SEMF Pty Ltd v Renown Corporation Pty Ltd

The Dynamics SL and BP software

1. It is convenient to begin by saying something more about the nature of the Dynamics SL and BP software.
2. Dynamics SL is a commercial 'off the shelf' SQL-based enterprise resource planning (ERP) software which is installed at the customer's premises and which consists of a number of modules that can be selected and configured to meet the customer's particular needs. ERP is a process used by organisations to co-ordinate and streamline business activities such as planning, resource management, purchasing, sales, finance and human resources. SQL (Structured Query Language) is a standard programming language used to manage electronic databases. The experts described the Dynamics SL system as a "project-centric management and accounting solution" (at para [20] of Joint Expert Report) which was most suited to mid-sized project-driven organisations, such as professional services and construction management organisations. It included a Customisation Manager module, which enabled the system to be adapted to the specific requirements of an organisation by enabling the modification of any screen in any Dynamics SL module without needing to change the underlying source code. As I have already explained, BP, used in conjunction with other software, permitted users to obtain remote access to the Dynamics SL data base through a web browser.
3. Dynamics SL also included a module (the experts refer to it as a "reporting engine") known as 'Crystal Reports' which allows the user to generate a range of reports, to modify reports and to create new ones. In addition, another piece of software available from Microsoft known as SSRS (Microsoft SQL Server Reporting Services) enables remote users to obtain real-time access to data in systems such as Dynamics SL. Those data can be displayed in various forms such as paginated reports or reports suitable for display on mobile devices, such as smart phones and tablets.
4. Although Dynamics SL is described as an 'off the shelf' system, it, and associated software including BP, needed to be set up and configured by a person with expertise in the system before it could be used by a customer. In addition, the system could be customised to add particular features that were not part of the standard system. Included in the Renown System was a payroll system supplied by HR3 Pty Ltd and software developed by Renown itself to permit the system to be used for GST processing and reporting (referred to as the "Localisation Module").

