RICHARD ARNOLD Q.C. :
Introduction
- This is my judgment on the following applications:
i) An application by the Defendant ("Mr Altoft") made by application notice dated 23 November 2005 for security for costs. As I understand it, this application was originally listed to be heard before Master Teverson on 9 February 2006. On that occasion it was adjourned to 28 March 2006 with directions for the filing of further evidence in the meantime. On 28 March 2006 Master Teverson ordered that the application be referred to the Judge to be heard immediately after the next application.
ii) An application by the Claimant ("Vitof") made by application notice dated 3 February 2006 for summary judgment on its claims. As I understand it, this application was also originally listed to be heard before Master Teverson on 9 February 2006. He referred the matter to the Judge, I presume because Vitof was seeking injunctions, on the first available date after 3 April 2006 and gave directions for the filing of further evidence in the meantime.
iii) An application by Vitof made by the same application notice to strike out paragraphs 1-6 of the Counterclaim.
iv) An application by Vitof made by the same application notice for an order that costs reserved by paragraph 4 of an Order of Michel Kallipetis Q.C. sitting as a Deputy High Court Judge dated 6 December 2005 be paid by Mr Altoft.
v) An application by Mr Altoft made by application notice dated 30 March 2006 for reverse summary judgment on Vitof's claims.
vi) An application by Mr Altoft made by the same application notice for summary judgment on his counterclaims.
- These applications first came before me on 6 April 2006. The position on that occasion was that Mr Altoft had not given the 14 days' notice of his applications for summary judgment required by CPR r. 24.4(3), but only the 3 days' notice required for other sorts of application by CPR r 21.7(1)(b). Vitof was prepared to proceed with the remaining applications then, but wished to have time to file evidence in response to Mr Altoft's summary judgment applications, and in particular his application for summary judgment on his counterclaims. It seemed to me that it would make more sense for all the applications to be heard together once the evidence on Mr Altoft's applications was complete. Accordingly I adjourned the applications until 22 May 2006 with directions for the filing of further evidence in the meantime. During the hearing I discussed with counsel then appearing for Vitof certain deficiencies in Vitof's Particulars of Claim, as a result of which he indicated that Vitof would be likely to apply to amend.
- In the event Vitof did not send its draft amended Particulars of Claim to Mr Altoft until 19 May 2006 (the Friday before the Monday on which the adjourned applications were due to be heard). Moreover Mr Altoft told me that he had not seen the draft until late on 20 May 2006. Mr Altoft's position was that he did not seriously oppose Vitof being granted permission to amend, but he wanted to have more time in which to digest the amendments and possibly to file further evidence. Accordingly I granted Vitof permission to amend on the usual terms as to consequential amendments and costs, and adjourned the applications for a second time until 26 June 2006 with directions for the filing of further evidence in the meantime.
- Both parties did file further evidence. Mr Altoft also filed a further witness statement for which he did not have permission, but Vitof did not resist the admission of this evidence. In addition Mr Altoft served an Amended Defence and Counterclaim which included amendments to the Counterclaim which were not consequential upon the amendments to the Particulars of Claim. Vitof did not resist the amendments on this technical ground, but did so on the substantive ground that they were strikable for the same reasons as it sought to strike out paragraphs 1-6 of the original Counterclaim.
Principles applicable to summary judgment applications
- Since the principal applications before me are applications for summary judgment, it is appropriate to remind myself of the principles applicable to such applications. These principles have been considered in the leading cases of Swain v Hillman [2001] 1 All ER 91 at 94-95 and Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 at [90]-[97]. From these authorities and ED& F Man Liquid Products Ltd v Patel [2003] EWCA Civ 472 at [8]-[11] Sir Andrew Morritt V.-C. derived the following propositions in Celador Products Ltd v Melville [2004] EWHC 2362 (Ch) at [6]-[7]:
"(a) it is for the applicant for summary judgment to demonstrate that the respondent has no real prospect of success in his claim or defence as the case may be;
(b) a 'real' prospect of success is one which is more than fanciful or merely arguable;
(c) if it is clear beyond question that the respondent will not be able at trial to establish the facts on which he relies then his prospects of success are not real; but
(d) the court is not entitled on an application for summary judgment to conduct a trial on documents without disclosure or cross-examination."
- This summary was recently referred to with evident approval by Mummery LJ (with whom Longmore LJ and Lewison J agreed) in Doncaster Pharmaceuticals Group Ltd v The Bolton Pharmaceutical Co 100 Ltd [2006] EWCA Civ 661 at [4]. Mummery LJ went on at [5]-[18] to sound a number of cautionary notes about the use of the summary judgment procedure. In approaching this case I have borne these warnings in mind.
The factual background
- This litigation is the regrettable product of a falling out between two business partners (using that word in its popular rather than its technical legal sense), Mr Altoft and Luciano Chiovitti. Vitof was incorporated as the vehicle for that partnership. As counsel for Vitof acknowledged in opening Vitof's applications, the dispute between Mr Altoft and Mr Chiovitti is a bitter and factually complex one in which each accuses the other of serious wrongdoing. There is a considerable volume of evidence from each side (although the volume looks rather worse than it is, since the bundles prepared for this hearing include two or more copies of many documents and since Mr Altoft's materials in particular are, for understandable reasons, somewhat repetitious) and there are numerous conflicts of evidence.
- Counsel for Vitof acknowledged that the Court could not resolve many of the issues arising out of the dispute between Mr Altoft and Mr Chiovitti without a trial, and that it would be wrong even to attempt to do so at this stage. Accordingly, and as previously notified to Mr Altoft in counsel's skeleton argument dated 20 May 2006 and in a letter from Vitof's solicitors dated 19 June 2006, counsel for Vitof did not seek summary judgment to the full extent presaged by Vitof's application notice. Instead he sought judgment on a more limited range of claims which he submitted could properly be dealt with summarily.
- Nevertheless, in order to place those claims and Mr Altoft's counterclaims in context it is necessary for me to outline the facts of the matter as they now appear. In this section I shall endeavour to stick to facts that are either common ground or at least not seriously disputed, paying particular attention to the documentary evidence. I shall also attempt to indicate the facts that are disputed between the parties.
- Both Mr Altoft and Mr Chiovitti have considerable experience in the labelling industry.
- Mr Chiovitti is a Canadian citizen. He says he has a Bachelor of Mechanical Engineering degree (with a specialisation in Control Systems Engineering) from Concordia University, Montreal, Quebec. He was employed by Avery Label Canada, Inc from 1989 to 1996, by CCL Label from 1996 to 1999 and by Label-Aire, Inc from 1999 to July 2002. Label-Aire is a Delaware corporation based in California. Mr Chiovitti claims to have acquired broad experience and expertise in a number of aspects of the industry as a result of these employments. Mr Altoft disputes the extent of Mr Chiovitti's experience and expertise, but he does not dispute that Mr Chiovitti had experience of sales.
- Mr Altoft is a British citizen. He is an electronic engineer with expertise in writing computer software. From about 1992-summer 1995 and from about January 1996-1997 he worked for Avery Dennison Deutschland GmbH. It is common ground that during this period Mr Altoft came into contact with Mr Chiovitti. Over the next few years Mr Chiovitti engaged, or arranged for his employer to engage, Mr Altoft to write or modify a number of pieces of software for Avery's labellers.
- In 2000 Mr Chiovitti introduced Mr Altoft to Label-Aire, for whom Mr Chiovitti was by then working. As a result Mr Altoft entered into a written contract with Label-Aire dated 1 June 2000 to supply source code for a new generation applicator line and associated services. Clause 4.02 of this contract provides:
"All trade secrets, confidential or proprietary information, know-how, engineering data, drawings, specifications, notes, prototypes, computer programs, technical data, files, documentation, and the entire work product arising out of the performance of Contractor Services are owned by Client solely and exclusively, and Contractor hereby assigns to Client all rights, title and interest in such copyright and other proprietary rights."
- Both Mr Chiovitti and Mr Altoft claim that during the first half of 2002 they spotted a gap in the market for a high-speed labelling machine. It is common ground that as a result they discussed the possibility of establishing a business to make a new labelling machine. Mr Chiovitti says that agreement was reached in the late summer of 2002, and he therefore stopped working for Label-Aire in July 2002 and started working full-time on the project. Mr Chiovitti also says that work had started on the mechanical design of the proposed machine as early as April 2002, which is supported by an email he has disclosed from Mr Altoft dated 14 April 2002.
- Mr Altoft's evidence is little different. He agrees that work had started on the mechanical design in April 2002. He says that he flew to Canada in about June 2002, was shown the mechanics of a prototype machine that Mr Chiovitti had commissioned, spent about three weeks in Canada improving the mechanical concept and "returned to the UK with the arrangement that in the near future we set up a Company together and become partners" (although, for reasons that will appear below, it seems clear that in fact this trip lasted 27 days from early July to early August 2002).
- Furthermore, Mr Altoft has disclosed a number of documents which confirm this account. These include:
i) an email from Mr Altoft to Mr Chiovitti dated 19 June 2002 containing a letter which he says he drafted for Mr Chiovitti to send to Herr Sindermann of KHS GmbH, a potential customer. It is common ground that, as appears from both from the email dated 14 April 2002 and this email, Mr Chiovitti and Mr Altoft originally planned to call the company Epsilon Labelling;
ii) an email from Mr Altoft to Mr Chiovitti dated 7 August 2002 in which he said "We need to form a proper company
";
iii) an email from Mr Chiovitti to Mr Altoft dated 27 August 2002 attaching a Vitof start-up plan. It is clear that by this date Mr Altoft and Mr Chiovitti had decided to call the company Vitof;
iv) a Vitof business plan for Vitof which Mr Altoft says was written by Mr Chiovitti "in the summer of 2002"; and
v) an email from Mr Altoft to Mr Chiovitti dated 10 October 2002 saying "We have to set up the company as soon as possible
."
- It is common ground that there were considerable discussions between Mr Altoft and Mr Chiovitti as to the arrangements for setting up the new company, and in particular as to whether it would be incorporated in Canada or in England. Ultimately it was agreed that the company would be incorporated in England even though it was intended that initially the company would assemble labellers in Canada and sell them primarily in the USA (although Mr Altoft says that it was also proposed to manufacture and sell them elsewhere in the world). In late October 2002 Mr Chiovitti came to England, and Mr Chiovitti and Mr Altoft finalised the paperwork for setting up the new company with the assistance of a firm of solicitors called Battens.
- Vitof was incorporated on 30 October 2002. The Memorandum of Association, which is dated 25 October 2002 and signed by Mr Altoft and Mr Chiovitti as subscribers to one share each, is in fairly standard form. Clause 5 provides that the company's share capital is £1,000 divided into 1,000 shares of £1 each. The Articles of Association, which is also dated 25 October 2002 and signed by Mr Altoft and Mr Chiovitti as subscribers to one share each, is, while no doubt based on a precedent, drafted so as to reflect the fact that the company was to be a quasi-partnership between Mr Altoft and Mr Chiovitti.
- Article 7.1 of the Articles defines the expression "Independent Accountants" as meaning the company's auditors. Article 7.2 defines the expression "Transfer Event" as including inter alia "any Member
resigning as a director". Article 7.3 provides that, where such a Transfer Event has occurred, a notice shall be deemed to be given to the other Member (the "Transferee Member") giving the Transferee Member the option to purchase the shares (the "Transfer Shares") of the resigning Member (the "Transferor Member") in accordance with the relevant provisions of the Article. The relevant provisions in the case of a resignation are as follows:
"(e) for all other Transfer Events within 60 days of the Transfer Event the Transferee Member and the Transferor Member shall agree a price for the Transfer Shares and if no price shall be agreed the price shall be the market value of the Transfer Shares as between a willing buyer and a willing seller as determined by the Independent Accountants. The Independent Accountants will not have any regard to the fact that the Transfer Shares may comprise a minority or majority holding. The Independent Accountants costs shall be borne by the Members in equal shares
(f) Within 30 days of agreement or determination of the price ('the Certified Price') the Transferee Member shall notify the Transferor Member in writing whether he wishes to purchase all of the Transfer Shares at the Certified Price
(h) If the notice given under Article 7.3(a) is not deemed withdrawn under Article 7.3(g) above and the Transferee Member so notifies the Transferor Member of his willingness to purchase all of the Transfer Shares at the Certified Price a contract shall be deemed to have been entered into between the Transferee Member and the Transferor Member from the date upon which such willingness to purchase is received by the Transferor Member and it shall be a term of such contract that the Transfer Shares are sold cum rights and free of all liens charges and encumbrances with the sale and purchase being completed and the Certified Price being paid within 60 days of the date of the contract
(i) On payment of the Certified Price the Transfer Member shall be bound to execute a transfer of such shares to the Transferee Member and if he should make default in so doing the Company may receive and give good discharge for the purchase money on behalf of the Transferor Member and shall authorise some person (who shall be deemed to be the attorney of the Transferor Member for that purpose) to execute in favour of the Transferee Member a transfer of the Transfer Shares".
