Plaintiff v Defendants

1 This difficult and unfortunate litigation comes before me following a judgment delivered by Nettle J on 18 February 2004. The parties differed over the intellectual property rights to a patentable invention and two related computer programmes. These had been developed by the first and second defendants (respectively, Professor Kenneth Wilson and Dr Donald Feaver) - each of whom was a member of the academic staff of the Victoria University of Technology - with the assistance, in particular, of a former student of Professor Wilson's, Craig Astill.

2 At relevant times, Professor Wilson held a chair in the University's Graduate School of Business, an entity within the Faculty of Business and Law. He was, in addition, head of the School of Applied Economics. One of the units in that School was the Centre for International Business Research and Education ("CIBRE"), of which Dr Feaver was (again, at relevant times) the head.

3 The University has for some time taught, and been involved in research into, a subject that may conveniently be called "international trade". Indeed, in 1990 one of its predecessor institutions - the Footscray Institute of Technology - became the first higher degree-conferring institution in Australia to establish a Bachelor of Business in International Trade. The success of this initiative resulted, in 1998, in the establishment of CIBRE, the purpose of which was to identify relevant and practical research opportunities.

4 The idea that became the source of the invention may be traced back to July 1999, or thereabouts, when Professor Wilson was contacted by a man who, like Mr Astill, was former student of his. Mr Joseph Buccheri put before Professor Wilson a proposal that a company called "World Trade On-line Ltd" ("WTO"), of which Mr Buccheri was a director, join with the University in the development of a concept for an electronic international trade exchange. The hope was that international traders and brokers would be thereby enabled to transact their business through what was described as "a controlled electronic trading environment".[1] A key component of the concept was the provision of an on-line course in international trade.

5 Professor Wilson was interested. So was Dr Feaver. They set about preparing a "high level" schematic design for the architecture of the proposed system. A week or so later, in early September 1999, Mr Astill joined them. By the end of September 1999, the three had produced a "process flow diagram" or "schema" which, they were satisfied, was sufficiently well developed to be demonstrated at a meeting with IBM in Malaysia. It was described as an internet-based trading exchange mechanism with software able to perform those specific, practical tasks that are needed in order to conclude and execute transactions in international trade using a web site service.

6 According to Mr Buccheri's account of the relevant circumstances, he "approached Professor Wilson in order to gauge the possibility of the University developing an online education and training course"[2] for the accreditation of international traders and brokers who wished to undertake trading transactions electronically through a controlled electronic trading environment. Professor Wilson considered that this represented an opportunity for CIBRE, and for an expansion of the range of the courses offered by the University. In a letter written on 5 August 1999 to an associate of Mr Buccheri, he spoke of his belief that, because the University had a long established expertise in international trade research, "we are well placed to assist you in the development of the 'World Trade Online' initiative". This pronouncement was doubtless gratifying to "WTO in general and Buccheri in particular [because they] wanted the design to be carried out in the name of the University, so that it attracted the cachet of the University's reputation".[3]

7 It was on the basis of this and other like evidence that Nettle J concluded "that the opportunity to design the WTO system was presented to Professor Wilson and Dr Feaver in their capacities of head of the School of Applied Economics and head of CIBRE"[4]. His Honour also found that, until 23 September 1999, the two "conceived themselves to be engaged on a university project".[5] On that day, however, they resolved with Mr Astill that they would reserve exclusively for themselves all technology and intellectual property developed in the course of the project. This, as his Honour found, amounted to their taking over the project and causing it to be transferred to themselves or their corporate entities (in the case of Professor Wilson, Jahupa Pty Ltd; in that of Dr Feaver, Coap Pty Ltd; and in that of Mr Astill, Caason Pty Ltd.), thereby depriving the University of the benefits to which the project gave rise - including opportunities for its development and promotion.

8 The next step was the introduction of a corporate vehicle as owner of the intellectual property which had been and was to be created. This was achieved when, on 6 December 1999, a company called iP3 Pty Ltd (subsequently re-named iP3 Systems Ltd) was incorporated. A little more than three months later, on 16 March 2000, iP3 systems lodged an Australian provisional patent application for an invention entitled "E-Commerce Facilitation". A complete patent specification was filed exactly twelve months after that, on 16 March 2001. On the same day, Professor Wilson, Dr Feaver and Mr Astill assigned to the company their rights in the invention.

9 Following the appointment in September 2001 of a new chief executive officer, iP3 introduced an improved website. It recorded the development, as part of the project, of a "negotiation module" for use in international trade, and of two allied computer programs. These were given the names "Electron" and "Ether", and they became important components of the total package.

10 Doubtless the hope was that the improved website would increase the company's exposure. If so, it succeeded in ways which were not necessarily welcome. In the second half of 2002, another professor at the University came across the site, and expressed concern about the dual and possibly conflicting capacities in which Professor Wilson and Dr Feaver were acting. They were members of the academic staff, and yet were at the same time engaged in what the intervenor said appeared to him to be a commercial venture for their personal gain, to the unjustifiable exclusion of the University.

