Zerofootprint Software Inc. & Anor v A2green Pty Ltd & Ors

Judgment 1The plaintiffs in this matter have filed a motion on 15 November 2013, seeking an order under rule 28.2 of the Uniform Civil Procedure Rules 2005 (UCPR) that all issues other than damages and/or accounts of profit be heard and determined before the hearing and determination of damages and/or accounts of profit. 2The substantive proceeding concerns the demise of an agreement between participants in a joint corporate enterprise for the development and marketing of carbon reporting software. 3The first plaintiff (ZFP Canada) and second plaintiff (ZFP Australia) allege that the first defendant (A2green) has breached a shareholders agreement, that the second defendant (Mr Solsky) has breached his duties as a director of ZFP Australia and, that all the defendants have misappropriated and/or unlawfully exploited ZFP Canada's confidential information. 4The plaintiffs allege that the third defendant (Global) and fourth defendant (Carbonsystems, previously Omni) were recipients of the confidential information belonging to ZFP Canada and were knowingly concerned in the wrongdoing of A2green and Mr Solsky. Global and Carbonsystems deny any knowledge of any alleged wrongdoing on their part, and further deny that they received any confidential information belonging to ZFP Canada or that the carbon reporting software developed by Carbonsystems contains any confidential information belonging to the ZFP Canada. 5The plaintiffs commenced these proceedings by way of summons and commercial list statement filed on 6 November 2012. 6ZFP Canada and A2green are the sole shareholders of ZFP Australia, as to 25% and 75% respectively. Mr Solsky is, and was at all relevant times, a director of ZFP Australia, A2green and Global, and has, since 15 December 2009, been a director of Carbonsystems. Global is the controlling shareholder of Carbonsystems. The principal of ZFP Canada is Dr Ron Dembo (Dr Dembo). 7On 1 May 2008, ZFP Canada, A2green and ZFP Australia entered into a written shareholders agreement (the Shareholders Agreement), and further, ZFP Canada and ZFP Australia entered into a written intellectual property licence agreement (the Licence Agreement). 8The purpose of the Shareholders Agreement was to enable ZFP Canada and A2green to participate in an incorporated joint venture by becoming shareholders in ZFP Australia. A2green was required to (among other things) act in the best interests of ZFP Australia (clause 3.3) and develop and "aggressively" promote ZFP Australia's business particularly in Sydney, Melbourne and Brisbane (clause 3.4), with the primary object ZFP Australia being to commercialise in Australia the "Zerofootprint calculator and other Intellectual Property methods under the Licence Agreement" (clause 3.1). In accordance with its right to do so, A2green appointed Mr Solsky to the board of ZFP Australia (clause 4.2) and agreed to procure the full time services of Mr Solsky at no charge to ZFP Australia until 31 December 2008 (clause 2.2). Importantly, A2green was prohibited from disclosing to any third person "Confidential Information" (as defined in clause 1.1 of the Shareholders Agreement) that it obtained as a result of the Shareholders Agreement or anything done under it. 9Under the Licence Agreement, ZFP Canada granted to ZFP Australia a licence of the "Licensed Material" (as defined in clause 1.1) for the purpose of conducting and promoting the business of ZFP Australia in Australia and New Zealand (clause 2.1(a)). If ZFP Australia becomes aware of any potential project or opportunities in connection with the Licensed Material outside Australia or New Zealand, then ZFP Australia must use its best endeavours to promptly advise ZFP Canada of that project or opportunity (clause 5.1), and then ZFP Canada and ZFP Australia must identify and use their best endeavours to agree on the most appropriate contract structure and commercial arrangements for the project or opportunity (clause 5.2). Importantly, the parties were prohibited from using any "Confidential Information" (as defined in the Licence Agreement) for any purpose except that contemplated by the Licence Agreement. 10A core component of the business of ZFP Canada and ZFP Australia was the development and exploitation of two particular technologies, known as "PCM" and "ECM". PCM (an abbreviation for "Personal Carbon Manager") is a source code underlying a suite of software products, including carbon calculators, that enabled customers, as individuals, to calculate and report on their carbon footprint (PCM). ECM (an abbreviation for "Enterprise Carbon Manager") is made up of software and products (then in a developmental stage) that would enable governments, corporations and other entities to calculate and report on their carbon footprint (ECM). The plaintiffs allege that PCM and ECM are included within the ambit of "Confidential Information" as defined in the Shareholders Agreement (clause 1.1). 11The plaintiffs allege that, from April (or May) 2008, a number of activities were undertaken by ZFP Canada, ZFP Australia and Omni, which brought ECM to a stage where it was suitable for commercial exploitation. 