- On the incorporation of Vitof Mr Altoft and Mr Chiovitti became its directors and Mr Altoft its company secretary. Mr Chiovitti claims that both men also became employees of the company, a claim that is supported by certain documents exhibited by Mr Chiovitti, although it is common ground that there were no written contracts of employment. Mr Altoft denies that he was an employee of Vitof, however, and counsel for Vitof accepts that I cannot resolve this dispute. Mr Chiovitti's role was to deal with manufacture and sales, while Mr Altoft's role was to deal with development of the software and circuit designs and sourcing of electrical components.
- On 1 November 2002 Mr Altoft ("AA"), Mr Chiovitti ("LC") and Vitof entered into a Shareholders' Agreement under which they agreed among other things to subscribe at par for an additional 499 shares each. Recitals (B) and (C) of the Shareholders' Agreement recite:
"(B) AA and LC (together 'the Shareholders') have agreed to cooperate in the establishment and management of a business involving design of labelling equipment through the medium of the Company and for this purpose have agreed to subscribe for shares in the Company.
(C) The Shareholders have agreed to enter into this Agreement for the purpose of regulating their relationship with each other and certain aspects of the affairs of and their dealings with the Company. The Company has agreed with Shareholders that it will comply with the terms and conditions of this Agreement insofar as they related to the Company."
- The Shareholders' Agreement includes the following provisions:
"1. Definitions and interpretation
In this Agreement
:
1.1 unless there be something in the subject or context inconsistent therewith the following expressions have the following meanings:
'Excess Price' means the amount by which the consideration paid on a further disposal of shares exceeds the consideration paid on the previous disposal of shares regardless of the number of shares disposed of
1.6 all obligations entered into by more than one person are given or entered into severally unless otherwise specified
2. Consideration
In consideration of the mutual agreements and undertakings set out in this Agreement the parties to this Agreement have granted the rights and accepted the obligations appearing below
3. Completion
3.2 On Completion:
3.2.2 The Shareholders shall procure the following to be done:
3.2.2.1 a board meeting of the Directors shall be held at which
(b) loan agreements are entered into by the Company with AA and LC
4. Auditors; bankers; registered office; accounting reference date; secretary
Unless otherwise agreed between the Shareholders in writing:
(1) the auditors of the Company shall be Albert Goodman of Hendford Manor, Yeovil;
(2) the bankers to the Company shall be HSBC;
(3) the secretary of the Company shall be AA or such other person as may be selected by the Directors
6. The Company's business
6.1 Each Shareholder shall use all reasonable and proper means in his power to maintain, improve and extend the business of the Company and to further the reputation and interests of the Company
7. Directors
7.3 Each of AA and LC undertakes with each of the other parties hereto that he will for so long as he is a director or an employee of the Company devote substantially the whole of his time attention and abilities to the business of the Company
9. Transfers of shares
9.4 If within two years of a disposal by either AA or LC of his Shares ('the disposing shareholder') there is a further disposal of
9.4.1 those Shares; or
9.4.2 (if the original disposal was by way of the company purchasing its own shares) some Shares
then within 7 days of completion of the further disposal the other Shareholder shall procure that the disposing shareholder shall receive additional consideration equal to 50% of the Excess Price
10. Restrictive Covenants
10.1 Each of the Shareholders (each of whom is in this sub-clause called 'the Covenantor' covenants with each of the other Shareholders and separately with the Company that the Covenantor (whether alone or jointly with any other person, and whether directly or indirectly, and whether as agent, director, shareholder, partner, manager, employee, consultant or independent contractor of, in or to any other person) shall not whilst the Covenantor is the holder of any shares in the Company and for a period of 1 year after ceasing to be a shareholder in the Company ('the Termination Date') without the prior written consent of the other Shareholders:
10.1.1 solicit or endeavour to entice away from or discourage from dealing with the Company any person who was at any time during the period of two years preceding the Termination Date a manufacturer for or supplier, customer, client, distributor, agent or independent contractor of or to the Company or has agreed to become such whether or not such person would commit a breach of contract by reason of leaving service or transferring business;
10.4 The provisions of sub-clause 10.1 shall remain in force and be fully applicable in all circumstances in accordance with their terms and in particular shall not be discharged or affected by any breach or repudiation of this Agreement in each case whatever its nature or howsoever caused or arising or by any other matter, circumstances or thing whatsoever
14. Parties bound
14.1 The Company undertakes with each of the Shareholders to be bound by and comply with the terms and conditions of this Agreement insofar as the same relate to the Company to act in all respects as contemplated by this Agreement
15. Confidentiality
15.1 Each of the Shareholders undertakes to the other Shareholder(s) and the Company that he will not a any time hereafter use or divulge or communicate to any person other than to offices or employees of the Company whose province it is to know the same or on the instructions of the directors any confidential information concerning the business, accounts, finance, contractual arrangements or intellectual property (whether owned or licensed by the Company) or other dealings, transactions, affairs or property of the Company which may come to his knowledge and he shall use all reasonable endeavours to prevent the publication or disclosure of any confidential information concerning such matters and so that these obligations shall continue to apply after that Shareholder cease to be a party to this Agreement or otherwise involved in the affairs of the Company without limit in point of time but shall cease to apply to information which shall come into the public domain other than by a breach of this Clause or which for any other reason, other than through the default of that Shareholder, shall have ceased to be confidential"
- Clause 11 of the Shareholders' Agreement contains certain provisions designed to prevent deadlock in the event of a disagreement between Mr Altoft and Mr Chiovitti. It is unnecessary to set these out, but they included provision for determination of disputes by an expert.
- It is clear that clause 3.2.2.1(b) of the Shareholders' Agreement was complied with and that Mr Altoft and Mr Chiovitti entered into Loan Agreements with Vitof on 1 November 2002, although neither side has put these Loan Agreements in evidence. Mr Altoft says that he and Mr Chiovitti agreed to finance Vitof as necessary to cover its bills on the basis that their payments into the company's bank account and expenses would be considered as loans to be repaid when the company was making a profit, and Mr Chiovitti has not disputed this.
- To begin with Vitof's bank account was with the Weymouth branch of HSBC (account number 11571370). In December 2003 a second account was opened with the Oakville, Ontario branch of HSBC (account number 060756-001). Mr Altoft had internet access to both accounts.
- It is common ground that Vitof developed a labelling machine called the PDFM (a promotional version of an originally planned DFM labeller). There are disputes, however, as to the contributions of Mr Chiovitti and Mr Altoft to the development of the PDFM, in particular with regard to the software and the circuit designs. Mr Altoft says that he wrote the software and designed the circuits, although he accepts that Mr Chiovitti made a number of suggestions for features to be included. Mr Chiovitti says that the process was a collaboration between the two men in which he devised the specification for the PDFM and a number of specific features, although he accepts that Mr Altoft was the person who actually wrote the source code and drew the circuit diagrams. One of the features which Mr Chiovitti says he devised is an "asynchronous algorithm". Mr Altoft disputes this claim, but accepts that he wrote software for "asynchronous" operation to satisfy a requirement of Mr Chiovitti's although he claims that this feature is pointless.
- Mr Chiovitti says that Mr Altoft arranged for Vitof to claim research and development tax credits from the Inland Revenue for the development of the PDFM in 2003. Mr Aloft has not disputed that a claim of this nature was made, but as the evidence presently stands it is far from clear what was claimed, when or on what basis.
- PDFM machines were assembled on behalf of Vitof by Jancox Metal Products Inc ("Jancox"), a company based in Mississauga, Ontario. The circuit boards were made in the UK by UK Electronics Ltd ("UKE"), the motor controllers (also known as chopper drives) were made in Germany by Middex-Electronic GmbH ("Middex") and the keypad display units were supplied by Custom Design Technologies Ltd ("CDT") of the UK.
- Vitof secured a number of distributors for the PDFM. It appears that initially Promo Edge Company was appointed as a distributor under an agreement dated 26 September 2003, but that this agreement was terminated on 19 August 2004. After Promo Edge Company, Northfield Corporation ("Northfield"), QLC Inc ("QLC"), York Label Inc ("York") and MPI Label Systems Inc ("MPI") were appointed as distributors. Mr Altoft claims that all four distributors were (or were previously) distributors for Label-Aire.
- A copy of a Distribution Agreement between Vitof and Northfield dated 12 August 2004 is in evidence. Mr Chiovitti says that this is a standard form of agreement which was prepared (as appears on its face) by Battens. Mr Chiovitti says that Battens were instructed to do this by Mr Altoft, and Mr Altoft has not disputed this.
- The Distribution Agreement recites:
"(A) VITOF has developed and now manufactures and owns the intellectual property rights in labelling machinery and related products and equipment."
It includes the following provisions:
"1 Interpretation
1.1 In this agreement, unless the context otherwise requires:
'Intellectual Property' means any patent, copyright, registered design, trade mark or other industrial or intellectual property right subsisting in the Terrtitory in respect of the Products, and any applications for any of the foregoing
7 Intellectual Property
7.5 The Distributor shall, at its own expense, take all such steps as VITOF may reasonably require to assist VITOF in maintaining the validity and enforceability of the Intellectual Property of VITOF during the Term of this agreement.
7.7 The Distributor shall promptly and fully notify VITOF of any actual, threatened or suspected infringement in the Territory of any Intellectual Property of VITOF which comes to the Distributor's notice
and the Distributor shall at the request and expense of VITOF do all such things as may be reasonably required to assist VITOF in taking
any proceedings in relation to any such infringement
."
- Both Mr Altoft and Mr Chiovitti claim that they began to distrust the other during the course of 2004 as a result of the other's actions:
i) Mr Chiovitti has claimed that in about February 2004 Mr Altoft ordered excessive quantities of circuit boards from UKE and motor controllers from Middex and had them delivered to his home for no good reason; although Mr Altoft has demonstrated, and Mr Chiovitti now accepts, that in fact the motor controllers were shipped by Middex direct to Canada.
ii) Mr Chiovitti claims that from August 2004, and for reasons unknown to him, Mr Altoft became increasingly disengaged from Vitof's business and was uncontactable for days or even weeks at a time. Mr Chiovitti sent Mr Altoft an email dated 8 November 2004 complaining about his unavailability (which Mr Altoft at one stage said that he received on 10 November 2004 but now accepts that he received on 8 November 2004);
iii) Mr Altoft claims that for various reasons by the end of May 2004 he had become concerned that Mr Chiovitti was lying to him about his financial dealings with Vitof. Mr Altoft says that his concern increased as a result of some communications with Mr Chiovitti in late October 2004.
- Needless to say, I cannot possibly decide who is telling the truth about these matters.
- It is common ground, however, that on 10 November 2004 Mr Altoft visited Jancox unannounced, removed a quantity of electronic parts belonging to Vitof (referred to in these proceedings as "the hardware inventory", although it should be noted that Mr Altoft says that some of the electronic stock was already held in the UK) from Jancox's premises and arranged for it to be shipped to the UK. Mr Altoft claims that, as a result of a discussion with Joe Gortnar, the owner of Jancox, he concluded that he could no longer trust Mr Chiovitti and that his purpose in taking this action was to ensure that Mr Chiovitti could not build and sell labellers without his knowledge. Mr Altoft's account of his conversation with Mr Gortnar is disputed by Mr Gortnar, however.
