. If this rule is not observed this may eventually lead to an increase in obsolete stock. - back order system A parts computer system should be able to retain back-orders, and fill back-orders when the line items become available. This includes filling back orders for parent line items with corresponding child line items, or filling back orders for child line items with corresponding parent line items. It also includes prioritising the orders depending on the relative priority of the type of orders, and then on the date that the original order was made. This means that if stock becomes available a VOR back order will be filled before an earlier stock order and an earlier daily order, and two VOR back orders will be filled depending on when they were made. - pricing A parts computer system should be able to price orders. The price of the order includes a. the cost of the items translated into Australian dollars b. the margin on each of the items c. the freight d. the urgency of the order In relation to the margin, the margin varies depending on the value of the item. - management information A parts computer system needs to compile management information. First, it needs to compile information about the level of demand at a part number level. This facilitates forecasting demand for a particular line item and ordering to ensure that there is sufficient stock available while at the same time managing the amount of capital tied up in inventory. If demand is not accurately forecast, less parts may be ordered which will reduce customer service levels, or more parts may be ordered which will increase the value of capital tied up in inventory and may ultimately lead to obsolete stock. Second, it needs to compile information about the customer service level, that is, the extent to which orders are able to be fully filled within the required timeframe. Third, it needs to compile information about prices so that sales and profitability can be analysed in light of price movements. - reports A parts computer system needs to be able to generate ad-hoc reports in an easy manner. This is because management does not know what information they need until they have a problem and then need information rapidly to analyse the problem and implement corrective action." The problems at 1 January 2000 62 It was to be expected that problems would be encountered when the new system was made operational. The magnitude of the changes made this inevitable. 63 It is significant that the problems which did emerge were largely confined to the Parts area. There is no suggestion that the system was not Y2K compliant, or, apart from Parts, was not functional in relation to Alfa Romeo. These were the original motivations for the change to a new system. 64 There is no evidence that the problems which were encountered caused Ateco to suffer any financial loss from inefficient trading. No doubt there was inconvenience and frustration amongst employees and executives. 65 The following is a summary of the problems with the new system (the detailed catalogue is more extensive) which Ateco identified:

(a) there was no "user type" software to create any reports or to assist writing any reports; (b) Ateco could not print picking slips; (c) the new system did not allow the user to generate the reports that the original system generated. Although the new system had a module, Query 400, which allowed the users to create and tailor their own reports, the relevant employee did not have time to learn how to use the system as he was too busy manually pricing the stock; (d) it was not possible to produce a re-order report on the new system; (e) the system could not upload invoice information from Ateco's overseas suppliers, so the system could not automatically receipt the supplies. When Ateco received a shipment of supplies, its personnel had to manually receipt all supplies before putting the supplies into stock. Overseas suppliers supply approximately 95% of Ateco's business. This problem persisted for six weeks after the system went live; (f) the system was also incapable of having more than 50 customers having direct online access at any one time. This was inadequate because it prevented many significant customers from having this facility which reduced the quality of service available to these customers and increased the volume of all the entry work in the parts department. (g) the IMAS system did not include procedures which were recognised from the parts industry as being standard: (h) the new system did not properly recognise supersessions, even though there was much discussion about the supersession module and how supersession files should function. The suggested problem was, in particular, that if there was a back order held against a part number in the supersession chain, the system would not allocate stock from another part number within the chain that had stock on hand. Release of orders that contained supersessions became a manual function. (i) when the new system went live it did not distinguish between order types. The new system had no function to distinguish between VOR (Vehicle Off Road) orders that had been actioned and VOR orders that had not been actioned. This meant that every time there was a need to check how many VOR orders had not been actioned, it was necessary to print out all VOR orders, including VOR orders that had been actioned. (j) another fundamental problem was alleged to be the absence of a pricing module. This meant that an employee had to manually price all parts using a calculator as they came into stock. This was unnecessary on the old system. Mr Villari says that the pricing orders were done correctly by the new system and that the only missing component