11 The University had not before this adopted any official position towards the extra-curricular work of Professor Wilson and Dr Feaver. But now things changed; and so the seeds of conflict were sown. Following an investigation by the University, a writ was filed on 4 June 2003, Anton Piller orders were made, and the trial began on 13 November 2003 before Nettle J. It occupied some 24 days. In his reasons for judgment of 18 February, his Honour found that the shares in iP3 Systems held on behalf of Professor Wilson and Dr Feaver "are and at all relevant times have been ... held upon constructive trust for the plaintiff". In each case, the number of shares in question was 4,381,786 - a combined total of 8,763,572.

12 His Honour then, on 10 March, made orders designed to transfer the legal interest in the shares to the University. First, he declared that the 4,381,786 shares held by Jahupa Pty Ltd for Professor Wilson were then, and had at all relevant times been, held upon constructive trust for the University.[6] A like order was made in respect of Coap Pty Ltd's similar holding.[7] His Honour next prohibited any of Professor Wilson, Jahupa Pty Ltd, Dr Feaver, Coap Pty Ltd or iP3 from cancelling any of those shares,[8] and required all those defendants to do everything necessary to effect a transfer of the shares to the University, and the latter's registration as owner of them.[9] Should any have already been sold or otherwise divested, his Honour ordered that ("[s]ubject to and immediately after the determination of the special referee", to whom certain questions were referred by the order next following, "and the acceptance of such determination by the Court") the proceeds thus realised be paid to the University.[10]

13 That having been, or having been required to be, done, his Honour ordered pursuant to Order 50 of the Supreme Court (General Civil Procedure) Rules 1996 (which is headed "References out of Court") that the following questions be referred to a special referee for determination:

(a) What allowance is due to the first, second, fourth and fifth named defendants [respectively, Professor Wilson, Dr Feaver, Jahupa Pty Ltd and Coap Pty Ltd] for expenses, subscription moneys, skill, effort and risk outlaid or incurred in conceiving, designing or developing the invention the subject of the proceeding, or the Electron and Ether computer programs the subject of the proceeding, up to and including 18 February 2004 [the date upon which judgment was delivered]?;

(b) What is the appropriate commercial rate of interest and the total amount of interest properly to be allowed to the first, second, fourth and fifth named defendants in respect of the allowances to be determined in accordance with paragraph ... (a)?[11]

14 Where no jury is involved, r.50.01 of the Rules empowers the Court to refer any question to a special referee, either for decision upon the question, or to obtain the referee's opinion with respect to it. By r.50.02, the Court may give directions for the conduct of the reference; and, by r.50.03(2)(b)(ii), the Court may remit the whole or any part of the question originally referred to the special referee for further consideration by that or some other person. Alternatively, r.50.04 provides that the Court may as the interests of justice require adopt or decline to adopt the report in whole or in part, and may make such order or give such judgment as the Court thinks fit. The discretion is thus very wide (and, indeed, in Nichols v Stamer[12], Brooking J recorded how he had searched in vain "for any general statement of the principles on which the Court acts in exercising the discretion to adopt a report wholly or partially or to decline to do so.")

15 A special referee was in due course appointed: Mr Greg Meredith, of the firm of Ferrier Hodgson, accountants. The hearing before him commenced on 28 February 2005, and continued over a further eight days in March, concluding on 12 March 2005. Mr Meredith's report was filed and served on 31 May. In it, he determined the total allowance which should be awarded to Professor Wilson and his company (Jahupa Pty Ltd) "for expenses, subscription moneys, skill, effort and risk outlaid or incurred in conceiving, designing or developing the invention the subject of the proceeding, or the Electron and Ether computer programs the subject of the proceeding, up to and including 18 February 2004". The figure at which he arrived, including interest to 30 June 2005 in the sum of $98,808.01, was $508,249.51. For Dr Feaver and his company (Coap Pty Ltd) the allowance, again with interest to 30 June 2005 (in Dr Feaver's case amounting to $120,579.07) was $588,665.93.

16 Mr Meredith reached these conclusions by, first, accepting the amounts claimed by Professor Wilson and Dr Feaver for expenses and subscription moneys - although he deleted from these the liability of the two men to contribute to the legal expenses incurred in the proceeding by iP3. The special referee then assessed the number of hours Professor Wilson and Dr Feaver spent in conceiving, designing and developing the invention and the software. He did so having adopted a generous interpretation of what was encompassed by the expressions "conceive", "design" and "develop", but deducting from the hours spent in these endeavors those which represented University time. He then applied what he determined was a generous hourly rate, including a risk premium, of $110.00.

