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High Court of New Zealand Decisions |
Last Updated: 20 December 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2015-404-003135
[2018] NZHC 3310 |
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BETWEEN
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DETECTION SERVICES LIMITED
First Plaintiff
DETECTION SOLUTIONS LIMITED
Second Plaintiff
DETECTION SERVICES PTY LIMITED
Third Plaintiff
DETECTION SOLUTIONS PTY LIMITED
Fourth Plaintiff
STEPHEN CARL JOHN SIMMONS
Fifth Plaintiff
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AND
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CHRISTOPHER LORRAINE PICKERING
First Defendant
AQATAR LIMITED
Second Defendant
JAKE VAN DER PEYL
Third Defendant
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Hearing:
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10 – 19 September 2018
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Appearances:
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M Corlett QC and R Butler for the Plaintiffs
A Barker QC and J Grimmer for the Defendants
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Judgment:
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14 December 2018
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JUDGMENT OF WOOLFORD J
This judgment was delivered by me on Friday, 14 December 2018 at 1.00 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
DETECTION SERVICES LIMITED v PICKERING [2018] NZHC 3310 [14 December 2018]
TABLE OF CONTENTS
The law – fiduciary obligations [12]
Did fiduciary obligations arise in the present case? [25]
The relationship between the parties [25]
Did the parties’ relationship give rise to fiduciary obligations? [39]
Estoppel by representation [70]
Background
[1] The fifth plaintiff, Stephen Carl John Simmons, and the first defendant, Christopher Lorraine Pickering, were once good friends. They worked together from around 2007 to develop a leak detection system for use in high pressure water mains. The association between the parties got even closer when Mr Simmons employed Mr Pickering as General Manager of his companies (Detection Services group) in January 2010.
[2] Unfortunately, they had a falling out in 2011 and Mr Simmons fired Mr Pickering. The dispute between them revolved around ownership of the leak detection system. They were unable to agree who was to have the system and it was placed in storage. It remains there today.
[3] Mr Simmons proceeded to build a new leak detection system. He and his companies now sue Mr Pickering and his company for the cost of building the new system, including componentry and staff costs, as well as for loss of profits. In total,
$3,165,850 is claimed. Mr Pickering counterclaims for $257,170, which he says is the sum Mr Simmons agreed but refused to pay for the original leak detection system.
[4] I expand on the facts and make findings where appropriate in my reasons below.
Parties
[5] The statement of claim names five plaintiffs. At the outset of the hearing, counsel acknowledged only two suffered loss and are the proper plaintiffs for the purpose of the proceedings:
(a) The third plaintiff, Detection Services Pty Ltd, is the company which incurred staff time on the rebuild and is alleged to have suffered the loss of profits that are claimed.
(b) The fourth plaintiff, Detection Solutions Pty Ltd, is the company which incurred most of the costs to build the new leak detection system.
[6] Likewise, counsel advised the Court the plaintiff no longer sought judgment or relief against the third defendant, Jake Van Der Peyl, who has played no part in the proceedings.
[7] There will accordingly be an order striking out the first, second and fifth plaintiffs and the third defendant under r 4.56(1)(a) of the High Court Rules.
Causes of action
[8] The statement of claim originally contained causes of action for breach of contract and misuse of confidential information. These are no longer pursued. The only remaining relevant causes of action are the claims for breach of fiduciary duty and estoppel brought by the third and fourth plaintiffs, Detection Services Pty Ltd and Detection Solutions Pty Ltd, against the first and second defendants, Mr Pickering and his company, Aqatar Ltd.
[9] The causes of action pleaded in the counterclaim are breach of contract and estoppel.
Employment proceedings
[10] Mr Pickering filed a claim for unjustified dismissal and payment of a bonus in the Employment Relations Authority. The claim was heard over nine days in 2012. In a decision dated 31 July 2012, the Authority found Mr Pickering had been unjustifiably dismissed because Mr Simmons could not dismiss Mr Pickering for refusing to hand over the leak detection system as the system had been jointly developed. Furthermore, the development of the leak detection system was not part of Mr Pickering’s employment contract. Any work undertaken on the system by Mr Pickering was, therefore, not as an employee.
[11] The Authority also concluded Mr Pickering had contributed to his dismissal because he had incorporated his own company, Aqatar Ltd, without advising
Mr Simmons, failed to send invoices to Mr Simmons, and asserted he or Aqatar alone owned all the rights in the system. The award for unjustified dismissal was therefore reduced by 50 per cent.
The law – fiduciary obligations
[12] There are two broad types of circumstances in which the issue of the existence of fiduciary obligations will arise. In the first, the relationship is of a kind which, by its nature, is recognised as inherently fiduciary.1 These inherently fiduciary relationships include that of solicitor and client, trustee and beneficiary, principal and agent, and doctor and patient.2 However, an inherently fiduciary relationship may nevertheless involve duties which have no fiduciary element.3
[13] Aside from the established categories, any relationship, whether contractual or otherwise, may potentially give rise to fiduciary obligations. Whether it did so will depend on the particular aspects of the relationship. The “true principle” is for there to be fiduciary obligations, the “circumstances must be such that one party is entitled to repose and does repose trust and confidence in the other”.4 That is the test.