- Either on 10 November or on 11 November 2004 Mr Chiovitti discovered what Mr Altoft had done, and on 11 November 2004 Mr Chiovitti sent Mr Altoft an email to protest. Mr Altoft says that as a result he met Mr Chiovitti a couple of times to discuss how to separate. Mr Altoft claims that the discussions did not get very far because Mr Chiovitti only wanted to get his hands on the software and circuit designs.
- On 12 November 2004 Mr Altoft sent Mr Chiovitti certain proposals by email based on the idea that the two would form two independent companies. On about 14 November 2004 Mr Altoft returned to the UK. On 16 November 2004 Mr Chiovitti replied by email rejecting Mr Altoft's proposal, formally requesting that the inventory removed by Mr Altoft be returned immediately to Canada and requesting that Mr Altoft immediately provide a current copy of the source code for the software and the (designs of the) circuit boards. Mr Chiovitti stated that if these requests were not complied with he would invoke the deadlock provisions in the Shareholders' Agreement.
- Shortly afterwards, I think on 18 November 2004, Mr Altoft sent Mr Chiovitti some revised proposals by email. The revised proposals include the following:
"1. You form a new company that continues to deal with the distributor network you have already set-up in USA and Canada. I become 100% shareholder of Vitof Ltd
2. We would both recover our directors' loans only as labellers are sold. The boards and software to enable our loans to be covered and Jancox to be payed off will of course be simply shipped to your company there is no question of commission. The software and circuit board diagrams will be stored in a safe at a suitable location eg Battens. Once the directors loans are paid off I will give your company 50% of the value of the remaining stock of circuit boards and start receiving a commission for the board/software support instead of half the profits of each labeller sale.
3. Once we have both recovered our directors' loans you would purchase the mainboards from my company and pay a licence fee for the software installed on each further labeller at a rate to be determined. All revenue from further labeller sales through the N. American distributor network will go entirely to your company.
5. If I no longer wish to support the boards or software the circuit diagrams or software respectively will be released to your company. The boards/software can only be used in the company you form for the following 10 years and if your company is sold/dissolved/merged etc the electronics/software rights are lost.
Explanations
Clause 5 prevents the following situation arising: I have a successful and profitable company and I want to semi-retire. You now have access to the software and electronics but cannot sell it to, or merge with, another company that would then compete with my own and cripple my retirement income."
- There were further exchanges by email between Mr Chiovitti and Mr Altoft on 18 and 19 November 2004, but no agreement was reached.
- In the meantime Mr Chiovitti sent Richard Bugler of Albert Goodman an email on 17 November 2004 stating that he understood that Vitof's next returns were due on 20 November 2004 and that he was under the impression that Mr Altoft had sent him everything he required to complete the returns in early August.
- At around this time Mr Altoft took legal advice. On 30 November 2004 he sent Mr Chiovitti by email, fax and post a letter addressed to both Mr Chiovitti and Vitof which had been drafted for him by a firm of solicitors called Humphries Kirk. In this letter Mr Altoft stated among other things (emphasis added):
"2. Repayment of Loans
(a) I hereby give written notice for repayment of all loans made by me to the Company pursuant to the Loan Agreement dated 1 November 2002. All such loans must be repaid at the expiry of 12 months from the date of this letter. The amount of the loans is as set out in our accounts for the period dated 31 July 2003 plus such additional sums as have accrued since then as set out in the attached spread sheet which I invite you to agree.
(b) If you wish to call your loan in at the same time then I will accept that your loan and my loans should be repaid at the same time notwithstanding that your notice may be dated after my notice.
(c) I will endeavour to agree the amount of your loans and I invite you to agree my loans. If we cannot agree the amount of the loans then I suggest that loans be as specified by Albert Goodman, Accountants acting as experts. I will submit to them that in giving their expert opinion, they should expect us both to provide receipts for the sums claimed and should submit both our claims to the same degree of proof.
3. Circuit Boards
(a) You have complained that I have acted improperly in removing the circuit boards from Jancox Metal Products Inc. I deny any wrongdoing in relation thereto. I am a director of the Company and I am entitled to take possession of the Company's property.
(b) However, I also agree that you are entitled to call for the circuit boards and I will procure the delivery of any circuit boards that are called for by you for testing purposes or to be incorporated into a machine for sale. All you have to do is call for the circuit board and I will send it.
4. My Intellectual Property
(a) So far as the circuit boards and the underlying software are concerned:-
(i) I am the author of the underlying software ('the Software') used in the labelling machines both as expressed in a source code and as compiled into an object code (as a UK National Sections 11, 15A(5)(c) of the Copyright Designs and Patents Act (reflecting the international legal position as set out in the Berne Convention for the Protection of Literary and Artistic Works) clearly confer such rights to me as my personal property).
(ii) The Software is a copyright work and I hereby assert my Copyright in these works. For the avoidance of doubt, I am the person who created these works, which were created before the Company existed, and I have not been an employee of the Company at any time, there is no contract of employment and I have received no salary.
(iii) Insofar as Moral Rights apply, they are hereby asserted.
(iv) I am also the author of all design drawings relating to the circuit boards and I assert my Copyright therein.
(v) I also assert my Design Right in the circuit boards themselves pursuant to Section 215 Copyrights, Designs and Patents Act 1998 [sic].
(b) I permit the Company and its customers to utilise my Copyright and Design Right for the purpose of operating any labelling machines manufactured and sold but for no other purpose whatsoever.
5. Deadlock Procedure
(a) You have purported to invoke the 'disputes and deadlock' procedure set out in clause 11 of the Shareholders' Agreement in relation to the circuit boards.
(b) However, as I have agreed, in this letter, to send circuit boards to you for the Company's proper purposes i.e. testing and installation into machines to be sold. Accordingly I do not think that there is in fact any dispute that needs to be subjected to this procedure.
(c) The Shareholders' Agreement does not purport to deal with my personal rights and property. It only deals with matters concerning our involvement as shareholders of Vitof Limited. Accordingly, the disputes procedure is not competent to deal with my personal ownership of and right to assert my Copyright and Design Right."
- The emailed and postal versions of this letter were accompanied by six pages of spreadsheets containing details of Mr Altoft's expenses over the period 2002-2004. These give the date, details of the expense, (in most cases) the account it was paid from and the amount. The earliest expense listed is dated 8 July 2002 and is for a flight from Guanajuato (which I believe to be in Mexico) to Toronto. There is also a claim for travel allowances for a 27 day trip to Canada from 9 July to 5 August 2002 and a few additional expenses relating to the same trip. Almost all the other expenses claimed date from after 30 October 2002.
- On 2 December 2004 Mr Chiovitti replied to Mr Altoft's letter. In his reply he stated among other things (emphasis added):
"1) Deadlock
We are clearly in deadlock as to where the electronics and software inventory is stored and we must agree on an Expert before December 3rd.
2) Circuitboard ownership
The circuit boards were purchased by the Vitof Ltd and are clearly owned by the company.
3) Ownership of the circuit board design
The circuit board design was a collaborative effect. I worked on the circuit board design and testing as well as you. I set all the specs with regards to the I/O and put all the designs on CAD. I actively helped source and select the processor, ICs, and connectors. The circuit board design is clearly not your intellectual capital as you claim.
4) Ownership of the software
You claim that the software is your intellectual capital. Although you performed the actual coding, the development was an entirely collaborative effort.
a) I wrote the performance specs for the labellers including the software features. Several of the features, indeed all the unique components, were my ideas based on the industry knowledge I have my years of working directly in the field with customers. These features include the:
- Asynch labelling
- Warning messages wrt Speed for given label length
- the Quick Set functions
I designed the spreadsheets used to create the tables used by the software for these functions.
b) You claim that the source code legally belongs to you as it predates the formation of Vitof. This is certainly news to me and causes me alarm. In my capacity of Director for Vitof, it is my duty to investigate the legal ramifications to Vitof if parts of the source code predate the formation of Vitof.
5. Your claim of not being paid for the work with regards to the software development and circuit board design
As you know this was the basis for your involvement in the Company and your contribution to gain 50% ownership of the Company. I had originally contacted you with regards to hiring you on contract for this purpose. You insisted that you should contribute these efforts towards an ownership stake in the Company.
Further the Vitof shareholders agreement clearly spells out that in section 7.3 that as a director or an employee you must devote substantially the whole your time, attention and abilities to the business of the Company.
12) Impact to Current Operations/Call for electronics
Your actions have made it impossible for us to even test labels. Send me a complete set of electronics for the BDFM prototype immediately
"
- Annexed to Mr Chiovitti's letter were certain counter-proposals to the proposals previously made by Mr Altoft.
- It is common ground that Mr Altoft did send Mr Chiovitti the set of electronics requested at the end of Mr Chiovitti's letter.
- On 9 December 2004 Mr Altoft replied to Mr Chiovitti's letter dated 2 December 2004. In his letter, which again was drafted by Humphries Kirk, Mr Altoft stated among other things:
"1. Deadlock
(a) I do not think we are in deadlock. I have already agreed and accepted that the circuit boards belong to Vitof Ltd and that you may call them off as required. I have also agreed to send you circuit boards against your request (and will be charging the expenditure for that against the Vitof credit card because you have requested me to send them to you).
3. Ownership of the circuit board design
(a) I have had the benefit of finding out quite a lot about UK and International Design Law. In the UK the law is set out in the Copyrights Designs and Patents 1988, which mirrors the 'Berne Convention' which is an International Convention binding on most countries including Canada.
(b) I accept you provided assistance while I designed the circuit board. However, the legal position is very clear:-
(i) In order to be recognised as a joint 'Author' of the circuit board design, you have to show that you actually carried out specified design work. In fact, of course, you did not do so, nor do you have the necessary skills to do so.
(ii) Your collaborative effort was to provide suggestions, which I would incorporate into my design of the circuit board. An example is that you made a suggestion that we should incorporate I/O for a barcode reader. That sort of collaborative effort is not design and therefore does not entitle you to be treated as 'Joint Author'.
(iii) However, this argument is largely irrelevant. Even in the events that you were able to show that you are joint author of the circuit board design, the position is that both authors are entitled to assert their copyright/design right and both authors would be entitled to prevent the other, or Vitof Ltd, from copying or adapting the design.
4. Ownership of the software
(a) Thank you for your acceptance that I performed the actual coding. You are quite right. Again you made suggestions, which I incorporated into my writing of the software.
(b) You claim that you wrote the performance specifications. In fact, the performance specifications were written by both of use and again at best, therefore, you could claim to be Joint Author in the performance specifications.
(c) The copyright in the source code legally belongs to me because I wrote it and I am therefore its Author. It is really as simple as that. At no time have I ever agreed to transfer my proprietary rights to any third party, nor would I. I have already agreed in my formal letter of 30 November that I permit Vitof Ltd to use my intellectual property rights for the purposes of its business, namely manufacturing and selling labelling machines, and also allow the customers of Vitof Ltd to use my intellectual property rights for the purpose of using labelling machines manufactured by Vitof Ltd. I have therefore precisely complied with my obligations as shareholder and director of Vitof Ltd.
5. I am not an employee of Vitof Ltd. I am a director and such I am substantially devoting the whole of my time, attention and abilities to the business of Vitof Ltd. This is irrelevant to the question of my ownership of the intellectual property in the fruits of my skill and labour."
- On 10 December 2004 Mr Chiovitti sent Mr Altoft a letter by email and post in which he stated:
"Formal notice of deadlock (Inventory & Source Code)
We are formally in a deadlock with regard to:
1) the storage of the electronic inventory and source code
2) That you, not Vitof, are responsible for the costs of approximately £4,600 with regards to the sequestering of the inventory.
I am formally requesting that:
1) Half the boards and a current copy of the source code are sent to me
OR
2) All the boards and a current copy of the source code is secured by a neutral third party appointed by Battens.
AND
That you pay the approximately £4,600 you charged to the Company credit card to sequester the inventory.
The deadlock occurred on November 19th 2004 as a direct result of your actions of the week November 8th 2004.
