Temwell Pty Ltd (ACN 082 656 157) v DKGR Holdings Pty Ltd [2003] FCA 939

FEDERAL COURT OF AUSTRALIA

Temwell Pty Ltd (ACN 082 656 157) v DKGR Holdings Pty Ltd [2003] FCA 939 TEMWELL PTY LTD (ACN 082 656 157) -v- DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616), mCOM SOLUTIONS INC, DRAGON VENTURES. COM INC, mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950), DAVID HAINS, ROBERT VAN ZANTEN, DRAGONVENTURES.COM LTD, RICHARD HAINS and IAN MORRIS KIEFEL V 663 of 2000

RYAN J

4 SEPTEMBER 2003

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY V 663 of 2000

BETWEEN: TEMWELL PTY LTD (ACN 082 656 157) Applicant

AND: DKGR HOLDINGS PTY LTD (formerly known as DYNAMIC DATA SYSTEMS PTY LTD) (In Liquidation) (ACN 062 778 616) First Respondent

mCOM SOLUTIONS INC. Second Respondent

DRAGON VENTURES. COM INC Third Respondent

mCOM SOLUTIONS AUSTRALIA PTY LTD (In Liquidation) (ACN 091 375 950) Fourth Respondent

DAVID HAINS Fifth Respondent

ROBERT VAN ZANTEN Sixth Respondent

DRAGONVENTURES.COM LTD Seventh Respondent

RICHARD HAINS Eighth Respondent

IAN MORRIS KIEFEL Ninth Respondent

JUDGE: RYAN J

DATE: 4 SEPTEMBER 2003

PLACE: MELBOURNE

REASONS FOR RULING ON APPLICATION FOR LEAVE TO FURTHER AMEND THE AMENDED DEFENCE AND THE REPLY TO THE DEFENCE TO CROSS-CLAIM 1 On 18 August this year I ordered that the applicant ("Temwell") have leave to further amend its third further amended statement of claim. The second and fourth to seventh and eighth and ninth respondents ("the mCom respondents") now seek leave further to amend their amended defence and their reply to defence to cross-claim. I shall deal separately and in order with each of the proposed amendments which have been opposed.

Paragraph 9 2 The proposed amendment to this paragraph seeks to substitute the following subparagraphs and particulars; '9. … (b) further to (a), the Governing Terms Agreement expressly provided: 2.6 Consents and Approvals Unless otherwise expressly provided, a Party may give or withhold approvals and consents, may be satisfied or unsatisfied, may form opinions and may exercise rights, powers or remedies at its absolute discretion. 15. ASSIGNMENT Unless otherwise expressly provided in any Transaction Document, no Party shall novate, assign, transfer or otherwise create any other interest or right in all or any of its rights and obligations under any Transaction Document without the prior written consent of each other party. (c) To the extent Temwell's written consent was required to be obtained by DDS as a precondition to valid assignment of any or all of the rights held by DDS pursuant to the Transaction Documents then Temwell's discretion whether or not to give such consent: (i) was required to be exercised in good faith; (ii) was not a discretion which Temwell was entitled to exercise; (A) so as to deprive or seek to deprive DDS of the benefit of its contractual rights as against Temwell pursuant to the Transaction Documents or to derogate from such contractual rights and benefits as accrued to DDS pursuant thereto; or (B) so as to achieve or to seek to achieve a collateral purpose; (C) other than in good faith and in the exercise of a duty of fair dealing so far as the interests of DDS were concerned ("the Discretion Criteria"). Particulars The constraints upon the Temwell discretion pleaded in (i) and (ii) arise as a matter of law and are to be implied into the contractual relationships between DDS and Temwell embodied in the Transaction Documents and in particular, clauses 2.6 and 15 of the Governing Terms Agreement.' 3 Some concern was expressed by Mr Golvan SC for Temwell about the width of those particulars. However, Mr Sher QC for the mCom respondents has assured me that it will not be contended that the implication of the constraints on Temwell's discretion alleged in the proposed par 9(c) arises otherwise than from within the four corners of the Transaction Documents. As the questions going to the availability and extent of that implication, including the effect of what is called the "entire contract" provision in cl 18 of the Governing Terms Agreement are pure questions of law, and are arguable, I consider that the amendment to par 9 can be made without injustice to Temwell. I shall therefore grant leave to make it subject to the particulars being reformulated to read: 'The constraints upon the Temwell discretion pleaded in (i) and (ii) arise as a matter of law from the terms of the Transaction Documents and in particular clauses 2.6 and 15 of the Governing Terms Agreement.'