12The plaintiffs allege that, from the date on which ECM became commercially viable, the software that made it up was in the possession and control of Mr Solsky or A2green (or both), and that unknown to ZFP Canada and Dr Dembo, Mr Solsky (while a director of ZFP Australia) caused A2green to secretly enter into a joint venture agreement with Omni pursuant to which they would seek to licence the commercially viable ECM to ZFP Canada and ZFP Australia and third parties. The plaintiffs allege that the purpose of the joint venture agreement between A2green and Omni was to wrongly exploit the commercially viable ECM and "Confidential Information" (as defined in the Shareholders Agreement) to generate financial benefits for A2green and Mr Solsky, without any benefit to either ZFP Canada or ZFP Australia. This was allegedly done by having Carbonsystems (or another entity in its corporate group) sell or licence ECM (or a modified version of it) and the Confidential Information (as defined in the Shareholders Agreement). Mr Solsky is said to be a director in each and every entity in the Carbonsystems corporate group, and is alleged to have been instrumental in facilitating or causing entities in the Carbonsystems corporate group to engage in that conduct. Global is the holding company in the Carbonsystems corporate group, holding 100% of the shares in the fourth defendant in these proceedings, and three other companies. 13The plaintiffs allege that Mr Solsky's conduct constitutes (among other things) a misappropriation of Confidential Information (as defined in the Shareholders Agreement), in that he used it and caused the Carbonsystems corporate group to use it for the purposes of developing a product that was not for the exclusive benefit of ZFP Canada or ZFP Australia. The plaintiffs also allege the conduct of A2green constitutes (among other things) a misappropriation of Confidential Information (as defined in the Shareholders Agreement) in that it used it and is using it for the purposes of developing a product not for the exclusive benefit of ZFP Canada or ZFP Australia but for one or more of all the defendants. 14The plaintiffs say Carbonsystems (or a company in its corporate group) is exploiting or causing the exploitation of ECM or Confidential Information (as defined in the Shareholders Agreement) or Licensed Material (as defined in the Licence Agreement), and that such conduct amounts to a misappropriation of the Confidential Information or a knowing participation in the wrongdoing of Mr Solsky or A2green. 15A2green and Mr Solsky (in their commercial list response filed on 23 August 2013), and Global and Carbonsystems (in their commercial list response filed on 4 October 2013) deny the plaintiffs' central allegations. 16For the purposes of the application before me, it is unnecessary to identify every controverted allegation, and sufficient to observe that the pleadings clearly put in issue whether Carbonsystems received any information from ZFP Canada or ZFP Australia, whether that information possessed or was of a relevant quality, and what, if anything, the defendants did with that information. The plaintiffs allege the misuse of information took place secretly. 17Against all the defendants, the plaintiffs claim (among other things) damages, equitable compensation, an account of profits, and a declaration that all profits generated and assets acquired be held on trust. 18The Civil Procedure Act 2005 (CPA) s 62(2) permits the separate determination of any factual issue in proceedings. In the UCPR, r 28.2 provides: 28.2 Order for decision The court may make orders for the decision of any question separately from any other question, whether before, at or after any trial or further trial in the proceedings. 19Apart from these legislative provisions, the court may, as an incident of its power to control its own procedure, determine issues separately. In exercising the power under r 28.2 of the UCPR, the court must give effect to the overriding purpose to facilitate the just, quick and cheap resolution of the real issues in the proceedings (s 56 of the CPA). 20The relevant matters to take into consideration when deciding whether or not to make an order for the resolution of a separate question have been recited extensively in several cases and many were listed in Idoport Pty Ltd & Anor v National Australia Bank Ltd & 8 Ors; Idoport Pty Ltd & Market Holdings Pty Ltd v Donald Robert Argus; Idoport Pty Ltd "JMG" v National Australia Bank Ltd [2000] NSWSC 1215 (at [7] per Einstein J): (1) The power of the Court to order the separate determination of an issue is a discretionary power which must be exercised judicially, but cannot otherwise be fettered. (2) In exercising the power ..., the Court is now enjoined to give effect to the overriding purpose of ... to facilitate the just, quick and cheap resolution of the real issues in the proceedings and cannot be stated in a more confined way... (3) The Court begins with the proposition that it is ordinarily appropriate that all issues in a proceeding should be disposed of at the one time. Accordingly, it is for the party who wishes to have a question separately determined to show that it is desirable for that to occur. (4) Without being exhaustive, the separate determination of an issue may prove to be an appropriate procedure in at least the following sets of circumstances: (a) where the resolution of that separate issue will have the effect of resolving