[14] In the present case, Mr Simmons says there was a joint venture relationship. In Chirnside v Fay, Blanchard and Tipping JJ said:5
The essence of a joint venture which is not yet contractual is that it is an arrangement or understanding between two or more parties that they will work together towards achieving a common objective. It is fallacious to think that there can be no joint venture unless and until all the necessary details have been contractually agreed. A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective. Each party is then proceeding on the basis that he or she is acting in the interests of all or both parties involved in the arrangement or understanding. A relationship of trust and confidence thereby arises; each party is entitled to expect from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be. This in essence is the position
1 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73].
2 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73].
3 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [72].
4 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [85].
5 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [91].
which was reached between Messrs Chirnside and Fay. Neither of them was thereafter entitled to act solely in his own interests.
[15] A joint venture relationship is, however, not inherently fiduciary. As the Supreme Court said in Paper Reclaim Ltd v Aotearoa International Ltd, the term “joint venture” is to be applied with caution.6 It is a wide term that can apply to a range of circumstances. This is evident in the following statement from the High Court of Australia:7
The term “joint venture” is not a technical one with a settled common law meaning. As a matter of ordinary language, it connotes an association of persons for the purposes of a particular trading, commercial, mining or other financial undertaking or endeavour with a view to mutual profit, with each participant usually (but not necessarily) contributing money, property or skill. Such a joint venture (or, under Scots’ law, “adventure”) will often be a partnership. The term is, however, apposite to refer to a joint undertaking or activity carried out through a medium other than a partnership: such as a company, a trust, an agency or joint ownership.
[16] Then, in Amaltal Corp Ltd v Maruha Corp, the Supreme Court said the characterisation of a commercial arrangement as a joint venture can be unhelpful as a guide to whether the parties owed each other fiduciary obligations.8 The determination as to whether the parties owed fiduciary obligations remains heavily fact dependent.9 As the English Court of Appeal said in Ross River Ltd v Waveley Commercial Ltd:10
From these it is clear that, although the analogy with a partnership may suggest that fiduciary duties are owed in the context of a joint venture, the phrase “joint venture” is not a term of art either in a business or in a legal context, and each relationship which is described as a joint venture has to be examined on its own facts and terms to see whether it does carry any obligations of a fiduciary nature.
[17] The central question remains whether the circumstances were such that one party was entitled to, and did, repose trust and confidence in the other. In Curtis v Gibston, the Court of Appeal set out factors relevant to that determination:11
Relevant factors will include the degree of common purpose established between the parties, the stage in the venture that has been reached and the extent to which the parties have reposed trust and confidence in each other. In
6 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31].
7 United Dominions Corporation Ltd v Brian Pty Ltd [1985] HCA 49; (1985) 157 CLR 1 at 10.
8 Amaltal Corp Ltd v Maruha Corp [2007] NZSC 40, [2007] 3 NZLR 192 at [20].
9 Curtis v Gibson [2011] NZCA 373 at [79].
10 Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910 at [34].
11 Curtis v Gibson [2011] NZCA 373 at [80].
general, some positive steps towards the implementation of a joint plan will be required before the Court will be willing to find that fiduciary obligations have arisen. And, as Finn J observed in Gibson Motorsport Merchandise Pty Ltd v Forbes it must be shown that the circumstances are such as to require the parties to subordinate their self interest to joint interest.
[18] While the existence of any duty is ultimately fact-dependent, the distinguishing obligation of a fiduciary is that of loyalty.12 In Bristol & West Building Society v Mothew, Millett LJ provided a non-exhaustive list of the facets of the duty of loyalty:13
The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.
[19] As Millett LJ said in Bristol & West Building Society v Mothew, fiduciaries must act in good faith. There is, however, academic debate as to whether the duty of good faith is fiduciary in nature. The duty is not peculiar to fiduciaries.14 The learned authors of Snell’s Equity state:15
Duties of good faith are frequently recognised without any suggestion that the responsibility to act in good faith arose because of the presence of a fiduciary relationship or on the basis of fiduciary principles. The duty of good faith is, therefore, not peculiar to fiduciaries and ought for that reason to be classified in some manner other than as a fiduciary duty.
[20] Recently, in Al Nehayan v Kent, Leggatt LJ held it did not follow from the conclusion no fiduciary duties were owed that the person’s “entitlement to pursue his own self-interest was untrammelled”.16 The Judge considered a duty of good faith
12 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [15].
13 Bristol & West Building Society v Mothew [1998] Ch 1 (CA) at 18.
14 John McGhee (ed) Snell’s Equity (33rd ed, Sweet & Maxwell, London, 2015) at [7-010].
15 John McGhee (ed) Snell’s Equity (33rd ed, Sweet & Maxwell, London, 2015) at [7-010].
16 Al Nehayan v Kent [2018] EWHC 333 (Comm) at [167].
could be implied into a certain category of contract—relational contracts. Specifically:17
...a category of contract in which the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract. Such ‘relational’ contracts involve trust and confidence but of a different kind from that involved in fiduciary relationships. The trust is not in the loyal subordination by one party of its own interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith.
