These proceedings were the subject of an expedited hearing before me in August. On 30 September, I delivered my judgment: DXC Eclipse Pty Ltd v Wildsmith (No 2) [2022] NSWSC 1330. On 10 October, I made orders disposing of the plaintiff's claims.
This judgment deals with the costs of the proceedings. It assumes familiarity with my September judgment, paragraphs of which are referred to in this judgment as "J2" (the September judgment was the second published judgment in the proceedings; there was an earlier interlocutory judgment by Slattery J in May: DXC Eclipse Pty Ltd v Wildsmith [2022] NSWSC 512).
The background to the proceedings is set out at J2 [2]-[21]. For present purposes, it may be summarised as follows.
The plaintiff in the proceedings is DXC Eclipse Pty Limited ("DXC Eclipse"). DXC Eclipse is a software reseller. Its business involves the supply and installation of "software solutions" for business customers. DXC Eclipse is part of a multi-national group of companies ("DXC Group") and is a subsidiary of DXC Technology Australia Holdings Pty Limited ("DXC Holdings").
The proceedings arose out of the acquisition by DXC Eclipse of another software solutions business in April 2018. That business was conducted through a unit trust structure by a corporate trustee under the name "Sable37". DXC Eclipse acquired the business by purchasing the shares in the corporate trustee and the units in the unit trust under an agreement referred to as the "Securities Purchase Agreement".
The defendants are Mr Martin Wildsmith, the first defendant, and On-Key Consulting Pty Limited ("OKC"), the second defendant. They were two of the vendors under the Securities Purchase Agreement. Mr Wildsmith is the owner and sole controller of OKC. As in my September judgment, I will, for simplicity, refer to Mr Wildsmith as if he were the sole defendant and will only refer to OKC where it is necessary to do so.
The Securities Purchase Agreement contained restraint covenants given by the vendors lasting for seven years (that is, until April 2025). The restraints were expressed to be given in order to protect the business of Sable37 in DXC Eclipse's hands, which was defined as "the Business". Relevantly, there were restraints against:
1. carrying on or being interested in a "Competing Business", defined as a business "competitive with" the Business (cl 16.1(c); J2 [110]);
2. soliciting customers or former customers, or suppliers or former suppliers, of the Business (cl 16.3(b)(a) and (b); J2 [176]); and
3. soliciting employees of "any Related Body Corporate" of DXC Holdings (cl 16.3(b)(d); J2 [184]).
Prior to the acquisition, Sable37's business involved the supply and installation of software solutions based on business software products of Microsoft Corporation called "Finance and Operations" ("F&O") and "Customer Engagement" ("CE"). DXC Eclipse supplied and installed software solutions based on another Microsoft business software product called "NAV". Following the acquisition, DXC Eclipse has continued both businesses. Before the acquisition, Microsoft had announced plans for both products to develop into "cloud-based solutions" (see J2 [48]-[53]). The new version of NAV is known as "Business Central" ("BC").
One of the terms of the Securities Purchase Agreement was that Mr Wildsmith was to accept employment with DXC Eclipse to manage the two businesses. He did so, served for the period required in the Agreement, and later left.
In December last year, Mr Wildsmith let it be known that he wanted to get back into the software solutions industry. He incorporated a new company called Will Thirty Three Pty Limited ("Will Thirty Three") for this purpose. Mr Wildsmith's plan was that Will Thirty Three would sell software solutions based on BC. In February this year, it was announced that Mr Wildsmith would be appointed to the board of another software solutions business, Sentient Dynamics Pty Limited ("Sentient"). That company specialises in the supply of solutions based on yet another Microsoft product called "Power Platform".
DXC Eclipse commenced the proceedings in late March this year. In April, prior to the hearing, Mr Wildsmith gave undertakings to DXC Eclipse. Some were unconditional undertakings, accepted by DXC Eclipse, that would apply regardless of the outcome of the proceedings, not to solicit, before April 2025, any customers or employees of Sable37 as at the date of the purchase (J2 [22]). Mr Wildsmith also gave other interlocutory undertakings to DXC Eclipse.