the entirety of the litigious controversies or of substantially narrowing the field of litigious controversy; (b) where the resolution of that separate issue carries with it a strong prospect that the parties will thereafter be able to resolve their dispute themselves and thus avoid further litigation; (c) where there is a clear demarcation between that issue and all other issues in the case, including issues going to the credit of witnesses. (5) Conversely, the separate determination of an issue will rarely be an appropriate procedure where: (a) there are intertwined issues of fact or law between the separated question and the other questions such that the determination of the separate question will not have any substantial effect upon the width of the field of litigious controversy or the prospect of the settlement of the balance of the litigation. (b) where there is a commonality of witnesses and issues of credit as between the separate issue and other issues in the case which will or may necessitate a ruling on the credit of one or more of the common witness, thus possibly precluding that same judicial officer from again dealing with the matters going to the credit of the common witness... (c) there is a possibility that the resolution of the separate issue will not finally determine the issue but will merely result in an appeal from that decision in relation to that separate issue, creating a multiplicity of proceedings, interruption to the court and undesirable fragmentation of the proceedings. (6) The experience of courts suggests that the separation of proceedings often does not result in the quicker and cheaper resolution of proceedings as anticipated, but often has the reverse effect, merely causing added delay and expense to the resolution of the litigation. Thus, before an issue is to be separately determined, it must be possible to clearly see that it will facilitate the quicker and cheaper resolution of the proceedings. [Citations omitted] 21Other factors which would militate against severance include where the separated question may require findings of fact on matters likely to be contentious on the determination of remaining issues in the proceedings (CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 at 606; Murphy v Hilliard [2007] NSWSC 703 at [23]) or where the question involves alternative causes of action or defences (Printing & Kindred Industries Union of Australia v Clark (NSWSC, Needham J, ED No 550/76, 17 September 1976, unreported)). Nonetheless, the court may order the separate trial of liability and damages whenever it considers that it is appropriate to do so. 22It is true that caution has been expressed against the separation of issues. For example, in ABB v Freight Rail [1999] NSWSC 1037, a breach of contract case where an application was made to separate questions of liability and damages, Rolfe J said (at [15]-[21]): [15] The first reason why, in my opinion, the application should be refused is that, as was conceded in argument, there is no guarantee that certain witnesses will not give evidence on the issues of liability and damages. Whilst the plaintiff stated it had filed all its evidence in chief, it did not rule out the possibility that evidence in reply may be filed from a witness going to both issues. In my view, it would require an exceptional case for the Court to order a separate hearing of liability and damages when any witness is likely to give evidence on both issues. The reasons are obvious. A case should be conducted on the basis that the witness is cross-examined on all issues at the same time and in the context of all issues, because his or her evidence on one issue may impact on the acceptability of his or her evidence on the other. If there is not adherence to this practice difficult questions arise for the Court as to the extent to which cross-examination on the matter not being litigated should be allowed, and for the cross-examiner as to how far matters not in issue can and/or should be pursued, and how that evidence should be treated in the overall assessment of the witness. In my opinion, the cross-examiner should not be precluded, particularly where credit is in issue, from cross-examining on the issue of damages merely because the only matter being litigated is liability. That not only causes difficulties for the cross-examiner, but also for the Court. The Court may be prevented from making a fully informed assessment of the credibility of the witness if the cross-examination is truncated, or if certain contradictory material cannot be led because the cross-examination goes only to credit and not to an issue. [16] A further difficulty, in these circumstances, is that if a Judge hearing the issue of liability makes any finding as to the credit of a witness, who is subsequently to give evidence in the event of the question of damages being litigated, that Judge will, in all probability, be disqualified from hearing the matter and, accordingly, the store of knowledge he or she has obtained from the initial hearing is lost, as is the impact of the evidence upon him or her: Australian National Industries Ltd v Spedley Securities Ltd (In Liquidation) (1992) 26 NSWLR 411. The finding may not necessarily have to be an adverse one to have this result. This is but one consequence, which leads to an inefficient