Paragraph 22A 4 This proposed new paragraph pleads; '22A. Further and in the alternative to paragraph 22: (a) DDS was entitled to assign its rights in the Application Software, alternatively, its rights pursuant to the LRC Agreement and the Call Option Agreement absolutely, without the requirement for consent by Temwell; (b) alternatively, DDS was entitled to assign its rights in the Application Software, alternatively, its rights pursuant to the LRC Agreement and the Call Option Agreement subject only to the right of Temwell to consent or withhold consent in accordance with the Discretion Criteria and not otherwise.' 5 As I understand it, the entitlement alleged in the proposed new subpar 22A(a) is claimed to have arisen from the unreasonable withholding of consent by Temwell if, as is denied, it did withhold consent; see In re Winfrey and Chatterton's Agreement [1921] 2 Ch 7. That again is a pure question of law and, provided that par 22A(a) is expanded to make clear the basis on which the alleged entitlement of DDS is said to have arisen, I would allow its insertion. 6 Subparagraph 22A(b) is a reflex of the proposed new par 9(c) and, for the reasons explained in relation to that subparagraph, I shall allow its insertion.

Paragraph 22B 7 This is another completely new allegation in the following terms; '22B. (a) Insofar as the letter of 22 February 2000 did not constitute consent to the assignment and; (b) insofar as there was any withdrawal of such consent on 22 March 2000, (the fact and effect of which as contended for by Temwell are denied) then Temwell was not in any event entitled to refuse to consent or to withdraw consent in relation to an assignment by DDS; (i) at all; (ii) alternatively to (i), other than in accordance with the Discretion Criteria. (c) Further, if Temwell did not consent by the letter of 22 February 2000 or alternatively if there was withdrawal of consent as alleged in paragraph 21A of the fourth further amended statement of claim (which matters are denied), then any such refusal or withdrawal, as contended for by Temwell: (i) was for a collateral purpose - namely so as to compel a buy-out of Temwell's interest, if any, in the Application Software by mCom Inc; and (ii) did not represent a permitted exercise of the discretionto consent in accordance with the Discretion Criteria. Particulars There was no proper basis consistent with the Discretion Criteria upon which consent could be withheld. The following matters are relied upon: (i) Temwell had no ability pursuant to the Transaction Documents to compel the purchase of the Application Software by DDS, whether pursuant to the Call Option or on any other basis. (ii) DDS held no ability to itself deal with the Application Software whilst the Licence Research & Commercialisation Agreement remained on foot. (iii) DDS was not in a financial position to: (A) pay royalties due; (B) maintain expenditure required for ongoing research and development of the MTD product whereas the proposed assignee was in a financial position to do so. (iii) DDS was insolvent, the proposed assignee was not. (iv) After an assignment to a solvent assignee Temwell would be in the same position as against DDS as if there has been no assignment, it would retain the same rights but in addition it would have rights against the assignee, mCom Inc. Further, the only reason identified by Temwell as the basis for purportedly refusing consent and/or seeking to withdraw consent on 22 March 2000 was that of seeking to achieve a collateral purpose, namely, that of being "bought out" to which it was not entitled whether as against DDS or as against the proposed assignee.' 8 The first criticism on behalf of Temwell directed to this new paragraph is that no basis is indicated for the allegation in 22B(b)(i) that Temwell: ' …was not in any event entitled to refuse its consent or to withdraw consent … (i) at all.' 9 I infer that it will be contended that the consent was irrevocable as a matter of law, having regard to its nature as revealed by relevant parts of the Transaction Documents, or that, because the purported withdrawal was unreasonable, DDS was entitled to assign without consent by application of the principle which I have already discussed at [5] above in relation to par 22A. 10 If these inferences are correct, it is desirable that the two bases which I have identified be set out in the pleading. Subject to that being done, I shall allow the insertion of subpars 22B(a) and (b)(i). 11 Paragraph 22B(c) contains a positive averment of a specific collateral purpose. It is not clear whether par 22B(c)(ii) is intended to indicated that the presence of that specified collateral purpose was the sole reason why the discretion miscarried or whether it is an allegation that the Discretion Criteria were misapplied or disregarded in some other respect. The particulars appended to par 22B favour the latter interpretation. 12 The fundamental objection to the insertion of par 22B(c) is that opens up a new area of factual investigation going to whether Temwell could, in pursuit of its own legitimate interests and consistently with the Transaction Documents, have withheld or deferred consent to an assignment of the licence to the mCom respondents. I acknowledge the force of this objection but consent or absence of consent to the assignment has always been crucial in this case. The issue of the circumstances in which the consent could be withheld or withdrawn, although only lately exposed, is a real question, and, in accordance with established principle, an amendment should be allowed which enables that question to be tried, provided that the other party is adequately protected against the resultant costs and will not otherwise be irreparably disadvantaged. 13 Counsel for Temwell have criticised the particulars appended to the proposed par 22B as providing insufficient indication of how Temwell's withholding or withdrawal of consent is said to have been unreasonable. That is true insofar as those particulars travel beyond what I have called the positive averment of a specific collateral purpose. However, if the construction of the Transaction Documents for which the mCom respondents contend, is ultimately upheld, the onus, in an evidentiary sense, of showing that its consent was not unreasonably withheld or withdrawn would be on Temwell. Subject to removal of the ambiguity to which I have already referred, I would therefore allow the insertion of the proposed new par 22B(c), without, at this stage, requiring the provision of further particulars. I appreciate that this grant of leave may expand the evidence which Temwell considers it appropriate to adduce. To facilitate its taking that course, if so advised, and to minimise any consequential costs and delay, I shall allow that evidence to be adduced orally without the filing of affidavits and shall permit Mr Fraid to be recalled and further examined orally in chief. Of course, no adverse inference will be drawn solely from his failure, or that of any other deponent, to address earlier the issue which has been made relevant by the amendment for which leave has been granted.