was automatic re-pricing of parts. He says that it was not specified until it was raised in August 2000 but was never approved and never carried out. However, Ateco asserts that the original system had a pricing module and Mr Villari was told during the meetings that the Parts System need a pricing module like the one in the current system. The difficulties between the parties, problems with money and a change to IDS 66 During the course of 1999 and 2000 there were a number of acrimonious exchanges between Messrs Villari and Crichton. The correspondence between the parties towards the latter part of 2000 reveals the extent to which the relationship had broken down. 67 Mr Hatton, who was at the relevant time Ateco's manager of spare parts, sent Mr Villari a memorandum on 27 January 2000 cataloguing the identified problems. He concluded by saying: "The current system is extremely labour intensive and there is an urgent need for a meaningful consolidated enquiry screen incorporating related information to facilitate prompt response to customer enquiry or to review decisions and to avoid major changes to the standard IMAS 400. This facility may be achieved by the development of a new customised screen. To group the required information as the current system is unworkable and loss of management control, worker frustration creating guess work decisions, providing inaccurate information to dealers and significant reduction in our services being provided." 68 Mr Villari wrote to Mr Crichton expressing his concerns in relation to the KIA franchise on 2 February 2000. His letter reads as follows: "The following letter is to give you an update on the progress of the computer system modifications required for the new KIA franchise. This afternoon we have received the initial Melbourne data containing the Vehicle Model and Parts List. We have already loaded the data on our IBM AS/400 system and are working on the conversion so that the initial shipments of vehicles and parts expected by the middle of February can be loaded onto the system with a minimum of effort. I hope however, that the rest of the information requested, especially the historical one, is also going to arrive soon. During last week due to a general lack of information, I took the initiative and called a meeting with Jeff Barber, Brian Inns, Paul Cummins and Kay Hawkins regarding the KIA operations and the impact it will have on operations in general. All who attended, including myself, have little or no detail about the business plan or the logistics that are intended for the KIA operation. Given the change in distribution model that the new KIA operation will bring, I am concerned at the lack of information being given to your staff members and us. I urge you to call a meeting at your earliest convenience to inform us and your key operatives on the business intelligence available, so that we may ensure that all business processes are planned according to need. Because of the little time available, I have asked and got Brian Inns help in engineering a distribution model that could provide the needed controls and facilities. However I would like these ideas and plans to get approval from you and your management to ensure that they are based on actual events and plans. On the assumption that Prix Car will be doing some if not all of the Vehicles storage, preparation and distribution, Brian and I have contacted and visited Prix Car's offices at Minto to work out with them a method of communications for all vehicle shipments, allocation, preparation and dispatch details. Unfortunately the current KIA operation does not have any of these facilities in place, it all seems to be manual, which is inefficient for both Ateco and Prix Car. For the sake of efficiency and expediency Prix Car has suggested we use the same methodology that they already have in place with some of their other more advanced customers. This, once again will need your approval, as it involves set-up costs. The following is list of questions that we need answered as quickly as possible in order to complete our task effectively: s Where are the Vehicles and Parts warehouses and sales offices going to be and how are they going to be equipped and resourced; s What responsibilities, activities and resources will these warehouses and sales offices have; s What is the format of Purchase orders and shipment schedules by port/destination; s What are the Sales and Marketing requirements for KIA. These are just a few points that will help us in determining the needs and requirements, more details will certainly come to light as the process starts rolling." 69 Mr Hatton wrote again to Mr Villari on 6 March 2000 and again on 28 March 2000 2003 cataloguing his complaints. He concluded the March letter by saying: "We have persevered with the handicap of an 'unfriendly' ineffective labour intensive system for 4 months which has caused considerable staff aggravation and total loss of management control, some of which will not be resurrected and we are close to coming to an operational standstill." 70 The parties met on a regular basis in an endeavour to resolve their difficulties. Schedules of outstanding items were drawn up and priorities accorded to matters which required attention. A system was implemented for the identification and recording of problems and communication of them to Mr Villari. More formal regular review meetings were also implemented. Many problems were progressively fixed. 