use of the Court's and the parties' time and resources. [17] The next reason why I do not consider it appropriate to make the order is that I proceed on the assumption that the plaintiff, in bringing the litigation, believes it is entitled to damages. In the present case that has been confirmed. Two matters flow from that. Firstly, if the plaintiff does not succeed on the issue of liability there is a strong likelihood that an application will be made for leave to appeal and, if that application and the appeal are successful, the issue of damages will have to be addressed, possibly, in this case, but probably in most, by another Judge. Once the issue of damages is decided another application can be made for leave to appeal, thus prolonging the litigation even further. I have left out of this equation any application for special leave to appeal to the High Court. I see nothing efficient, in the administration of justice, in the sense of bringing about finality to litigation, or in the utilisation of the time and resources available to the Court and the parties, to have, in the general run of case, four potential hearings. In fact it seems to me an entirely inefficient use of such time and resources. It also means that the time during which the litigation is on foot is lengthened to a substantial extent. This is not in the interests of the Court or the parties. A real objective of the Commercial List is to have cases resolved quickly, so that parties will know what their respective financial positions are. The presently suggested approach thwarts that aim, with the resulting financial detriment to the parties. [18] Secondly, the costs of proving damages, on the assumption that the defendant is liable, will have to be incurred in any event. A plaintiff, bringing forward a case bona fide, must confront that, as must a defendant facing such a case. To suggest that the costs will be saved if the issue of liability is determined first is to make the pessimistic assumption that the plaintiff will not succeed on it at first instance or on appeal. [19] My next reason is that until there has been an assessment by the parties of the amount to which each says the plaintiff, if successful on the issue of liability, would be entitled, there can be no meaningful consideration by the parties of what the financial stake in issue is. In those circumstances, the parties are unable to give proper thought to an appropriate commercial settlement, consideration of which will be dependent not only on the amount involved, but also on the risk inherent in the issue of liability. In my opinion, it is highly desirable for parties involved in commercial litigation to focus on the whole case in determining how it can best be resolved. [20] Finally, I consider that in most cases, (and this does not seem an exceptional one), a Judge at first instance should decide as many issues as possible, so that in the event of an appeal the Court of Appeal will be in a position to dispose of the matter finally, if it seems appropriate to that Court to do so. [21] All of these matters, taken in isolation or in the aggregate, constitute compelling reasons why, at least in the normal run of case of which I think this is one, there should be no separation of issues. I have expressed similar views on a number of previous occasions... 23Commonly, severance applications seek to separate the determination of liability from damages. Where there is a clear line of demarcation between liability and damages issues, so that (for example) evidence is unlikely to overlap between the two issues, and where the assessment of damages is particularly complex, the case for separate determination may be stronger. 24The plaintiffs advance six reasons in support of the severance application. First, the plaintiffs say that the liability findings will determine the nature of the claims available to the plaintiffs. In response, the defendants say that this describes every case and therefore does not provide a basis for departing from the usual course of avoiding separation. I should add that this case does seem to me to be distinguishable from the usual or more common type of case. The liability question or questions raise a multitude of issues, including the construction of the relevant agreement or agreements between the parties, whether A2green or Mr Solsky used ZFP Canada's confidential information in developing what is referred to as the commercially viable ECM, whether the defendants have been and are commercially exploiting a product that incorporates or utilises ZFP Canada's intellectual property or confidential information, whether Mr Solsky wrongfully misappropriated a business opportunity available to ZFP Australia, and whether Mr Solsky deliberately misinformed ZFP Australia as to as to certain matters, including the purpose of the work being carried out by ZFP Canada and ZFP Australia in the period July to December 2008. The remedies available to the plaintiffs will vary depending on the findings in relation to these issues. 25Secondly, the plaintiffs say that the liability and quantum issues are discrete and there does not appear to be the threat that witnesses against whom credit findings have been made, will be called in later proceedings. In response, the defendants say that this "cannot be assured", as the questions likely to arise in liability are, even though slightly different, nonetheless closely related, and would "likely" involve the same witness, at least on the part of the defendants. 