17 The "executive summary" of Mr Meredith's report sets out in tabular form the steps in his calculations. He first took the sum of $80,185.00 as being due to Professor Wilson for what in the "executive summary" he called "loans and expenses". No allowance was made for subscription moneys. To the "loans and expenses, however, Mr Meredith added $25,055.50 as a "risk premium", giving a sub-total of $104,250.50. The special referee added to this a "gross allowance" of $384,340.00 for "skill, effort and risk"[13]; and from it was deducted the salary which the professor received from iP3 ($74,349.00). A further deduction, of $4,800, was made to allow for the fact that the inventors used University-owned computers. Finally, interest to 30 June 2005 in the sum of $98,808.01 was added, resulting in a total of $508,249.51. For Dr Feaver and his company (Coap Pty Ltd) the allowance, again with interest to 30 June 2005, was $588,665.93. This sum was reached by taking the amount allowed for loans and expenses ($12,571.23) and adding to it: (a) $59,879.43 as subscription money; (b) $72,450.66 as risk premium; (c) $460,240.00 for skill, effort and risk; and (d) interest of $120,579.07. Mr Meredith then subtracted (a) $81,539.00, being Dr Feaver's salary from iP3; and (b) $4,800.00, being the "computer-use" deduction.

18 The University is happy with this outcome. Professor Wilson and Dr Feaver are not. On 17 August 2005, they issued a summons (dated 9 August) seeking an order pursuant to r.50.03(2)(b) that the Court remit to Mr Meredith for his further consideration part of the question initially referred to him. For its part, the University - by a summons dated 15 August and issued the following day - seeks orders that the special referee's report be adopted, and (in effect) that the amount ($508,249.51) allowed by the special referee to Professor Wilson and Jahupa Pty Ltd be set off against the amount claimed by the University as owing to it from the proceeds of the sale of the 4,381,786 "Wilson" shares in iP3. That sale, according to the University's summons, realised $559,578.67. The University claims that following judgment it is entitled to this amount, together with interest. If the University's position were accepted, the net result, of course, would be a payment to it.

19 The University in its summons of 16 August makes a like claim against Dr Feaver and Coap Pty Ltd. In this case, the amounts are, respectively, $588,665.93 (allowed by Mr Meridith); and $559,578.67 (being the proceeds of sale of Dr Feaver's 4,381,786 shares in iP3) together with interest on that latter sum. If that interest were included, there may again be a balance in the University's favour.

20 The issues joined by the two summons now fall for determination. That requires consideration of the principles for which, 26 years ago, Brooking J in Nichols v Stamer[14] searched in vain. Fortunately for the rest of us, 19 years after Nichols v Stamer his Honour revisited the scene - this time as a member of the Court of Appeal, with Phillips and Buchanan JJA as his colleagues on the bench. The case was Plumley v Adguage Pty Ltd & anor.[15]

21 In Plumley, a dispute had arisen between the shareholders of a company called Markbys Renaissance Pty Ltd ("Markby's"). The dispute was settled on terms which required each of the appellant, her husband, and a company controlled by them, to purchase both the shares and the units in Markby's, and units in a unit trust then held by the first respondent ("Adguage"). It was therefore necessary to have these shares and units valued. The parties sought, and on 8 December 1994 obtained, an order by consent, pursuant to O.50, that an expert be appointed as special referee for this purpose.

22 The special referee chose the capitalised maintainable earnings method, rather than the assets method, to value the shares and units. The appellant contended that, as a matter of law, the assets method should have been adopted; and, because the relevant balance sheet showed an excess of liabilities over assets, the true value of the shares and units in question was below that assessed. It was therefore also submitted that the failure of the special referee to reduce the value of the securities to reflect the balance sheet was an error of law.

23 Buchanan JA, with whom Brooking and Phillips JJA agreed, accepted that a judge ought not to adopt and act upon a special referee's decision on a question of law unless it appears to be correct. But:

"... a decision as to a mater of fact is not to be reconsidered afresh, and in general should only be rejected if it is patently unreasonable or contrary to or against the weight of the evidence. Otherwise the reference will be no more than a rehearsal for the trial of the same issue before the court."[16]

24 The Court of Appeal in Plumley held that the choice of the method of valuation was not a matter of law. In the words of Buchanan JA_:_

"It is not a principle of law that the value of shares in a company cannot be valued according to a capitalisation of future maintainable earnings without adjustment to reflect the relative values of the assets and liabilities of the company."[17]

25 The decision of the special referee "that in this case the appropriate method of valuation was to capitalise future maintainable earnings"[18] was therefore hers to make; and, having determined upon the appropriate method, her findings were findings of fact.

26 The relevant authorities, which have considerably increased in number since the lament of Brooking J in Nichols v Stamer, are as one in stressing that, in exercising the responsibilities vested in him or her, the special referee is not conducting a mere prelude to further litigation. Although the courts have declined to catalogue the grounds upon which they may refuse to adopt a special referee's report, their discretion to adopt or reject it, in whole or in part, is confined only by the interests of justice. This will depend upon the particular circumstances attending particular cases.[19] While r.50.04 includes no guidance to those who must exercise the discretion that it confers upon them, no judicial discretion may be exercised wilfully. This means that, in deciding whether or not to adopt or decline to adopt the report of a special referee, the court must exercise its discretion "in a manner consistent with the object and purpose of the rules and the place they play in the administration of justice according to law."[20] If the dissatisfied party has identified an error in the law, then because there can be no implied authority to make such errors, the report may be set aside or remitted.[21] A like result would normally - if not inevitably - follow if the referee has acted perversely or unreasonably (as he or she would if his or her decision was against the weight of the evidence). But a court cannot interfere simply because a number of alternative factual findings are open, and the special referee has chosen one or more of them rather than another or others.

