Trilogy v CLS Software [2002] NSWSC 1174 | Case summary

These Heads of Agreement are made on April 10, 2002 between CLS Software International Inc ('CLS') of 9601 Jeronimo Road, Irvine, California, USA, 92618 and Trilogy HIS Pty Limited ('Trilogy HIS') of 444 Gardeners Road, Alexandria, NSW Australia. The parties agree as follows: 1. Until such time as a Distribution Agreement is entered into between the parties as a replacement for that distribution agreement made 30 December 1996 between CLS and Trilogy Business Systems Australia Pty Limited (the 'Old Agreement') which has since expired, this agreement resolves all outstanding items currently in dispute. 2. The parties agree and acknowledge that they have satisfied themselves that these Heads of Agreement are self sufficient in themselves and on no account will the parties allege in any Proceedings that they are deemed to be void by reason of uncertainty. 3. Until superseded by a more formal instrument of agreement, these Heads of Agreement shall remain in full force and effect from the date hereof during which time Trilogy HIS shall have the exclusive distribution rights to the CLS Software (as defined in the Old Agreement) in the Territory (as defined in the Old Agreement) and to all other software products distributed by CLS and/or any corporation associated with or related to CLS. The parties shall work in good faith to expeditiously replace these Heads of Agreement with a more formal instrument of agreement (the 'New Agreement') with the substance comparable to that of the attached draft having a term of 5 years. 4. In full settlement of any royalties payable by Trilogy Business Systems Australia Pty Limited to CLS up until and including 30 June 2002, Trilogy HIS will: (a) Pay to or procure the payment to CLS of the sum of US$150,000; and (b) pay to or procure the payment to CLS of the sum of US$50,000,000 as a pre-payment against future licence fees, but subject to the express condition that if the said sum of US$50,000 is not credited fully against such future licence fees within six months of the date of payment to CLS of that sum, then the said sum of $50,000 or such part as remains uncredited against future licence fees, may at the absolute discretion of Trilogy HIS be credited against other payments which may be due and payable by Trilogy HIS to CLS. The settlement monies referred to above shall not become payable to CLS until such time as the parties execute the New Agreement. 5. Trilogy HIS shall purchase the CLS Software (as defined in the Old Agreement) from CLS at a price being forty per cent (50%) (sic) of the current list price of the CLS Software (as defined in the Old Agreement) and shall similarly purchase any other software product as referred to in these Heads of Agreement at fifty percent (50%) of the current list price of that software. 6. Trilogy HIS will pay to CLS royalties of: (a) ten percent (10%) of collected support fees from any existing customer at the time of these Heads of Agreement; and (b) ten percent of the current list price for support from any new customer who is not a customer of Trilogy HIS at the time of these Heads of Agreement; all of which shall be paid by Trilogy HIS to CLS within thirty (30) days of the close of each quarter. 7. Unless specifically referred to in these Heads of Agreement, no part of the Old Agreement shall form part of these Heads of Agreement."