[21] Leggatt LJ considered the implication of a duty of good faith in the contract was essential to give effect to the parties’ reasonable expectations and satisfied the business necessity test.18 The Judge said:
In my view, the implication of a duty of good faith in the contract is essential to give effect to the parties’ reasonable expectations and satisfies the business necessity test which Lord Neuberger in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC 742, [2015] UKSC 72 at paras 16 to 31 reiterated as the relevant standard for the implication of a term into a contract. I would also reach the same conclusion by applying the test adumbrated by Lord Wilberforce in Liverpool City Council v Irwin [1976] AC 239 at 254 for the implication of a term in law, on the basis that the nature of the contract as a relational contract implicitly requires (in the absence of a contrary indication) treating it as involving an obligation of good faith.
[22] A majority of the New Zealand Court of Appeal recently said: “the correct approach to the issue of implication is currently uncertain”.19 Kós P, however, said:20
The essential articulated rules for implication of terms remain. These recognise that with more substantial modification being sought to the express words of a contract, more substantial hurdles need to be crossed. So, Belize Telecom does not alter the fundamental point that implication is not to be deployed to improve a contract, but simply to ascertain the meaning all parties intended the contract to bear.
[23] Regardless of the precise approach to implication, I consider a duty of good faith can potentially be implied into joint venture contracts as held by Leggatt LJ. Obviously, whether it should be implied will depend on the particular facts. But a
17 At [167].
18 Al Nehayan v Kent [2018] EWHC 333 (Comm) at [174].
19 Ward Equipment Ltd v Preston [2018] NZCA 444, [2018] NZCCLR 15 at [47].
20 Ward Equipment Ltd v Preston [2018] NZCA 444, [2018] NZCCLR 15 at [94].
relational contract, as described by Leggatt LJ, seems like an obvious case for such implication.
[24] As to the content of the duty of good faith, the Full Court of the Federal Court of Australia said in Paciocco v Australia and New Zealand Banking Group Ltd:21
The usual content of the obligation of good faith ... is an obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
Did fiduciary obligations arise in the present case?
The relationship between the parties
[25] Mr Simmons says there was a joint venture between himself and Mr Pickering together with their related companies. Mr Pickering does not accept there was any joint venture, although in cross-examination he accepted there was a lot of sharing of information:
Q I take it from your answer that, given that there was sharing of information and discussions between the parties, you do accept that it was a joint development?
A I accept that there was a lot of sharing of information to ensure that the equipment, once purchased by DS, was going to be fit for purpose. And in that process; if you describe that process as a “joint development”, then a joint development correctly describes it.
[26] I have no doubt there was a joint venture between the parties to design and build a leak detection system for Detection Services group. However, as noted, whether fiduciary obligations were owed turns on the particular aspects of the parties’ relationship. I turn to that.
[27] Mr Simmons and Mr Pickering were good friends. Mr Simmons was based in Australia. He shared ideas with Mr Pickering. Mr Pickering was subsequently
entrusted with and voluntarily assumed responsibility for developing the leak detection system in New Zealand.
[28] At a base level, each stood to gain. The benefit for Mr Simmons was to exploit commercial opportunities in Australia and New Zealand for leak detection in high pressure water mains. The benefit for Mr Pickering was in being paid for his time and effort (in addition to his salary he was receiving as General Manager of Detection Services group) in developing the system and in licensing the computer technology, in respect of which he had intellectual property rights, as well as possibly using the computer technology in other areas such as deep-water surveys of ocean vents, a particular interest of Mr Pickering’s.
[29] Mr Pickering had some computer skills and at an early stage developed the computer software and interface for the system. Mr Simmons has always acknowledged that Mr Pickering had intellectual property rights to the computer software and interface.
[30] When it came to building the system itself, Mr Pickering did not, however, have any particular engineering skills. As a result, he was given access to confidential information, including particular designs for the various componentry and interacted with Detection Services group engineering staff and with third party suppliers. I am satisfied such sharing of information was much more than Mr Pickering ensuring the system he was building met the requirements of the customer, as Mr Pickering claims.
[31] The evidence shows Mr Pickering was trusted in the business. This was the case even before he commenced employment as General Manager of Detection Services group in January 2010. An example is a meeting with City West Water in Sydney in September 2008 attended by both Mr Simmons and Mr Pickering (who at that time was employed by an office furniture company) in which joint development of a mains water survey system was proposed, ownership of which could include all parties.
[32] Another example is a subsequent business proposal dated December 2008 prepared by Mr Pickering. It is significant that, in the business proposal, Mr Pickering
acknowledges the existence of a joint venture. He states the design of the leak detection system was Mr Simmons’ idea and he had joined Mr Simmons “to commercialise the venture”. The proposal may have been primarily prepared for a university assignment, as Mr Pickering claims, but it reflected what was proposed with City West Water.
[33] In November 2009, Mr Simmons supplied Mr Pickering with quotes for the construction of the major components in Australia for the purpose of Mr Pickering obtaining second quotes from New Zealand engineering firms. The New Zealand quotes were markedly less than the Australian quotes, which Mr Simmons says led to the decision to build the system in New Zealand. Clearly, they were working together.
