Telecom New Zealand Limited v Aldous Limited (in receivership) [2012] NZHC 1501 (28 June 2012)

Last Updated: 22 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-3513 [2012] NZHC 1501

BETWEEN TELECOM NEW ZEALAND LIMITED Plaintiff

AND ALDOUS LIMITED (IN RECEIVERSHIP) Defendant

Hearing: 26 June 2012

Appearances: S E Fitzgerald and R H Carajannis for Plaintiff

D M Hughes and L M Van for Defendant

D G Collecutt for Party to be served

Judgment: 28 June 2012

_{JUDGMENT OF PETERS J}

This judgment was delivered by Justice Peters on 28 June 2012 at 5:15 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors: Russell McVeagh, Auckland:

[e-mail] / [e-mail]

Kensington Swan, Auckland

[e-mail] / [e-mail]

_{Simpson Dowsett Mackie, Auckland:} [e-mail]

_{Counsel: D G Collecutt, Auckland:} [e-mail]

TELECOM NEW ZEALAND LIMITED V ALDOUS LIMITED (IN RECEIVERSHIP) HC AK CIV-2012-404-

3513 [28 June 2012]

[1] Telecom New Zealand Limited (“Telecom”) has commenced proceedings against Aldous Limited (in Receivership) (“Aldous”) and has sought summary judgment on its claim. Telecom has also made an application for interim relief and it is that latter application with which I am concerned.

[2] In its application for interim relief, and pending further order of the Court, Telecom seeks orders that Aldous refrain from removing Updates and Source Code and printed and/or electronic publications relating to the same from Aldous’ possession and/or control. Aldous opposes the application, as does a secured creditor of Aldous, namely J Piasecki and others (“secured creditor”). The receivers of Aldous are Mr M S Lawrence and Mr C C McCullagh and they were appointed by the secured creditor in April 2012.

[3] Telecom’s application for interim relief came before Courtney J on 22 June

2012 and the Judge made orders largely in terms of the application, pending the hearing on 26 June 2012. I continued those orders at the conclusion of the hearing on 26 June 2012.

[4] After Telecom commenced proceedings, counsel for Aldous filed a protest to jurisdiction. That protest was based on dispute resolution provisions, not only in the agreement to which I refer below, but also in other agreements between Telecom and Aldous. It was agreed at the hearing that it was not necessary for me to consider that protest for the purpose of determining Telecom’s application.

Background

[5] In 2003 Aldous and Telecom entered into an agreement, referred to as the

Enterprise Software Licence Agreement (“agreement”).

[6] Pursuant to the terms of the agreement, Aldous granted to Telecom a licence

(“licence”) which allowed Telecom to run and use copies of particular software

(“software”), and to modify the software or merge it with other software.[1] The parties agreed that licence was perpetual and irrevocable.

[7] The software has been modified regularly since 2003. These alterations are referred to as “updates”. Telecom’s estimate is that, in the last four years, it has spent more than $7,000,000.00 on updates alone, leaving aside licence and other fees. Counsel for Telecom submits that the software in its present form is entirely bespoke to Telecom.

[8] Telecom’s evidence is that the software as it now stands is essential to the running of its CDMA network and that it is also essential that Telecom, with or without the assistance of third parties, be able to modify the software in the future, so that it remains current. Telecom is only able to modify the software if it has the source code for the latest update of the software and associated documentation, which I refer to as “the materials”.

[9] The agreement contained provisions requiring Aldous to enter into an agreement with an escrow agent, pursuant to which Aldous would lodge with the agent copies of the materials as they changed from time to time. Telecom, Aldous and an escrow agent entered into such an agreement in 2007 (“escrow agreement”). The terms of that agreement required Aldous to deliver the materials to the escrow agent, and to do so within a matter of 10 days or so of each update. The escrow agreement entitled Telecom to demand the release of the materials if, as has occurred, receivers were appointed to Aldous.

[10] There is a dispute between the parties as to whether the escrow agreement remained on foot after June 2008, when the parties entered into another agreement. For present purposes I propose to proceed on the basis that the escrow agreement continued in effect, as I am not satisfied that the June 2008 agreement brought it to an end.