26Thirdly, the plaintiffs say that a finding against the plaintiffs on liability would bring an end to the proceedings. In response, the defendants say this is "unduly optimistic", as the plaintiffs' case is based on multiple causes of action, against multiple defendants, and there are prospects of appeal in the event that liability is found on less than all bases (I note however that any such appeal is likely to require an application for leave to appeal). I have already identified very briefly the various issues and causes of action likely to be agitated. It is clear that there may be mixed results as between the defendants. Some defendants could be found liable pursuant to some causes of action, and some may not. There would potentially be a significant saving of time if the nature and extent of damages assessed could be limited by reference to those issues of liability on which the plaintiffs succeed, and there is little doubt that the liability issues are likely to be complex and time consuming in and of themselves. 27Fourthly, the plaintiffs say that a settlement of the matter is far more likely if the liability issues were determined first. In response, the defendants again say this is "unduly optimistic". 28Fifthly, the plaintiffs say that the cost of expensive expert evidence may be avoided completely if the plaintiffs lose on liability. The defendants respond by saying that this would only be the case if proceedings in relation to damages are avoided entirely, and the plaintiffs fail on all causes of action. The plaintiffs' evidence is that, from discussions enquiries with potential experts, the cost of a forensic accountant for a report of the sort foreshadowed would be approximately between $75,000 and $100,000, and the cost of obtaining evidence from an industry expert would be about $35,000 or more. Those costs can be reduced or avoided entirely if the experts limit their evidence to those matters which remain following the determination of liability, or if the plaintiffs lose on all bases of their liability case. 29Sixthly, the plaintiffs say it would be appropriate to allow the liability findings to be made to enable a fully informed election between damages and an account of profit to be made. The defendants respond by saying that such an election can only be made during the damages phase of the case in any event, since it is only then that the plaintiffs will know which remedy is more advantageous. 30In the case before me, the plaintiffs submit that the parties' lay evidence has been served, and that there are, as yet, no orders in respect of expert evidence, and that indeed no expert evidence is envisaged by the plaintiffs and none has been foreshadowed by the defendants in respect of liability. The question of quantum, however, will require expert evidence from forensic accountants and industry experts, in order to assess changes in company values, revenues, profits and industry opportunities foregone and remaining. 31Having regard to these matters, and given the equitable nature of the relief sought by the plaintiffs (i.e. that the plaintiffs, if successful, will need to elect between alternative remedies), I find the following observations of Brereton J (in what appear to be comparable circumstances) in Hexiva Pty Ltd v Lederer [2006] NSWSC 318 (at [53]-[54], [56], [58]-[64]), to be particularly forceful (citations omitted): [53] There are, of course, many authorities which urge against the determination of separate questions, but it must be said that there is some distinction between the identification and determination of a single separate question, on the one hand, and the separation of liability and quantum on the other. More particularly, in equity, as distinct from at common law, traditionally inquiries as to damages or the taking of accounts of profits have been undertaken separately by a Master, after the determination of liability by a Judge. [54] I do not take the urgings of high authorities, to the effect that the determination of separate issues is to be avoided, as being directed to changing the traditional practice of equity courts of, where appropriate, first deciding issues of liability, and then ordering inquiries or accounts. ... [56] The Civil Procedure Act 2005 (NSW), ss 56 and 62, are relevant to the present application... ... [58] ... extensive expert opinion evidence would not be taken at the liability hearing if it were to proceed separately, so that there would be a saving in that respect also. Thus if, at the liability hearing, the defendants were to succeed, none of the accounting evidence from either side would ever have to be taken; whereas, if the plaintiffs succeed, the evidence of the defendants' accountant would be irrelevant and would not have to be taken. That is a factor which tends to favour a severance of the questions of liability and quantum. [59] A further factor which significantly favours that course is that it would enable the plaintiffs to make an election as to their remedy at an appropriate time, and limit the evidence on any inquiry to that which is relevant to the particular remedy for which the plaintiffs might