[34] There are many other examples of technical and financial information, often confidential, being shared by Detection Services group with Mr Pickering in 2008 and 2009. That is, before Mr Pickering’s employment by Detection Services group.
[35] The leak detection system was built only after Mr Pickering commenced employment as General Manager of Detection Services group in January 2010. Mr Pickering has provided a summary of the costs he says he incurred in building the system. Of the total costs of $176,001.38, only $2,747.10, or 1.6 per cent of the total costs, were incurred prior to January 2010. Mr Pickering says those costs were the costs of a computer and associated equipment. The remaining costs of $173,254.28, or 98.4 per cent, of the total costs were incurred between January 2010 and July 2011, when Mr Pickering was employed by Detection Services group.
[36] It is unnecessary for me to determine exactly when the joint venture was formed, but it was formed at least prior to December 2008, when Mr Pickering acknowledged the existence of the joint venture in the business proposal he prepared.
[37] Mr Pickering says, however, two systems were being developed side by side – his system in New Zealand and another system by Detection Services group in Australia. A similar argument was rejected by the Employment Relations Authority, who found only one system was being developed and that it was a joint development. I agree with the Authority’s findings. It accords with the totality of the evidence.
[38] Beyond this, as best as I can ascertain them, the terms of the joint venture were:
(a) The leak detection system would be jointly owned by the parties throughout the development process.
(b) Mr Pickering would retain intellectual property rights to the initial phase of development, being the computer software and interface.
(c) Mr Pickering would fully disclose all third party costs in developing the system, which would be paid for by Detection Services group.
(d) Mr Pickering would be entitled to reasonable recompense for his time and effort in developing the system.
(e) The completed system would be available for the exclusive use of Detection Services group.
Did the parties’ relationship give rise to fiduciary obligations?
[39] Mr Simmons says the joint venture with Mr Pickering led to a fiduciary relationship between them. Mr Pickering denies he had any fiduciary obligation to Mr Simmons.
[40] I am satisfied the parties were in a fiduciary relationship—each owed fiduciary obligations to the other. This is because they did, and were reasonably entitled to, repose trust and confidence in one another. Five factors support this conclusion.
[41] First, the parties were acting towards a common purpose. This is evident in the conclusions I reached above on the aspects of the parties’ relationship. They worked together in developing the leak detection system. The information provided to Mr Pickering is also consistent with the parties working together towards a common purpose. Mr Pickering regularly updated on progress too.
[42] Second, in terms of Chirnside v Fay, the relationship had advanced considerably beyond mere preliminary discussions of possibilities. The parties had
almost completed construction of the leak detection system. In other words, positive steps had been taken towards the implementation of a joint plan.
[43] Third, Mr Pickering was given access to confidential information which would not have been provided to him unless there was a fiduciary relationship between the parties.
[44] Fourth, Mr Simmons relied on Mr Pickering to undertake the construction of the system in New Zealand. In fact, Mr Simmons entrusted Mr Pickering with development of the leak detection system in New Zealand rather than Australia because of the lower quoted manufacturing costs in New Zealand. Mr Simmons was in a situation of vulnerability because of his inability to directly supervise or closely monitor the development. The vulnerability became readily apparent when Mr Pickering refused to ship the almost completed system to Australia.
[45] Fifth, the longstanding relationship between Mr Simmons and Mr Pickering further supports the existence of a fiduciary relationship. They plainly trusted each other. That trust was carried forward into business. The fact they failed to document their relationship indicates the trust they reposed too, at a broad level.
[46] The relationship between the two men broke down because of their failure to reach agreement on the terms of the transfer of the system from Mr Pickering to Mr Simmons. Mr Pickering claims Mr Simmons had agreed to purchase the system for $257,170 plus GST, but then he refused to pay. Mr Pickering says he was therefore justified in retaining the system. Although Mr Simmons did say he would buy the system from Mr Pickering, he was, in effect, seeking to implement the terms of the joint venture by reimbursing Mr Pickering for all third party costs after these were disclosed by Mr Pickering and, in addition, recompensing Mr Pickering $40,000 for his time and effort in developing the system outside of his normal working hours.
[47] I consider the parties’ relationship analogous to the relational contract described by Leggatt LJ. They committed to collaborating with each other on a long-term basis. Per their agreement, they were required to treat each other with
integrity and in a spirit of co-operation. A relationship of good faith was essential to give effect to their intentions. Assuming there was a contract, I would have held a duty of good faith should be implied. But given my findings on the fiduciary claim, it is unnecessary to take this point further. As mentioned, the breach of contract claim was also abandoned.
Breach
[48] The parties owed fiduciary obligations to each other. The key obligation was that of loyalty. This duty has several facets. The parties had to refrain from preferring their own interests. And in doing so, they had to act in good faith. In other words, they owed an obligation to subordinate self interest to joint interest. Specifically, to the extent the agreement between Mr Simmons and Mr Pickering did not specify the terms of the transfer of the system from Mr Pickering to Mr Simmons, I consider the parties had an obligation to negotiate and settle the terms in good faith. That is what joint interest demanded.
