Sprint Electric Ltd v Buyer's Dream Ltd & Anor, Court of Appeal - Chancery Division, July 30, 2018, [2018] EWHC 1924 (Ch)

Resolution Date:July 30, 2018
Issuing Organization:Chancery Division
Actores:Sprint Electric Ltd v Buyer's Dream Ltd & Anor
 
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Neutral Citation Number: [2018] EWHC 1924 (Ch)

Case No: HC-2017-001837

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

BUSINESS LIST (CHANCERY DIVISION)

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 30 July 2018

Before:

RICHARD SPEARMAN Q.C.

(sitting as a Deputy Judge of the Chancery Division)

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Between:

Claim No: CR-2017-006788

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

COMPANIES COURT (CHANCERY DIVISION)

IN THE MATTER OF SPRINTROOM LIMITED

AND IN THE MATTER OF THE COMPANIES ACT 2006

Between:

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Michael Hicks for the Claimant and Rebecca Page for the First Respondent (instructed by Moore Blatch LLP)

Anthony Pavlovich and Jaani Riordan (instructed by Blake Morgan LLP) for the Defendants and the Petitioner

Hearing dates: 8-11 and 14-18 May 2018

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Table of Contents

Para.

INTRODUCTION 1

TERMINOLOGY 9

THE EVIDENCE OF THE WITNESSES 10

THE FACTS 16

2014 37

2015 54

2016 69

2017 115

FISCAL FACTORS IN THE PRESENT CASE 123

Legal framework 123

Application to the present case 141

THE SOURCE CODE CLAIM 145

The dispute in outline 145

Issues 1, 2, 7 and 8 154

Legal framework 162

The contracts in issue 170

The 1997 Contract 177

The 2000 Contract 203

The 2007 Assignment 227

The 2015 Contract 245

Directors' Duties 255

BDL's claim for infringement of copyright 263

The claim for relief 269

Issues 3, 4 and 6 275

Issue 5 299

Schedule No 200815 300

Schedule No 130116 313

THE UNFAIR PREJUDICE CLAIM 319

The relevant legal principles 319

The dispute in outline 331

Issue 1 338

The parties' submissions 339

Discussion and conclusion 346

Issue 2 359

The significance of Mr Prescott's offers 360

The unfair prejudice complained of 377

Mr Prescott's position 385

Discussion and conclusion 389

Issue 3 403

Issue 4 405

Issue 5 411

CONCLUSION 413

INTRODUCTION

  1. This is the trial of two sets of proceedings. The first (``the Source Code claim'') concerns source code and associated documents relating to the software used by Sprint Electric Limited (``SEL'') in motor controllers which SEL is in the business of designing, developing and selling. The Source Code claim is brought by SEL against (a) a former director of SEL and the author of the source code (``Dr Potamianos'') and (b) Dr Potamianos' service company (``BDL''). By a counterclaim in the Source Code claim, BDL claims that it is the owner of the copyright in, essentially, the same source code and associated documents as form the subject of SEL's claim, and, further, seeks an injunction restraining SEL from exploiting its copyright, financial remedies, and other orders. There are further, relatively minor, claims and cross-claims in the Source Code claim, relating to various disputed invoices. SEL is a wholly owned subsidiary of Sprintroom Limited (``SRL''), and 40% of the shares in SRL are held by Dr Potamianos. The second claim (``the Unfair Prejudice claim'') is a petition presented by Dr Potamianos against (a) SRL and (b) the holder of the remaining 60% of the shares in SRL (``Mr Prescott''). In that claim, Dr Potamianos contends that the affairs of both SRL and SEL have been and are being conducted in a manner that is prejudicial to his interests, and he seeks an order requiring Mr Prescott or SRL to purchase his shares in SRL. These two sets of proceedings were ordered to be tried together, with the evidence and disclosure in each case being treated as being provided also in the other.