I consent to Martin Crowdy of Albert Goodman acting as an expert
"
- On 13 December 2004 Mr Altoft replied declining to consent to Mr Crowdy's appointment, saying that the expert could only determine the question of storage of the invention and who should pay for it but not "my personal property".
- On 20 December 2004 Mr Altoft sent Mr Chiovitti an email (which he copied to Mr Bugler) requesting him to provide details of his expenses from June 2002 to date so that Albert Goodman could audit Vitof's accounts for the year ending 31 July 2004, and saying that he would do the same. Mr Altoft re-sent this email on 30 December 2004 (again with a copy to Mr Bugler) saying that he had no response.
- On 6 January 2005 Mr Altoft sent Mr Chiovitti an email stating that Mr Chiovitti had said that he would issue an invoice on 17 December 2004 to Northfield for their purchase order 7759 but he had not received a copy although he had requested one on 23 December 2004.
- On 20 January 2005 Mr Altoft sent Mr Bugler an email (which he copied to Mr Chiovitti) requesting him to begin preparing the accounts. In this email he recorded that he had twice asked Mr Chiovitti to provide Albert Goodman with details of his expenses and asked Mr Chiovitti once more to do so.
- On 30 January 2005 Mr Chiovitti sent letters to Mr Altoft and Albert Goodman by email and post. The letter to Mr Altoft is marked "without prejudice", but it has been exhibited by Vitof without objection from Mr Altoft and I am satisfied that it is not truly without prejudice. In this letter Mr Chiovitti states among other things (emphases as in the original):
"A. Hardware inventory:
Schedule 'A' to this letter lists hardware equipment indisputably owned by VITOF, and essential to VITOF'S business and its survival as an on-going entity, which, prior to November 9, 2004, was stored
at the facilities of
JANCOX
On November 10, 2004, without lawful cause or excuse, and without prior notice to the undersigned, as a Director of VITOF, you caused to be removed from JANCOX' facilities all of the hardware equipment listed in Schedule 'A' and, apparently, shipped all such items to an undisclosed location, under your sole control, in the United Kingdom.
The explanations and justification for such removal, which you gave to representatives of JANCOX on November 10, 2004, were false and deceitful and constitute fraudulent misrepresentations which, together with your actions, thereby place you in clear breach, and violation, of your fiduciary duties as a Director of VITOF.
This Letter shall constitute my formal demand to you to deliver to VITOF's Corporate Counsel, BATTENS
, In Trust, on or prior to 17:00 hours on February 4, 2005, the hardware equipment listed in Schedule 'A'
B. Intellectual Property Rights:
After extensive consultations, it is the opinion of internationally renowned Counsel that all intellectual property rights with respect to the 'VITOF PDFM', including circuit board design and source code, are owned and held exclusively by VITOF pursuant to and in accordance with the Copyright, Designs and Patents Act 1988 [UK].
This Letter shall constitute my formal demand of you to deliver to BATTENS, In Trust, on or prior to 17:00 hours on February 4, 2005, all documentation in your possession pertaining to the intellectual property [including circuit design and source code] pertaining to the 'VITOF PDFM'
."
- In the letter to Albert Goodman Mr Chiovitti instructed Albert Goodman to suspend work on preparing Vitof's financial statement for the year ending 31 July 2004 saying that there was no purpose in continuing such work while the matter of the inventory removed from Canada by Mr Altoft remained unresolved.
- On 3 February 2005 Mr Altoft sent letters to Mr Chiovitti and Mr Bugler by email and post (and fax in the case of the letter to Mr Chiovitti). In his letter to Mr Bugler Mr Altoft instructed Albert Goodman to finish preparing the accounts, and if information from Mr Chiovitti was not forthcoming to do so on the basis that he had not put in his claim for expenses. In his letter to Mr Chiovitti Mr Altoft stated:
"For the record I confirm that Vitof Limited's various boards are in my possession, in my capacity as a director of Vitof and that I have and will send these to you as necessary to be incorporated into machine to be sold by the company.
Your letter is written to me pretending that I am an employee of Vitof. This is not true. I have never had a contract of employment by Vitof and have never been paid as an employee.
I have seen your letter to the account suggesting that the accountant should stop work on the accounts. This is unlawful under English law. If the accounts are not prepared and sent to Companies House in time then you and I as directors will be fined. So far as I am aware I have given the accountant all necessary information from my point of view to enable him to prepare the accounts. You have failed to provide the information from your point of view and in particular details concerning your proper expenses. These failures amount to failures under clause 6 of the Shareholders Agreement putting you in breach.
In any event I am writing to the accountant asking him to go ahead and prepare the accounts based upon such information as he currently has."
- On 4 February 2005 Mr Altoft sent Mr Chiovitti an email (which he copied to Mr Bugler and Caroline Carretta of Battens) stating that he had checked Vitof's accounts the day before and noted that two cheques had been paid out of the Canadian account for C$2,300 and C$4,000 on 28 January 2005. Mr Altoft asked to whom these cheques had been paid. He also said that he had not seen any invoice issued for a labeller sale since July 2004 nor any funds arriving in Vitof's accounts for such sales even though (he claimed) Mr Chiovitti had previously told him that a sale had been made to Northfield and that a sale to MPI was imminent.
- On 6 February 2005 Mr Chiovitti sent Mr Altoft a letter by email and post (with copies to Battens and Albert Goodman) replying to Mr Altoft's letter dated 3 February 2005. In this letter he stated:
"By your actions, you have:
1. conclusively demonstrated that your word is of no value on any subject whatsoever;
2. irreparably destroyed our business relationship; and
3. brought an end to the business and activities of VITOF, for which VITOF and I both hold you personally liable."
- Also on 6 February 2005 Mr Chiovitti sent a letter to the Weymouth branch of HSBC by email and fax (with copies to Mr Bugler and Ms Carretta) instructing it immediately to terminate all Vitof's credit facilities and in particular to cancel all its credit cards.
- On 7 February 2005 Bob Rosenthal of HSBC sent Mr Chiovitti an email (with a copy to Mr Altoft) in which he stated (emphasis added):
"I acknowledge the content of your fax, which I have also discussed with Mr Antony Altoft. It is clear that you have differing views and the Bank account cannot continue under the present mandate of 'Any one of the listed signatories'.
In the circumstances I propose to take the following action:-
I have today cancelled the Business Credit Card facility
The current account is present £305-20 in credit. A £600 overdraft facility has been agreed on a one-off basis to facilitate payment of one cheque
We will allow this transaction to be completed after which the facility will be cancelled and the remaining credit balance frozen. I will then require your joint instructions as to the disposal of these funds."
- Also on 7 February 2005 Mr Chiovitti sent a terse reply to Mr Altoft's email dated 4 February 2005 stating that all outstanding invoices had been paid and applied towards expenses incurred on behalf of Vitof. Mr Altoft says that he was not satisfied with this reply and called HSBC in Canada asking it to trace Vitof's cheques. Mr Altoft has exhibited faxed copies of Vitof's cheques numbers 0001-0008 drawn on the Canadian account which it appears that he was sent on 24 March 2005. These show that cheques numbers 0007 and 0008 in the sums of C$4,000 and C$2,300 respectively both dated 28 January 2005 were made out in favour of Mr Chiovitti and signed on behalf of Vitof by Mr Chiovitti. Mr Altoft says that he concluded that Mr Chiovitti was taking funds from the company.
- Mr Chiovitti claims that at around the beginning of February 2005 he opened two new bank accounts in his own name but on behalf of Vitof, although for reasons that I will explain it appears that at most he only opened one new account and Mr Altoft does not accept even that much. Mr Chiovitti's explanation for taking this step has changed slightly over time:
i) In the letter from his then (and now Vitof's) solicitors Faegre & Benson LLP dated 28 July 2005 referred to below, it was said that:
"In your letter to our client
you asserted that Northfield
had purchased three machines from our client and that the monies received by our client in relation to those machines were paid into our client's personal bank accounts at the Bank of Montreal.
Our client is well aware of his fiduciary duties and obligations to the Company. We are instructed to emphasise that such segregated accounts were specifically set up, and required, because the Company's Bankers, HSBC Bank PLC, had frozen the Company's accounts and its credit facilities. Given that the Company was, and remains, 'deadlocked', our client no longer had access to such accounts for the Company's on-going business requirements, including the timely payment of its suppliers and trade creditors.
For the avoidance of doubt, our client maintains two segregated accounts a Canadian dollar account and a US dollar account at the Bank of Montreal, a federally chartered bank with an international reputation.
As a result of your wrongful removal of all inventory owned by the Company from the premises of Jancox, our client had no option but to purchase replacement inventory to satisfy customer needs and requirements. In fact, we are instructed that the expenses incurred by our client, to date, for such purposes, have exceeded the sums received in relation to sales and that the balances on the accounts currently show a deficit. At no time has our client personally benefited, in any way, from any monies paid into the above accounts
."
ii) In paragraph 51 of his witness statement dated 31 August 2005 Mr Chiovitti said:
"As Mr Altoft well knows, Vitof's Bank account at HSBC Bank plc (Weymouth, Dorset DT4 8PH) was frozen at about the beginning of February, 2005 by that bank which recognised that a dispute had arisen between me and Mr Altoft and that it would only accept future instructions in relation to that account if they were from us jointly. As a result, Vitof was unable to pay its suppliers and trade creditors in a timely way. Accordingly, in order to rectify this impasse and this urgent problem, I opened segregated, sole purpose US and Canadian dollar accounts held by me, in escrow for the account of Vitof, so that Vitof could meet all of its obligations generally as they came due. Mr Altoft well knows that I have done this and it is therefore quite disingenuous of him, to say the least, to state to third parties that I have 'stolen' monies belonging to Vitof. In point of fact, the current position of these accounts is a net deficit as can be seen from the spreadsheet at 'LC4' which details the income obtained (into both the US and Canadian dollar accounts) and expenses I have incurred on behalf of Vitof."
iii) Exhibit LC4 sets out revenue totalling US$54,036.84 (equivalent to C$65,384.58) represented by invoices numbered 25-31 to Northfield. It appears to show that the receipts from two of these invoices were paid to "My Account", three to Jancox and two to "Trust account". LC4 also sets out expenses totalling C$66,997.15. It appears to show three of the payments had been made from "Trust account" and three from "My Account". I infer that "My Account" is Mr Chiovitti's account with the Bank of Montreal at North York, Ontario (account number 8032-397) and that "Trust account" is Mr Chiovitti's account with the Bank of Montreal at Oakville, Ontario (account number 4601-547), both of which are referred to below. Thus it appears from LC4 that Mr Chiovitti only opened the latter account for this purpose, although I should emphasise that I am not making any finding to that effect.
iv) In an affidavit sworn by Stephen Llewellyn of Faegre & Benson on 3 February 2006, Mr Llewellyn states:
"25. Mr Altoft claims that by opening new segregated escrow accounts under Mr Chiovitti's control for Vitof to receive funds in Canada in early 2005 (see paragraph 51 of Mr Chiovitti's first witness statement) Mr Chiovitti was in fact misappropriating Vitof funds. Mr Altoft states that the reason given by Mr Chiovitti for such accounts that, because of the dispute between Mr Altoft and Mr Chiovitti, Vitof's joint control accounts with the HSBC plc in the UK and Canada could not be used was false. Mr Altoft states that Vitof's Canadian accounts were never frozen, and adduces evidence in that respect from HSBC Canada.
26. I am informed by Mr Chiovitti and believe that Mr Altoft's allegation is misconceived. In fact, Mr Chiovitti's clear belief that all Vitof's accounts in the UK and Canada should and could not be used came from the deadlock reach by the deterioration of relations between Mr Altoft and Mr Chiovitti at this time (including the fact that Mr Altoft had misappropriated Vitof's hardware), and the fact that Mr Altoft had unrestricted access to Vitof's accounts which were controlled from the UK by Mr Altoft.
27. Accordingly, to keep Vitof operating in North America, Mr Chiovitti diverted Vitof's invoices to separate accounts, for which he has accounted at LC4. Mr Chiovitti's understand of the 'freezing' of Vitof's UK and Canada accounts (the latter had been opened from the UK and operated as a satellite of the UK account) derived from a letter Mr Chiovitti himself wrote to HSBC plc Weymouth dated 30 January 2005 asking, because of the dispute, that all Vitof's accounts be terminated."