71 However, Mr Villari felt the need to write further on 5 May 2000. His letter was in the following terms: "The following is the summary of outstanding tasks and enhancements that Business Bytes is currently working on. As you are aware we are under increasing pressure to provide the New Vehicles Department with the reporting enhancements that they have requested. I was a little disappointed at the tone of the last meeting as it seemed antagonistic, rather than co-operative, I hope that can be changed soon as it tends to slow down our efforts. However, given Mr Neville Crichton's express instructions I will continue giving Warranty, Parts and General Support the highest priority until further instructions. In order to quickly appease the New Vehicles Department I am currently in the process of hiring a couple of contractors to expedite proceedings. I only see the need for two contractors for a maximum period of 1 month, after which the majority of the outstanding tasks will have been completed, therefore necessitating only a maximum of two resources from Business Bytes to help with the implementation of the General Ledger automatic interface and some further GST requirements. One task which would greatly improve throughput and productivity is training, which everybody claims to be too busy to do. There are a lot of people in your organisation with expensive and powerful PCs which are not being used effectively due to their lack of expertise. A good example is to look at what Jeff Barber is able to do using the system's database in contrast to what we are being asked to do by all others who have more powerful PCs than Jeff's. We have had many meetings where we have identified the need for training, but no action has been taken due to a lack of time and will by the users. The problem with that approach is that you will always need new reports and data analysis and unless time is made, you will always be needing to find resources to fill the need." 72 On 25 July 1999 Mr Crichton wrote in the following terms: "As you are aware, I have had a growing concern about the service level Ateco has been receiving from Business Bytes. While understanding that the acquisition of the Kia distribution activity has imposed additional work load on the systems area, the lack of support is now having a serious impact on a number of our fundamental operations. Parts supply, vehicle distribution, warranty analysis and certain finance functions are suffering from missed system deadlines and from sub-standard systems support when compared with other vehicle importers. These are seriously affecting our present business operations, not to mention the future of the company in terms of customer and dealer relations. I am not prepared to have Ateco's operations held to ransom by Business Bytes any longer. The matter is far too important to be fobbed off by glib promises which are rarely met. Either Business Bytes puts in place the resources to overcome the existing problems and to meet ongoing requirements or I will have no option but to consider an alternative approach regardless of the short-term cost and disruption. You are to meet with the usual systems group this week and to provide them with a firm timing plan to complete all of the outstanding items including those which are priority listed in the Requirements Review. If the outcome is not satisfactory, I will have no hesitation in taking the appropriate action. Our company is attempting to achieve a rapid rate of growth and I cannot have it hamstrung by inadequate systems back-up." 73 Part of the reason for the problems is revealed in the last paragraph of the letter. Ateco was undergoing a period of rapid growth, the acquisition of Alfa Romeo and KIA adding significantly to the demands of the business and its management. To this must be added the need to be Y2K compliant and also provide for GST. By July 2000 there was an additional need for the system to accommodate a warehouse in Western Australia. It is not surprising that unless considerable resources were applied by both Ateco and Bytes there could be problems. 74 Mr Villari responded to Mr Crichton's letter of 25 July with a letter dated 3 August 2000. It reads as follows: "The following letter is in response to your letter dated the 25th July 2000 relating to the level of support that Business Bytes is providing Ateco Automotive Pty Ltd. I assure you that over the past 8 months, all my staff, myself included, have been working on the Ateco project to the exclusion of almost all other customers. This alone in our business is called suicide, as it makes us very vulnerable. I therefore, cannot understand why you think that we are holding Ateco to ransom, when I feel that the opposite is true. I personally have not had any holidays, time off or a weekend for the past two years, due to commitments with your company (with the exception of emergency surgery to remove some kidney stones). I also forget the last time that I worked less than 12 hours per day (on ATECO), never mind 5 days per week. Whenever Ateco has needed our support at 6 am, 10 pm or in the middle of the night, whatever day of the week, Business Bytes and myself personally have always been there and available. This in my book spells commitment, exceptional service and dedicated professionalism. If anybody tries to tell you otherwise, they must have hidden agendas, because I have worked with all major software houses and I assure you that no other company will provide you with that level of support. The KIA franchise has created a great deal more work for us and we had little or no information about the KIA operation until a month before implementation (just ask Brian Innes). However, we still got KIA operational in time to trade even if we could not give them all the bells and whistles. GST was also a very important business issue and even though we got very little information from your company, we still made sure that Ateco was ready by the 1st