The terms of the agreement between SEMF and Renown

1. An issue in the case is which documents comprise the contract governing the parties' relationship and, in particular, which documents identify the features that Renown was required to deliver.
2. In order to identify the documents that comprise the contract, it is necessary to say something about the history of the negotiations between the parties.
3. Following some initial conversations and correspondence, on 6 April 2013, Mr Marosa sent Mr Loke an email attaching a document described as "Project Management, Finance, Payroll & HR System Proposal for SEMF". The details of that proposal are not important because it was revised and resubmitted first on 8 April 2013 and then on 23 January 2014.
4. After receipt of the second proposal, there were further discussions between representatives of SEMF and Renown during which SEMF provided detailed information regarding its existing hardware, business systems and processes and the number of staff who would be using the new system.
5. Sometime during the second half of 2013, SEMF decided to put the upgrade on hold. However, in October 2013, SEMF and Renown entered into an agreement in respect of the installation of a specific module known as Dynamics CRM (Customer Relationship Management). In connection with that agreement, Mr Marosa sent Mr Waitzer a copy of Renown's standard terms and conditions.
6. On 14 January 2014, Mr Waitzer sent Mr Marosa an email saying that in light of an improvement in SEMF's revenue, he would like Mr Marosa to "dust off the quotation from last year …". Mr Waitzer explained that he wanted to get some idea of whether costs had increased since the original quote "so I can go to the next board meeting with some factual information".
7. Mr Marosa replied by email on 23 January 2014. The reply relevantly said: I have reviewed the proposal, I have taken out the CRM sections, so it is now Dynamics SL and Payroll/HR only. In regards to prices, after further meetings with John (after the proposal was sent), we needed to add some functionality, which added $6K approx. The rest is the same. To help, you could have a phased implementation, where you start with Dynamics SL, (which provides you the most benefits and payback), then add/implement the Payroll and HR at a late [sic] date, decreasing your initial investment of software and services by approx. $35K ..... Just a thought. The first step with the implementation [is] to perform the scoping exercise (Analysis and Design phase), as we did with the CRM implementation. Some news, Microsoft has added functionality to the Dynamics SL suite (included in the original cost), with mobile device (Phone/Tablet/IPad) Time Entry, with other functionality to follow (see attached brochure).
8. The email attached a revised proposal. As the parties accept, the proposal contained a good deal of promotional material together with an outline of the functionality available using Dynamics SL and a quote for the costs of acquiring Dynamics SL and configuring it for use in SEMF's business.
9. The proposal was divided into a number of sections. The first contained an executive summary, which included sections describing the benefits of the system based on Microsoft Dynamics and a section headed "Why Choose Microsoft Dynamics SL 2011 and Renown?".
10. Section 1.1 headed "Benefits of Renown and Microsoft Dynamics to SEMF" relevantly stated: Based on the scope of our discussions to date, Microsoft Dynamics SL and HR3 Payroll will provide SEMF: … ● Provide an end to end solution, from "Timesheet to P&L" where data is entered once, minimising or eliminating any integration or manual effort and provide online web based enquiries and automated reporting. It's one solution providing "One Version of the Truth". … ● Provide the operational team Real Time online browser based Project Enquiries, Functionality and Reporting. … ● Expense entry allows for FBT functionality. ● Ability to produce (general ledger based) Project P&L's in addition to the Project Profitability breakdown and reports. ● Timesheet Approvals online with delegation functionality should the approver be on leave. ● Timesheet to Accounts Payable for Subcontractors timesheets. No rekeying. Also produces the Reciprocate Tax Invoice (RCTI). ● Automate the billing of expenses. Provide set-up for billable & non-billable expenses, also allowing for a margin to be automatically added (%) on top of the billable expenses (prior to being invoiced to the customer). No rekeying or knowledge required of the Project details by the finance team or the Engineers is needed (as the billable rules are set-up in the Project). … ● Invoices produced by back office team, with Draft are available online for Project Managers to review / approve (with details of transactions). …
11. Section 2 of the proposal set out information about Microsoft Dynamics SL 2011. Section 3 set out what was described as a "Solution Investment Summary", which provided detailed costing for the project. The introduction to that section stated: We have provided detailed software pricing based on Dynamics SL 2011 & HR3; ● 6 Concurrent Users Microsoft Dynamics SL Windows Full Client ● 100 named Microsoft Dynamics SL Business Portal named users (allows time and expense entry, approvals, reporting and project set-up, project management and enquires. ● 1 user of HR3 Payroll and HR for 150 Group Certificates. The Dynamics SL Windows Full Client is Concurrent user license. This allows it to be loaded on multiple desktops, but only 6 users can be logged in at any one time. The Microsoft Dynamics SL Business Portal Web client is based on named users (and can be reassigned as Users leave/join the organisation). The section goes on to describe the pricing for the required Microsoft Dynamics SL 2011 modules. It also contained a table setting out "Dynamics SL 2011 Implementation Estimates", which included a "Scoping and Design Phase", together with estimates for the cost of installing and configuring the system, training staff, data migration and associated work. The "Estimate Implementation Total to "Go-Live"" was $79,810. A separate quote was given for the cost of implementing the HR3 payroll system.
12. Section 4 of the proposal set out information about Renown's implementation methodology. Section 5 set out information about Renown. Section 6 set out "Proposal Terms and Conditions". Those terms and conditions were stated to be: ● Prices are current for 30 days only ● Goods and Services Tax (GST) is not included in the prices quoted ● A deposit of 50% of the software is payable on confirmation to proceed with the implementation ● Services are billed on a weekly cycle ● 14 day terms ● Travel. o Travel from the local Renown office is chargeable at current consulting rates, one way only. Any Airfares, accommodation, car hire and living expenses may be required for travel outside of the Renown offices local metropolitan area. These will be the [sic] preapproved by the client and be [sic] the costs will be responsibility of the client.
13. Mr Waitzer and Mr Marosa met to discuss the proposal on 7 February 2014. Following that discussion, Mr Marosa sent Mr Waitzer and email summarising the discussion. The email included the following: ● A number of approaches can bet [sic] taken, putting a Fixed Price in at this point will mean we will have to place a high premium on it to allow for all unknowns. My suggestion is to perform the Scope and Design stage (first phase of the implementation). This will allow both teams to agree on scope, approach. This will allow Renown to produce a more realistic price, as we are guessing less unknown, and this should be better for SEMF as well. It went on to state: ● We can fix price the Scope and Design phase at $16,800 plus Travel plus GST (emphasis in original)
14. Mr Waitzer replied to that email on 10 February 2014. In that reply he said: Thanks and OK with principal [sic] to scope the project on rates (with upper limit as you have provided) and called this "phase 1", and then we fix as needed for implementation (phase 2).
15. On 12 March 2014, Mr Waitzer sent Mr Marosa an email saying that he had obtained approval to proceed. The email continued: John Loke is putting together a team that will be able to respond to phase 1 (scoping) so that we can be very definitive in what we are looking for. (Emphasis in original)
16. On 21 March 2014, there was a meeting between representatives of SEMF and Renown described as a "Project Kick Off" meeting. Following that meeting, Renown commenced work on the scope of the project. As part of that work, it provided information about the system requirements for the Microsoft Dynamics SL 2011 package and SEMF provided details of the business reports it used.
17. On 5 May 2014, Renown provided SEMF with a Statement of Works. That document was signed by SEMF on 19 May 2014. The Statement of Works described the "Scope of Services" in the following terms: Implementation of Microsoft Dynamics SL 2011 and HR3 systems. Services are provided on both a Fixed Price and Time and Materials basis as noted in the sections below. Time and materials services proposed are an estimate of charges. Modules to be implemented are, as per the Design Document; ● Project Accounting and Management, Invoicing ● Time Sheet and Expense Entry, Browser Based Business Portal ● Operational and Financial Reporting ● Financials (GL, AP, AR, Budgets, Banking, GST, BAS) ● Timesheet to Accounts Payable Prices ex GST in AU Dollars ● HR3 Payroll & HR. Exclusions & Assumptions for this SOW; As detailed within this document and in the section below; ● Assume SEMF implementation resources are available and perform allocated tasks in a timely manner and not deviate on scope or timeline. The impact of any deviation may change the scope or the length of the project which may increase items such as project management and consulting, which may require a variation, depending on impact, to be agreed to (which may apply to the fixed Price components) ● SEMF to provide reasonable access to competent, suitably qualified and experienced personnel, as required, who are able to provide informed guidance on SEMF processes. ● Set-up and configuration of infrastructure platform for Dynamics SL & HR3 is the responsibility of SEMF; Renown to load Dynamics SL & HR3 software only. ● As the software is provided by 3rd Party Vendors, i.e. Microsoft, addressing and fixing any software bugs, if any arise, depending on impact, may require may require [sic] a variation to be agreed to (which may apply to the Fixed Price components), ● Renown's Terms and Conditions of trade includes has been provided as a separate document for your signature and applies to this SOW.