The main debate between the parties at the trial concerned the operation of the non-competition covenant. It was contended for DXC Eclipse that the restraint covenant covered Mr Wildsmith's involvement in both Will Thirty Three and Sentient. DXC Eclipse sought an injunction, lasting until April 2025, accordingly. Mr Wildsmith disputed that the covenant applied to his involvement with Will Thirty Three or Sentient. He also disputed the reasonableness of the restraint, if the covenant did apply.
There were two further claims for relief made by DXC Eclipse at the trial. First, DXC Eclipse sought an injunction based on the non-solicitation covenant, in its application to suppliers, against Mr Wildsmith being involved in dealings between Will Thirty Three and Microsoft (J2 [24]). Mr Wildsmith disputed the reasonableness of the restraint. Second, DXC Eclipse sought an injunction based on the employee solicitation covenant against Mr Wildsmith soliciting any current employees of Sable37, and any employees of its parent company and that parent's related companies (J2 [25], [186]). The application for this injunction arose from a post on Mr Wildsmith's LinkedIn account (J2 [187]). Mr Wildsmith disputed the reasonableness of the restraint.
I concluded that the non-competition restraint did not apply to Mr Wildsmith's involvement in Will Thirty Three or Sentient, and the restraint was in any event unreasonable. The injunction sought by DXC Eclipse against Mr Wildsmith from being involved in dealings with Microsoft was unreasonable (J2 [183]). The employee solicitation injunction sought by DXC Eclipse was also unreasonable (J2 [189]).
DXC Eclipse's application for injunctions (which has been the subject of the expedited hearing) was dismissed. Strictly speaking, my findings were confined to the future enforcement of the restraints (see J2 [20]). But DXC Eclipse did not pursue any claim for damages for breach of the restraints in the period prior to judgment. Accordingly, its claim was dismissed.
[2]
Indemnity costs application
It was common ground that the defendants were entitled to their costs of the proceedings, at least on an ordinary basis. But Mr Wildsmith asked that his costs of the proceedings be paid on an indemnity basis.
The application was based principally on an offer made by Mr Wildsmith in March this year, shortly before the proceedings were commenced. The issue between the parties was whether DXC Eclipse's failure to accept the offer was unreasonable. Although the negotiations between the parties covered all three of the restraints which were the subject of claims by DXC Eclipse, it will be sufficient for the purposes of this judgment to refer to the competition restraint, which was the main issue at the trial.
On 2 March 2022, the solicitors for DXC Eclipse wrote to Mr Wildsmith alleging potential breaches of the restraints contained in the Securities Purchase Agreement. The letter relevantly alleged that Mr Wildsmith's new business ventures through Will Thirty Three, and his involvement with Sentient were in breach of the non-competition restraint.
The letter requested an explanation from Mr Wildsmith about how his new business ventures with Will Thirty Three and Sentient were not "Competing Businesses". The letter demanded written confirmation from Mr Wildsmith that he was aware of, and would not breach, his undertakings under the non-competition restraint.
The solicitors for Mr Wildsmith responded on 10 March. Their letter denied that Mr Wildsmith's new business ventures were in breach of the non-competition restraint. It contended that the non-competition clause was directed towards any business competitive with the business of Sable37 as at April 2018, which business only involved the supply of software solutions based on F&O and CE. BC-based solutions were never sold by Sable37.
The letter also contended that Mr Wildsmith's involvement with Sentient was not in breach of the non-competition covenant. Sable37 never supplied Power Platform solutions, and any business supplying Power Platform solutions did not compete with the business of Sable37 that was bought by DXC Eclipse. Power Platform solutions did not compete with F&O and CE solutions.
The letter went on to say that any attempt by DXC Eclipse to enforce the non-competition restraint beyond the scope of the goodwill of the Sable37 business it purchased would be unreasonable and going further than reasonably necessary to protect any legitimate business interest, and invalid as against public policy. It would also be excessive in duration and geographical scope.
Accompanying the letter was an offer to avoid litigation. The offer contained undertakings from Mr Wildsmith concerning solicitation of customers and employees. But it contained no undertakings about competition.
