Hume Computers Pty Ltd ACN 003 154 827 v Exact International BV [2006] FCA 1439 | Case summary

8 The Distributorship Agreement, entered into some 13 days after the letter of comfort, provides for Hume to be a re-seller of Exact's software, as well as for Hume to carry out maintenance of the software sold to licensees. Hume's reward for this is an entitlement to 50 percent of the proceeds of sale and 50 percent of the maintenance fees paid by customers. 9 The exact relationship between Hume and the licensees is not spelled out clearly in the Distributorship Agreement. This is because Hume is bound to sign up the end users of the products as licensees to a contract made directly between Exact and the licensee. The terms of the contract between Exact and the licensees are set out in Exhibit C to the Distributorship Agreement. Article 11 of that document provides that Exact shall itself maintain the software under the terms of the contract with the end user. 10 However, Article 7 of the Distributorship Agreement provides that Hume is responsible for all support to be provided to the licensee under the licence agreement or the maintenance agreement and that Exact will provide Hume with the support reasonably required in order for Hume to meet those obligations. In my opinion, the effect of Article 7 is that Exact appoints Hume as its agent to maintain and support the software sold by it to the licensees or end users. 11 Under Article 14 of the Distributorship Agreement, Hume is required to use its best endeavours to promote and extend sales of Exact's products in Australia to potential licensees. It is bound not to conduct the business of selling or distributing any similar products to those of Exact. Article 20 provides for the agreement to continue for an indefinite period subject to Articles 20(2) and (3). Article 20(2) provides for termination by Exact for cause. Article 20(3) provides that the Distributorship Agreement may be terminated without cause by either party on 31 December 1999 or at the end of any calendar quarter thereafter on 90 days' prior written notice. 12 Importantly, upon termination by either party, Hume is to be paid compensation equal to 50 percent of all maintenance fees for a period of three years; see Article 21(1)(a). This clause, though not entirely clear in its meaning, plainly enough entitles Hume to substantial compensation on termination of the Distributorship Agreement. The effect of it seems to be to entitle Hume to what amounts to compensation equal to three years' notice of termination. This arises from the terms of Article 3(2), Article 21 and Exhibit A of the Distributorship Agreement. 13 Article 25 is an entire agreement clause and provides that any variation of the Distributorship Agreement shall not be binding unless made in writing and signed by the parties. Article 27 provides that the Distributorship Agreement is to be governed by the laws of The Netherlands, and all disputes concerning the validity, interpretation or performance of the agreement are to be submitted to the courts of The Hague. 14 From the inception of the Distributorship Agreement Hume ordered its software from Exact Malaysia. As of January 2000, apparently in accordance with procedures established by Exact, Hume began to log the identity of all its customers onto an internet portal system. Whilst this gave Exact access to the identity of those customers, the purpose of doing so seems to have been a limited one. Consistent with the contractual arrangements in the Distributorship Agreement, the purpose of Hume's entry of data onto the portal seems to have been to enable Exact to provide what may be called "second-line support" for those customers. That is to say, first-line support as Exact's agent is provided by Hume, with backup or second-line support coming from Exact, notwithstanding the fact that Exact has a direct contractual relationship with the end users. 15 On 17 January 2002, Mr Aidan Leathem of Hume was informed by Exact that it intended to set up a subsidiary in Australia. Whilst this was done without the consultation required by the letter of comfort, the effect of the communications between the parties appears to have been that the Australian subsidiary of Exact would only provide closer after-sales support service to Hume. This is described in the statement of claim as the '2002 ESA Representation'. 16 ESA was established on or shortly after 8 May 2002 and has conducted business in Australia since that time. There is evidence of a further representation in similar terms made in 2003. This was that ESA had no intention of selling directly to the Australian market other than in exceptional circumstances and only to established international customers of Exact. This is called the '2003 ESA Representation'. 17 As early as January 2004, Hume began to complain about direct sales made by ESA in apparent breach of earlier assurances. Mr Aidan Leathem said in an email of 21 January 2004 that this was placing a strain on the relationship between Exact and HBS. 18 In June 2004 Exact proposed to Hume that it acquire Hume's business, which would be merged with that of ESA. Mr Leathem has given evidence that in the course of the discussions, Mr Patel of Exact assured him that even if a deal was not reached, ESA would only pursue clients who had offices in "multiple countries". No agreement was reached between Exact and Hume for the purchase of the business, and the relationship between the parties continued to deteriorate. 