- For his part Mr Altoft says that he only found out about Mr Chiovitti's use of these accounts from Northfield in early July 2005, as related below. He also claims that by February 2005 most of Vitof's business was conducted through Vitof's Canadian account, and that the status of this account was unchanged. In addition, Mr Altoft points out that he has challenged Mr Chiovitti to produce opening statements for these accounts and Mr Chiovitti has not done so. Again, I cannot resolve the rights and wrongs of this aspect of the dispute.
- Between 20 February 2005 and 3 June 2005 Mr Chiovitti issued five invoices (numbered 1-5) in his own name to Northfield. Each of these invoices bears instructions for payment to Mr Chiovitti's account with the Bank of Montreal in North York, Ontario (account number 8032-397). Mr Altoft says that this is the same account as the account to which a payment of salary for Mr Chiovitti had been made on 31 December 2003, and Mr Chiovitti has not disputed this. Again Mr Altoft says that he only discovered about these invoices subsequently. Mr Chiovitti says that these invoices were issued after he had taken legal advice and relate to work done by Mr Chiovitti personally or parts procured by Mr Chiovitti personally. I note that the invoices appear on their face to relate to work done on labellers and include one invoice for the supply of "1 inch laydown drive rollers PDFM-207". Again, however, I cannot determine whether or not Mr Chiovitti was justified in issuing these invoices in his own name. (Nor can I resolve a complaint raised by Mr Chiovitti by way of counterblast, namely that an invoice issued by Mr Altoft to Avery Dennison Deutschland GmbH dated 7 April 2004 for work done supporting ALS Ltd in the sum of £822 should have been issued in the name of Vitof even though Mr Chiovitti accepts that this work was nothing to do with the Vitof labeller.)
- Mr Altoft says that around this time (February 2005) he became concerned that Mr Chiovitti would order labeller components directly from Vitof's suppliers. He says that he telephoned Gary Howarth of UKE and Arndt Schirmer of Middex about these and they informed him that Mr Chiovitti had indeed placed such orders.
- On 21 February 2005 Herr Schirmer sent Mr Altoft an email stating (emphasis added):
"[A] few minutes ago we received a request for 20X BCD400VF [motor controllers] form [sic] Luciano. He told us that you work at different countries and there is no competition between you and him. For this reason it would [be] no problem to sell this drive to both. We want to do a clear and correct agreement. What do you think about?"
Although Mr Chiovitti has given evidence (though Mr Llewellyn) that he was pursuing Vitof's interests rather than his own and that he purchased these controllers in the name of Vitof (as indeed he did: see below), he has not denied making the statement I have italicised.
- On 24 February 2005 Mr Altoft sent emails to both Mr Howarth and Herr Schirmer in similar terms. In his email to Mr Howarth Mr Altoft stated:
"Thank you for informing me of the purchase enquiries that Mr Chiovitti has made in his own name. The Intellectual Property in the circuit boards manufactured by you for Vitof as per my instructions belongs to me personally and I hereby assert my copyright and designright (as applicable) in such circuit boards.
Consequently you are not entitled to supply such boards to any third parties, including Mr Chiovitti, who has no right to order them in his own name.
I am sorry to tell you that I am currently in dispute with Mr Chiovitti and I therefore request that you do not accept orders from Vitof unless such order is made in writing and signed by both of the director-shareholders, namely by both Mr Chiovitti and myself."
- It appears that at around the same time Mr Altoft may have instructed Humphries Kirk to write to UKE in similar terms, although Mr Altoft denies this.
- On 25 February 2005 Mr Schirmer sent Mr Chiovitti and Mr Altoft an email saying that Middex had received conflicting information about Vitof from them, that they did not know the truth, that there was no contract between Middex and Vitof or one of its directors, that the BCD400VF was a standard drive with a simple modification in which no-one had rights and that Middex would accept orders from both directors on behalf of Vitof.
- On 1 March 2005 Mr Chiovitti sent Middex a purchase order in the name of Vitof for 20 motor controllers to be delivered to Vitof c/o Jancox. Middex accepted this order on 3 March 2005.
- Also on 1 March 2005 Mr Chiovitti sent UKE a request for a quotation in the name of Vitof for 25 mainboards, 25 powerboards, 25 keypad/display boards and 100 label sensor boards again to be delivered to Vitof c/o Jancox. On 7 March 2005 Mr Howarth replied to this request stating that he had been advised by Mr Altoft and his (Mr Altoft's) solicitor that he could not accept a purchase order from Vitof without Mr Altoft countersigning the requisition.
- On 8 March 2005 Chris Millington of CDT sent Mr Chiovitti an email recording that he had been asked to provide Mr Chiovitti with prices for keypads as per his order. Mr Millington went on:
"to modify art work (change 'Vitof' logo) all depends on what it will be changed to!"
Mr Chiovitti has not explained this.
- On 9 March 2005 Mr Altoft sent Mr Chiovitti a letter by email and fax in which he stated:
"I have been informed by our suppliers that you have tried to place orders with them for circuit boards in your own name independent of Vitof.
I would like to remind you that according to clause 6.1 of the shareholders agreement each of the shareholders are required to use all reasonable and proper means to improve and extend the business of the company and under clause 7.3 we have both agreed for so long as we are directors of the Company to devote substantially the whole of out time, attention and abilities to the business of company. Further, under clause 10.1.1 each of the shareholders have covenanted not to entice away any of the company's suppliers.
Clearly, approaching the suppliers outside of Vitof and acting in competition with Vitof is in contravention with all such provisions and also a breach of your fiduciary duties as a director of Vitof.
If on the [other] hand I have got a wrong impression and you indeed have purchase orders for Vitof, I would be grateful, if you could forward me copies of them and inform me of their details.
I would like to confirm that Vitof still has a number of circuit boards in stock and I would be happy to send you the number that is required for the agreed sales, provided you let me have all such purchase order details and co-operate fully with me in regard to these sales. I would also need you to keep me updated as to when Vitof is being paid for these sales and in particular, if Vitof intends to invoice partly in advance of making the supply.
Please remember that the sale proceeds are property of Vitof and not accounting for them will be a breach of your fiduciary duties as a director of the company and also a criminal act.
Finally, I understand from the accountant that you have not provided any receipts for your expenses in preparation for the accounts.
Could you therefore ensure that you arrange for all necessary receipts to be sent to our accountants Albert Goodman as soon as possible."
- Mr Altoft says that he received no reply to this letter, nor any other communication from Mr Chiovitti for a period of over four months.
- On 24 March 2005 Mr Chiovitti sent CDT a purchase order in the name of Vitof to CDT for 50 keypad display units to be delivered to Vitof c/o Jancox. CDT accepted this order on 31 March 2005. Again Mr Altoft has exhibited a copy of this order which it appears he obtained subsequently.
- Mr Altoft says that, in addition to obtaining components from Middex and CDT, Mr Chiovitti obtained circuit boards from a source other than UKE using circuit diagrams supplied by Mr Altoft. Mr Chiovitti has not disputed obtaining circuit boards from another source (which it appears from LC4 was Jancox, although Mr Altoft says that Jancox do not make circuit boards and may have ordered boards from another supplier on behalf of Mr Chiovitti). Indeed Mr Chiovitti claims that he had a set of the Gerber files produced by UKE (as to which, see below), which would enable him to have such circuit boards manufactured, although Mr Altoft says that the only Gerber files supplied by UKE were those for version 2.0 of the main board.
- On 14 April 2005 Mr Chiovitti sent an email to Mr Bugler enquiring about an invoice which he understood had been issued by Albert Goodman to Vitof in the sum of £1,762.50 and reiterating that he had instructed Albert Goodman to suspend work on Vitof's accounts. Mr Bugler replied to this email on 17 May 2005, enclosing a copy of Albert Goodman's fee note dated 6 April 2005 for £1,762.50 and explaining that he had prepared Vitof's accounts as the company accountant in conjunction with Mr Altoft to ensure that the company fulfilled its legal obligations to Companies House and the Inland Revenue. Vitof's abbreviated accounts for the year ending 31 July 2004 were signed by Mr Altoft as having been "approved by the Board on 10 May 2005" and filed at Companies House on 26 May 2005.
- On 3 June and 10 June 2005 Mr Chiovitti in the name of Vitof shipped and invoiced to Northfield two PDFM labellers and ancillary equipment against Northfield's purchase order number 7962. The first labeller was the subject of invoice number 30 in the sum of $16,866.00. The second labeller was the subject of invoice number 31 in the same sum. Northfield had already paid in advance for both labellers against a pro forma invoice number 30 dated 5 April 2005 in the sum of $33,732.00. As I understand it, it is common ground that Mr Chiovitti did not inform Mr Altoft of these sales at the time, and that Mr Altoft only became aware of them later.
- On 6 June 2005 Mr Altoft sent Northfield an email in which he stated that he was working through Vitof's accounts and had noticed that Vitof had a purchase order (number 7759) from Northfield for a labeller, but he could not seem to find a corresponding invoice issued by Vitof or record of payment received. He went on to say that he had been told that the payment had been made and asked Northfield to let him know where it was made to and to send him a copy of the invoice. On 8 July 2005 Rob Lindquist of Northfield sent Mr Altoft a copy of Vitof's invoice number 5 to Northfield dated 17 December 2004 for a PDFM and two ancillary products in the total sum of $16,390.00. The invoice quotes Northfield's purchase order number 7759 and states that the goods were shipped on 17 December 2004. This copy of the invoice bears the details of Vitof's Canadian HSBC account, but these have been crossed out. In his email Mr Lindquist stated that he believed that Northfield had received an email from Mr Chiovitti requesting that the money be paid to an account with the Bank of Montreal in North York, Ontario (account number 8032-397).
- At around the same time Northfield also sent Mr Altoft a copy of Vitof's pro forma invoice number 30 dated 5 April 2005 referred to above. Northfield also sent Mr Altoft a copy of its wire transfer instruction dated 7 April 2005 to pay the amount invoiced to an account in the name of Mr Chiovitti at the Bank of Montreal in Oakville, Ontario (account number 4601-547).
- I interpolate at this point that during the course of these proceedings Vitof has disclosed all of its invoices numbered 25-31 issued to Northfield. As noted above, Mr Chiovitti accepts that the receipts from these sales were paid into accounts in his own name. I have already set out Mr Chiovitti's explanations for this and referred to the fact that his exhibit LC4 accounts for the revenue and expenses relating to invoices 25-31.
- On 11 July 2005 Mr Altoft sent Mr Chiovitti by email, fax and post a letter, again drafted by Humphries Kirk, in which he stated among other things:
"As you know it has come to my attention that at least three of VITOF Limited's labelling machines have been sold and the proceeds of sale have not been credited to VITOF Limited's bank account. In particular, I have discovered that Northfield Corporation have purchased three machines under purchase order 7759 ($16,390) and purchase order 7962 (£33,732) total $50,122 and that on your express instructions the monies for both of these invoices have been paid into your personal bank accounts at Bank of Montrιal.
The fact that the invoices for these payments are numbers 35 and 30 imply that there must be at least four other invoices issued by you in the name of VITOF Limited proceeds for which have also not been credited to VITOF Limited's bank account.
I understand that you assured Northfield Corporation that this action was in order because VITOF Limited's bank account had been frozen. Such statement is not true.
Accordingly, you are in breach of the Shareholders Agreement and specifically clause 6.1, clause 6.2.1, clause 6.2.4 and clause 16.5. It is also a breach of your obligations as director to ensure that all monies due to the company are properly accounted for and paid into the companies account. Such breach is clearly material and indeed goes to the heart of your contractual obligations, and therefore is a repudiatory breach of the Shareholders Agreement.
In a without prejudice email dated 22 June 2005 I have tried to achieve settlement of the dispute arising from your repudiatory breach of the Shareholders Agreement but this has failed.
Accordingly, I hereby accept your repudiatory breach of the shareholders agreement and I regard the Shareholders Agreement as no longer being valid or binding on either of us. Your actions in appropriating the company's money and in failing to declare it either to me or to the company's auditor amounts, in my view, to a dishonest appropriation of the company's money which is both a criminal offence and a breach of your obligations as director.