27 The plaintiff submits that in this case Mr Meredith came to conclusions of fact to which, on the evidence, he was entitled to come. That therefore is where the matter must rest. The special referee in Plumley was entitled to hold, because it was a decision on a question of fact, that the value of shares in a company were in the circumstances properly valued according to a capitalisation of future maintainable earnings. By parity of reasoning, so in this case was the special referee entitled to take as the basis of his assessment the figure reached by multiplying, by a generous hourly rate, the number of hours spent by the two men in conceiving, designing and developing the invention and the software. Indeed, (the plaintiff's submission continues) the special referee went out of his way to concentrate upon the facts, and to reject the opposite, hypothetical, approach urged upon him by the defendants. Mr Meredith examined and took into account expenses actually incurred, subscription moneys actually outlaid, skill actually employed, efforts actually made and the risk actually taken, in producing the benefit actually transferred. One might, perhaps, disagree with his findings, or some of them; but they were open to him. And a court cannot interfere simply because a number of alternative factual findings are open, and one or more of these rather than another or others is or are chosen.

28 Professor Wilson and Dr Feaver take a very different position. They point to the breadth of the discretion conferred by r.50.04: "The Court may as the interests of justice require adopt ... or decline to adopt the report in whole or in part, and make such order or give such judgment as it thinks fit". They also submit that that discretion would ordinarily be exercised by declining to adopt a report that disclosed some error of principle.[22]

29 This, the relevant defendants argue, is just such a case. It may be distinguished from Plumley v Adguage Pty Ltd, because in this case the special referee did fall into an error of principle. He was bound to ensure, as Nettle J expressed it at paragraph [196] of his judgment, that the liability of Professor Wilson and Dr Feaver as fiduciaries was not "transformed into a vehicle for the unjust enrichment of the plaintiff". It was all very well to examine such things as skill actually employed and efforts actually made, but if the level of remuneration upon which the special referee determined was unreasonably low, and if that determination was made after the special referee had dismissed as irrelevant evidence (such as that called by the defendants from one of their experts, Professor Michael Georgeff) which bore directly on what remuneration was reasonable, then the University would be advantaged in a way which was not just.

30 It was necessary for the defendants to concede in their submissions that, as Nettle J found, Professor Wilson and Dr Feaver did breach their fiduciary obligations to the University. This followed because, on entering into the agreement of 23 September 1999, they deprived the University of an opportunity which had been presented to them in their capacities as, respectively, head of the School of Applied Economics and head of CIBRE: the opportunity, that is, to design the WTO on-line system. But, as the submissions emphasised, neither man acted dishonestly. On the contrary, Nettle J concluded that:

"As far as the evidence goes, [they] acted in ignorance of the full extent of their obligations to the University and more probably than not in the positive belief that they were doing nothing wrong."[23]

31 In these circumstances, the relevant governing principle (as Professor Wilson and Dr Feaver submit) is that laid down in Phipps v Boardman.[24] That was a case where trustees of a will (or, in the case of Mr Boardman, a solicitor to those trustees) bought on their own behalf shares in a company some of the shares of which were already held on behalf of the trust. In making their purchase, the trustees used confidential information about the financial state of the company. They acquired this information only because, as legal owners of the shares of which they were trustees, the information was passed to them. They were held to be liable to account for the profit they had made from the transaction. According to Dunn LJ in O'Sullivan v Management Agency Ltd:[25]

"Phipps v Boardman ... shows the strictness of the rule [of equity, which insists on the liability to account of those who, by use of a fiduciary position, make a profit][26] since no moral blame attached to the trustees, who had consulted their fellow trustees and obtained their consent from all save one, who was senile. In recognition of this the court ordered that they should be given credit not only for their expenses but also be given a liberal allowance for their skill and work in producing the profit."

32 O'Sullivan is an instructive case. The plaintiff was, until 1970, a musician and composer who had discovered that the adoption of the professional name "Gilbert O'Sullivan" did not guarantee success. This changed, however, when on 25 February 1970, he signed a management agreement with an internationally renowned manager, producer and performer, one Mills. Other, complementary, agreements were signed then or in the succeeding months with entities with which Mills was associated. Success followed with remarkable swiftness. By 1972, 6,500,000 of the plaintiff's records had been sold, and he had been acknowledged by the Music Business Association as the biggest selling solo artist in the world.

33 Nevertheless, all was not as it should have been. In 1970, Mr O'Sullivan was only 23 years old, with the naivety of one with little if any business experience. He had no independent advice when he linked his fortunes with those of Mr Mills, who he trusted to look after his best interests. That trust was misplaced. In their totality, the arrangements put in place in 1970 were "unfair in that the defendants were taking a bigger share of the profits than the plaintiff [O'Sullivan] appreciated".[27] He had no idea of what might have been a proper split, or even how to calculate the entitlements which his contracts provided for him.