19 In June 2005, Hume threatened legal action, apparently as a result of ESA entrenching upon what Hume considered to be its market. A "code of conduct" was apparently established between the parties, regulating the basis upon which ESA could make direct sales. Mr Urand gave evidence in cross-examination that ESA adhered to the code of conduct until January 2006. However, in January of this year ESA approached 10 of Hume's customers. Hume then sent a letter of demand to ESA and the approaches to customers seemed to cease temporarily. Nevertheless, I have evidence of access to the portal which was obtained by ESA during the ensuing period. I infer from this, and from concessions made by Mr Urand in cross-examination, that by at least August 2006, ESA decided to approach Hume's customers directly. This was done by obtaining details of Hume's customers on the portal. 20 The effect of Mr Urand's evidence in cross-examination was that ESA obtained details of Hume's customers, that is, those who were not obtaining software or maintenance directly from ESA, from the portal. This information was used by ESA to target those customers to come across from Hume to ESA. 21 Mr Urand conceded that one of the purposes of the marketing event of 18 October 2006 is to try to move customers away from Hume to ESA. Indeed, on 11 October 2006, Mr Urand sent an email to invitees for the marketing event informing them of the hearing of the present notice of motion. Mr Urand stated that ESA opposes the orders sought by Hume. He said that ESA believes that this will prevent ESA from ensuring that Exact's obligations under the licensing and maintenance agreement are met, and from ensuring that customers get the best possible experience from their software. 22 The background to this approach by ESA appears to be that ESA alleges that it has received complaints from customers about Hume's maintenance of Exact's software. Nevertheless, despite the provisions of the Distributorship Agreement, which would require Exact to give notice of these complaints to Hume, no such notice has been given. Instead, Exact appears to have taken the view that self-help is the better course. 23 Mr Urand could not explain why he did not tell Hume of the complaints. He conceded that ESA saw complaints from customers as an opportunity to transfer their custom from Hume to ESA, but he denied that this was the reason for the direct approach. Mr Urand also conceded that ESA has made repeated contact with customers to enquire whether they have complaints about Hume's service. 24 The case which Hume seeks to bring against Exact and the other respondents is a serious one. It alleges that what Exact and ESA have done is part of a deliberate and planned worldwide expansion strategy. Under the alleged strategy, Exact is said to establish a distributor in a particular territory, thereby avoiding the need to expend its own resources in establishing a market. Where the distributorship becomes successful, according to Hume's case, Exact moves in after a three-to-five-year establishment period and takes over the distributorship. 25 Hume has obtained evidence of this from Mr Kampen, who was formerly a senior executive with the Exact group of companies. Indeed, he negotiated the Distributorship Agreement for Exact and was a signatory to the letter of comfort. According to Mr Kampen's evidence, Mr Hagens, the then CEO of Exact, told him that the plan is to buy "jewels for scrap-metal prices". Hume contends that this and other evidence points to the fraud and conspiracy alleged in the statement of claim. The assurances as to non-competition and eventual breaches are said to be part of a plan to erode the value of Hume's business, which is to be found in the ongoing payment of maintenance fees payable under the Distributorship Agreement. 26 The conspiracy and fraud cases are complex. Hume has established a serious question to be tried on these counts, but it is unnecessary for me to determine the strength of the serious question for the reasons stated below. In any event, it seems to me that quite apart from the claims of breach of s 52 of the Trade Practices Act 1974 (Cth), fraud and conspiracy, there is certainly a serious question which can be seen to have been established on the evidence that I have set out. 27 In my opinion, there is a serious question to be tried at a final hearing as to whether Exact (and through it ESA) have breached an implied obligation of good faith to cooperate in achieving the contractual objects found in the Distributorship Agreement. The principle embodied in this implied obligation was stated by the NSW Court of Appeal in Burger King Corporation v Hungry Jack's Pty Limited [2001] NSWCA 187 at [169] and following. The obligation includes an implied covenant not to prevent the performance of the contract or to withhold its benefits. 28 By keeping the Distributorship Agreement on foot and thereby obliging Hume to perform its obligations to locate and service customers, whilst at the same time asserting a right to entice those customers away from Hume, Exact appears to be acting in breach of its implied obligation. This is a sufficient basis to warrant the grant of interlocutory injunctive relief subject to considerations of the balance of convenience. 