McLean v Marshall

• Jurisdiction: New Zealand
• Judge: GENDALL J
• Judgment Date: 11 July 2014
• Neutral Citation: [2014] NZHC 1624
• Docket Number: CIV-2013-412-000188
• Court: High Court
• Date: 11 July 2014

Between

Dwf Mclean

First Plaintiff

Dwf Mclean And G H Thorp As Trustees Of The Mclean Family Trust

Second Plaintiffs

and

R R Marshall

Defendant

[2014] NZHC 1624

CIV-2013-412-000188

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

Application for damages for breach of contract — parties had entered into a joint venture agreement for the development of a software system — defendant gave three months’ notice of termination — plaintiff alleged defendant failed to pay his one-half share of trading losses incurred in testing the software, failed to provide source and took steps to prevent the plaintiff from using the software by ‘locking’ the System via the insertion of a ‘malicious bug’ — claimed losses for: an inability to personally trade any version of the System; inability to demonstrate any version of the System to interested parties and being unable to commercially exploit the System because of the refusal to provide the source codes — claimed loss of $636,000 — whether the defendant had been obliged to provide the source code — whether the plaintiff had established causation in respect of the loss of chance claim.

Appearances:

L A Andersen for Plaintiff

Defendant Appears in Person

JUDGMENT OF GENDALL J

Table of Contents

	Para No
Introduction	[1]
The claim	[7]
The evidence for Mr McLean	[11]
Mr McLean	[11]
Mark Hook	[21]
The evidence for Mr Marshall	[22]
Mr Marshall	[22]
Pauline Steedman	[24]
Annette Marshall	[25]
The joint venture element	[26]
Analysis of the claimed breaches	[30]
Preliminary	[30]
Trading losses	[32]
Failing to provide source code	[36]
The so-called malicious “bug”/code	[39]
Analysis of quantum	[40]
Preliminary	[40]
Trading losses	[41]
Malicious code	[42]
Restoration of code	[45]
Loss of chance	[47]
Result	[51]
Costs	[54]

Introduction

1 On or around 12 March 2007 the first plaintiff (Mr McLean) and the defendant (Mr Marshall) entered into a joint venture agreement (the Agreement) which concerned the development of a software system which would enable automated trading of foreign exchange (the System).

2 On 12 March 2012 Mr Marshall gave three months notice under the Agreement to terminate the Agreement as from 12 June 2012 (the Termination Date). Mr Marshall and in the pleadings the second plaintiff (the Trust) say that at the Termination Date there was “significant international interest in the purchase of the system and/or the right to use the system under license.”

3 Mr McLean alleges that Mr Marshall has breached the terms of the Agreement by:

• (a) Failing to pay his one-half share of trading losses incurred in testing the software.

• (b) Failing to provide Mr McLean with the source code for the System at regular intervals during and on termination in contravention of the Agreement.

• (c) Taking steps to prevent Mr Marshall from using the software by ‘locking’ the System via the insertion of what Mr Marshall terms a ‘malicious bug’.

4 As a result of this, Mr McLean alleges that he has suffered loss:

• (a) from an inability to personally trade any version of the System.

• (b) through an inability to demonstrate any version of the System to various interested parties.

• (c) from being unable to commercially exploit the System following the termination by Mr Marshall because of the refusal to provide the source codes.

• (d) as a result of being unable to amend the source code to “take into account the changing connectivity requirements of the parties that power the System, rendering it useless.”

5 As a result, Mr McLean claims to have suffered loss totalling $635,991.87. This comprises $4,997.25 in unpaid trading losses, $12,961.54 being the cost of reviewing and discovering the malicious software, $103,033.08 being the cost of identifying issues with the undocumented source code and restoring it to its position as at termination, and loss of chance claims involving potential lost opportunity to market the system, lost IP sales and lost trading opportunities totalling $515,000.

6 As a further and alternate claim, the Trust alleged that Mr Marshall owed it $17,896.90 as advances made to Mr Marshall by Advanced Trading Platforms Ltd (ATP) that have not been repaid together with Judicature Act 1908 interest. This claim was subsequently withdrawn by Mr McLean and the Trust following settlement being reached between all parties. The matter is therefore concluded and is not addressed in this judgment.