[49] I regret to say both men failed to negotiate with each other in good faith, as is evident from Mr Pickering’s e-mails over many months and the position adopted by Mr Simmons’ lawyer in his letter of 4 July 2011. Instead, they preferred their own interests. My reasons follow.
[50] Mr Pickering, although acknowledging he needed to invoice Detection Services Group for the equipment, failed or refused to raise an invoice. Even after Mr Pickering’s own lawyers had sent an agreement with non-negotiable terms, which indicated a specified sum to be paid before the system could be transferred, Mr Pickering still did not render an invoice. When Mr Pickering failed or refused to raise an invoice, Mr Simmons asked for the third party invoices behind the costs that Mr Pickering asserted Aqatar had incurred. Mr Pickering only provided a spreadsheet of costs, which was unverifiable and not cross-referenced to the invoices he asserted lay behind the spreadsheet.
[51] As noted by the Employment Relations Authority, Mr Pickering’s failure to supply invoices when requested did not facilitate matters. The Authority member,
Ms D King, said she did not find Mr Pickering’s explanation for this failure convincing or satisfactory.
[52] In evidence before me, Mr Pickering acknowledged he could have provided Mr Simmons with an itemised invoice of the costs he had incurred and that Mr Simmons had agreed to pay, but he was not going to. He has never done so. In re-examination, Mr Pickering gave, for the first time, a further breakdown of the costs he said comprised the specified sum to be paid before the system could be transferred, which included a software licence fee of $5,550; $20,000 for “minor components and the suchlike”; an invoice from his solicitor “for about $3,500” and “an interest component of approximately $12,000”. These should have been itemised and evidenced at the time of the negotiation.
[53] Mr Pickering also wrongly claimed ownership of the whole system. In response to an e-mail from Mr Simmons asking for a list of intellectual property owned by Aqatar, Mr Pickering said:
Regards below, Aqatar owns the whole lot at present so the list is short – everything. What you need to do is list what you believe Detection Services “owns” if you consider it worth spending your time doing it.
[54] Mr Simmons responded:
Aqatar can certainly claim IP ownership to the software development but the majority of the system design concept was developed in Aus by myself and DC [David Caunter]. Certainly Aqatar does own the equipment, this is only because you decided to go it alone against my requests in order to I believe retain the IP for yourself (this has certainly caused me concern and is directly against the spirit of the joint development).
We have next week to prove the system works and will be able to work in Melbourne. It will [likely] take 2 weeks to get to Aus, if it works we need to ship it immediately to Aus, probably Melbourne to save time.
You have not raised invoice nor have we agreed a transfer price, we agreed the cost would be open book.
What day are we do the first insertion.
[55] Mr Pickering replied:
Nice try. You can tell anyone you like that you and DC have developed anything at all. You have not furnished any drawings, you have not done any
of the sourcing and liaison, absolutely nothing. All of the electronics, the drive mechanism and the software have been developed completely independent of anything to do with yourself and DC. The rest is public domain.
[56] This issue was also considered by Ms King in the Employment Relations Authority, who said:
Mr Pickering initially asserted that he had incorporated Aqatar to keep track of costs. He told Mr Simmons that Aqatar did not own IP in the development and later changed his position and asserted Aqatar owned everything. This alteration in position was not helpful regarding attempts Mr Simmons was making to negotiate to purchase the system.
[57] Mr Pickering continued to assert his right to any or all intellectual property in the system right up until the breakdown of the relationship. In the draft agreement prepared by Mr Pickering’s lawyers on Mr Pickering’s instructions, Aqatar offered to assign to Detection Services group on settlement all of Aqatar’s rights, title and interest in any intellectual property that formed part of the assets (not including the intellectual property that Aqatar owned in relation to the software).
[58] Notwithstanding that Mr Simmons undoubtedly felt frustrated at the approach taken by Mr Pickering to negotiations regarding the transfer of the system, he also failed to negotiate and settle the transfer when he instructed his lawyers to write to Mr Pickering by letter dated 4 July 2011. In that letter, Detection Services group claimed ownership of the entire system including any or all intellectual property. It demanded that Mr Pickering provide Detection Services group with possession of the as built system and all related materials within five days.
[59] The letter also required Mr Pickering to confirm in writing that neither he nor Aqatar claimed any ownership in the equipment or related materials (including the intellectual property). Mr Pickering was asked to treat the above requirements as an instruction from his employer and warned that failure to comply with the instruction would be treated as a disciplinary matter. In effect, Mr Simmons alleged that Mr Pickering had wrongfully appropriated the project and related opportunities from Detection Services group.
[60] The letter wrongfully claimed Detection Services group was the owner of the system. Plainly, this preferred self interest over joint interest. In fact, the system was
jointly owned as Mr Simmons had earlier acknowledged. Mr Simmons conceded in evidence that such a claim was “a mistake”, but described the letter as a negotiating tactic. There was, however, no attempt made to continue the negotiations.