elect. The plaintiffs claim accounts, equitable compensation, and damages (including aggravated and exemplary damages). Damages and an account of profits are alternative remedies, and although a plaintiff can apply for damages and an account of profits in the alternative, it can obtain judgment only for one or the other: a double inquiry as to profits and damages is not maintainable, and once judgment has been given for one, any right to elect for the other is lost... [60] However, a plaintiff should in general not be required to elect, or be found to have elected, between remedies, unless and until it is able to make an informed choice, which involves the right to receive reasonable information as to its potential entitlement in the case of both alternative remedies ... Thus, a plaintiff should not be required to elect, at least until all the evidence is complete, and if the trial is not split, the parties will have to call evidence addressing both damages and an account of profits, as would the respondents; whereas if the trial is split, so that there is a separate inquiry as to the quantum of compensation, then the issue does not arise until after liability has been determined, and the election is made before the inquiry as to quantum is embarked upon ... [61] It follows that in this case, if the inquiry as to quantum is not separated, then the evidence at the trial will have to cover both possibilities - and account of profits and damages - and not just one of them. [62] Together, the foregoing matters favour the application in this case of the traditional approach in equity of determining the amount of compensation after liability has first been determined, enabling the plaintiff to make an informed election. [63] One factor which weighs against severance is that the parties have already prepared their expert evidence, filed and served it, and no doubt considered it, and, so it is said, the evidence of all parties is now complete and ready for trial. I fear that severing the question of quantum may practically invite further evidence on any inquiry as to damages, and would avoid the finality which the final hearing so far on all issues would offer. [64] Nonetheless, on balance, I think that the just determination of the proceedings, the efficient disposal of the business of the court, and the efficient use of available judicial and administrative resources, as referred to in the Civil Procedure Act, s 57(1), tend to favour the prior determination of the issues of liability, as equity ordinarily would. In particular, that will have the result that the evidence as to compensation is limited to the particular remedy the plaintiffs elect, if they succeed, and will not be required at all, if they fail. 32His Honour was dealing with a case involving allegations of breach of fiduciary duties. The considerations referred to by his Honour are relevant here. However, in the case before Brereton J, one factor weighing against severance was the fact that the parties had already filed and served their expert evidence as to quantum (at [63]). That factor has no place in the matter currently before me. 33In my view, this case presents a sufficiently clear line of demarcation between liability and damages issues. Further, the preparation of the expert evidence that would be involved in assessing quantum in a case such as this, is likely to involve considerable expense. Additional expense will be incurred when that evidence is taken at trial. Furthermore, as the plaintiffs will need to elect between alternative remedies if they succeed on liability, they should be given an opportunity to do so at the appropriate time (when they will be better informed), and any expert evidence ultimately put can be limited to what is relevant to the elected remedy. The plaintiffs have clearly left open the possibility of electing either damages or an account of profits as a remedy, in circumstances where both would not be available simultaneously. 34The defendants' arguments do no more than raise questions about the plaintiffs' submissions in relation to the factors favouring the exercise of my discretion to order separation, but do not, in my view, displace those considerations or sufficiently outweigh the advantages to be gained from ordering the separate determination of liability and damages. Rolfe J's decision in ABB v Freight Rail was decided prior to the enactment of sections 56 to 59 of the CPA. The approach taken by Brereton J in Hexiva Pty Ltd v Lederer takes this statutory change into account, and in my view, is more appropriate in the circumstances of this case. In Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor [2006] NSWSC 1464, Brereton J (at [6]) stated: [6] While much has been said against the resolution of separate questions in Courts of high authority, nonetheless, since the (NSW) Civil Procedure Act 2005, it is my view that the Court should take a more interventionist role in identifying and separating important issues which can resolve significant parts of the litigation expeditiously. 35These are my reasons for making the order, pursuant to r 28.2, that any question of the quantum of any compensation or damages which might be payable by the defendants, or any of them, to the plaintiffs, be determined separately and after the trial of the proceedings on liability.