34 At the same time, this was a case:

"... where both parties [were] contributing effort towards a joint objective. The plaintiff until he had come into contact with Mills ... was an unknown and unsuccessful singer earning his living as a postal worker. As a result of his association with Mills he became a pop star of worldwide renown. This was the result of joint enterprise in which both parties played an important part."[28]

35 After holding that the defendants occupied a fiduciary relationship with O'Sullivan, and had abused their position by exercising undue influence over him, Waller LJ continued:

"No reported case has been shown to us where the effect of undue influence on any similar agreement, or indeed any agreement where both parties have been contributing, has to be considered. In the case of trustees making use of information for their own benefit [as in Phipps v Boardman] they were not working for the interests of the beneficiary. In the case of doctors, money lenders, etc., the other party was not doing work. In my judgment the approach which the court should make is that indicated in the passage from Lord Blackburn [in Erlanger v New Sombrero Phosphate Co][29] quoted by Rigby LJ[30] and approved by Lord Thankerton.[31] The important words of Lord Blackburn are that equity should give relief 'whenever, by the exercise of its powers, it can do what is practically just.' In my judgment this court is not concerned with punishing the defendants for their behaviour. We are concerned to see that the plaintiff gets the profit to which he is entitled and at the same time see that the defendants receive remuneration, but no more, for all the work that they have done in pursuance of this joint project ... This the defendants are entitled to keep ... On the other hand it is clear that the profit which the defendants [until these proceedings] kept was excessive. The excess profit was retained without the knowledge of the plaintiff. The defendants must account for this profit. It will be for the official referee to decide what would be reasonable remuneration. It must include all expenses and a fair profit."

36 Where a constructive trust is imposed, not by reason of dishonesty but by the strict application of the rules of fiduciary accountability, the benefit for which the trustees must account is the benefit obtained by them as a result of the relevant breach of fiduciary duty. As Nettle J said:[32]

"In this case the benefit obtained by Professor Wilson and Dr Feaver by reason of their breach of fiduciary duty derives from the invention of the system. But the value of the benefit is not the same as the value of the system. Although the system is a specific asset, and the asset has a value, only part of that value is due to the opportunity obtained in breach of fiduciary duty. The remainder is due to the time, energy, skill and financial contribution expended by the defendants.

Furthermore, it is not as if the invention itself were presented to Professor Wilson and Dr Feaver and as if they had acquired the invention, as such, in breach of fiduciary duty. In truth they were presented with no more than an opportunity to create the invention, and their breach of fiduciary duty consisted in seizing that opportunity rather than affording the opportunity to the University. Without the investment of Professor Wilson's, Dr Feaver's and Mr Astill's and others' skill and effort and capital and risk, there would not have been any asset. The case is truly one of misappropriation of business opportunity."

37 By his judgment, Nettle J restored that opportunity to the University. But, in the next paragraph of his reasons for judgment, he added:

"In the result both logic and equity dictate that allowance be made for the efforts and outgoings devoted to the invention up until the filing of the complete patent specification in March 2001 and that any interest in the invention which is to be accorded to the plaintiff should be limited to that extent."[33]

38 Wilberforce J made much the same point at first instance in Phipps v Boardman. His Lordship there said that "[i]t ... would be inequitable now for the beneficiaries [read 'the University'] to step in and take the [benefit] without paying for the skill and labour which has produced it."[34] For if that were the course dictated by equity, the University would then obtain, for nothing, something which was of value. It would therefore be unjustly enriched, while on the other hand Professor Wilson and Dr Feaver would be deprived not only of the profits they hoped to generate through their inventiveness and hard work, but also of any remuneration at all for their labour and skill. [35] Yet the labour was great, and the skill was of a high order. The benefits of this were to be transferred by order of Nettle J to the University. But, as his Honour indicated at paragraph [196] of his reasons for judgment, this must be done in a way which did not result in the University being unjustly enriched.

39 Equity will adopt such flexibility in its approach as is necessary to ensure that practical justice between the parties is achieved. Thus, in O'Sullivan's case, Dunn LJ said[36]:

"Mr Bateson [for O'Sullivan] submitted that the defendants had gained the following advantages: (1) profits from the agreements; and (2) the copyrights in the songs and master tapes for the life of O'Sullivan and 50 years thereafter. He pointed out that none of the agreements obliged the defendants to do any work on behalf of O'Sullivan whether by promoting or exploiting him or his works or at all, although he conceded that the defendants had in fact done such work gratuitously. He accepted that the defendants in accounting for their profits were entitled to credit in respect of their proper and reasonable expenses for the work done, including work done gratuitously, but that they were not entitled to credit for any profit element in such work. He submitted that the exceptions made in Phipps v Boardman, where the trustees were morally blameless should not become the rule.

I do not think that equity requires such a narrow approach. It is true that in this case moral blame does lie upon the defendants as the judge's findings of fact show. On the other hand it is significant that until O'Sullivan met Mills he had achieved no success, and that after he effectively parted company with Mills in 1976 he achieved no success either. During the years that he was working with Mills his success was phenomenal. Although equity looks at the advantage gained by the wrongdoer rather than the loss to the victim, the cases show that in assessing the advantage gained the court will look at the whole situation in the round. And it is relevant that if Mr Bateson's approach is applied O'Sullivan would be much better off than if he had received separate legal advice and signed agreements negotiated at arm's length on reasonable terms current in the trade at the time. This point was made forcibly by Mr Miller at the conclusion of his address in reply, when he relied on the maxim 'He who seeks equity must do equity' and submitted that equity required that the position of O'Sullivan was relevant in considering the appropriate remedy."