I hereby reserve all my rights in respect of the all rights arising prior to today under the Shareholders Agreement.
Accordingly, I have reported these facts to the Police and a statement will be passed to the Canadian police in Ontario.
VITOF Limited still exists and is still trading. I have already offered to make circuit boards available for sales and that offer remains valid. I am contacting the distributors and confirming that VITOF Limited is still able to deliver labelling machine and that I am prepared to provide software support for those labelling machine, provided, of course, that VITOF Limited has received the proceeds of sale for them
."
- On 11 and 12 July 2005 Mr Altoft sent identical letters, again drafted by Humphries Kirk, to each of MPI, York and QLC in which he stated among other things:
"As you know I am one of two directors of VITOF Limited ('the Company') and am also a 50% shareholder with Mr Luciano Chiovitti.
The Company manufactures and sells labelling machines ('the Machines') using circuit boards ('the OEM Circuit Boards') and software ('the Software') designed by me. I own the designs and software and permit the Company to use them for the Machines.
It has come to my attention that Mr Chiovitti has apparently been selling the Machines to various distributors, including yourselves but that the money for the sales thus generated has in fact been paid into his personal accounts and not to the account of VITOF Limited ('Grey Machines').
Furthermore it is possible that the Grey Machines may incorporate circuit boards that are reverse-engineered copies of the OEM Circuit Boards. I hold the Company's stock of OEM Circuit Boards and have made these available to Mr Chiovitti on demand so that he can incorporate them into Machines. However he has only taken delivery of about 10 but has apparently shipped more than 10 machines. Accordingly it seems that Mr Chiovitti may have arranged for these circuit boards to be copied/reverse engineered. Such action is probably unlawful as being a breach of my design right in the circuit boards and/or copyright in the design documents.
Accordingly my position with regard to the software support in relation to the Grey Machines is reserved.
VITOF Limited is a duly registered company which is trading and is ready, willing and able to deliver Machines to you. I am prepared to personally provide software support services in relation to any Machines that are delivered by VITOF Limited and for which VITOF Limited receives the proceeds of sale."
- On 13 July 2005 Mr Chiovitti replied to Mr Altoft's letter to him dated 11 July 2005. Mr Chiovitti's letter is marked "without prejudice", but it has been exhibited by Mr Altoft without objection from Vitof and I am satisfied that (with the possible exception of one paragraph) it is not truly without prejudice. In his letter Mr Chiovitti rejected Mr Altoft's claims and in particular his claim to personal ownership of intellectual property rights.
- On 15 July 2005 Mr Chiovitti wrote to Mr Bugler complaining that Albert Goodman had acted contrary to his instructions, disputing Vitof's liability for both the sum of £1,762.50 charged by Albert Goodman on 6 April 2005 and a further sum of £1,142.50 shown due on a statement of account issued by Albert Goodman on 31 May 2005, claiming that the financial statements for the year ending 31 July 2004 prepared and issued by Albert Goodman falsely stated that they had been approved by the Board on 10 May 2005 and requesting Albert Goodman to notify their insurers of a potential claim.
- On 12 July 2005 Northfield placed with Mr Altoft on behalf of Vitof an order for a PDFM labelling machine, one mainboard, one power board and two motor drives. Mr Altoft in the name of Vitof invoiced Northfield for these items on 17 July 2005. The invoice gives a shipping date of 18 July 2005. Mr Altoft's evidence is that the labeller, and four others, were partially manufactured by Teknimek Engineering in the UK, who invoiced Northfield for the work on 20 July 2005.
- In emails dated 25 and 28 July 2005 Northfield expressed to Mr Chiovitti its dissatisfaction with the level of support it was receiving from Vitof for machines which it had sold. Mr Altoft claims that this is because Mr Chiovitti had refused to supply Northfield with parts because Northfield was not prepared to make payments into Mr Chiovitti's bank accounts rather than Vitof's accounts. As I understand it, Northfield had turned to Mr Altoft to provide support and thus it was that Mr Altoft had supplied a machine and parts to Northfield in Vitof's name.
- On 28 July 2005 Faegre & Benson wrote on behalf of Mr Chiovitti to Mr Altoft (with a copy to Humphries Kirk). In this letter Faegre & Benson:
i) asserted that Mr Altoft had removed the hardware inventory from Jancox without lawful cause or excuse and in breach of his fiduciary and other duties. Faegre & Benson repeated the demands made in Mr Chiovitti's letter dated 30 January 2005;
ii) asserted that the intellectual property rights in the source code and circuit boards designs belonged to Vitof since Mr Altoft was an employee of the company, alternatively that Mr Altoft had made an equitable assignment of such rights to Vitof, and that
"your assertions, which we understand you have made only recently, that: (i) you owned copyright in the 'source code' immediately prior to the formation of the Company and, (ii) as alleged owner, you have merely permitted the Company to use such 'source code', since November, 2002 up until today's date, are both wholly incorrect";
iii) gave the explanation about Mr Chiovitti's bank accounts that I have quoted in sub-paragraph 59(i) above;
iv) enclosed a letter to Albert Goodman. This letter is not in evidence, but it appears that in it Faegre & Benson asserted that Mr Altoft had instructed Albert Goodman to file Vitof's statutory accounts on behalf of the Board without authority;
v) enclosed a letter to Northfield (which again is not in evidence) and demanded that Mr Altoft cease and desist making defamatory statements in relation to Mr Chiovitti;
vi) enclosed copies of letters to HSBC and Battens (which again are not in evidence); and
vii) demanded that by 5 August 2005 Mr Altoft deliver up to Humphries Kirk as escrow agents the hardware inventory (listed in Schedule A to the letter) and copies on a suitable medium of all circuit board designs and source code for the PDFM labeller, supply certain information and give various undertakings.
- On 29 July 2005 Mr Altoft resigned as a director of Vitof as a result of advice from Humphries Kirk. My impression is that Mr Altoft somewhat regrets this decision; but nevertheless he understands and accepts that he must abide by the consequences of it. In any event, whether the decision to resign was well-advised or not is not a matter for me.
- On a date which is unclear, but at around the end of July 2005, Mr Altoft gave a witness statement to Dorset Police in which he gave his account of the events up to 29 July 2005, focussing on his claim that Mr Chiovitti had stolen at least $50,122 from Vitof by diverting the payments from Northfield from Vitof's Canadian HSBC account to his personal accounts with the Bank of Montreal. On 11 August 2005 Dorset Police sent the statement to the Toronto Police Service.
- On 2 August 2005 Humphries Kirk replied to Faegre & Benson on behalf of Mr Altoft. This letter was copied to Dorset Police. In it Humphries Kirk stated among other things (emphasis added):
"2. Hardware inventory
(a) Our client, as shareholder and Company officer was perfectly entitled to take possession of the circuit boards. Our client has made it quite clear that these circuit boards belong to Vitof Limited are held by our client to that effect.
(b) Our client has also made it quite clear in writing by letter dated 30th November 2004 and by several emails since, and hereby repeated, that the circuit boards are freely and immediately available to your client, for the proper and lawful purpose of being incorporated into labelling machines. All your client has to do is to ask for them and indicate details of the sales of the machines into which they are being incorporated.
3. Intellectual Property Rights
(a) The source code does not belong to Vitof Limited and indeed it could not possibly belong to Vitof for reasons well known to your client. Specifically, the source code was written long before Vitof Limited was set up. There is no legal assignment of the source code to Vitof Limited in existence.
(b) There are no facts in existence to support your allegation of an equitable assignment of the source code to Vitof Limited. Specifically, the Distributor Agreement does indeed make reference to intellectual property, to which you refer, makes reference only to trademarks.
(c) Our client's position is that he has permitted Vitof Limited to use the source code. He will continue to do so as long as Vitof Limited carries out its lawful obligations to him
4. Mr Chiovitti's activities in relation to the Company's business
(a) We should tell you that our client's account of Mr Chiovitti's activities in relation to the Company's business
have been notified to the UK police who are making detailed enquiries. Because of that, your letter ad this letter will be passed to the police.
(b) We note your client's assertion (through your good selves) that the Company's bank accounts have been frozen. This is not true. None of the Company's bank accounts have been frozen. The only change is that the UK bank account with HSBC Bank plc has had its mandate changed to require signature of both Mr Chiovitti and Mr Altoft in relation to withdrawals.
(c) Accordingly, your client's explanation (through your good selves) of his actions is not true and is rejected. Your client's continuing dishonesty simply reinforces his repudiation of the Shareholders' Agreement, which repudiated was accepted by Mr Altoft's letter to Mr Chiovitti dated 11 July 2005 (copy attached for ease of reference). We note that Mr Chiovitti has had the option, through you, to withdraw and attempt to rectify his repudiatory breach of the Shareholders Agreement, but that he has not done so and instead has chosen to instruct you to send an ultimatum to our client, expiring on 5th August.
7. Information Undertakings and Delivery up of Company Property
(b) 7.2 our client will not give any undertaking concerning his intellectual property rights. However, our client is prepared to agree that, for so long as it abides by its legal obligations to him, Vitof Limited has such right and title as our client can licence to use the software and to use his circuit board designs
.
(d) 7.4
(ii) So far as the software is concerned, as your client well knows, our client is not at liberty to provide the software to your client
"
- On 8 August 2005 Mr Chiovitti wrote to HSBC's Weymouth branch informing it that Mr Altoft had resigned as a director of Vitof and instructing it to close Vitof's account and remit the net proceeds to Faegre & Benson as escrow agents. On 10 August 2005 Humphries Kirk wrote to Faegre & Benson enclosing a copy of this letter, asking what precisely Mr Chiovitti had in mind and saying that Mr Altoft might well be prepared to agree to it. The letter went on to refer to the fact that Mr Altoft remained a shareholder and company secretary. It also recorded that the writer would be on holiday for two weeks from 19 August 2005.
- On 11 August 2005 Mr Chiovitti wrote to Northfield advising it that the Distribution Agreement between Vitof and Northfield had expired at midnight on 11 August 2005 and would not be renewed. Mr Altoft says that York also ceased to be distributor at some point, and he implies that this was of York's own volition because it had failed to sell a labeller it had acquired from Vitof, but it is not clear when he says this occurred.
- On 15 August 2005 Humphries Kirk wrote to Faegre & Benson again on the subject of the UK account, and stated (emphasis added):
"
As you know our client has been paying the proceeds of a sale of machines to Northfield into that account. Messrs Northfield have told our client that they would prefer to deal with him rather than Mr Chiovitti in future.
Our client takes the view that for so long as he is a shareholder of Vitof he is perfectly entitled to deal with Northfield, providing he is careful to ensure that he properly accounts for all proceeds. Obviously, if Vitof does not wish to deal with Northfield then our client will be free to deal with them direct if he wishes to. The view that we take however is that, at least until the parties have had the opportunity to explore as to whether a settlement can be achieved, it would be sensible for Northfield to continue to be served by our client and on the basis that he will account to Vitof Limited for all monies received. On that basis we respectfully that it would be more sensible to leave the bank account where it is so that our client can pay money into it."
- On 22 August 2005 Mr Chiovitti appointed one Eric Given to act as a director of Vitof. On the same day Vitof's board of directors passed a resolution removing Mr Altoft as company secretary and appointing Mr Chiovitti in his place.
- Also on 22 August 2005 Faegre & Benson replied to Humphries Kirk's letters dated 2, 10 and 15 August 2005 on behalf of Vitof as well as Mr Chiovitti. In this letter Faegre & Benson stated among other things:
"Hardware
We have noted your confirmation that your client admits that all of the Hardware Inventory in his possession (see Schedule 'A') is, in fact, the property of the Company. Since your client is no longer a Director of the Company, all such property must be immediately returned to the Company. It is clear that your client, in his capacity as a Shareholder of the Company, has not legal authority or basis to the continued possession of such property. In point of fact, your client's continued possession of the Company's property is tantamount to conversion.