The claim

The Agreement

7 The starting point in assessing any contractual claim must be the constituting document itself, here the Agreement. For convenience I replicate below the relevant aspects of the Agreement:

• 1.1 “CMS API” means computer software that connects to an internet trading platform made available under license by Commodity Market Systems of the USA.

  …

• 1.3 “Source Code” means the computer program instructions written by Rob consisting of a set of instructions or statements in both machine readable and human readable media and the associated documentation.

• 1.4 “The System” means the Source Code, together with in the initial instance the CMS API, which has been and will continue to be enhanced by the Partners to include their particular trading requirements.

  …

4 Resulting Source Code

• 4.1 As the System is developed Rob [Mr Marshall] will progressively provide to Wayne [Mr McLean] an updated executable registered copy of The System.

• 4.2 Rob will place a copy of the resulting Source Code in an agreed secure location accessible to both he and Wayne.

• 4.3 Pre Initial Completion date Rob will maintain the issuing of executable copies of The System to ensure that only he and Wayne receive a copy.

• 4.4 The Partners will equally share in any ownership of The System and its associated intellectual property, excluding that which is licensed from CMS or any other provider of trading platform APIs.

5 Use of the System Post Initial Completion Date

• 5.1 The Partners agree that each may use their individual copy of the System for their personal trading purposes as they so decide, but they shall not be entitled to sell, license or otherwise make use of their respective copy of The System unless by mutual agreement to do so.

• 5.2 It is the Partners’ intention to:

  • (i) continue to work together to ensure that the System meets their on-going trading requirements and to enhance The System, and;

  • (ii) jointly deposit funds with CMS and trade foreign exchange on an agreed basis using The System, and;

  • (iii) use as much of The System as possible and develop a trading system that will operate automatically on various trading platforms, especially those of entities that have a very high credit rating for deposits, and;

  • (iv) jointly enter into agreements with third parties to expand the use of the System, such as a Managed Fund, particularly is association with Infoscan Limited, Mr Peter Bull and possibly Financial Markets Trading Limited.

6 Responsibilities of the Partners Post Initial Completion Date

• 6.1 Rob will maintain the issuing of executable copies of The System to the Partners and to any third parties and he will inform Wayne as to how to issue executable copies.

• 6.2 Rob will continue to write the Source Code for any further enhancements of The System.

• 6.3 Wayne will promote The System to his financial market contacts as he and Rob so agree.

• 6.4 Wayne will study and recommend where The System should best be located from a taxation point of view.

7 Revenue, Costs and Expenses

• 7.1 The Partners shall equally share in any income received under clause 5.2 and for example from royalties should the System be licensed to third parties.

• 7.2 Should the Partners agree to sell an executable copy of the System or sell the System outright then they will share any revenue on the basis of Rob receiving sixty percent of any revenue and Wayne the balance.

• 7.3 The Partners shall equally bear the costs of operating the System, purchasing hardware to do so, etc.

• 7.4 The Partners shall bear their own legal and accounting costs and expenses of an incidental to this Agreement.

8 Co-operation in good faith

• 8.1The Partners agree with each other that;

  • (i) at all times they shall actively co-operate together in the profitable use and expansion of The System, and that they shall at all times act towards each other faithfully and honestly.

  • (ii) they shall further document their business arrangement by way of a more extensive agreement if considered necessary due to the use made of The System.

9 Mutual Non-compete

• 9.1 The Partners hereby covenant that they will not, save for any activity that is currently carried out by either of them, set up a structure that in any way competes with or mirrors the activities of this agreement.

  …

11 Termination

…

• 11.2 Any sales of the System including royalties (if any) from sales shall continue to be shared by the Partners in the proportions set out in clause 7.0.

• 11.3 Either partner may terminate this joint venture by giving three months written notice to the other partner.

  When one partner terminates the joint venture by giving such written notice to the other, each partner shall retain his respective rights to the ownership of the System and shall be able separately from the other partner to use and sell the System in its current format at the time of termination, however

  • 11.3.1 No payment shall be required by either partner to the other for their own personal use of the System.

  • 11.3.2 Revenue from any future sales of that version of the System shall continue to be apportioned as per clause 7.2.

  • 11.3.3 For any continuing benefit to the partner giving notice of any pre termination agreement made in respect of clause 5.2, the partners must negotiate...