[11] As it has turned out, Aldous did not lodge the materials with the escrow agent. After the receivers were appointed in April 2012, Telecom asked the escrow

agent to release the materials. The escrow agent did not have them for the most recent update, or for anything close to it and, after a period of discussions, Telecom issued its proceedings.

[12] The receivers and secured creditor oppose any order that Aldous should deliver the materials to the escrow agent or to Telecom. The receivers wish to dispose of Aldous’ assets and distribute the sale proceeds to the company’s creditors. The secured creditor has made substantial advances to Aldous and naturally seeks to recover as much of its debt as possible. The materials that Telecom requires are a significant asset because of their importance to Telecom.

[13] Aldous granted security to the secured creditor in the form of a debenture dated 16 April 2009 and a General Security Agreement (“GSA”) in March 2010. The GSA is on the standard Auckland District Law Society GSA form 6301. The secured creditor perfected its security interest by registering the debenture and the GSA on the Personal Property Securities Register. Although the agreement between Telecom and Aldous contains provisions which might be read as providing that Telecom owns the materials and/or underlying intellectual property, the receivers and secured creditor submit that the secured creditor has a (perfected) security interest in the same, which interest defeats any rights Telecom may claim based on the contractual provisions. It is likely that issues will arise at trial as to who has priority to the materials that Telecom seeks.

[14] I note also that the receivers have raised another issue, namely that the staff with the expertise to copy the source code and documentation that Telecom seeks ceased to be employed as of 25 June 2012. I do not place great weight on that objection, because Telecom has said that it is willing to meet the costs of whatever work is required to copy the materials. If may be prudent for the parties to co- operate to ensure that the relevant staff assemble the materials now, while the staff can be contacted and memories are fresh.

[15] Telecom contends that there is a serious issue to be tried and that the balance of convenience lies in its favour.

Serious issue to be tried

[16] I am satisfied that there a serious issue to be tried.

[17] Telecom’s case is that Aldous’ obligations to lodge the materials with the escrow agent are clear, that there is no dispute that Aldous breached those obligations, and that, had Aldous done that which it was obliged to do, Telecom would have the materials it requires. Telecom’s case is that the Court would be likely to grant an order for specific performance against Aldous and that the receivers’ appointment does not preclude such an order.

[18] The receivers and secured creditor acknowledge Aldous breached its obligations, subject to the issue referred to in [10] above. They submit, however, that there is no real prospect of the Court making the orders that Telecom seeks because of the matters referred to in [13] above. I accept that submission has force, but it is impossible at present to determine whether it will be sufficient to defeat Telecom’s case.

Balance of convenience

[19] For the following reasons I am also satisfied that at present the balance of convenience lies with Telecom.

[20] First, the relief that Telecom seeks may be rendered nugatory if the injunction is not granted. Counsel for Aldous informed me that the receivers have not yet agreed a sale but they might do so at any time, and on terms that might affect their ability to comply with any order that the Court might make subsequently.

[21] Secondly, Telecom has given an undertaking in damages. That undertaking protects the position of the company and secured creditor. There is no corresponding protection for Telecom if the order is not made and the assets are sold. Damages would not be an adequate remedy for Telecom.

[22] Thirdly, the Court is able to hear the proceeding quickly and Telecom has undertaken to do all it can to ensure the prompt resolution of the dispute. The parties could have a hearing before the end of August 2012, assuming the case would not take more than two days. Accordingly, any delay to the receivers and the secured creditor will not be lengthy and, as I have said, Telecom has given an undertaking in damages.

[23] Counsel for Aldous submitted that Telecom should be denied interim relief because it must be taken to have known of Aldous’ failure to comply with its obligation to deposit the materials with the escrow agent. That is because the agent was obliged to notify Telecom on receipt of materials from Aldous and there cannot have been such notification. I accept that what Telecom knew or should have known may be relevant in the substantive proceedings but it does not dissuade me from granting the relief Telecom now seeks.

Result

[24] I make orders in terms of Telecom’s interlocutory application on notice for interim orders dated 22 June 2012, with the exception of the order sought in paragraph 1(b) of the application. Costs are reserved.

[25] If the parties wish to secure a hearing date prior to the end of August 2012, please would they file a memorandum promptly as to the estimated hearing time. Directions can follow shortly thereafter.

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M Peters J

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[1] Enterprise Software Licence Agreement 21 March 2003 Special Contractual Provisions, cl 1.1.