40 Although Fox LJ accepted that "the rules of equity against the retention of benefits by fiduciaries have been applied with severity"[37], his Lordship was of the view that equity's approach was broader than that for which O'Sullivan's counsel submitted. And it seems to me, with respect, that this view was justified. The maxim, adopted by Dunn LJ, that he who seeks equity must do equity, and the proposition that the court will look at the whole situation in the round, are associated with the principle, explicitly recognised by his Lordship's colleagues (Fox LJ[38] and Waller LJ[39]) in O'Sullivan's case "that equity should give relief 'whenever in the exercise of its powers it can do what is practically just'." Cardozo J put it with his usual felicity when he said, in Beatty v Guggenheim Exploration Co:[40]

"A court of equity in decreeing a constructive trust is bound by no unyielding formula. The equity of the transaction must shape the measure of relief."

41 Consistently with these expressions of principle, Fox LJ, when considering Phipps v Boardman, noted with approval that the fiduciaries succeeded in obtaining an allowance 'on a liberal scale' for their work and skill. His Lordship continued: [41]

"They were allowed that [i.e. an allowance on a liberal scale] in the High Court by Wilberforce J[42] on the ground that it would be inequitable for the beneficiaries to take the profit without paying for the skill and labour which produced it. The point does not seem to have been disputed thereafter. In the Court of Appeal Pearson LJ said[43]:

'It is to my mind a regrettable feature of this case that the plaintiff seems likely to recover an unreasonably large amount from the defendants' - the fiduciaries - 'even when under the judgment the defendants have been credited with an allowance on a liberal scale for their work and skill.'

42 O'Sullivan's case therefore complements Phipps v Boardman; and the effect of what Wilberforce J said, in his judgment in the latter case, is apposite here. If Professor Wilson and Dr Feaver had not of their own initiative assumed the role of conceiving, designing and developing the invention, or the Electron and Ether computer programs, the University "would have had to employ (and would, had [it] been well advised, have employed) an expert [such as Professor Wilson or Dr Feaver, or both] to do it for [the University]. If ... trustees had come to court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question."[44] As a matter of commercial reality, the offer of such remuneration - if it were not to be an empty gesture - must have been attractive, but not over-generous, to a member of the University's academic staff of the seniority and background of (as the case required) Professor Wilson or Dr Feaver. One might expect that such an offer, incorporating reasonable terms current in academia at the time, would - if followed by negotiations at arms' length, conducted with the assistance of appropriate legal advice - result in agreement with which all parties could happily live.

43 It was the task of the special referee to identify those terms, and then apply them. The University contends that he did just that, albeit that for its part it put forward, in its submissions to the special referee, calculations which if accepted would have resulted in Professor Wilson being awarded an allowance of only $92,702.63, and Dr Feaver an allowance of only $19,773.83 (together in each case with interest at 6.5%).

44 By contrast to the position taken before the special referee by the University, Professor Wilson and Dr Feaver submit that Mr Meredith adopted a wrong principle, was misled thereby into making the wrong calculations, and in those circumstances inevitably came to the wrong conclusions. And because he adopted a wrong principle, the Court must now, in the proper exercise of its discretion, rectify the error. He was of course correct in awarding more than the figures favoured by the University, but the amounts he allowed were rather less than the $6,538,356.82 put forward by Professor Wilson and the $6,530,622.48 put forward by Dr Feaver.

45 The submissions with which Mr Meredith was favoured by the parties were in such striking contrast that it is not surprising that he found some difficulty in navigating his way through them. The defendants argued that this was a case in which equity would include a profit element in an allowance to the fiduciary, especially "where the profits are solely attributable to the skill and effort and capital and risk expended and incurred by the fiduciary, no contribution of that kind was made by the plaintiff, and no assets of the plaintiff were ever at risk."[45] It was therefore proper to receive evidence from a witness who "over many years" had "been involved in detailed negotiations on a wide range of employee remuneration packages in respect of start up technological companies", those packages commonly including an "equity" profit component.[46]

46 The defendants called a witness who, they submitted, fitted just this description. Professor Michael Georgeff of Monash University was asked how he would structure a remuneration package for each of Professor Wilson and Dr Feaver "in relation to their proposed participation in the creation and development of the 'Electron' and 'Ether' invention." He was also asked how that package would make allowance for the skill, effort and risk in respect of the contribution made by each of them. These, according to the defendants, were questions which went to the heart of the special referee's inquiry.

47 Mr Meredith disagreed. He characterised Professor Georgeff's evidence as "hypothetical", adopting as he did the University's insistence that unless the exercise took into account "expenses actually incurred, subscription moneys actually outlaid, skill actually employed, efforts actually made and the risk actually taken in producing the benefit actually transferred"[47] it lacked the necessary connection with reality. The position adopted by the University made that connection. In the special referee's view, Professor Georgeff did not.

