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White SW Computer Law Intellectual Property, Information Technology & Telecommunications Newsletter August 2004

What happens when joint ventures fail?

The Supreme Court handed down its judgment in Scheuer v Bell & Ors 1). This case involved a complex set of facts and multiple parties and illustrates the complexities often involved in software development projects and the difficulties that can arise when one or more parties decide to leave a joint venture.

The case involved six defendants. The first defendant, Phillip Bell ( “Phillip” ) is a computer programmer who was approached in 1995 to develop a software program for the automotive repair industry. This project was undertaken as a joint venture, but by 1998, further funds were required for the project and Anthony Bell, Phillip's brother ( “Anthony” ) invested $100,000 in the venture.

Following the departure of one of the original joint venturers in 1999, the plaintiff, Scheuer, a new investor, acquired a one third interest in the venture for $1,000,000. Scheuer was later told by Anthony that he would in fact receive a thirty-five percent interest.

Scheuer claimed that a number of representations had been made to him during negotiations, namely that MPDL Pty Ltd (one of the defendants) was entitled to exploit the product, the product had the potential to generate substantial revenue, the product was already installed and ready to use at over 100 sites, the product was capable of being marketed to over 1200 sites, the product was capable of being exploited as is and that Phillip would be involved in the day to day management and development of the product. From late February 2000, Scheuer became involved in the business and from April 2000 he became concerned that a number of representations made about the business had been incorrect, including the fact that the roll out of the technology had not commenced. In July Scheuer told Phillip and Anthony that he was terminating the arrangements between himself and them as he was unhappy with the progress of the project and because the business was not as had been represented to him. Scheuer subsequently requested that the monies paid by him be refunded.

Following negotiations between the parties, Scheuer remained in the business and together with Anthony, unsuccessfully tried to sell the assets and undertaking of the company or shares in the company on a number of occasions. Eventually, the business became non-operational. Scheuer claimed, amongst other things, that he was entitled to recover all monies paid under the two Heads of Agreement and that the representations made to him about the business were misleading and deceptive and so, he was entitled to recover his loss and damages.

The defendants. defences included, amongst other things that Scheuer was not entitled to terminate and rescind the Heads of Agreement, that Scheuer was not entitled to seek repayment of the monies paid by him, that the representations made to Scheuer by Anthony were true and that Scheuer did not act in reliance on the alleged representations.

To complicate matters, various claims were made by Phillip against his brother Anthony and various entities controlled by Anthony. The trial lasted for 30 days. Amongst other things, the Court had to decide whether or not the use of unlicensed software in the development of the software was material to the dispute.

Visual Basic 6 (“VB6”) software had been used to incorporate a feature required by an insurance company. An academic version of VB6 had been acquired by the programmer, using his student card. A full licence to use the product was not acquired and so the unlicensed use of the Visual Basic 6 software constituted a breach of copyright. The Court found that the use of unlicensed software in the development of the product was a material matter as it left the business open to litigation for breach of copyright and the use of unlicensed software had the potential to tarnish the commercial reputation of the business, the product and Scheuer in the marketplace. As a result, the Court found there had been a material misrepresentation, amongst others, concerning the entitlement of the company to exploit the product, in that it had been developed using unlicensed software. This arose notwithstanding that a small amount of money could have been spent to buy the correct licence.

For Scheuer to establish that he had relied on the misrepresentations made to him, it is sufficient that he shows that the representation plays some part, even if only a minor part in his decision to enter into the contract. He did not have to prove that the misrepresentation was the only inducement to enter into the contact. The Court held that a number of misrepresentations had been made to Scheuer, including the fact that the product was in a state that was able to be exploited commercially and had the potential to generate substantial income; that Philip would work full-time in the business; and that the business was entitled to exploit the product on a commercial basis. It was also found that Scheuer was induced to enter into the Heads of Agreement by those misrepresentations.

On the basis of the misrepresentations that had been made to him, Scheuer was entitled to rescind the two Heads of Agreement. This had the effect of annulling the contracts from the time of their inception, restoring all parties to their positions before the contract. This means that a party to whom or in respect of whom a payment was made under the contract, is required to repay it.

In addition, Scheuer was entitled to recover damages resulting from the misrepresentations which were equal to the amounts paid by him as instalments of the purchase price and as contributions to working capital. Phillip and Anthony were held equally liable under the Trade Practices Act to pay the damages ordered as they both had some involvement in the making of the misrepresentations.

This case highlights, amongst other things, the importance of ensuring all the software which is used to develop software products is correctly licensed. In addition to the threat of suit of copyright infringement from the copyright owner, the mere risk of such a threat may provide an opportunity for investors and customers alike to rescind their contracts with a software developer and potentially, as in this case, claim damages for misrepresentation.

As a customer or investor acquiring a software product or licence, it is also prudent to include a clause in the contract which warrants that the software product does not infringe any third party's intellectual property rights.

1) [2004] VSC 71

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