of July. If you are wondering what else we have been doing, I can summarise it as creating, from scratch, a full interactive Web enabled 'B2B' (Business to Business) system that will require very few human resources to operate. As an example consider the following scenario: s A vehicle is requested by a dealer or one of your staff; s If the vehicles is in Bond the system will automatically send a Request For Out transaction to Mantons; s Mantons will automatically send back to us a Nature 30 transaction to indicate that the duty has been paid; s This triggers the system to automatically send TDG a transaction via the Web to tell them to start preparing the vehicle and dispatch it to the dealer; s When TDG has dispatched the vehicle they will send us a transaction indicating the dispatch details; s This again triggers Ateco's system to produce an invoice; s The invoice is then automatically sent to the dealer's Finance Company via and EDI transaction; s The Finance Company automatically deposits the money into Ateco's Bank Account. s The process is even simpler if the vehicle is already out of Bond. All of the above is within two weeks of completion and although it sounds logical and simple it is a very complex and laborious task that requires painstaking attention to detail. We are also trying to achieve the same level of automation in the Parts Department, which would almost complete the business cycle. If you have the patience to work with us, we have the vision to take you where no other Vehicles Distributor is even close to. Whilst we are on the subject of Vehicle Distributors, some of them have made direct approaches to us to provide them with our support and expertise, because theirs is expensive, unprofessional, incompetent and unethical. Unfortunately for me, but fortunately for you, Ateco is a very dynamic environment and I find myself absolutely inundated by support calls, management and analysis of requirements that all seem to be of the utmost urgency. This I feel is a natural development of events, given that nobody in your organisation has had any formal training on the system and the volume of transactions has trebled. I have had many review meetings with your management personnel and I must say that very few of them have been constructive or productive due to the continuous bickering about priorities that nobody seems able or capable to adjudicate on. Almost immediately after the meetings are finished my priorities change without any formal notification. I feel that my task is to provide results and do the work, rather than fight political issues of which I have no control nor can I defend myself, because I am too busy working. I have found the 'one-on-one' meetings much more constructive and helpful and I have them almost on a daily basis, either in person or by telephone and mail. Ateco has done a great thing by spending a lot of money in getting all users expensive and powerful Personal Computers to enable them to be more efficient and effective at their task. However, the users, due to lack of training and often lack of will, are using them as expensive letter writing implements. Each of PCs, when you include software and support, I estimate will cost about $3,000.00 per user, per year. As an example of what a little training can achieve is to look at Geoff Barber and Brian Lynne. After a very brief tuition by Business Bytes, they are almost fully self-sufficient on the reporting requirements. This was our aim from day one; whereby Ateco would be self-sufficient with their reporting requirements without any outside assistance or cost. Admittedly, Geoff and Brian are probably exceptional users, but I am sure that other people in your company could achieve similar results in little time. I would like to remind you that I have personally looked after all your computer requirements for over 12 years and in all that time your company has always been given the best of equipment, the best of systems, the best of service, the best rates and the best ethical standards (lying is a firing offence in our company). During that period I have gained expertise and knowledge of your people and operations that nobody else in your organisation can match. That fact, makes me a very useful member of your team and I feel that you are being unfair in letting others use me and my company as an excuse for their own shortcomings, as I feel that I and everybody in my company, have always been co-operative, cost effective and honest. We have concentrated on getting the job done honestly and without playing the in-house politics. Another demonstration of our dedication and honesty is the fact that we have not had the time to bill Ateco for June and July. This combined with the fact that you have held back the payments for April and May, puts our company at great risk financially, especially with the $100K+ wages that my computer experts require. I would like to thank you for giving our company a very exciting project to develop and for being a very good customer over the yeas and I hope that we can continue to work closely in the future." 75 The next letter was written by the Managing Director of KIA dated 7 August 2000 it was in the following terms: "Neville is surprised that you have not responded to his letter of 25 July to you regarding the service level provided to Ateco by Business Bytes. Moreover it would appear that no attempt has been made to organise the meeting he suggested you have with the Ateco's systems group. We are tending to conclude that you have no interest in continuing the relationship with Ateco. Please let me know if that is the case. If not, let me know when you can meet with out group to discuss when the various open items can be resolved. Incidentally I am still awaiting a response to my email to you of 3 July regarding the capability of the systems to assist with running an offshore activity." 