[61] Mr Simmons then turned the negotiations into an employment dispute and dismissed Mr Pickering as General Manager of Detection Services group. As found by the Employment Relations Authority:
The dismissal was unjustified because Mr Simmons could not dismiss Mr Pickering for refusing to hand over the development to DSL as the development did not belong in its entirety to DSL. Mr Simmons’ refusal to investigate the issue of ownership by undergoing an inspection process destroyed the possibility of a fair investigation and a resolution.
[62] The Authority concluded:
Had the proceedings been conducted in a more measured and considered manner the parties may well have been able to negotiate a sale and purchase of the development.
[63] I agree. Instead of acting in good faith to negotiate and settle the terms of the transfer of the system, they acted in their own interest. Both Mr Pickering and Mr Simmons breached their fiduciary obligation of loyalty to one another.
[64] They were not far apart. Mr Pickering had delivered the system to a freight forwarding company where it was packed and readied for shipment. Mr Pickering sought a payment of $257,170 plus GST from Mr Simmons and had provided a spreadsheet of most major costs totalling $161,818.66, on top of which Mr Simmons had agreed to pay Mr Pickering $40,000 for his time and effort in developing the system. Mr Pickering said that there were “a heap of minor invoices which made up the balance, together with associated costs”, but refused to itemise these or provide the underlying invoices. Nonetheless, Mr Simmons knew that Mr Pickering had personally purchased all the components for the system over the previous 18 months and had not been reimbursed. He had also been told a year earlier by Mr Pickering that the development was being funded via a loan account so that interest would be included in the costs of development. The draft agreement sent to Mr Simmons by Mr Pickering’s lawyer also provided for a software licence fee of $5,500 for each leak
detection system developed by the Detection Services group. These are two of the associated costs which were specified by Mr Pickering in re-examination.
[65] To recapitulate, Mr Simmons’ claims against Mr Pickering for breach of fiduciary duty must fail because Mr Simmons was also in breach of his fiduciary duty to Mr Pickering. Both men are of strong and determined character. The conduct of the negotiations would ordinarily not lead to legal consequences. It was only because of the fallout from the relationship between the two men built up over many years that the conduct of the negotiations ended in this fashion.
[66] I, accordingly, decline to order any relief. He who comes into equity must come with clean hands.22 An early statement of this doctrine can be seen in Dering v Earl of Winchelsea, where Lord Chief Baron Eyre said:23
If this can be founded on any principle, it must be, that a man must come into a Court of Equity with clean hands; but when this is said, it does not mean a general depravity; it must have an immediate and necessary relation to the equity sued for; it must be a depravity in a legal as well as in a moral sense. In a moral sense, the companion, and perhaps the conductor, of Mr. Dering, may be said to be the author of the loss, but to legal purposes, Mr. Dering himself is the author of it; and if the evil example of Sir Edward led him on, this is not what the Court can take cognizance of.
[67] The essence of the clean hands doctrine is if the petitioner is guilty of impropriety in a matter pertinent to the suit, equity may refuse the decree sought.24 General impropriety on the part of the plaintiff is not enough. The plaintiff’s impropriety must be closely connected with the equitable remedy sought for relief to be denied. It is a fact-dependent question. In Grobbelaar v News Group Newspapers Ltd, Lord Scott said:25
[I]t is long-established practice that an equitable remedy should not be granted to an applicant who does not come before the court with “clean hands”. The grime on the hands must, of course, be sufficiently closely connected with the equitable remedy that is sought in order for an applicant to be denied a remedy to which he ordinarily would be entitled. And whether there is or is not a sufficiently close connection must depend on the facts of each case.
22 Milloy v Dobson [2016] NZCA 25 at [99].
23 Dering v Earl of Winchelsea (1787) 1 Cos 318, 29 ER 1184 at 319–320. Emphasis added.
24 Milloy v Dobson [2016] NZCA 25 at [99].
25 Grobbelaar v News Group Newspapers Ltd [2002] UKHL 40, [2002] 1 WLR 3024 at [90].
[68] The learned authors of Equity and Trusts in New Zealand put the position as follows:26
[W]here a person seeks to invoke equitable relief in relation to a particular transaction, he or she must not have acted improperly in relation to that transaction. Hence, even if the plaintiff can show a violation of his or her equitable rights, relief to give effect to those rights may not issue if it would allow the plaintiff to derive a benefit from his or her wrong.
[69] In the present case, it is because of the manner in which both men, or their companies, pursued their self interest ahead of joint interest that the relationship between them deteriorated and the system ended in storage. And this matter in the courts. Mutual trust and commitment were crucial to the success of the venture. Each side failed in that regard. The relief sought is intertwined with the breaches by both parties.
Estoppel by representation
[70] In addition to breach of fiduciary duty, Mr Simmons also claims estoppel by representation against Mr Pickering. While this claim was not formally abandoned, it was not pursued in closing submissions.