The remainder of the Statement of Works set out a description of each stage of the project and the amount that Renown would charge for that stage. Most, but not all, of the components were expressed to be fixed price. Renown's terms and conditions of trade were not included with the Statement of Works and a copy of the terms and conditions was not signed in connection with the project.

1. The reference to the "Design Document" in the scope of services appears to be a reference to two documents. One was titled "Microsoft Dynamics SL Setup - Financial Series" and the other was titled "Microsoft Dynamics SL Setup - Project Series".

Events following signature of the scope of works

1. Following signature of the scope of works, work commenced on implementing the Renown System. On or about 17 June 2014, a test site for Dynamics SL was set up at SEMF's office in Sydney. There were delays in implementing the system and a number of problems arose during the implementation. In the meantime, in about August 2014, Dialog acquired Renown.
2. Problems continued throughout 2015. Neither party suggested that the history and details of those problems are important to the resolution of the current dispute.
3. On 7 April 2016, Dialog wrote to SEMF saying that it was no longer in a position to provide support for Dynamics SL except on a "best endeavours basis". The letter stated: Whilst we still have a small Dynamics SL team, who are working hard to provide support, we are limited in how much we can achieve in a day. As the only Dynamics SL provider in Australia and as a trusted business advisor to your business, we would like to provide some alternatives for you to assess for your ERP solution to help manage your business with.
4. The letter gave SEMF two options. Option 1 was for Dialog to provide maintenance only for the Dynamics SL software. That option was described in the following terms: Dialog will provide maintenance only for your Microsoft Dynamics SL Software. Consulting and support will be outsourced to external contractors with no involvement by Dialog. A few important points to consider: ● We cannot guarantee SLA response times for any support call raised with Dialog and will provide support on a best efforts basis until 30th June 2016, after which it will be your responsibility to arrange any support from external contractors directly; ● Your Dynamics SL annual maintenance can continue with the Microsoft Annual Enhancement program for those active within this program through Dialog. Each year you will have the option to continue or opt out of the program; ● We will not provide any future consulting services for upgrades of Dynamics SL; ● We will no longer charge AEP on add-on modules owned by Dialog; ● If a third party purchases the add-ons modules intellectual property from Dialog then you can discuss the options from the new owner.
5. Option 2 involved replacing Dynamics SL with either Dynamics NAV or Dynamics AX, which are cloud based enterprise resource planning systems. The letter provided indicative costings for those solutions.
6. Solicitors engaged by SEMF replied to that letter requesting a meeting with an intention "to find a commercial and reasonable solution to the issues which have arisen".
7. In June 2016, SEMF requested assistance from Microsoft. Microsoft referred SEMF to an organisation known as "Plumbline". After examining the Renown System, Plumbline prepared a report titled "Dynamics Gap Analysis", which set out an overview of SEMF's system and what needed to be done to rectify its problems.
8. During the first part of 2017, further investigations were undertaken by Plumbline. The issues were not resolved and SEMF commenced these proceedings on 22 February 2018.

Did Renown breach the contract?