76 Mr Crichton, himself wrote on 28 August 2000. His letter stated: "I have your letter of 3 August in response to mine of 25 July regarding our concern about the systems support according to Ateco by Business Bytes. In my letter the only thing I asked you to do was to immediately get together with our systems group to provide them with firm timing to complete all the outstanding items. You have not done this but instead provided a long, self serving account of the level of service provided by your company over the years. I am not interested in the effort, only the results. You also chose to outline a supposedly state-of-the-art business to business system which you are working on. Other vehicle importers have had these kinds of applications for years. You said it was within two weeks of completion but here we are more than three weeks on and I understand it remains a long way from being operational. That is exactly the problem I talked about in my letter - glib promises rarely met. This is not some game where a testimonial to your own efforts will make the problem go away. I am still getting constant complaints from parts, vehicle sales, finance and warranty about lack of systems support. Please contact Ric Hull and set up the meeting which I requested in my letter and which he asked for in his letter to you of 7 August. We also urgently need an answer to our enquiry to do with the capability of the system to deal with an off-shore activity." 77 Finally Mr Villari wrote on 16 October 2000 "The following letter is to request a meeting with yourself, to discuss and review our company's position in your organisation. I am aware that over the past few months you have been looking and considering other software packages to replace the system you are currently operating on. Whilst, I feel that looking at alternate packages is a healthy exercise for any company, I get the impression that the process being adopted is not one of evaluation and consideration, but rather to get rid of the current system regardless of cost or consequences. As your computer systems consultant, I feel compelled to advise you in considering your current platform with greater scrutiny, as I feel that it is a superior platform for your current and future business plans than any other I have seen. The cost of moving to a different Software Package is for the very brave, especially since you have so many activities under the one 'umbrella'. I have a great deal of experience in system's implementation and one golden rule is that you take the initial estimated cost and multiply it by ten over the ensuing two or three years, depending on the pace of change which historically has been dynamic to say the least. Another consideration is the fact that you could be dealing with organisations that do not have your company as a priority and may therefore not respond to your needs with the same sense of urgency as ours. Furthermore, after spending a lot of money, you might end up not having as many facilities as the system you currently own, especially since your software was specifically developed for your company, whilst all others are generic packages that will need extensive modifications to bend them. I understand that having been the instruments of change, has made us unpopular with some of the more conservative staff, but I feel that those changes were needed and are now starting to pay dividends in productivity and efficiency. Over the past two years the changes to your existing system have been numerous: s New Network with proper Virus protection, Backups and Security; s E-mail facilities for all staff with proper Virus protection, backups and Security; s Fax from your desk facilities; s Installed many Personal Computers with Office Automation; s Installed a new IBM AS/400 with IBM IMAS/400; s Converted all your systems from System/36 to AS/400; s New Web Server for Internet trading; s Internet Dealer Interface for Parts Dealers; s Bob Jane distribution setup; s Implement Alfa/Fiat Parts system and the data conversion; s Made all systems Year 2000 aware; s Implemented the new KIA operation; s Got the system read for GST; s And numerous other enhancements to better suit Ateco's operations. We have always got it ready on time even at great personal cost so that Ateco would not be inconvenienced and we did all of the above without any support from Ateco's management. The software package you are currently running already has proved itself as reliable, efficient and highly functional. As you are aware, I am in constant contact with most of your key operatives and apart from the complaints about a lack of training, the feedback I get from them about your current system is very positive and all seem keen to progress further with the enhancements being made. I hope you will give us the opportunity to discuss the matter with you are your earliest convenience, so that we may present our alternatives in a fair and reasonable way." 78 Mr Crichton's reply did not suggest that there was likely to be a continuing long-term relationship between the two companies. This turned out to be the case. Eventually Ateco declined to pay for work for which it had been invoiced, (the fees are sued for in these proceedings), and wrote terminating the arrangement. 