[71] Counsel for the plaintiffs relied on Hopgood v Brown in his opening submissions, where Evershed MR said:27
In my judgment, that formulation was addressed to and limited to cases where the party is alleged to be estopped by acquiescence, and it is not intended to be a comprehensive formulation of the necessary requisites of any case of estoppel by representation. The doctrine of such estoppel, which is really a rule of evidence, is to be found in many circumstances and is of a much more general character. I adopt as accurate for the purposes of this judgment the statement of the governing principle given in Spencer Bower on Estoppel (1923), at pp. 9 and 10:
From a careful scrutiny and collation of the various judicial pronouncements on the subject, of which no single one is, or was perhaps intended to be, quite adequate ...” — I think the learned writer is using the word “adequate” as meaning “exhaustive” — “The following general statement of the doctrine of estoppel by representation emerges: where one person (‘the representor’) has made a representation to another person (‘the representee’) in words, or by acts and conduct, or (being under a duty to the representee to speak or
27 Hopgood v Brown [1955] EWCA Civ 7; [1955] 1 WLR 213 (CA) at 223–224.
act) by silence or inaction, with the intention (actual or presumptive), and with the result, of inducing the representee on the faith of such representation to alter his position to his detriment, the representor, in any litigation which may afterwards take place between him and the representee, is estopped, as against the representee, from making, or attempting to establish by evidence, any averment substantially at variance with his former representation, if the representee at the proper time, and in the proper manner, objects thereto.
[72] The case relied on reveals an insurmountable difficulty with this cause of action. Namely, estoppel by representation is not a cause of action. Evershed MR termed it a “rule of evidence”. Whether it should be so characterised is debatable. In Berridge v Benjies Business Centre, Lord Hoffmann said:28
It is true that estoppel is sometimes called a rule of evidence, but this is not the case. It is a rule of substantive law, by which the facts which a party is estopped from proving, which would otherwise be material to the issue of liability, are assumed to be otherwise. Evidence to the contrary is inadmissible not on account of some technical exclusionary rule like hearsay, but because the substantive law makes it irrelevant
[73] I respectfully agree with Lord Hoffmann. The effect of estoppel by representation is not to render evidence inadmissible.29 Rather, the doctrine is applied substantively in determining what the facts are. But regardless of how it is labelled, the point remains: estoppel by representation is not a cause of action. The position is as stated in latest edition of Spencer Bower: Reliance-Based Estoppel:30
Estoppel by representation of fact may, then, establish a fact necessary to complete a cause of action as well as removing a defence thereto. Indeed these are the sole purposes, other than to affect a remedy, for which it is deployed. It has consequently been said to be a rule of evidence by reference to two undeniable and complementary qualities it has in English law: that its effect is to estop a party from denying a relevant fact, and that it is not a cause of action.
[74] And as Lord Russell said in Nippon Menkwa Kabushiki Kaisha v Dawson’s Bank Ltd:31
Estoppel is not a cause of action. It may (if established) assist a plaintiff in enforcing a cause of action by preventing a defendant from denying the existence of some fact essential to establish the cause of action, or (to put it
28 Berridge v Benjies Business Centre [1996] UKPC 38; [1997] 1 WLR 53 (PC) at 57.
30 At [1.51].
31 Nippon Menkwa Kabushiki Kaisha v Dawson’s Bank Ltd (1935) 51 LI L Rep 143 (PC) at 150.
another way) by preventing a defendant from asserting the existence of some fact the existence of which would destroy the cause of action.
[75] In any event, given my factual findings on the fiduciary duty claim, estoppel by representation adds nothing. This is because the representations relied on, even if established, are consistent with my factual findings. Mr Simmons says the relevant representations made by Mr Pickering in this case were that he was engaging in the development of the leak detection system jointly with Mr Simmons and for their mutual benefit. I have found the system was being jointly developed. Mr Pickering was not in fact developing system for himself and/or Aqatar, although he may have wrongly claimed that he was in negotiations with Mr Simmons over the transfer of the system.
Counterclaim
[76] Mr Pickering’s position is the leak detection system was developed by him and belonged to him and his company Aqatar. As noted, a key part of his defence to Mr Simmons’ claim is regardless of who developed the system, Mr Simmons agreed to purchase it from him. As a consequence, if Mr Simmons has suffered any loss, it is only because he refused in the end to pay for the system.
[77] That defence is also the basis of Mr Pickering’s counterclaim. Mr Pickering says Mr Simmons agreed to purchase the system from him. In the counterclaim, Mr Pickering seeks an order that Mr Simmons pay $257,170 for the system.
[78] Mr Pickering says if the Court is not satisfied there was an express agreement as to the payment of $257,170, then in the alternative Mr Simmons is estopped from denying an obligation to pay this amount. In broad terms, Mr Pickering says from 2009 through to 2011 Mr Simmons represented that Detection Services group would pay the costs incurred in constructing the system as well as $40,000 for Mr Pickering’s time and effort spent in developing the system. In reliance on these representations, Mr Pickering constructed the system and delivered it to a freight forwarding company for shipping to Australia.
[79] In closing submissions, Mr Pickering accepted on the evidence he could not maintain the counterclaim for $257,170, the sum originally referred to in the agreement drafted by his lawyers. He conceded the evidence did not establish a concluded agreement to pay that sum. He, therefore, now only seeks reimbursement for the costs of the components of the system totalling $160,415.45 as itemised in a schedule of invoices in the Pickering bundle of documents which support the costs claimed. This is a reduction from the original sum of $176,001.38 because of the double counting of invoices from a supplier and a difference in currency conversion rates.