1. As I have said, there is an issue between the parties concerning which documents form the contract that governs the relationship between them. SEMF contends that the contract included version 3 of the proposal but did not include Renown's standard terms and conditions. On the other hand, Renown contends that the contract did not include the Proposal but did include the standard terms and conditions, together with the Statement of Works, the MS Dynamics SL Setup - Financial Series and the Microsoft Dynamics SL Setup - Project Series.
2. However, as ultimately put, nothing turned on the resolution of these issues. Renown did not rely on any of the provisions of the standard terms and conditions, so whether they were incorporated or not had no effect on the outcome of the case. It was common ground that the Statement of Works required the installation of various modules of Dynamics SL together with the HR3 software and software written by Renown to deal with and to provide reports in relation to GST and that that software had to be written and configured in a way that meant SEMF obtained the benefits that were accepted features of the Dynamics SL and BP software. Those obligations were implicit in the agreement contained in the Statement of Works to provide the relevant software. Accordingly, it was unnecessary for SEMF to prove that various statements in the Proposal concerning the functionality and benefits of the proposed system were themselves terms of the contract. Moreover, as I have said, the defendants concede, in light of concessions made by Mr Finn, that there are some faults in the Renown System. The real dispute is the significance of those faults and what damages SEMF is entitled to recover in light of them.
3. It is convenient to address those questions by starting with Mr Shawver's summary of his opinions in the joint report concerning the faults with the Renown System.
4. In answer to the question whether Dynamics SL and BP had the promised functionality, Mr Shawver summarised his opinions in the joint report that it did not in these terms: 143 … First, the evidence shows that SEMF could not generate accurate and reliable project invoices for billing customers from BP. The project invoices generated in BP used SSRS did not match or reconcile to the standard project invoices generated in Dynamics SL, which used and still uses Crystal Reports today. In fact, Renown created the project invoice reports in SSRS and since these custom customer project invoices were inaccurate, SEMF could not and still cannot use BP to generate customer project invoice today. 144 Second, the evidence shows the fact that the project managers at SEMF could not use project inquiries using BP to make business decisions in a timely manner. SEMF is currently only using a fraction of the functionality associated with BP. Basically, SEMF is only entering and approving timecards, approving expenses, as well as only approving project invoices in BP. Without being able to rely on accurate and reliable customer project invoices or perform "real-time" project inquiries remotely in BP, SEMF wastes a lot of resources reviewing and verifying the accuracy of customer project invoices and projects in Dynamics SL. I note that the user licenses for Dynamics SL are considerably more than the user licenses of BP. 145 Third, the evidence shows that errors processing employee expense claims and processing GST transaction existed and still exist today. The GST and BAS, as well as the Split Feature for the Expense Type of ENTM customisations related to Dynamics SL works and was used by SEMF. However, the GST and the Split Feature for the Expense Type of ENTM customisations related to BP that Renown designed and customised have never worked properly. Since the code associated with Dynamics SL and BP are different, the GST and BAS, as well as the Split Feature for the Expense Type of ENTM customisations needed to be created twice or in both applications. However, since the GST and BAS, as well as the Split Feature for the Expense Type of ENTM customisations, did not work in BP, Renown and SEMF had to spend a considerable amount of time correcting data before vendor invoices could be paid. 146 Fourth, the SOW and the Proposal discusses a "Real-Time" solution. Dynamics SL has been a "Batch Oriented" application and has not been considered a "Real-Time" solution except for reporting data for over 30 years. Although functionality has been added to Dynamics SL over the past few years to make the entry, releasing, posting, and approval processes more automated, Dynamics SL is not considered a "Real-Time" application like Netsuite within the ERP industry. I note the evidence shows that Renown developed a customisation after going live in the production environment to help simulate a "Real-Time" process regarding timecards for showing uncommitted project hours related to labour. This customisation was needed since the standard functionality of Dynamics SL and BP requires timecards to be approved before projects are updated or reflected with the uncommitted hours related to labour. Note, SEMF paid for this customisation by Renown because Renown considered this customisation "Out of Scope", which shows that Renown did not provide SEMF a "Real-Time" solution as set out in the SOW and the Proposal. 147 Lastly, the Report Writing section of the SOW clearly states that Renown needed to deliver financial reports and operational reports such as Project by Monthly/Item, WIP Reports, Utilization, Staff Head Count, Proportional FTE Report, X Cost Report, and AR Monthly Aging Report. The evidence shows that initially the project WIP reports were inaccurate, and the profit and loss financial statements were not accurate, reliable, or timely. In fact, SEMF paid a consultant named Rob McLean to correct issues and update reports to be accurate such as the Project WIP reports after going live on the solution. Note that operational reports such as the Project WIP and financial reports such as Profit & Loss Statements are critical to running a business. 148 Although some of the issues associated with the implementation of Dynamics SL and BP performed by Renown at SEMF may appear to be immaterial when viewed individually, the evidence shows that Renown failed to deliver crucial functionality that SEMF needed to operate and manage the business efficiently and effectively. The SOW and the Proposal compiled by Renown for the implementation of Dynamics SL and BP at SEMF clearly states that Renown will provide SEMF with an "end to end solution, from Timesheet to P&L" solution. The evidence shows without a doubt that Renown did not provide SEMF with an "end to end solution, from Timesheet to P&L" solution since accurate project invoices could not be generated and provided to customers on a timely basis. Since accurate and reliable project invoices could not be generated and provided to customers on a timely basis, accurate and reliable profit and loss financial statements could not be generated on a timely manner.
5. Some further explanation is necessary to understand some of the matters referred to by Mr Shawver. As I have said, at the time that Renown implemented the Renown System there were at least two ways in which information could be extracted from a Dynamics SL database. One was using Crystal Reports, which was a standard reporting module for Dynamics SL. A report produced by Crystal Reports was a batch, not a real-time report. That is, the report would be run manually at a particular point in time and would extract and present information from the database at that time, not at the time the report was viewed. Depending on when the report was viewed (it may only be a few seconds or a few minutes later), the information contained in it may be out of date. The other type of report was one produced using SSRS. SSRS reports were real-time reports. The information contained in them reflected the then current information in the Dynamics SL database. Consistently with representations made in the proposal, Renown chose to configure BP to use or work with SSRS reports, not Crystal Reports. However, for reasons that are not fully explained in the evidence, the SSRS reports as implemented by Renown did not accurately extract information from the Dynamics SL database. Consequently, BP could not be used reliably to generate invoices and provide other project-related information. This problem was never fixed. As a result, employees of SEMF have only been able to use BP to submit timesheets and expense claims, and for managers to approve time, expense claims and customer invoices. According to Ms Katherine Parry, the Finance Manager of SEMF, individual employees on occasions still also encounter problems entering time or expenses, particularly if they are working from a personal computer rather than one supplied by SEMF.
6. In order to overcome the limitations on BP, Project Managers must log into Dynamics SL itself to create projects, to run basic project reports and to prepare invoices. In order to permit that to happen, SEMF has acquired five additional concurrent licences to use Dynamics SL at a cost of $27,183.38. As a result, much of the billing is done by a limited number of Project Managers and Finance staff. Even then, the number of users who can undertake those activities at any one time is limited to the number of licences held by SEMF, which is a particular problem at the time of end of month billing. A number of other reports (such as a timesheet status report) must be run manually and circulated to staff weekly, instead of SEMF being able to rely on automated systems to perform those functions.
7. The standard Dynamics SL system required customisation so that it could deal with issues specific to Australia, the most significant of which is the proper recording and treatment of GST. Renown created its own Localisation Module to deal with issues specific to Australia and wrote code to integrate that module into Dynamics SL. There were, however, problems with that module, which have not been fully resolved. According to Ms Parry, the result is that it has been necessary to introduce manual audit and checking procedures, which include (1) physically inputting the GST codes on expense reimbursements claims that have not carried through from BP; (2) manually separating the GST component of transactions entered via the Cash Manager module and entering that amount directly into the general ledger account using an additional row on the input screen. In addition, because of errors, SEMF is unable to use the GST reports generated by the Localisation Module but instead must prepare monthly Business Activity Statements relying on information extracted from the balance sheet.
8. Mr Finn did not seriously take issue with the problems identified by Mr Shawver; and, as I have said, the defendants did not seriously suggest that the problems with the Renown System fell short of what was contractually promised. In the joint report prepared by the experts, Mr Finn said nothing about the problems Mr Shawver identified and which are extracted above. In cross-examination, Mr Finn accepted that there were some issues with project invoicing, but said that he did not have time to investigate the nature of those issues and whether Mr Shawver's opinions were accurate. He also accepted that there were some problems with the SSRS reports because the data was not correct. Mr Finn thought that that could be explained either because "the report itself has a coding error, or the SQL Server objects that that report was using had a coding error". Mr Finn did suggest that much of the project specific information could be obtained through a facility known as "Quick Query". However, Mr Finn did not examine the Renown System using BP; and there is no evidence that "Quick Query" was a module or facility that was available through BP (rather than through Dynamics SL itself). The evidence of Mr Shawver and Ms Parry is to the contrary. Accordingly, I accept that the Renown System suffered from the problems identified by Mr Shawver. I also accept that those problems meant that the Renown System did not comply with what was contractually promised because no proper implementation of an ERP system using the modules that Renown contracted to deliver would have suffered from those problems.
9. In their final written submissions, the defendants concede that the proper enquiry is what loss has been caused by the identified failures, which they say should be assessed at the time of breach.

