Detection Services Pty Ltd v Pickering

• Jurisdiction: New Zealand
• Judge: Gilbert J
• Judgment Date: 21 November 2019
• Neutral Citation: [2019] NZCA 575
• Docket Number: CA30/2019
• Court: Court of Appeal

Between

Detection Services Pty Limited

First Appellant

Detection Solutions Pty Limited

Second Appellant

and

Christopher Lorraine Pickering

First Respondent

Aqatar Limited

Second Respondent

[2019] NZCA 575

Court:

Gilbert, Duffy and Wylie JJ

CA30/2019

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Equity, Intellectual Property — joint venture — whether principle of “clean hands” applied

Counsel:

M A Corlett QC, R D Butler and J Nedeljkov for Appellants

A R B Barker QC and J K Grimmer for Respondents

• A The appeal is allowed.

• B The cross-appeal is dismissed.

• C The proceeding is remitted to the High Court to determine the quantum of damages payable to the appellants.

• D The Costs judgment is set aside. Costs in the High Court are to be assessed by that Court in the light of this judgment.

• E The respondents are to pay the appellants costs for a standard appeal on a band A basis and usual disbursements. We certify for second counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Gilbert J)

Table of contents

Introduction	[1]
Appellants' claim	[9]
Respondents' defence and counterclaim	[14]
High Court judgment	[16]
Grounds of appeal	[24]
Grounds of cross-appeal	[25]
The issues	[27]
Did the respondents breach their obligations to the appellants?
Submissions on appeal	[28]
Analysis	[31]
Was the High Court correct to deny relief to the appellants by applying the clean hands maxim?	[42]
Submissions on appeal	[49]
Analysis	[51]
Was the High Court correct to dismiss the respondents' counterclaim for breach of contract?
Submissions on appeal	[58]
Analysis	[63]
What, if any, relief should be given?	[66]
Result	[68]

Introduction

1 This appeal and cross-appeal illustrate the difficulties that can arise when long-standing friends enter into a business venture without legal advice, formal documentation, or any clear understanding of their respective rights and obligations.

2 Stephen Simmons, who lives in Sydney, is the founder of the Detection Services group of companies which specialises in detecting leaks in water pipes. The group comprises the two appellant companies, both based in Australia, and two related New Zealand companies, Detection Services Ltd and Detection Solutions Ltd. For convenience, we will refer to these companies collectively as “Detection Services”. Detection Services' customers include various Australian water authorities responsible for public water supply.

3 Christopher Pickering, who lives in Auckland, is the founder of the second respondent, Aqatar Ltd, a company incorporated in New Zealand in January 2010. Mr Pickering has expertise in computer software development.

4 Mr Simmons and Mr Pickering were long-standing friends until they fell into dispute over ownership of a new computer-controlled leak detection system, which the High Court found was designed and built for Detection Services in a joint venture between the parties. 1 The system was intended to be used by Detection Services to detect leaks in high-pressure water mains. In very general terms, the system was a refinement of existing technology involving the deployment of a hydrophone attached to the head of a cable into the main. As the hydrophone travels down the main with the water flow it transmits acoustic changes to the operator indicating the location of a leak. Mr Pickering proposed that the new system be controlled using a computer that would display and record the data collected. The system is obviously far more complex and sophisticated than indicated by this brief description, but it will suffice for present purposes.

5 The High Court found that the joint venture was formed some time prior to December 2008. A year later, in late 2009, Mr Pickering was employed as the general

manager of Detection Services. He took up this position from January 2010, reporting to Mr Simmons as managing director. Mr Pickering developed and built in New Zealand, mostly in his own time, a prototype of the new system with technical assistance from the appellants in Australia. Mr Pickering met the cost of the development from his own resources, but the High Court found that Detection Services was to reimburse him for these costs and pay reasonable recompense for his time. Mr Pickering was to retain the intellectual property rights in the computer software and interface