The Company's Software
Your client's contention is that the source code for the PDFM and DFM labelers was written long before the Company was set up. This is wholly incorrect to the knowledge of your client. In point of fact, we are instructed that the current source code for the PDFM and DFM labellers was developed and written in calendar years 2002, 2003 and 2004. Mr Chiovitti, for the account of the Company, made extensive contributions to these activities. Your client's refusal to provide any undertaking with regard to the intellectual property of the Company is noted
.
Northfield
We are concerned to note your assertion in your letter of 15 August that your client 'takes the view that for so long as he is a shareholder of Vitof, he is perfectly entitled to deal with Northfield'. In his capacity of shareholder, your client has no such entitlement to act on behalf of the Company. Moreover, your client has no authority to whatsoever to purport to represent the Company.
Further, we note with concern the following statement contained in your letter of 15 August: 'Obviously, if Vitof does not wish to deal with Northfield, then our client will be free to deal with them direct if he wishes to'. We draw your attention to Clause 10 of the Shareholders' Agreement
Your client's proposed conduct with regard to Northfield is in clear breach of this provision.
Accountants
Albert Goodman has resigned its mandate to act as Accountants to the Company with effect from 18 August 2005. The Company will shortly appoint new Accountants. Amongst other things, the new Accountants will be instructed to prepare amended Financial Statements and an amended Corporate Tax Return Filing for the period ended 31 July 2004 in order to correct the substantial errors and mistakes in the Financial Statements that were improperly prepared and issued by Albert Goodman. In this connection and for such purposes, we require from your client the immediate return of all of the Company's business records, receipts, etc in your client's possession. These are, after all, unquestionably the property of the Company and are essential in order that the Company may properly discharge its statutory obligations
."
- The letter concluded by demanding that Mr Altoft give a series of undertakings by 26 August 2006 failing which proceedings would be issued and injunctive relief pending trial sought. These included undertakings to deliver up to Vitof care of Faegre & Benson the hardware inventory, copies of the source code and circuit designs and the company's business records.
- On 23 August 2005 Humphries Kirk wrote to Faegre & Benson saying:
"As you are well aware, the parties have been in discussions for attempting to find a non-litigated solution to this matter. Furthermore, as you have been previously notified, the person dealing with this matter is currently away on holiday.
Your deadline of Friday 26 August 2005 and the ultimatums contained in your letter dated 22 August 2005 are therefore unreasonable.
Our position remains as previously stated, namely that the circuit boards in our clients possession are the property of Vitof Limited and are held by our client to that effect. Our client has also made it quite clear on numerous occasions and hereby repeats, that the circuit boards are freely and immediately available to your client for the proper and lawful purpose of being incorporated into labelling machines."
- On 25 August 2005 Mr Altoft instructed new solicitors, The Stokes Partnership, who wrote to Faegre & Benson on 26 August 2006 saying that they were taking instructions and would reply within the next five working days.
- On 31 August 2005 Mr Chiovitti on behalf of Vitof wrote to Mr Altoft to dismiss him as an employee with immediate effect on the basis that his conduct had produced an irreparable breakdown of the implied duty of trust and confidence between Vitof and himself.
The proceedings and subsequent events
- These proceedings were begun by a Claim Form issued on 31 August 2005. On the same day Vitof applied for interim injunctions and for an order for delivery up of the hardware inventory, Vitof's business records and the intellectual property relating to the PDFM. This application was supported by a witness statement made by Mr Chiovitti. It was listed before Evans-Lombe J on 8 September 2005.
- Since The Stokes Partnership had informed Faegre & Benson that they did not have instructions to accept service of proceedings on behalf of Mr Altoft, Faegre & Benson instructed a process server to serve the proceedings and application on Mr Altoft personally. The process server visited Mr Altoft's flat on 1, 2, 4 and 5 September 2005, but on each occasion was told by his wife that he was away until late on 5 September 2005. When he visited on 6 September 2005 he was told that Mr Altoft was still away.
- In the meantime Faegre & Benson sent the papers to The Stokes Partnership. On 1 September 2005 The Stokes Partnership wrote to Faegre & Benson acknowledging receipt, confirming that they did not have instructions to accept service and seeking an adjournment of the hearing to give them time to prepare a response. On the same day The Stokes Partnership requested, and Faegre & Benson supplied, an electronic copy of Mr Chiovitti's witness statement (without exhibits) so they could email it to Mr Altoft. Faegre & Benson's response on 2 September 2005, which was elaborated on 6 September 2005, to the request for an adjournment was that Vitof would agree to an adjournment provided that Mr Altoft delivered up the hardware, business records and intellectual property (in the case of the latter to be held in escrow) and gave undertakings in the meantime.
- Mr Altoft says that the reason why he was not at home at the beginning of September 2005 is that on 28 August 2005 he went to California to visit Label-Aire and did not return until 5 September 2005. While he was in California he received a copy of Mr Chiovitti's witness statement (without exhibits) by email from The Stokes Partnership. On 6 September 2006 he met The Stokes Partnership and received a full set of the documents served by Vitof for the first time.
- Mr Altoft says that the reason for his visit to Label-Aire was that he had decided that it was time to confess to Label-Aire that the software in the Vitof labeller was essentially the software which he had previously written for Label-Aire. To demonstrate this he printed out and took with him comparative extracts from the two sets of source code.
- After his return to the UK, on about 7 September 2005, Mr Altoft sent Label-Aire by email an almost complete copy of the source code used in the Vitof labeller (almost complete because Mr Altoft says that he removed the code relating to the asynchronous algorithm from this copy). Vitof contends that Mr Altoft thereby acted in contempt of court since he was deliberately attempting to pre-empt Evans-Lombe J's Order, but it has made no application in that regard.
- Mr Altoft told me that his reasons for sending the source code to Label-Aire were three-fold. First, he wanted to "come clean". Secondly, he didn't want Mr Chiovitti to "get away with it". Thirdly, he assumed that it would come out in any case. By this I understood him to mean that he anticipated that the source code would have to be disclosed in the course of these proceedings, and thus would come to Label-Aire's attention. He also told me that he was advised to try and get an agreement from Label-Aire that it would not pursue him. So far as I aware, he did not succeed in obtaining such an agreement.
- On 7 September 2005 The Stokes Partnership wrote to Faegre & Benson and to the clerk to Evans-Lombe J reiterating the request for an adjournment and stating that, if the hearing went ahead, Mr Altoft would represent himself. The letter to the clerk to Evans-Lombe J explained Mr Altoft's absence from the country during the period 28 August to 5 September 2005 and said that he had only received a full set of the papers on 6 September 2005. The letter to Faegre & Benson stated among other things (emphasis added):
"On the subject of the ownership of the intellectual property, our client's position on this issue is that the legal rights to the software belong to Label-Aire Inc by virtue of the terms of the consultancy agreement made in June 2000, a copy of which is exhibited to your client's witness statement (page 6 LC1). It is also our client's case that Mr Chiovitti has been aware throughout that the rightful owner of any intellectual property used by Vitof is Label-Aire Inc.
As you can see from the letter to the Court, our client has already come clean with Label-Aire, who has been informed of these proceedings. Our client will continue to co-operate with Label-Aire and apart from that is quite happy to give an undertaking that he will not disclose or share any information with third parties.
As far as acting on behalf of Vitof Ltd is concerned, our client did do in order to continue to support an existing customer, with full disclosure to your client. You may recall that our client stated that any sale proceeds would be paid into the company's account. At no point has our client attempted to act in any way in self interest and prejudicial to the company. As the company is in fact a quasi-partnership, there is no reason why our client should not continue to represent the company, notwithstanding his ill-advised resignation as a director. Nevertheless, given the present circumstances, our client is prepared to undertake to refrain from holding himself out as acting on behalf of, or with the authority of the company, until further order of the Court
.
Our client is also willing to hand over to you the software and hardware and other records belonging to the company on condition that they are held by you in escrow, until further order of the Court."
- Mr Chiovitti says that he telephoned George Allen, the President of Label-Aire, on 7 September 2005, to ask about the claim made in the letters from The Stokes Partnership. Mr Chiovitti's contemporaneous note of the conversation includes the following:
"1)
George then confirmed that Antony had indeed visited Label-Aire to 'give his [Antony's] side of the story' and to find out where Label-Aire stood, and what they would/might do about it.
2) George explained that Antony claimed that the Vitof 'source code' was the Label-Aire 'source code' with extra layers of programming on it and that Label-Aire's people would immediately recognize the 'source code'. George went on to say that Antony explained that he intended to rewrite the 'source code' for Vitof but he [Altoft] 'never got around to it'.
3) George then stated that Antony had agreed to send him [i.e. Label-Aire] Vitof's 'source code' so that Label-Aire could compare the two
George claimed that he hadn't received the 'source code' yet, but expected to receive it from Altoft within 24 hours.
5) I reminded George of our conversation in January of this year [2005] and his lack of interest, at that time, in the original claims that I had then reported to him, namely that Antony was now claiming [i.e., in December, 2004] that portions of Vitof's 'source code' pre-dated the formation of Vitof [in October 2002] and that Antony now [December, 2004] himself claimed to own the 'source code'. At that time [i.e., January 2005], I informed George that that could only mean that Label-Aire [and possibly even Avery], and certainly NOT Antony, owned the 'source code', in its then condition, and prior to the formation of Vitof. I stated to George that while I believed this to be a lie on the part of Altoft, I nonetheless wanted to know what, if anything, Label-Aire thought of this.
6) George then went on to say that he's now heard the 'other side of the story', i.e. from Altoft, and
he is now concerned about Label-Aire's 'property' being available in the market.
7) I went on to reiterate that I was unaware of what Altoft had actually done since it was HE [Altoft] that was Vitof's Software Engineer. I had always been under the impression from Altoft that Vitof's 'source code' had been developed by Altoft from 'scratch'
"
- Mr Altoft says that he was in regular contact with Mr Allen at this time, and agrees that Mr Allen told Mr Chiovitti that he did not have the software, but says that in reality the software was already being analysed by Label-Aire's engineering team.
- I interpolate that Mr Altoft also says that at some point in 2005 Mr Chiovitti send a copy of the software used in the PDFM to Avery Dennison asking it to compare the software with the software Mr Altoft wrote for that company. This claim is supported by an email from a representative of Avery Dennison which Mr Altoft has exhibited, and Mr Chiovitti has not disputed it. Mr Altoft says that he wrote the Label-Aire software from scratch and did not copy it from the Avery Dennison software.
- At the hearing on 8 September 2005 Mr Altoft represented himself. He told me that he was jet-lagged, had had little sleep for three days and did not defend himself. Be that as it may, Evans-Lombe J made an Order in favour of Vitof in which he granted interim injunctions until 22 September 2005 or further order restraining Mr Altoft from (a) disposing of the intellectual property rights relating to the PDFM and in particular the software, source code and circuit board designs (including allowing any access to the same by Label-Aire), (b) holding himself out as in any way acting with the authority and/or behalf of the Applicant, (c) doing the acts specified in clause 10.1.1 of the Shareholders' Agreement and (d) disclosing Vitof's confidential information to any third party (save his legal advisors). Evans-Lombe J also made orders requiring Mr Altoft to deliver up to Vitof the hardware specified in Schedule A to the Order and all of Vitof's business records in his possession, and to deliver up to Faegre & Benson to hold on escrow copies of the intellectual property so as to leave none in his possession. (I would point out that two different versions of Schedule A appear in the papers at various points. As I understand it, the version appended to the Order included or was intended to include all Vitof equipment then in Mr Altoft's possession. Thus it did not include items which Mr Altoft had removed from Jancox but had already returned; but did include items which had not been removed from Jancox such as an IBM laptop.) Evans-Lombe J ordered that the costs of the application were to be Vitof's costs in the application.
- I have not been supplied with a transcript of Evans-Lombe J's judgment, but I have been supplied with a note prepared by Faegre & Benson. It is evident from that note that Evans-Lombe J considered that Vitof had established a case to be tried and that the balance of convenience favoured the grant of injunctions to maintain the status quo for 14 days while Mr Altoft filed evidence in response. As for the orders for delivery up of the hardware inventory and the company's business records, it is evident from the note that Mr Altoft accepted that these were Vitof's property and had to be returned, and accordingly the orders were final orders made on admissions.