Damages

1. The defendants submit that SEMF should only be entitled to recover the costs of fixing the problems with the existing system and that SEMF has not proved the nature of those problems and the costs of fixing them with sufficient specificity so as to be entitled to recover anything. In the alternative, they submit that if SEMF's damages are to be measured by replacing the existing system with one based on Dynamics SL 2018 and 2018 Web Apps, then there should be a large discount for betterment.
2. The defendants' primary submission rests on two propositions. First, they submit that there is no reason why the Court should depart from the usual principle that damages are to be assessed as at the date of breach: Johnson v Perez (1988) 166 CLR 351 at 367 per Wilson, Toohey and Gaudron JJ; [1988] HCA 64. In this case, that was said to be when the system went live in October 2015. Consequently, the damages should be assessed by reference to the costs of fixing the problems at that time, not by reference to the costs of software that was not available at that time. Second, they rely on the principle that damages must be proved with a degree of precision that reflects the proof that is reasonably available to the parties: State of New South Wales v Moss (2000) 54 NSWLR 536 at [72]; Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 at [38]; Sabouni v Revelop Building and Developments Pty Ltd [2021] NSWSC 31 at [42] per Black J. In this case, SEMF has made no attempt to prove the costs of rectifying the problems with the Renown System in October 2015.
3. I do not accept the defendants' submissions. As Wilson, Toohey and Gaudron JJ recognised in Johnson v Perez, the principle that damages are to be assessed at the time of breach is not a universal principle to be applied in all cases but is a rule that yields "if, in the particular circumstances, some other date is necessary to provide adequate compensation" (ibid at 367).
4. Generally speaking, the purpose of an award of damages for breach of contract is, so far as money can do it, to place the injured party in the position that it would have been in if the breach had not occurred: Robinson v Harman (1848) 1 Exch 850; 154 ER 363; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at 285-6; [2009] HCA 8 at [13]; Clark v Macourt (2013) 253 CLR 1 at 30; [2013] HCA 56 at [106] per Keane J. In this case, that principle requires damages to be calculated by reference to the costs of giving SEMF an ERP system that complied with the contractual specifications: see Bellgrove v Eldridge (1954) 90 CLR 613 at 617 per Dixon CJ, Webb and Taylor JJ; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 at [13]ff. It is not suggested in this case that SEMF delayed excessively in seeking relief so that in some way or another it failed to mitigate its loss. On the contrary, SEMF gave Renown an extended period of time in which to fix the problems. It was Renown who in effect concluded that it could not do so. Nor is it suggested that the Renown System is sufficiently close in functionality to the system for which SEMF contracted that it would be unreasonable for Renown to insist on performance strictly in accordance with the contract. There remain significant problems with the Renown System which have a real effect on SEMF's operations. Consequently, SEMF is entitled to recover the reasonable costs of fixing the remaining problems. Mr Shawver's evidence is that that is best done by replacing the existing system with one based on Dynamics SL 2018 and 2018 Web Apps.
5. Renown take issue with Mr Shawver's evidence. Its case is that the errors in the coding that apparently cause the problems could be fixed without upgrading the software platform and configuring the system from scratch. There are, however, difficulties with that submission. First, Mr Finn accepted that that could not be done without access to the source code for the Renown System. It is unclear whether that code is available. Whether it is available or not is something within Renown's knowledge, since it is its source code. It led no evidence that the code is available. Second, there is no evidence that Renown's solution is a practical one. The evidence is that Renown was unable to fix the problems and decided to withdraw support. It proposed two options. One was to outsource support to external contractors "with no involvement by Dialog". Renown recognised that that option had a number of problems. One problem (not mentioned by it) is that it appears that there is no other person or organisation in Australia with the necessary qualifications and experience to fix the remaining errors. Renown's second option was to replace the Renown System with a different system based on Dynamics NAV or Dynamics AX, which are cloud based systems. That option corresponds more closely to what is proposed by Mr Shawver. Third, in their report, Mr Bowling and Mr Finn accepted that the most efficient and cost-effective approach would be to replace the existing system. They said: Despite the above [where they express the view that it is not necessary to upgrade the system to Dynamics SL 2018 and SL 2018 Web Apps], in our opinion, it would be more efficient and cost effective to upgrade to Microsoft Dynamics SL 2018 / SL 2018 Web Apps to avoid further cost by SEMF and DIALOG in resolving open issues, and especially as extended support for Microsoft Dynamics SL2011 ends July 13 2021.
6. Mr Bowling and Mr Finn do, however, disagree with Mr Shawver's estimate of the costs of a system using Dynamics SL 2018 and SL 2018 Web Apps. Mr Shawver's estimates of the costs of replacing the Renown System with one based on Dynamics SL 2018 and SL 2018 Web Apps is summarised in the following table: Task Hours Costs in US Dollars Project Management (Project Plan and Issue Log) 250 Installation of SL 2018 8 Installation and Configuration of SL Web Apps 40 First Upgrade of Database 180 Training on new features of SL 2015 and SL 2018 40 Discovery Sessions to Review and Identify GAPs 80 Creation of Test Scripts 40 User Acceptance Testing - Standard Features Only 80 Creation of Design Document for GAPs Identified 120 Development of Customizations in core Dynamics SL - GST, Split, etc. 700 Development of Customizations in SL Web Apps - GST, Split, etc. 300 User Acceptance Testing - Customizations in Dynamics and Web Apps 160 Report Customization 120 Second Upgrade of Database 80