2 Central to the controversy which has arisen between the parties is clause 3 of the heads of agreement and the part of clause 4 as to the timing of the payment of US$200,000 by the plaintiff. 3 On or about 9 May 2002, the first defendant purported to terminate the heads of agreement or, at all events, to inform the plaintiff that termination would occur on 13 May 2002 unless the distribution agreement contemplated by the heads of agreement had been executed by that date. In the early days of June 2002, the first defendant said on two occasions that the heads of agreement had been terminated. Moves on both sides towards settling the terms of the distribution agreement as contemplated by the heads of agreement nevertheless continued. 4 The heads of agreement and the proposed distribution agreement relate to distribution by the plaintiff in Australia of certain software products of the defendants. These products are supplied by the plaintiff to customers in Australia. The customers are hotels and motels. The products involve a system of recording charges to guests for accommodation and services so that guest billing is faster and more efficient. 5 The first defendant had an Australian distributorship agreement with another Australian company for a term of five years up to 31 December 2001. That other company had a name similar to that of the plaintiff, but is apparently not formally related to the plaintiff. By a process that is not wholly clear, the plaintiff assumed the role of the other company vis-a-vis both the defendant and the Australian customers as of 1 January 2002 and began to perform in relation to them as the other company had previously performed. There was apparently no explicit contract in place between the plaintiff and the first defendant at that stage. They appear to have operated under some form of common assumption that the terms of the expired contract with the other Australian company should continue to be observed. The heads of agreement are the first and only document with apparent contractual force entered into between the present parties. 6 The substantive relief sought by the plaintiff in these proceedings is a declaration that the heads of agreement were not terminated by the first defendant; a declaration that the parties are bound by the heads of agreement; and an injunction restraining the defendants from selling, installing or supporting the software products otherwise than through the plaintiff in accordance with the heads of agreement and the expired agreement with the other Australian company. 7 The first defendant has foreshadowed a cross-claim seeking rectification of the heads of agreement on the basis that they do not reflect the parties' agreement; alternatively, rescission for mistake on the part of the first defendant of which the plaintiff was aware. There are also foreshadowed claims based on misleading and deceptive conduct as a basis for termination or rescission of the heads of agreement. The first defendant also foreshadows seeking a declaration that the heads of agreement had been validly terminated or rescinded by it. Claims for the payment of money by both the old distributor and the plaintiff are also included. As to the last element, the plaintiff has, through a letter from its solicitors, given notice of a claim for damages in reply relating to and arising out of defects in the software "provided by your client to our client". 8 The claim with which I am presently concerned is the plaintiff's claim for interlocutory relief by way of injunction restraining the defendants, until determination of the proceedings or further order, from acting upon or implementing a purported notice of termination of the 30 October 2002 in relation to the heads of agreement. That particular notice of termination was given by the defendant's solicitors by way of what one might term back-up precaution. The notice purported to terminate the heads of agreement if they had not already been effectively terminated as of 13 May. At all events, the interlocutory application was argued on the basis that the effect of the injunction sought would be to preclude the defendants, until trial or further order, from acting upon or giving effect to any termination of the heads of agreement. 9 The first issue to be considered is, of course, whether there is a serious question to be tried as to the effectiveness and validity of the purported termination or terminations of the heads of agreement or, putting it more widely, whether the heads of agreement continue to bind the parties according to their terms. Issues going to whether there is a serious question to be tried were canvassed before me in some detail. In the end, however, I do not think there can be any real doubt that there are substantial questions of fact that need to be resolved about events surrounding the formation of the heads of agreement and that the present status and ongoing effect of the heads of agreement are things requiring full investigation. 10 The heads of agreement are unambiguous in their express terms. Whether, as the defendant says, they are affected by mistake or include an implied term allowing termination are matters for genuine debate. There is at least a reasonable probability of the plaintiff succeeding in its contention that the purported terminations were ineffective. There is also cogency in the defendant's mistake and rectification claims. In other words, there are serious questions to be tried and in those respects and to that extent the plaintiff has made out its claim for interlocutory relief. 11 That leads to the question of the balance of convenience, that is, whether the defendant will suffer greater hardship through grant of an interlocutory injunction than the plaintiff will suffer if the injunction is not granted. The court must weigh up the comparative injury that will arise from granting or withholding the injunction, seeking out the major risk of damage and in particular of any irreparable damage. This aspect was referred to in Cayne v Global Natural Resources plc [1984] 1 All ER 225 as "the balance of the risk of doing an injustice". 12 I look first at the position of the defendant. The defendant's prime concern pending resolution of the substantive disputes is, no doubt, to have its software product properly distributed, maintained and supported in the Australian market on a financial basis reasonably acceptable to it. The evidence shows, I think, that the plaintiff continues to provide these services. Significantly, however, it has not been paid any support fees. In fact, it has not been paid support fees I think since 1 January 2002. 13 Part of the heads of agreement involves a sum of US $200,000 which the plaintiff and the defendant have agreed as a compromise sum to cover what are effectively support fees unpaid by the former Australian distributor (the company with the name similar to that of the plaintiff) for the last two years of its incumbency to 31 December 2002, plus the plaintiff's support fees for the first six months of the plaintiff's incumbency, that is to say, the first six months of 2002. Exactly why the plaintiff would be prepared to take on this debt of the former distributor is unexplained and I suppose unimportant. 14 The fact is that the plaintiff agreed to pay US$200,000 to cover the other company's arrears of support fees plus the first six months of its own term and one of the hotly contested issues surrounding the heads of agreement is the inclusion of the provision making this US$200,000 payable only when a new distribution agreement is entered into in accordance with the heads of agreement which, of course, may never happen, given that any new agreement is, as the heads of agreement recognise, dependent on the outcome of negotiations the parties are supposed to conduct in good faith. 