Paragraph 23(b) 14 It is proposed to substitute a new subparagraph in the following terms; '(b) Further: (i) there was no breach by DDS of its contractual obligations to Temwell by reason of the assignment in favour of mCom Inc, irrespective of whether Temwell consented or otherwise to such assignment because Temwell's consent to assignment was not required; (ii) alternatively, to the extent consent to assignment by DDS was required from Temwell, Temwell was only permitted, other than by acting in breach of its contractual obligations to DDS, to exercise the Temwell discretion in relation to consent to assignment in accordance with the Discretion Criteria; (iii) should Temwell exercise or purport to exercise the Temwell discretion other than in accordance with the Discretion Criteria so as to purport to refuse consent; or alternatively, to purport to withdraw consent once given a is now contended then: (A) as between DDS and Temwell, Temwell would be acting in breach of contract; and (B) in such event DDS was not obliged to secure Temwell's consent to assignment as a pre-condition to valid assignment. (iv) In any of the circumstances referred to in (i)-(iii) hereof, given there was no breach of contract by DDS there was no breach induced by the mCom Respondents or any of them.' 15 As I understand it, sub-subpars (i) and (ii) simply restate the assertion in subpars 22A(a) and (b), which I have already discussed. If that understanding is correct, the repleading of those matters in par 23 seems unobjectionable and will be allowed. The remaining subparagraphs seem to assert that a breach by Temwell of its obligations in relation to consent to an assignment operated to excuse what would otherwise have been a breach by DDS of its duty not to assign without consent. Accordingly, it is pleaded, there was no breach of contract by DDS which the mCom respondents could be said to have procured. That pleading also appears to raise a pure question of law. As it seems to me at the moment, it is not a strongly arguable question, but, contrary of the submissions of Counsel for Temwell, I do not regard it as foreclosed by considerations of privity of contract. Consistently with the grant of leave to make similar amendments discussed earlier in this ruling, I shall grant leave to insert the proposed new par 23(b). 16 Although I have not expressly dealt with them, it follows that there should be leave to make the corresponding amendments to the reply to the defence to cross-claim. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Associate: Dated: 4 September 2003 Counsel for the Applicant: Mr C D Golvan SC with Dr S Ricketson

Solicitors for the Applicant: Meerkin & Apel

Counsel for the mCom Respondents: Mr J L Sher QC with Mr J Delany

Solicitors for the mCom Respondents: Minter Ellison

Date of Hearing: 4 September 2003.

Date of Ruling: 4 September 2003