79 Mr Villari gave the following evidence: "Bytes usually rendered a monthly account which Ateco had paid until the November 1999 account which was remained unpaid. The November account comprised two invoices totalling in excess of $50,000.00. Bytes continued to work on Ateco's system and during January I phoned John (a reference to Mallos) and said:- 'John I have not been paid for November last year. It is causing me difficulties. Can I get a cheque.' John said to me, 'We have always paid your accounts in the past and will continue to do so.' I said, 'This is a larger account John and it represents money that I have paid out to contractors. I need payment now.' John said, 'I will see if I can get you a cheque. I promise that you will be paid.' When I dealt with Ken my accounts were paid 30 days. In dealing with John I did not receive the same prompt payment. Initially he stretched my accounts to 60 days then to 90 days. By February 2001 I had some money outstanding 120 days. On 19 February 2001 I wrote to Ateco and ceased to support Ateco pending payment of my outstanding accounts. During November 2000 John said to me, 'We have decided to change from Business Bytes to IDS Solutions ('IDS'). We will need you until about March next year until the changeover.' I said, 'I think that is a good decision. Things have not worked out between us and you are better off with another company. I will support you until the changeover to IDS.' " 80 Finally when payment was not forthcoming Mr Villari wrote a further letter on 19 February 2001: "The following letter is to formally inform you that Business Bytes will no longer support your company with computer services, unless you pay for our invoices for work done as far back as October 2000. During the transitional period between Business Bytes and IDS, we have been cooperative and supportive in order for Ateco to have a smooth transition between the two systems. We are a small company with limited resources and at your request have employed and paid for the contractors that you asked us to employ to speed-up progress on the development you requested. In keeping with honourable business practices we have paid for all the contractors and employees working on your project. Unfortunately we have been unable (despite daily attempts) to get your company to honour the invoices for the work performed. This situation has become very urgent as I can no longer afford to run my company without collecting the money owed to us by your company. This may result in employee retrenchments for which I will hold you personally responsible, given that it was you and Mr Rick Hull that made the initial demands to provide your company with more resources to accommodate your growth." 81 I have no doubt that some of the irritation with Byte's services expressed by Ateco was justified. Although there is no direct evidence, and I am satisfied it is of no ultimate concern, it is likely that the executives who came with the KIA franchise, which had been using IDS software were the catalyst for increasing dissatisfaction with Mr Villari and an ultimate decision to abandon IMAS 400 software and change to IDS. The IDS system was installed after carrying out a Requirements Analysis and with training of personnel. The cost to Ateco of the IDS system was of the order of $960,000. 82 As was to be expected there were also problems with the installation of that system. Evidence was tendered of those problems and the frustrations suffered by Ateco. The evidence of Mr White 83 Mr Ian White has extensive experience in the information technology industry. He has installed IMAS systems and was for a time the Customer Services Director for BCM Systems where he managed various consultants. In that role he gained a familiarity in the 1980s with some aspects of Ateco's business as it then was. 84 He was retained by the defendants to give expert evidence as to the appropriateness of IMAS/400 system for Ateco's business and review the work of Bytes in implementing its installation. His conclusions are appropriately summarised in the following terms: · IMAS 400 was an appropriate product for Ateco. Although other options could have been pursued it was a sensible option at the time. · The only problems in the running of the computer system relate to the Parts application. There were no problems in the areas of New Vehicles System, Warranty System, Ateco Equipment, Accounting or the Bob Jane area. · The installation of IMAS 400 was poorly managed by Ateco. The following difficulties were identified: (a) the scope of the project was unclear as there was no Requirements Analysis. (b) The Parts organisation did not want change and resisted its implementation. This is evidenced by Mr Mallos' statement that he only wanted a system which did the work of the existing system. (c) Ateco should have allowed Bytes to project manage the installation as was done with IDS. · The absence of a Requirements Analysis was a major problem. · There were inadequate resources provided for the training of Ateco's staff. · Because the Requirements of Ateco were not specified it was impossible to set accurate budgets. When the KIA franchise was acquired the progress towards implementing the new system was disrupted. · When Ateco decided to change to IDS it paid IDS to do a Fit Analysis. The same arrangement should have been made with Bytes. · Both IMAS 400 and IDS were similar in the degree of fit to Ateco's business. · The installation of IDS was well handled with a clear Scope, Role Definition, Training and Management of User Expectations. · The acquisition of the KIA franchise brought with it personnel who were familiar with IDS making it logical and efficient to abandon IMAS 400 and change to IDS-400. 