48 Consistently with his acceptance of the submissions put to him by the plaintiff, the special referee in his report noted what he called "a number of concerns" with Professor Georgeff's evidence, "particularly his views and calculations on equity". Mr Meredith did not, however, address these concerns in detail. His reasoning was simple. In his view, Professor Georgeff's report was "largely irrelevant" because it was founded on the "hypothetical" rather than the "actual".[48]

49 The reality, however, is that both the plaintiff and the defendants were seeking to persuade the special referee of what might or should have been. Neither Professor Wilson nor Dr Feaver were actually engaged by the University to invent anything: although Professor Wilson took it upon himself, before 23 September 1999, to use his authority as a professor to allocate tasks and responsibilities in relation to the project, he did not purport to formally engage anyone. Both the plaintiff and the defendant (the latter through Professor Georgeff) were necessarily, therefore, concerned to create a persuasive hypothesis about the terms of an engagement as it might have been but never was.

50 The special referee was, I think, mistaken in proceeding as if the defendants were supporting a purely hypothetical exercise while the plaintiff's submissions were wholly grounded in reality. Such a dichotomy was and is false. Yet the special referee's adoption of it was absolute. Having stated, in effect, that the University was propounding an allowance that was "not hypothetical or speculative"[49], he then turned to what he said was the defendants' "very different view".[50] He continued:

"I have determined that the hypothetical inquiry is not the correct approach to calculating an allowance. This approach was rejected by Fox LJ in O'Sullivan v Management Agency and Music Ltd, and his view was supported by Dunn LJ. I have not been referred to any legal authority which supports this as a method for calculating an allowance. Furthermore, I do not think that the application of the Wilberforce J's paragraph quoted by the defendants extends to applying a hypothetical inquiry in the way that the defendants suggest.

There does not appear to be any support in Nettle J's judgment for a hypothetical inquiry approach. In fact, given that the court orders are clear that Professor Wilson and Dr Feaver's equity interests in IP3, are to be transferred to the University, an allowance calculated by reference to equity, does not seem to be consistent with his Honour's decision. In any event, in my view, if Nettle J had wanted me to take a hypothetical approach to this task, he could have ordered that I do so.

Moreover, in terms of achieving a fair result between the parties, in the context of the University receiving a benefit under the orders of approximately $1,100,000 million in share proceeds and 8,800,000 shares in IP3 of a very uncertain value, I do not think that an award of some $13,000,000 as claimed by the defendants is fair or reasonable."

51 The special referee was wrong to conclude that an allowance calculated by reference to equity would be inconsistent with his Honour's reasons for judgment. That error is itself, it seems to me, a proper basis for declining to adopt his report.

52 There is another point to be made from the above passage of the report. As I read O'Sullivan's case, it does not examine the virtues or otherwise of a "hypothetical inquiry" as opposed to some other approach. In fairness to Mr Meredith, however, he may well have had in mind a point to be derived from each of the judgments of Dunn and Fox LL.J. Each referred to the evidence of a Mr Levison, an expert witness who gave evidence about the terms which he thought might reasonably have been negotiated if O'Sullivan had received independent advice from experienced persons. As I understand it, this was evidence of the kind given in the present case, before the special referee, by Professor Georgeff. But neither Dunn nor Fox LL.J were able to accept that evidence. In the words of Fox LJ:

"In the first place, Mr Levison's evidence was really only directed to the question of what might reasonably have been negotiated. The question what recompense in the circumstances of this case it would be reasonable to allow was not investigated. If, for example, there was any failure by the [defendant] companies or Mr Mills to promote Mr O'Sullivan's interests as vigorously or competently as they might have been expected to do, with the result that Mr O'Sullivan suffered loss that might affect the position. Secondly, an order which, in effect, would involve substantial division of the profits between the beneficiary on the one hand and the fiduciary ... on the other, goes far beyond anything hitherto permitted."

53 It is nevertheless my opinion that, in this case, the evidence of Professor Georgeff should not necessarily have been dismissed as irrelevant. It seems to me that the starting point of Mr Meredith's inquiry should have been evidence of the terms that were most likely to have been agreed between the University on the one hand and Professor Wilson and Dr Feaver on the other, assuming that both sides were at arms length, properly advised, fully informed and willing to be reasonable. Each side was bound to accept that the setting against which their negotiations were taking place was academia, and that the setting in the wider world of commerce might not necessarily be the same. The remuneration packages of employees of "start up technology companies", as the defendants called them, might not, therefore, be as directly relevant as might have been assumed in the presentation to the special referee of the defendants' case. The "intellectual property" policies of academic institutions (including the embryonic intellectual property policy of the Victoria University of Technology itself) as these policies adjust the respective rights of the institutions and their academic staff to the property in inventions and the like made under the aegis of the academic institution, are - it seems to me - very much in point.