15 In summary, therefore, grant of the injunction will entail for the defendant, it appears, a continued delay in receiving money, although I do note that the heads of agreement provide for ongoing support fee payments and, if the injunction were granted, there is no apparent reason why the plaintiff would not have to pay those according to the heads of agreement. Otherwise, and in the absence of any evidence that the plaintiff is not currently performing its tasks satisfactorily, there is no apparent burden for the defendant if it is, in effect, unable to resile from the heads of agreement pending the determination of the substantive proceedings. 16 From the plaintiff's perspective, freedom of the defendant to act upon and give effect to the supposed termination of the heads of agreement will have distinctly adverse consequences. In short, the defendant will, as it has clearly foreshadowed, make contact with the various hotels which are customers of the plaintiff, inform them that the plaintiff is no longer the defendant's distributor and then take steps to supply those hotel customers direct, cutting out the plaintiff or any other distributor in the process. 17 There is in evidence a form of draft letter proposed to be sent by the first defendant to the hotels announcing this move if the defendant becomes free to make the move. Because distribution of the defendant's system represents by far the largest element of the plaintiff's business this would mean that the plaintiff would suffer substantial damage if its right and ability to be the defendant's distributor were removed. 18 Mr Allison, the plaintiff's chief financial officer, gave evidence that at least 8 and probably eventually 11 of the total staff complement of 15 would lose their jobs if the plaintiff was no longer the defendant's distributor. Some 60 to 70 per cent of the plaintiff's revenues come from that source, according to Mr Allison. It is not going too far, I think, to say that the conduct of the plaintiff's business will be seriously threatened if, pending trial, the defendant is free to act on the purported termination of the heads of agreement. 19 Balancing the respective detrimental positions or consequences to which I have referred, I consider the greater and more serious burden to fall upon the plaintiff by reason of the very clear likelihood that it will lose its goodwill, or a large part of it, by being supplanted by the defendant in its relationships with its customers, that being something that will be irretrievable if, in the long run, it turns out to be the case that the heads of agreement are, in truth, the basis of an ongoing relationship between the plaintiff and the defendant. 20 The defendant says that an interlocutory injunction should be refused because damages will be an adequate remedy. According to this argument, it must be the case that the heads of agreement do not represent a perpetual contract between the parties and that if it has not already been validly terminated, it will come to an end one way or another in due course, perhaps because of an implied term allowing termination on reasonable notice or upon exhaustion of efforts to bring into existence the superseding formal agreement. On that basis, the defendant says it is a matter of working out an appropriate measure of damages to compensate for the loss of the benefit of the arrangement until such a concluding point. The whole matter may therefore be resolved by an award of damages if it turns out that the plaintiff's rights have been infringed, according to the defendant's submissions. 21 I do not think that it is appropriate to consider the adequacy of damages as a factor in its own right in a case such as this or, to put it another way, even if damages might be seen as an adequate remedy, that is not the end of the matter. The real issue is whether it is just to confine the plaintiff to its remedy in damages: see, for example, State Transport Authority v Apex Quarries Ltd [1988] VR 187. In my view it would not be just, at this point, to confine the plaintiff in that way, given that termination of its relationship with the defendant will have such a far reaching effect as has been described in the evidence of Mr Allison. 22 The defendant also said that an order which in effect compels the defendant to adhere to the heads of agreement, pending the determination of the proceedings, will involve a regime requiring an unacceptable degree of supervision by the court and for that reason the court should, in its discretion, refuse injunctive relief. 23 Mr Stevenson, who appeared for the defendant, referred to the decision of Hamilton J in Liristis Holdings Pty Ltd v Q-Corp Marine Pty Ltd [2001] NSWSC 418 where the authorities on that matter are collected and discussed. His Honour referred in particular to observations of Brennan CJ and McHugh, Gummow, Kirby and Hayne JJ in Patrick Stevedores Operations No. 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1. The members of the High Court there emphasised that constant supervision by the court is not, of itself, any longer an effective or useful criterion for refusing equitable relief. Hamilton J also referred to the observation at paragraph 2142 of Meagher, Gummow and Lehane "Equity: Doctrines and Remedies" that: "The individual judge's own intuitive sense of what is the most appropriate course to take in the particular circumstances is probably the deciding factor." 24 In the present case it seems to me that the only element of the heads of agreement that could possibly raise issues of continuing supervision is the mutual promise of the parties to work in good faith to replace the heads of agreement with a formal contract. Otherwise, the operative provisions, apart from those about the controversial matter of the payment of the US$200,000, boil down to nothing more than a short form agreement for the purchase of software and agreed rates of support payment. I do not accept that the plaintiff expects to obtain software for nothing. The agreement refers to purchase and the evidence shows that payments for purchases, as distinct from support payments, have been made in the ordinary course of business. These matters, it seems to me, require no real supervision, nor do I see any real obstacle to arise from the agreement to work in good faith towards replacement of an agreement which, of its nature, is not susceptible to the formulation of precise commands. 25 In the end I am satisfied that the balance of convenience favours the plaintiff to the extent necessary to support an injunction maintaining the status quo until trial, that it would be unjust to confine the plaintiff to a remedy in damages and that no need for continuing supervision of the court exists in such a way as to make grant of an injunction inappropriate. 26 Mr Lee, who appeared for the plaintiff, referred to evidence of the plaintiff's financial capabilities relevant to an undertaking as to damages. He confirmed at the close of the hearing that he had instructions to give that undertaking which was formally proffered to the court. 27 Upon the plaintiff by its solicitor giving to the court the usual undertaking as to damages, I order that the defendants, by themselves, their servants and agents, be restrained, pending determination of these proceedings or until further order, from acting upon or implementing any previous purported termination of the Heads of Agreement dated 10 April 2002 between the plaintiff and the first defendant.

Trilogy v CLS Software

At a glance

Court

Decision date

Before

Source

Judgment (10 paragraphs)

Parties

Cases Cited (2)