[80] The difficulty for Mr Pickering is the leak detection system did not belong exclusively to him and his company Aqatar. It was joint owned by Mr Pickering, Aqatar, Mr Simmons and Detection Services group. Although Mr Simmons did refer to purchasing the system, Mr Pickering put it more accurately as cost recovery when he stated in an e-mail to Mr Simmons:
There are several reasons for the project going through Aqatar, one of which is the accounts situation for [Detection] Solutions which is still getting sorted out. However, Aqatar is now carrying the development cost and the interest the development is incurring. All adds up and needs to be recovered.
[81] It is obvious from these comments that Mr Pickering gave consideration to running the project not through his own company Aqatar, but through one of Mr Simmons’ companies.
[82] A second difficulty for Mr Pickering is my earlier finding that Mr Pickering breached his fiduciary obligations which attached to the joint venture. He failed to negotiate in good faith with Mr Simmons by refusing to provide an itemised invoice of the costs he had incurred and wrongly claiming ownership of the whole system.
[83] In that way, Mr Pickering is the author of his own misfortune. I have no doubt if Mr Pickering had provided Mr Simmons with a copy of what he has now produced to the Court, namely a schedule of costs totalling $160,415.45 together with the invoices evidencing those costs, Mr Simmons would have paid that sum immediately together with $40,000 which he had agreed to pay Mr Pickering for his time and effort in developing the system.
[84] Mr Pickering’s counterclaim must fail as the underlying premise that the leak detection system belonged to him and his company, Aqatar, is false. There was no simple contract for the sale and purchase of the system. It was a joint venture and Mr Pickering was in breach of his duty to negotiate and settle the transfer of the system to Mr Simmons.
[85] The claim for estoppel does not add anything to Mr Pickering’s counterclaim. Mr Simmons would have reimbursed Mr Pickering for the componentry costs and his time and effort if he had itemised them fully and provided the underlying invoices.
Loss
[86] Having concluded both Mr Pickering and Mr Simmons breached their fiduciary duties, Mr Simmons’ claim against Mr Pickering must fail. It is therefore unnecessary for me to determine what Mr Simmons’ losses would have been if only Mr Pickering had breached his fiduciary duty. However, if I am wrong in my finding that Mr Simmons’ claim must necessarily fail, I express the preliminary view Mr Simmons’ claim substantially exceeds what may be properly payable by way of damages.
[87] Mr Simmons alleges three heads of loss:
(a) The componentry costs of rebuilding the leak detection system – AUD 366,798.10 incurred by Detection Solutions Pty Ltd and AUD 14,007.58 incurred by Detection Services Pty Ltd.
(b) The labour costs incurred by staff of Detection Services group – AUD 802,868.00.
(c) The loss of profit – NZD 1,983,565.00.
[88] The claim for componentry costs includes costs for items which were never part of the original leak detection system such as a drogue, an encoder, a radio transmitter, a means of chlorinating the cable and the fit out of a van. There is also a double up of costs such as rebuilding the drive by Lucan Engineering and the cost of
replacing faulty cable from Falmat. There are further items in the schedule of componentry costs which can be questioned such as an underwater video camera system, a hydraulic pump and reels and a lathe to assist in the construction of the new system.
[89] Mr Pickering also quite rightly raises the issue of betterment. He says the new leak detection system was a step up from the original system and that the costs involved in the development work should also be deducted from the schedule of componentry costs.
[90] The claim for staff time is similarly exaggerated. There are no documents to support staff costs of AUD 802,868. The costs claimed are at best a back of the envelope assessment by Mr Simmons. It appears Detection Services group had the new system largely complete by mid to late 2012, yet a significant component of the claim relates to staff costs after 2012. The claimed costs of AUD 802,868 can be compared to the sum of $40,000 Mr Simmons was willing to pay Mr Pickering for his time and effort in constructing the original system largely by himself.
[91] Finally, the claim for lost profits also has substantial difficulties. Mr Simmons claims lost revenue over a six-year period when the new system was largely completed in mid to late 2012. Mr Simmons acknowledged that work on the new system stalled for over a year because Detection Services group was facing a breach of copyright claim from a competitor, which was eventually settled by the payment of a substantial sum to the competitor. Mr Simmons also claimed lost revenue from leak detection programmes with identified customers when he did not know whether those customers did in fact undertake any leak detection work at all in that time. The claim for lost revenue is therefore largely speculative.
Result
[92] The plaintiffs’ claim is dismissed. The defendants’ counterclaim is also dismissed. The leak detection system which Mr Pickering paid for and which remains in storage is Mr Pickering’s to dispose of as he sees fit. It may still have some value in whole or in its parts.
[93] Costs on a 2B basis should follow the event in the case of both the plaintiffs’ claim and the defendants’ counterclaim. If the parties are unable to agree, memoranda of no more than five pages should be filed by 31 January 2019. A decision will then be made on the papers.
Woolford J
Solicitors: Dukesons Business Law, Auckland
Langton Hudson Butcher, Auckland
Counsel: M Corlett QC, Auckland R Butler, Auckland
A Barker QC, Auckland J Grimmer, Auckland
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/3310.html