54 Once the appropriate terms of the hypothetical engagement of Professor Wilson and Dr Feaver have been identified, the next step is to examine what actually happened. Account must be taken of any action or inaction by Professor Wilson or Dr Feaver that, judged against those terms, would have disadvantaged the University. To repeat the words used above by Fox LJ: "If, for example, there was any failure by the [defendant] companies or Mr Mills to promote Mr O'Sullivan's interests as vigorously or competently as they might have been expected to do, with the result that Mr O'Sullivan suffered loss that might affect the position." Thus, the terms of engagement may have dealt with the use by the inventors of University time in working on their project. As Nettle J recognised, albeit that his Honour did not fully examine the issue, neither Professor Wilson nor Dr Feaver were entitled to be paid twice. But doubtless any terms of engagement would make appropriate allowance for the fact that, ex hypothesi, the inventors were members of the academic staff with continuing academic responsibilities to the University. Any failure to fulfill these responsibilities, certainly any failure resulting from an undue concentration on the invention, may result in an adjustment by way of compensation. The question, when looking at what actually happened, is, therefore: Did Professor Wilson or Dr Feaver fulfil his obligations to the University as the notional agreement would have required, and did he take advantage of or benefit from his academic role in ways which that agreement would not have allowed? If so, how should that effect the rights to which under that agreement they would have been entitled?

55 The over-riding principle is that the fiduciary must not profit from his or her position as such. Put another way, by the strict application of the rules of fiduciary accountability, the benefit for which the trustees must account is the benefit obtained by them as a result of the relevant breach of fiduciary duty. But neither Professor Wilson nor Dr Feaver will profit from his position, or obtain a benefit as a result of a breach of fiduciary duty, if as a result of the special referee's fresh examination of the reference each receives an award that does no more than provide to each such remuneration as he would have received had he been as open with the University as he should, had thereafter agreed with the University upon appropriate terms of engagement, and had then given effect to his obligations under those terms.

56 I should add that, given the breach found by Nettle J, neither Professor Wilson nor Dr Feaver would be entitled to any termination payment.

57 For the reasons given in this judgment, the reference should be remitted to the special referee for further consideration in accordance with those reasons.

[1] Victoria University of Technology v Wilson & Ors [2004] VSC 33 at [10] per Nettle J; reported in [2004] VSC 33; 60 IPR 392. My summary of the background facts is based upon those set out in his Honour's judgment.

[2] Ibid, at [11].

[3] Ibid, at [154]

[4] Ibid, at [150].

[5] Ibid, at [154].

[6] Judgment, 10 March 2005, para.1.

[7] Ibid, para.2.

[8] Ibid, para.3.

[9] Ibid, paras 5, 6 and 7.

[10] Ibid, para.8.

[11] Judgment, 10 March 2005, para.9.

[12] [1980] VicRp 46; [1980] VR 479 at 495

[13] It is not said how it was that "risk" could appear twice; once as a "risk premium" and once in conjunction with skill and effort.

[14] [1980] VicRp 46; [1980] VR 479 at 495.

[15] (unreported) [1998] VSCA 70.

[16] Ibid, at [11].

[17] Ibid, at [14].

[18] Ibid, at [16].

[19] Ibid, at [13].

[20] Leighton Contractors Pty Ltd v C E Heath Underwriting (1995) 8 ANZ Ins Cas at 61-231.

[21] Buckley v Bennell Design and Construction Pty Ltd [1978] HCA 20; (1978) 140 CLR 1 at 36-38.

[22] Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 564.

[23] Victoria University of Technology v Wilson & Others [2004] VSC 33 at [201].

[24] [1964] 1 WLR 993 (at first instance); [1965] Ch 992 (Court of Appeal); [1966] UKHL 2; [1967] 2 AC 46 (HL).

[25] [1985] 1QB 428 at 456.

[26] Regal (Hastings) Ltd v Gulliver (Note) [1967] 2 AC 134 at 144, per Lord Russell of Killowen.

[27] [1985] 1 QB 428 at 472 per Waller LJ.

[28] Ibid.

[29] (1878) 3 AC 1218 at 1278.

[30] In Lagunas Nitrate Co. v Lagunas Syndicate [1899] 2 Ch 392 at 456.

[31] In Spence v Crawford [1939] 3 All ER 271.

[32] At [198] and [199].

[33] Victoria University of Technology v Wilson, supra, at [200]. Emphasis added.

[34] [1964] 1 WLR 993 at 1018.

[35] Save for remuneration that came from another source, such as iP3.

[36] [1985] QB at 458

[37] [1985] QB at 467.

[38] Ibid at 466.

[39] Ibid at 472.

[40] (1919) 225 N.Y. 380 at 386.

[41] Ibid at 467.

[42] [1964] 1 WLR 993, at 1081.

[43] [1965] Ch.992 at 1030.

[44] [1964] 1 WLR 993 at 1018, per Wilberforce J.

[45] Defendants' opening submissions to the special referee, para. [8].

[46] Defendants' outline of submissions dated 17 October 2005, at [19].

[47] Ibid, at [39]. Emphasis as in the original.

[48] Report of the special referee, dated 31 May 2005, at [43].

[49] Ibid, at [108].

[50] Ibid, at [109]