Total Hours 2198 $450,590 USD

1. The amount of $617,308 claimed by SEMF is the amount of Mr Shawver's estimate converted to Australian dollars at the current exchange rate (which was USD1 = AUD1.37 at the time of conversion). Mr Bowling and Mr Finn give an estimate that is substantially lower. Their estimate is approximately USD160,000. The differences between Mr Shawver and Messrs Bowling and Finn were not explored in the evidence. However, I prefer the evidence of Mr Shawver. It was apparent that he had a more detailed knowledge of the Renown System than either Mr Bowling or Mr Finn. Consequently, he was in a better position than they were to provide an estimate of costs. Moreover, it appears that Mr Bowling and Mr Finn's estimate assumed that parts of the Renown System could be moved across to the new platform. So, for example, they allowed 15 days to "Investigate/Resolve Open Issues". But, for the reasons I have given, it is far from clear that it would be practical to investigate the causes of the current problems, since that depends on whether the source code is available. Mr Shawver was cross-examined about some of the items on his list. He gave answers that explained why that work was necessary. He was not challenged on any of his estimates of the number of hours that it would take to complete each task that he identified. I accept those estimates.
2. In Tyco Australia Pty Ltd v Optus Networks Pty Ltd & Ors [2004] NSWCA 333 at [260]ff, Hodgson JA, in a passage referred to with approval by the Court of Appeal in Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd [2017] NSWCA 27 at [201], said that there were two circumstances in which an allowance for betterment would be made. The first is when a plaintiff chooses to acquire a more valuable asset than the one that is being replaced. The second is when "even if there is no alternative available to a plaintiff other than to acquire a more valuable asset, a plaintiff may have to give credit reflecting the greater value of this asset to the plaintiff, if there is a benefit to the plaintiff which is not remote in time or speculative, and which can be quantified" Tyco at [262].
3. Applying these principles, and subject to one qualification, I have concluded that no allowance for betterment should be made in this case. This case plainly does not fall into the first of Hodgson JA's two categories. As I have explained, there is no other practical means of SEMF obtaining the contracted-for system.
4. In order to understand why this case does not fall into the second of Hodgson JA's categories, it is necessary to say something more about the position if the Renown System as delivered had met the contractual specifications. In that event, the problems that currently exist with the system would not have been present. On the other hand, SEMF would have paid an annual maintenance fee to Microsoft calculated at 18 percent of the cost of the original software. SEMF stopped paying that fee in 2016. That fee would have entitled SEMF to upgrade to more recent versions of the relevant software - specifically, Dynamics SL 2018 and SL 2018 Web Apps. It was not suggested that, absent the problems with the Renown System, that system could not have been migrated to updated versions of the relevant software. Consequently, if Renown had complied with the contract and SEMF had paid the maintenance fee, SEMF would have ended up with the Renown System running on Dynamics SL 2018 and SL 2018 Web Apps. SEMF accepts that in calculating damages it should give credit for the maintenance fees it has not paid. Allowing for that credit, there is no betterment since the award of damages will put SEMF in the position it would have been in if Renown had delivered the contracted-for system without the current faults or limitations.
5. The second head of damage claimed by SEMF consists of costs it incurred in trying to fix the problems. Those costs are: 2 Costs incurred by COVA and paid to 3rd parties in endeavouring to rectify defects a Paid to Dialog for additional licences $27,184 b Paid to McLean $84,744 c Paid to Plumbline $13,935 d Paid to Kiley Nicholls $7,320 e Paid to Pinnacle Analytics $800 f Paid to Dialog for work that was unnecessary or ineffective $41,150