  2. There are a number of possible outcomes to these two sets of proceedings. First, SEL and Mr Prescott may succeed on both claims. In that event, SEL will be entitled to delivery up of, and the right to exploit, the source code and associated documents which are in dispute, and Dr Potamianos will be locked in as a minority shareholder in SRL, in circumstances where he has fallen out with Mr Prescott and the other directors, and is dissatisfied with the way in which SRL is being run. Second, BDL and Dr Potamianos may succeed on the Source Code claim and Dr Potamianos may succeed on the Unfair Prejudice Petition claim. In that event, SEL will not be entitled to retain or exploit the source code and associated documents which are in dispute, and Dr Potamianos will be entitled to an order requiring him to be bought out of SRL (the one issue upon which the parties have reached agreement is that, in the event that Dr Potamianos succeeds on the Unfair Prejudice claim, this relief would be appropriate). However, BDL's success on the Source Code claim will inevitably depress the value of SEL as a trading business, and, thus, the value of shares in SRL (including Dr Potamianos' 40% shareholding). The extent to which those values will go down is in issue, and the effect that will have on the price which Dr Potamianos is entitled to be paid for his shares will not be resolved by the current trial (in accordance with the list of issues for trial identified in the Order of Snowden J made on the CMC in the Unfair Prejudice claim on 8 November 2017).

  3. A third possible outcome is that SEL will succeed on the Source Code claim, and that Dr Potamianos will succeed on the Unfair Prejudice claim. That would result in the parties going their separate ways, and with Dr Potamianos being bought out at a price which reflects the value to SEL of being entitled to retain and access the source code and documents which it claims it needs to carry on business to optimum effect. A fourth possible outcome is that SEL will fail (and BDL will succeed) on the Source Code claim, and that Dr Potamianos will fail on the Unfair Prejudice claim. At least according to SEL's case, that would leave SEL in a predicament which is harmful to its business prospects, and Dr Potamianos with a devalued minority shareholding in SRL.

  4. It is obvious that there are potentially unsatisfactory consequences (for all parties) of rights to the source code and the object code of the relevant software being owned separately by different parties, of Dr Potamianos being locked in as a minority shareholder in the above circumstances, and of SEL's business being damaged. In order to ameliorate these factors, at the conclusion of the trial, and in the event that it succeeded in the Source Code claim, BDL (a) offered an unconditional undertaking to assign the source code that is in dispute to SEL at a fair value to be agreed between the parties or in default of agreement to be determined by the Court, and (b) further, stated that it would be willing to carry out further work on the software, if so required by SEL.

  5. This recognition of the desirability of seeking to address some of the unfortunate outcomes to which these proceedings may give rise is to be welcomed. At the same time, the fact that BDL was prompted to make this offer serves to underline the risks involved.

  6. In addition to all the above, it is clear that the parties were motivated by tax avoidance objectives when they entered into a number of key written agreements which are at the heart of these proceedings. Perhaps unsurprisingly, neither side suggested that the Court's approach to any of these agreements should be coloured by this consideration. However, it is impossible to ignore. Quite apart from any question of whether any of these agreements are tainted or ought not to be enforced according to their terms on these grounds, there is an element of artificiality concerning agreements of this kind which makes it difficult to construe them as if they were not geared to fiscal objectives.

  7. In these circumstances, and not least because determination of the issues listed for trial in accordance with the above Order and the further Order of Snowden J made on the CMC in the Source Code claim on 8 November 2017 will not necessarily resolve the dispute between the parties, these proceedings cried out for settlement, or, at least, a narrowing of the issues between the parties. It is most regrettable that this did not occur.

  8. Mr Michael Hicks appeared for SEL in the Source Code claim. Ms Rebecca Page appeared for Mr Prescott in the Unfair Prejudice claim. Mr Anthony Pavlovich appeared with Mr Jaani Riordan for Dr Potamianos and BDL in the Source Code claim, and appeared by himself for Dr Potamianos in the Unfair Prejudice claim. I am grateful to all of them for their clear and helpful written and oral submissions.

    TERMINOLOGY

  9. This judgment uses the following terminology:

    (1) Computer programs of the kind in issue in the present case are written and edited by the author in human readable form. This is known as ``source code''. In the present case, some of the source code is written in high-level programming language, and some of it is written in low-level programming language (called ``C'' and ``assembly language'' or ``assembler'' respectively). Source code comprises text files which are intelligible to a suitably skilled person and contain step-by-step instructions defining particular algorithms, and it may be divided into a number of separate modules or libraries, each dealing with a different algorithm or related group of algorithms. (It is SEL's case that in order to enhance, modify or fix bugs in the program it is in practice essential to have access to, and the right to edit, the source code.)

    (2) The form of the program which can be run on the target computer is known as ``object code''. A computer program known as a ``compiler'' is used (possibly in conjunction with other procedures) to turn source code into object code, which is machine-readable and consists of binary numbers as opposed to text. Source code and object code are different forms of a computer program.

    (3) A ``Hex File'' is one form in which object code can be stored. A device known as a ``programmer'' is used to take the Hex File and to transfer and store it in the appropriate component of the target computer system on which it...

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