29 An alternative basis available at this stage of the proceedings is that the information about customers supplied by Hume through the portal is given to Exact for a limited purpose and is otherwise confidential. Exact's assertion that it is entitled to use this information to target Hume's customers during the course of the existing Distributorship Agreement seems to me to raise a serious question of misuse of the information. 30 In deciding the issue of serious question, I do not need to consider the strength of such a question, because this decision will not effectively resolve the final hearing; Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533; Walker v ANZ Banking Group Ltd (No 2) (2001) 39 ACSR 557. Nor does the entire agreement clause in Article 25 of the Distributorship Agreement persuade me that there is no serious question to go to a final hearing; see for example, Lawson Hill Estate Pty Ltd v Tovegold Pty Ltd (2004) 214 ALR 478 at [82]-[83]. 31 In my opinion the balance of convenience favours the grant of interlocutory relief. It is true that Hume has had the benefit of the Distributorship Agreement for a period of nine years. It is also true that the claims it makes sound in damages. However, it seems to me that the approach that ESA wishes to take to the Distributorship Agreement would be to substantially erode the value of Hume's business. This is of importance in any consideration of balance of convenience, but it is even more pointed in the present case, where, upon termination of the distributorship, Hume is entitled to compensation based on the value of the customers whom Exact wishes to entice away. 32 What is striking about this entire proceeding is that neither side has sought to terminate the Distributorship Agreement, notwithstanding that all trust and confidence between the parties seems, at least from the evidence put before me thus far, to have evaporated. 33 ESA pointed to a number of discretionary considerations against the grant of relief. One of these was delay, however counsel for ESA and Mr Urand quite fairly said that he could not point to any prejudice in this regard. In any event, the matter has been brought to a head by the recent decision of ESA to seek to entice away almost all of Hume's customers. 34 Whether or not there is, as ESA contends, dissatisfaction amongst Hume's customers, I do not see that the balance of convenience favours allowing ESA to directly approach and entice those customers away from Hume while at the same time leaving the Distributorship Agreement on foot. Nor does the evidence that Hume has written additional modules to the Exact programs incline me in ESA's favour on the balance of convenience. This is a matter which can be sorted out contractually, either in the course of agreement or upon termination of the Distributorship Agreement. ESA also pointed to the sale, in about July 2005, of the business of Hume to its related company HBS. I do not see that this goes against the grant of interlocutory relief. 35 ESA also placed some store on the choice of law clause in Article 27 of the Distributorship Agreement. It was submitted for ESA that the exclusive jurisdiction clause found in Article 27 would point strongly against the grant of leave to serve Exact outside the jurisdiction. Leave has not yet been granted, but ESA argues at this stage that there are strong prospects that it will be refused when that application is heard. In my view, this argument fails to have regard to the decision of the Full Court in Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc (No 5) (1998) 90 FCR 1 at 24-25. The claims which Hume makes against Exact include claims under the Trade Practices Act which do not ordinarily fall within the purview of this type of clause. 36 There was debate about the form of any interlocutory relief. Counsel for Hume relied upon Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia No 3 (1998) 195 CLR 1 at [33] for the proposition that relief in wide terms should be granted, and said that this should extend to mandatory injunctive relief if necessary. However, it seems to me that the proper exercise of my discretion is that interlocutory injunctive relief should be limited to the prevention of enticement of Hume's customers. This can be stated in sufficiently clear terms to prevent the actions which ESA has sought to achieve, in particular at the 18 October 2006 marketing event. The precise steps which ESA must take to comply with the injunction will be up to it, but clearly enough ESA and Mr Urand should be restrained from soliciting the business of Hume's existing customers in the manner sought to be achieved by ESA. 37 I will make orders in terms of paragraphs 2(a)(A) and 2(a)(B) of the notice of motion. The terms "Relevant Person" and "Distributorship Agreement" will be defined as set out in the notice of motion. I do not consider that any of the other orders sought in paragraphs 2 and 3 of the notice of motion should be made. 38 The orders that I will make are upon the applicants by their counsel giving the usual undertaking as to damages. I will order the second and fourth respondents to pay the costs of the applicants of the day of 13 October 2006. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson J.

Hume Computers Pty Ltd ACN 003 154 827 v Exact International BV

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