1. Renown accepts that it is liable to pay for items (c), (d) and (e). It disputes the other items.
2. Item (a) relates to the additional licences acquired by SEMF to enable more concurrent users of Dynamics SL. Renown submits that those licences were required because Crystal Reports could not be accessed in the BP environment. However, it submits that the absence of access to Crystal Reports from BP was not a breach of contract by it. In its submission, the deployment of SSRS reports (together with the Quick Query module) afforded SEMF project managers with up to date information extracted from the Dynamics SL database.
3. In my opinion, there are two difficulties with this submission. First, I have found that the Quick Query module was not available through BP. If SEMF project managers had access to it, it was because they had access to Dynamics SL. Second, I accept that Renown did not have a contractual obligation to provide access to Crystal Reports from BP. It did, however, have a contractual obligation to provide remote access to various functions of Dynamics SL including invoicing and project queries using BP. Because of errors in implementing SSRS, that access was not available. The additional licences were required in order to obtain a reasonable level of access to those functions that would have been available if SSRS had been configured properly for BP. Accordingly, in my opinion, the costs of the additional licences are recoverable.
4. Mr McLean has specific expertise in training in Microsoft Office, Oracle (a type of database) and SQL. He had worked for SEMF between 2005 and about 2008. In October 2015, he was employed by SEMF to assist it in resolving problems with BP and, in particular, setting up a remote portal that would permit access to functions that were not available through BP, such as Crystal Reports. It is apparent that Mr McLean was employed specifically by SEMF to work on solutions to the problems with the Renown System and the implementation of BP in particular. I can see no reason why the fees paid to Mr McLean are not recoverable.
5. In relation to item (f), SEMF submits that it obtained no benefit from the work referred to in the relevant invoices "given that Dialog walked away prior to contracted functionality being achieved". Consequently, it says that it is entitled to recover the amount that it paid. The claim appears to be that SEMF paid the invoices expecting the work referred to in them to be completed, that work was not completed and SEMF obtained no benefit from what work was done, with the result that it should be entitled to recover the amount it paid. The evidence, however, is inadequate to justify this claim. It is not clear from the invoices precisely what work was done. SEMF does not point to any evidence that demonstrates that whatever work was done was wasted. Accordingly, in my opinion this claim must fail.
6. SEMF should be entitled to interest at court rates on each of the amounts that it is entitled to recover from the dates those amounts were paid.
7. The third head of damage is what SEMF described as "[c]osts incurred by COVA employees resulting from defects in system". That, however, is not an accurate description of what is claimed. Rather, what is claimed is the time spent by SEMF employees undertaking tasks that it is said would not have been necessary if the Renown System did not have the faults it does.
8. The Court will permit a plaintiff to recover the cost of the productive time of the plaintiff's employees that is lost by reason of a breach of contract: Tesrol Joinery Pty Limited v CEFLA Scri [2005] NSWSC 528 at [28] per Einstein J. Moreover, in some cases the Court will be prepared to treat the amount paid to employees as a proxy for the value of that time. As Wilson LJ explained in Aerospace Publishing Ltd v Thames Water Utilities Ltd [2007] EWCA Civ 3 at 86: Even though it may well be that strictly the claim should be cast in terms of a loss of revenue attributable to the diversion of staff time, nevertheless in the ordinary case, and unless the defendant can establish the contrary, it is reasonable for the court to infer from the disruption that, had their time not been thus diverted, staff would have applied it to activities which would, directly or indirectly, have generated revenue for the claimant in an amount at least equal to the costs of employing them during that time. In order to establish such a claim, the plaintiff must establish the extent of the diversion and that the diversion caused significant disruption to the business: ibid 86. See also BHP Coal Pty Ltd v O & K Orenstein & Koppel AG [2008] QSC 141; F.Y.D Investments Pty Limited v Promptair (No 2) [2019] FCA 419.
9. I am not satisfied that SEMF is entitled to recover the amount it claims in accordance with these principles. That is so for several reasons.
10. First, I am not satisfied that SEMF has established the extent of the diversion. SEMF seeks to establish the extent of the diversion through evidence given by Ms Parry. In her first affidavit, Ms Parry identifies six employees whose time is said to have been diverted because of faults with the Renown System. They are herself, Ms Belinda Irving, Ms Nicole Deng, Mr John Croxton, Mr Douglas Hall and Mr Allan Waitzer. Ms Parry, Ms Hall and Ms Deng were administrative staff. Ms Parry seeks to identify diverted time from time recording entries. In final submissions, SEMF accepts, based on the description contained in the entries, that some of those entries are unlikely to record diverted time. It excludes those entries to come up with a final figure. However, in my opinion, Ms Parry's interpretation of time entries made by others does not provide a sufficient basis for concluding that the relevant time arose because of faults in the Renown System. As I have said, I accept that there were faults in the Renown System. I also accept that time was wasted by employees in dealing with those faults and their consequences. However, the relevant time entries simply record time spent on the Renown System. They do not form a reliable basis for determining or estimating how much of that time was wasted. And I do not think that Ms Parry's interpretation of those time entries (apart from her own) can cure that problem.
11. In a second affidavit, Ms Parry seeks to identify additional time spent by SEMF employees to overcome the problems with the Renown System since she prepared her first affidavit. In that affidavit, she provided a range based on estimates of time that various project managers and other employees spent on dealing with the problems. For example, Ms Parry estimates that 12 project managers have spent 2 to 6 hours per month dealing with problems with the Renown System. Presumably, those problems relate largely to the extra time spent on billing. However, there is no evidence to that effect and again it is difficult to understand why Ms Parry's views on those matters provide an adequate basis from which to conclude that the relevant employees' time was diverted.
12. Second, a substantial amount of the time for which SEMF makes a claim is the time of administrative staff, including Ms Parry. There is no evidence that SEMF had to employ additional administrative staff because of problems with the Renown System. Moreover, it is unclear what productive work those staff members would have engaged in if they did not do the work that they did. It is important to remember that the cost of staff is recoverable because it is treated as a proxy for lost revenue. That seems a reasonable approach where the relevant staff members are engaged in work that generates income for the business. It seems less reasonable where the relevant staff do not undertake income generating work. That, of course, is not to say that the administrative staff do not perform work that is essential to the business. Moreover, in some cases it may be that the result of diverting the time of administrative staff is that billable time that ought to be captured and billed is not. In that case, it may be appropriate to make allowance for the cost of those staff members. However, in the present case it appears that most of the work in respect of which SEMF seeks to recover is undertaken to ensure that income is not lost for those reasons. There is some evidence that, on introduction of the Renown System, some billable time was lost. There is no evidence that that is a continuing problem.
13. Third, I am not satisfied on the evidence that the disruption to SEMF's business was sufficient to justify an award of damages based on employee costs. The transfer to a new computing system was bound to cause some disruptions. The question in this case is whether the faults in the Renown System were so serious that it could be said that those faults themselves caused a significant disruption to the business. I am not satisfied that they were. As the experts pointed out in their joint report, there was no catastrophic failure of the system. It is possible to use, and the system is used, to perform many of the contracted-for tasks. SEMF led evidence concerning continuing problems. It did not, however, lead evidence from which it could be concluded that those problems had caused a significant disruption to its business. Accordingly, in my opinion, SEMF is not entitled to the damages claimed under this head.

