Case: Gold Peg International Pty Ltd v Kovan Engineering (Aust) Pty Ltd [2005] FCA 1521
Outcome: applied
not dissimilar issue arose in a case determined by Crennan J in 2005: Gold Peg International Pty Ltd v Kovan Engineering (Aust) Pty Ltd [2005] FCA 1521 , 225 ALR 57 , though, in this matter unlike the present, aspects of some of the contractual arrangements were express. At [77] and following, her Honour set out the applicable principles: Applicable principles Where, as here, applicant asserts the existence of an implied term regulating the parties rights in the drawings in relation to copyright then the precise definition of that implied term involves a question of construction of the alleged agreement. In Parramatta Design &amp; Developments Pty Ltd v Concrete Pty Ltd [2005] FCAFC 138 ; [2005] 219 ALR 373 at [10] ('Parramatta') a Full Court of the Federal Court said of such an exercise: 'True, it is not an 'orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision': Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24 ; (1982) 149 CLR 337 at 345 per Mason J. Nevertheless the process involved is of interpreting the meaning of the contract as a whole : South Australia Asset Management Corp v Montague Ltd [1997] AC 191 at 212 per Lord Hoffmann.' In Codelfa , Mason J noted (at 346) that the implication of a term was appropriate to address a 'deficiency in the expression of the consensual agreement'. As his Honour noted, such implication might arise to address the failure of parties 'to direct their minds to a particular eventuality and to make explicit provision for it'. It is, of course, necessary to clarify that it is not appropriate to imply a term because it may be reasonable to do so, but rather to give business efficacy to contracts. The circumstances for implying a term were identified by the Judicial Committee of the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 ('BP Refinery') , as follows: '(1) it must be reasonable and equitable; (2) it must be necessary to business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.' Where, as in the present case, there is no formal contract concluded between the parties a more flexible approach to the question of implying terms is warranted than that laid down in BP Refinery at 283: see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 121; Hawkins v Clayton (1988) 164 CLR 539 at 573; Byrne &amp; Frew v Australian Airlines Limited [1995] HCA 24 ; (1995) 185 CLR 410 at 422-423. In this kind of case all that is necessary is to show that the term to be implied is necessary for the reasonable or effective operation of the contract in all the circumstances. The parties did not challenge her Honour's account of the principles. It is orthodox and I will apply them. Justice Crennan also discussed the application of these principles in a specific area of copyright between [81] and [85]. It is sufficient to notice three things which emerge from this discussion: (i) There are numerous instances when, in the circumstances, the courts have been prepared to imply a condition into an agreement between the parties that the author of a copyright work will assign legal title to it when called upon to do so because equitable ownership of the copyright in the work does not belong to the author. This can arise when there is a commissioning arrangement for the preparation of copyright material. (ii) If there is a lacuna in the contract and it is necessary to imply the grant of some right to fill the lacuna involving a choice between possible alternative rights, the choice should be of that right which does not exceed what is necessary in the circumstances. This principle is one of a number identified by Lightman J in Robin Ray v Classic FM Plc (1998) 41 IPR 235 in a lengthy passage quoted by Crennan J. In particular, if the need can be satisfied by the grant of licence or an assignment of the copyright, the implication will be of the grant of licence only. (iii) The circumstances may require the implication of a right for the assignment of the copyright, for example when the party commissioning the creation of the work should be able to exclude the author from using the work and also to enforce copyright against third parties. Again this emerges from the judgment of Lightman J. However the rationale for having regard to post-contractual conduct when the contract is not in writing seems of limited relevance in circumstances where a term is to be implied in the way discussed in some of the authorities referred to by Crennan J in Gold Peg , namely Hospital Products Ltd v United States Surgical Corporation , Hawkins v Clayton and Byrne &amp; Frew v Australian Airlines Limited being cases where it is necessary is to show that the term to be implied is necessary for the reasonable or effective operation of the contract in all the circumstances. The implication of the term arises because the parties have not addressed the subject matter to which the term relates. It is difficult to see how subsequent conduct can, as a matter of common sense, be taken to be a manifestation of the parties acting conformably with the term. They had not earlier turned their minds to the way the contract would operate at the time it was made. That is not to say that evidence of conduct surrounding the formation of the contract would be irrelevant in determining what term might be implied. Context, including the manifestation of subjective intention, can be important in determining what objectively may have been agreed or what might be implied: see Kovan Engineering (Aust) Pty Ltd v Gold Peg International Pty Ltd [2006] FCAFC 117 per Heerey and Weinberg JJ at [105] and per Allsop J at [118]. Consideration It is perhaps appropriate, at this point, to take a step back from the minutiae of the evidence. What the evidence discloses, at a high level of generality, is that two individuals developed, collaboratively, a business which was dependent on the significant contribution of both but which has always been owned and substantially controlled by only one of them. The individual who has owned the business is now resisting attempts by the other to assert a right which is very narrowly focused on a statutory right said to arise from authorship of computer software. It is difficult to avoid the conclusion that the legal controversy this judgment addresses may not explore and resolve all bases on which the rights of the parties might be determined. However forensic decisions have been made for what probably is a mix of legitimate reasons including the personal and financial circumstances of the parties, to invite adjudication only on the copyright issue. As noted at the beginning of this judgment, the second respondent is gravely ill and having regard to matters raised in interlocutory proceedings, it appears the first applicant which is the present manifestation of the business, is in comparatively straightened financial times. One possible consequence of the narrow focus of the litigation on the copyright issue is that it has created a prism through which the parties have sought to establish the facts but which has led to distortions of what in truth happened. Broadly described, the evidence at this high level of generality points to one of at least three possibilities. The first is that Mr Vardanian was generally aware that copyright attached to the programs he was writing and always and genuinely believed that he owned it both before and after August 1996. Perhaps that was because he did not view himself as an employee at least after his initial years working in the business. If so, it is difficult to understand why he never discussed ownership of the copyright with Mr Dilanchian during the many years they worked closely and collaboratively together to develop the business in circumstances where they had close family ties. I have no doubt at all, having regard to the evidence, Mr Dilanchian never turned his mind to the question of ownership of the copyright before probably 2003. The second possibility is that Mr Vardanian was generally aware that copyright attached to the programs but understood, perhaps in a vague and imperfect way, that while an employee of the Intelmail business it was owned by his employer but that his move to the Gold Coast and the new arrangements associated with it would alter that position to his benefit. If so, moving and not discussing the consequences with Mr Dilanchian would suggest some measure of deception on his part, which would have been curious given the way they had worked together and their family ties.