6 Upon completion of the prototype in mid-2011, Mr Simmons sought urgent delivery of it to Australia for testing, refinement and immediate commercial use, as had always been the parties' intention. However, at that stage, Mr Pickering claimed sole ownership of the entire system and refused to deliver it to Detection Services until agreement was reached on price and other terms governing its future use. The parties were unable to reach agreement. Lawyers became involved. The relationship between Mr Simmons and Mr Pickering broke down irretrievably leading Mr Simmons to terminate Mr Pickering's employment as general manager of Detection Services. Mr Pickering placed the system in storage and there it remains. Mr Simmons and Mr Pickering have not only lost their friendship, their efforts have come to nought. The mutual benefit they aspired to has been replaced by a legal battle over who should bear the losses.

7 Detection Services subsequently developed a new system. They then issued proceedings against the respondents in the High Court claiming the costs of developing the new system and lost profits suffered in the interim. The respondents counterclaimed in contract for the costs they incurred in developing the original system. Detection Services' claims and the respondents' counterclaims all failed following trial in the High Court. The appellants appeal and the respondents cross-appeal.

8 To set the context for the appeal, we commence by briefly referring to the salient features of the pleadings. As will be seen, the parties' respective cases in the High Court reflected the lack of clarity about the legal nature of their relationship and their polarised viewpoints on core factual issues. There was even uncertainty as to which parties were involved in the relationship.

Appellants' claim

9 The statement of claim listed five plaintiffs, Mr Simmons and all four companies in the Detection Services group, and three defendants, being the two respondents and an electronics expert engaged by them to carry out work on one component of the system. At the commencement of the trial, the appellants advised the Court that the two New Zealand companies and Mr Simmons should not have been included as plaintiffs (because none of them had suffered any loss) and the claim against the third defendant was no longer pursued.

10 The appellants advanced five causes of action in their statement of claim: breach of fiduciary duty; estoppel; breach of contract; misuse of confidential information; and division of co-owned property pursuant to s 339 of the Property Law Act 2007. However, at the commencement of the trial, counsel advised that only the first two of these, breach of fiduciary duty and estoppel, were still pursued.

11 The central thesis of the appellants' claims was that the parties engaged in a joint venture to develop a leak detection system for Detection Services. The system was initially called “DPX” by Mr Pickering but Mr Simmons later called it “Inscan”. The appellants claimed that DPX and Inscan were one and the same system whereas, as we will come to, the respondents maintained they were separate systems, developed independently. The appellants claimed the parties agreed to develop the system in New Zealand rather than in Australia because this was more cost-effective. The appellants asserted that the parties owed fiduciary duties to each other in the context of the alleged joint venture, having reposed trust and confidence in one another.

12 The appellants claimed the respondents breached their fiduciary duties in various ways in mid-2011, including by asserting sole ownership of the system following its completion, refusing to allow Detection Services to have access to it and withholding disclosure of records and information regarding its development. The appellants acknowledged that Mr Pickering was to retain the intellectual property rights in the computerised control componentry. The appellants characterised this feature as “not necessary” for the use of the system but “useful to have”.

13 The appellants claimed that as a result of the respondents' wrongful assertion of sole ownership and refusal to deliver the system to Detection Services, they were unable to use the system, exploit it commercially or develop it further. They sought judgment for the costs of developing the new system, said to be AUD 924,000, and loss of profits of AUD 603,880.

Respondents' defence and counterclaim

14 The respondents disputed these core allegations. They contended that the DPX and Inscan systems were entirely separate. They claimed that Mr Pickering developed the DPX system independently of Mr Simmons and Detection Services. They said Inscan was the name given by Mr Simmons to the separate system Detection Services proposed to develop with City West Water, a government-owned retail water business in Melbourne. The respondents denied there was any agreement between the parties for the joint development or joint use of the DPX system. They contended that Detection Services had no right to the DPX system and that they were within their rights to refuse to deliver it pending payment by Detection Services of “all costs incurred by Mr Pickering and Aqatar in developing the system, and an amount for the purchase of his intellectual property and any restraint on further activities by Mr Pickering or Aqatar, and compensation for the time and effort in...