The cross-claim

1. Renown seeks to recover the amount of $51,315 in respect of invoices issued by it. The following is a summary of the claim: Invoice Date Invoice Number Amount Paid Outstanding 6 September 2015 230776 $20,240.00 Nil $20,240.00 20 September 2015 230882 $12,320.00 $6,820.00 $5,500.00 18 October 2015 231106 & CR231106A $5,500.00 Nil $5,500.00 1 November 2015 231202 $660.00 Nil $660.00 13 December 2015 231477 $28,545.00 $16,390.00 $12,155.00 3 January 2016 231545 $935.00 $440.00 $495.00 7 February 2016 231807 $3,135.00 Nil $3,135.00 21 February 2016 231918 $605.00 Nil $605.00 6 March 2016 231998 $110.00 Nil $110.00 3 April 2016 232150 $1,320.00 Nil $1,320.00 17 April 2016 232234 $880.00 Nil $880.00 30 April 2016 232301 $55.00 Nil $55.00 15 May 2016 232378 $660.00 Nil $660.00 Total $51,315

1. In its response to the cross-claim, SEMF advances a number of reasons why the invoices are not payable. They are: (a) matters improperly charged as variations; (b) charges in excess of the submitted variation amounts; (c) charges in respect of expense incurred due to the fault of Dialog; (d) items in respect of which the cross defendant had already made payment; and (e) charges in respect of matters that were defect rectification.
2. However, no submissions or evidence was advanced in support of those allegations, and it appears that the allegations have been abandoned. SEMF's primary contention is that it is entitled to set-off the amount claimed by Renown against its damages claim. Renown accepts that that is the case. Accordingly, nothing further needs to be said about the cross-claim.

Conclusions and orders

1. It follows that SEMF is entitled to recover the following amounts: 1. $617,308 in respect of the costs of installing a new system based on Dynamics SL (or such other amount as correctly reflects the exchange rate at the date of judgment) less the amount of the maintenance fees payable to Microsoft from 2016; 2. The sum of $27,184 paid for additional licences; 3. The sum of $84,744 paid to Mr McLean; 4. The sum of $13,935 paid to Plumbline; 5. The sum of $7,320 paid to Ms Nicholls; 6. The sum of $800 paid to Pinnacle Analytics; 7. Interest on the amounts referred to in (b) to (f).
2. Renown are entitled to set-off the sum of $51,315 against the amounts payable to SEMF.
3. The orders of the Court are: 1. Direct that within 14 days of the date of this judgment, the parties bring in short minutes of order to give effect to this judgment and any agreement in relation to costs; 2. If the parties cannot reach agreement in relation to the form of orders or costs, direct that within a further 7 days the parties provide my Associate with written submissions not exceeding 5 pages setting out the orders for which they contend and the reasons for those orders; 3. Any outstanding matters be determined on the papers.

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: 01 December 2021