The offer was open for acceptance until 17 March 2022. It appears there was no formal refusal of the offer, which then lapsed. The proceedings were commenced on 30 March by way of Summons.
The eventual outcome (dismissal of DXC Eclipse's claim) was no more favourable to DXC Eclipse than the 10 March offer. Counsel for Mr Wildsmith contended that DXC Eclipse could have avoided the litigation entirely by accepting the offer. Counsel submitted that DXC Eclipse's conduct in refusing the offer and launching the proceedings was unreasonable.
In support of the application, counsel for Mr Wildsmith also relied on the April undertakings given by Mr Wildsmith (see above at [11]). I do not think those undertakings are relevant to this application. Some of the undertakings provided by Mr Wildsmith were interlocutory in nature and did not settle the proceedings. There was also a more fundamental issue. The undertakings did not of themselves involve an offer to settle the proceedings that could be accepted or rejected by DXC Eclipse. Accordingly, in what follows I will only deal with the 10 March offer.
At the trial, there were two hurdles facing DXC Eclipse's claim to enforce the non-competition restraint so far as competition from Will Thirty Three based on BC was concerned. DXC Eclipse's first hurdle was to demonstrate that the non-competition restraint applied to Mr Wildsmith's new business ventures. DXC Eclipse's case was put in two ways. First, it was contended that, as a matter of construction, the definition of "the Business" included the supply of future software solutions based on BC, even though Sable37 had not in fact sold solutions based on BC, or its predecessor NAV, before the acquisition (J2 [56]). Alternatively, the supply of solutions based on BC was itself competitive with the supply of solutions based on F&O which Sable37 had been selling (J2 [150]). DXC Eclipse's second hurdle was to demonstrate that protection against competition based on BC was reasonably required to protect the goodwill in Sable37 which it had purchased. Similar issues arose for competition from Sentient based on Power Platform.
So far as competition based on BC was concerned, on the first issue I concluded that supply of solutions based on BC was not in itself, as a matter of construction, covered by the definition of "the Business" (J2 [149]). And, although there might have been some overlap between the functionalities of BC and F&O, the evidence presented by DXC Eclipse did not satisfy me that BC-based competition from Will Thirty Three was a sufficient competitive threat to the F&O business purchased with Sable37 (J2 [158]). On the second issue, I was not satisfied that protection against such competition was reasonably required (J2 [174]). DXC Eclipse's claim for protection against competition from Sentient based on Power Platform was in no better position (J2 [158]).
It was common ground between the parties that the unreasonable refusal of an offer of compromise may justify the award of indemnity costs. The onus is on the offeror to establish that the offeree's rejection was unreasonable. It is necessary to look at all the circumstances of the case at the time the offeree failed to accept the offer. The mere fact that the ultimate result proves to be less favourable to the offeree than the terms offered does not of itself establish that rejection of the offer was unreasonable.
In the present case, DXC Eclipse eventually failed on the construction issue. But the argument on the issue at trial was (as one would expect) more wide-ranging and sophisticated than it was in the parties' pre-litigation exchange of correspondence. And in any event, DXC Eclipse had an alternative case which did not involve any debate about the construction of the covenant. DXC Eclipse failed on that issue, and on the reasonableness issue, but those failures were factual, and ultimately resulted from a close analysis of the evidence led at trial.
Sometimes it can be seen in retrospect that the substantial cause for the failure of a claim has been that the plaintiff had an unreasonable or incorrect view of the law or the facts. That is not the case here. DXC Eclipse's failure in the proceedings was not pre-ordained.
Mr Wildsmith was in effect offering DXC Eclipse nothing. In my view, it was not unreasonable for DXC Eclipse to decline the offer and proceed with the case, even though it has eventually been unsuccessful. Accordingly, I refuse Mr Wildsmith's application for costs on an indemnity basis.
[3]
Orders
The orders of the Court are:
1. Order that the defendants' costs of the proceedings (except the defendants' costs of the argument about costs) be paid by the plaintiff on the ordinary basis.
[4]
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.
Decision last updated: 16 December 2022