85 I accept Mr White's evidence. Although he was cross-examined none of his central conclusions were effectively challenged. Ateco did not call evidence from a computer expert. Conclusion Ateco's claim 86 Ateco claims that the conversations between Mr Mallos and Mr Villari in January to March 1998 resulted in the formation of a contract between Ateco and Bytes pursuant to which Bytes accepted responsibility for recommending an upgraded computer system and providing its services to implement the upgrade. The consideration for the contract is said to be a sum in excess of $700,000 being the amount paid to Bytes. The claim pleaded seeks to recover the whole of the monies paid to Bytes plus some incidental amounts and otherwise no claim is made that Ateco suffered losses because of any impact on its business. I am satisfied that a contract did exist although not in the terms pleaded by Ateco. 87 However, in my opinion, the precise terms of the contract do not matter, as it is apparent that if the contract was as pleaded, even on Ateco's own case, it received consideration of significant value. There is no question but that the advice in relation to hardware was appropriate. It was taken up and used for the IDS system. Furthermore, the system as implemented was Y2K compliant and performed many of the required functions in an appropriate manner. There were undoubtedly problems in relation to parts, some it may be assumed of real concern, but I could not find that Ateco did not receive significant value for the work which was done. 88 There is no doubt that over the relevant period the fees which Bytes sought to recover from Ateco far exceeded the initial cost discussed for the installation of the new system. However, this was due to the poor management of the process by Ateco and the significant alteration to the needs which occurred. There is nothing in the evidence which would suggest that having regard to the work required to be done the costs were not justified. 89 No evidence was tendered as to the reasons for the decision to cease using Bytes and commence using IDS beyond the complaints which I have related. If it be the fact that IDS was able to work satisfactorily this was not without a great deal of preparatory work being undertaken. The requirements of Ateco were carefully identified in a manner which Bytes required but alleges was never provided. 90 There is no doubt that there were problems in implementing the new system but I am satisfied that there was not relevantly a total failure of consideration: see McDonald v Dennings Lascelles Ltd (1933) 48 CLR 457; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. This case is quite different to the circumstances where a benefit was had for a period and then lost through an inherent defect in the item sold; Rowland v Divall [1923] 2 KB 500; Butterworth v Kingsway Motors [1954] 1 WLR 1286. 91 Ateco submits that there has been a total failure of consideration because the contract required that Bytes provide a system without problems. Because there were problems in Parts it is submitted that restitution should be given. I do not accept this submission. 92 Although when Bytes was terminated problems remained with the system I am satisfied that with the application of appropriate resources by Ateco, when requested by Bytes, many problems could have been avoided. I have identified the lack of willingness of Ateco's personnel to assist in developing the system and the failure, largely as a result of Mr Crichton's apparently ill informed intervention, to apply the resources which it should. It was inconceivable that, even if Ateco had accepted Bytes' advice and authorised the necessary steps there would not have been "teething problems". 93 It is true that the ultimate charges to Ateco by Bytes are well in excess of $900,000. However, I am satisfied that a significant part of this cost is due to the failure by Ateco to give adequate instructions and provide the required training and other resources. Significant costs also derive from the many additional requirements imposed on the system including KIA, GST and the Perth warehouse. The ultimate task was far greater than that which was originally contemplated by the parties. 94 The claim in negligence and under the Trade Practices Act also fail. I do not find that the advice given by Bytes was negligent or even inappropriate. In this respect Mr White's evidence, which I accept, was not contradicted. There were difficulties of implementation but the pleaded causes of action cannot be sustained. Ateco's summons must be dismissed.

Bytes claim 95 Bytes has claimed for work done pursuant to various invoices totalling $222,552. In conversations with Mr Mallos, Mr Villari was assured that the invoice would be paid. They were not. 96 There is nothing to suggest that the work was not carried out by Bytes or that the charges are not reasonable. Undoubtedly some of the work was undertaken to "rectify" problems within the system which Bytes had installed, and which were inevitable, and other work was undertaken to assist the implementation of the IDS system. The arrangements between the parties obviously involved Ateco paying for Bytes to modify the system to cope with any problems which emerged. Those problems were undoubtedly magnified by Ateco's failure to instruct Bytes to take appropriate steps at an early stage. 97 The rates charged were consistent with rates previously charged by Bytes to Ateco. I conclude the rates are reasonable. There is no reason to believe that the tasks for which payment is claimed were not completed. Indeed Mr Mallos, who was in a position to know, had no hesitation in indicating that the invoices would be paid. 98 The claim by Bytes succeeds and there will be judgment accordingly. Ateco should pay the costs of both its proceedings and the Bytes' proceedings. 99 I direct counsel for Bytes to bring in short minutes as may be appropriate

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