- On 12 September 2005 Mr Altoft delivered up Vitof's business records that were in his possession. On the same date he sent Faegre & Benson copies of the source code, the latest version of which was dated 29 May 2004, and circuit board designs. On 14 September 2005 he delivered up Vitof's hardware that was in his possession.
- On 14 September 2005 Mr Chiovitti and Mr Given on behalf of Vitof passed a resolution appointing Rees Pollock as the company's accountants with immediate effect.
- On 16 September 2005 Mr Altoft informed Faegre & Benson that he had not delivered up the latest version of the source code which had ever existed because he had accidentally overwritten it when trying to assist Northfield in July 2005. I was told by counsel for Vitof that Mr Altoft had fully complied with the order for delivery up of the hardware inventory; but Mr Altoft told me that, although he had delivered up everything in his possession, he had not delivered all the items listed in Schedule A to Evans-Lombe J's Order since that list was inaccurate.
- On 19 September 2005 Mr Chiovitti on behalf of Vitof wrote to Mr Altoft (with copies to Faegre & Benson and Rees Pollock). In this letter Mr Chiovitti stated among other things (emphasis as in the original):
"1. Albert Goodman:
As VITOF has previously advised you, the Firm of Albert Goodman has been dismissed as Accountants to the affairs of VITOF by Resolution duly adopted by the Board of Directors of VITOF on 22 August 2005. A Certified Extract of such Resolution was remitted to you by VITOF's Solicitor, Stephen Llewellyn, at the High Court of Justice, during the morning of 8 September 2005.
3. VITOF and Your 'Shareholder Loan Account':
You purport to have made 'Shareholder Loans' to VITOF, from time to time, during the period 1 November 2002 to the present date.
Be advised that the Board of Directors has instructed Messrs Rees Pollock to conduct an audit of your purported 'Shareholder Loans' to VITOF.
In this latter connection, the Board of Directors require you to make a detailed, line-by-line 'Statement' of each element of such purported 'Shareholder Loans' supported by the original document evidencing and corroborating each such element.
Be advised that you are required to deliver such 'Statement' [and original supporting documents] of your to purported 'Shareholder Loans' to VITOF'S Registered Office [address set out below], to the attention of VITOF'S Solicitor, Stephen Llewellyn, on or before the close of business on Tuesday, 4 October 2005.
In connection with the preparation of such 'Statement', should you require access to any records in VITOF'S possession, please contact Mr. Llewellyn who is hereby instructed to arrange appropriate access to same for you.
Upon receipt of the 'Statement' and documents herein requested, Messrs Rees Pollock shall perform their audit and advise VITOF accordingly.
4. Conclusion
In the event of your refusal and/or failure and/or neglect to comply with the within request, and in the manner and within the deadline stipulated, be advised that the Board of Directors of VITOF shall, in such event, then deem the balance of your purported 'Shareholder Loan Account' to be NIL."
- On 22 September 2005 Mann J made an Order by consent continuing the injunctions until the hearing of an application by order. Paragraph 5 of that Order provided that the costs of that hearing were to be costs in the application.
- Also on 22 September 2005 Vitof served its Particulars of Claim, which was verified by a statement of truth signed by Mr Chiovitti. In summary this alleged that:
i) All the components of the PDFM labeller, and all the intellectual property in such components, were proprietary to Vitof since they had been created by Mr Chiovitti and Mr Altoft in their capacities as directors and employees. The Particulars of Claim was unspecific as to precisely what intellectual property rights were relied upon.
ii) Mr Altoft's actions removing the hardware inventory from Jancox and refusing to return it until ordered to do so by Evans-Lombe J constituted conversion and/or a breach of his duties as a director and/or employee and/or a breach of clause 6.1 of the Shareholders' Agreement.
iii) Mr Altoft had asserted in his letters to Mr Chiovitti dated 29 [sic this should say 30] November 2004, 9 December 2004 and in his letters to the distributors dated 11 and 12 July 2005 that he personally owned the intellectual property rights in the source code, software and circuit boards. Such assertions were denials of Vitof's title and acts of conversion. Furthermore, Mr Altoft's failure to deliver up such intellectual property rights despite numerous requests since 30 January 2005 constituted conversion and/or a breach of his duties as a director and/or employee and/or a breach of clause 6.1 of the Shareholders' Agreement.
iv) By making and sending a copy of the source code to Label-Aire Mr Altoft had converted Vitof's property, acted in breach of clause 15.1 of the Shareholders' Agreement and infringed Vitof's copyright.
v) In Humphries Kirk's letter dated 15 August 2005 Mr Altoft had asserted that was entitled to deal with Vitof's distributors in a personal capacity contrary to clause 10.1 of the Shareholders Agreement.
vi) Mr Altoft had failed to deliver up Vitof's books and records as requested in Faegre & Benson's letter dated 22 August 2005 until ordered to do so by Evans-Lombe J.
vii) Vitof had suffered loss and damage with respect to the claims relating to the hardware inventory particularised at £19,496.68.
viii) Vitof had suffered loss and damages with respect to the claims relating to the intellectual property rights particularised at £538,086. This included £100,000 for "destruction of distribution network" due to the denial of Vitof's title.
- On 23 September 2005 Rees Pollock wrote to the members and directors of Vitof stating that they had been asked to prepare a valuation of 500 shares in the company in accordance with their letter of engagement and Article 7 of the company's Articles. The letter of engagement is not in evidence, but Rees Pollock stated:
"In preparing the valuation we have relied on material provided by the company's directors and have not sought any confirmations nor carried ou[t] any verification of the information provided. The material we have made use of comprises the following
- The company's memorandum and articles of association.
- The company's unaudited financial statements for the year ended 31 July 2004.
- The company's unaudited financial statements for the year ended 31 July 2003.
- The shareholders' agreement dated 1 November 2002.
- Representations from the directors and their advisors as to the activities of the company since 1 August 2003, together with details of its transactions."
- Rees Pollock's conclusion was as follows:
"The company has net liabilities, is loss making, has no significant recent trading history and requires ongoing financial support for investors. As such, our opinion is that the existing shares are of negligible value and we would value a holding of 500 shares at the amount of £1. This, therefore, constitutes the 'Certified Price' within the meaning of sections 7.3(e) and 7.3(f) of the company's articles of association."
- Mr Altoft says, and Mr Chiovitti has not disputed, that prior to this Mr Chiovitti had made no offer to purchase his shares. Mr Altoft also says that when he received his copy of this letter it was accompanied by a £1 coin. Apart from Vitof's annual return (as to which, see below), however, there is no evidence that Mr Altoft has executed a transfer of his shares or that Vitof has authorised someone else to do so in accordance with Article 7.3(i) of Vitof's Articles of Association. When I asked counsel for Vitof about this, he was unable to assist me.
- On 26 September 2005 Vitof closed its account with HSBC in Weymouth.
- On 3 October 2005 Mr Altoft replied to Mr Chiovitti's letter dated 19 September 2005 (with copies to Faegre & Benson and Rees Pollock), stating (emphasis as in the original):
"Your unilaterally and arbitrarily imposed deadline is not acceptable. It is a question of fact whether the loans have been made and there is nothing in the shareholder's agreement about having to provide the information as you now demand.
As you know I have already provided all original receipts and corroborating bank statements twice to Albert Goodman accountants. My loans were checked and no discrepancies found. My loans were entered into the accounts for the financial years ending in 2003 and 2004.
I do however have no problem in producing my receipts yet again if you want to make things difficult. I will therefore as you suggest contact Mr. Llewellyn of Faegre and Benson to arrange access to the receipts and records that I need. The return trip to London takes a full day and is rather expensive and I will therefore make arrangements with Mr. Llewellyn for access to the necessary documents within a more reasonable and convenient timescale.
You must also bear in mind that the greater part of my loans were straight-forward injections of funds into the company bank accounts (£29,000) for which of course there is no need or possibility of presenting receipts these payments can be quite clearly seen from the company bank statements."
- On 4 October 2005 Mr Altoft visited London and took the opportunity to visit Faegre & Benson to access the relevant receipts and documents to support his loan claims.
- On 5 October 2005 Mr Chiovitti and Mr Given on behalf of Vitof passed a board resolution declaring that, since Mr Altoft had not complied with the demand made in Mr Chiovitti's letter dated 19 September 2005, the balance of Mr Altoft's shareholder loan account "shall now be deemed to be NIL". Mr Chiovitti sent a copy of this resolution to Mr Altoft by email at 05:26 on the same day. Mr Altoft replied by email later that day saying:
"The board cannot simply decide that it does not owe money to its creditors.
I refer you to my letter to you of 3 October
My loan repayment is due on 30 November 2005. Let me known if you prefer to accept my loan in the amount already entered into the accounts prepared by Albert Goodman Accountants or whether you prefer I provide the relevant documentary evidence yet again."
- On 17 October 2005 Mr Altoft served his Defence and Counterclaim. The Counterclaim advanced two claims, namely (i) a claim in respect of the valuation of his shareholding and (ii) a claim for repayment of his loans.
- On 26 October 2005 Mr Altoft wrote to Mr Chiovitti saying that Mr Chiovitti could not dismiss a creditor by passing a board resolution, that Mr Chiovitti knew his loans were genuine and that they remained payable on 30 November 2005.
- On 1 November 2005 Vitof served its Defence and Counterclaim.
- On 16 November 2005 Vitof filed its annual return with Companies House which stated that as at 23 October 2005 Mr Chiovitti owned 1000 shares in the company and Mr Altoft owned none.
- On 6 December 2005 Mr Kallipetis made the Order referred to in sub-paragraph 1(iv) above, which continued the injunctions until trial or further order. Paragraph 4 of that Order provided that the costs of and associated with the application be reserved to the first case management conference in the action.
- On 27 December 2005 Mr Aloft telephoned Jerry Wille of QLC and also sent him an email. In the email Mr Altoft thanked Mr Wille for confirming that QLC was still a Vitof distributor, said that he was making a claim against Mr Chiovitti/Vitof for around $100,000 and asserted that the software used in the Vitof labeller belonged to Label-Aire. On 28 December 2005 Mr Wille replied stating that "our Distributor agreement ended and we have not been a Distributor since then". Later that day Mr Altoft replied saying "you led me to believe that you were still acting as a distributor for Vitof Ltd though you said that you had not sold any Vitof labellers in quite a while. I note also that you are still promoting yourselves as a Vitof distributor on your web-site." Vitof contends that by these communications Mr Altoft contravened Mr Kallipetis' Order, but has not yet made any application in that regard.
- Mr Altoft claims that QLC and MPI remain Vitof distributors to this day. He says that this is supported by print-outs from QLC and MPI's websites advertising the PDFM which he has exhibited. Indeed, during the course of the hearing before me Mr Altoft told me that these advertisements were still present on these websites. Following the hearing I visited the websites myself and found that the advertisements were indeed still present. Whether this means that QLC and MPI are actually still Vitof distributors, however, I cannot determine.
Vitof's application for summary judgment
- It is convenient to consider Vitof's application for summary judgment before turning to the other applications.
Ownership of the intellectual property rights
- Probably most important issues between the parties, and the ones that occupied the greater part of the hearing before me, concern the ownership of certain intellectual property rights relating to the PDFM labeller. Vitof claims that it owns them. Mr Altoft disputes this, but his position has changed during the course of the dispute.
- Mr Chiovitti says, and Mr Altoft has not denied, that prior to 30 November 2004 Mr Altoft made no claim to personal ownership of the intellectual property rights. Indeed, I consider that it is implicit in Mr Altoft's revised proposals of 18 November 2004 quoted in paragraph 37 above that Vitof owns the intellectual property rights in the software and circuit board designs and not Mr Altoft. As can be seen from paragraphs 40 to 88 above, however, from 30 November 2004 to at least 2 August 2005 Mr Altoft repeatedly asserted to Mr Chiovitti and to third parties that he owned the intellectual property rights. On 7 September 2005 Mr Altoft asserted for the first time (although he says it had been alluded to previously) that the rights in the software belonged to Label-Aire. During the course of the hearing before me he asserted for the first time that any rights in the circuit board designs were owned by UKE.
- It is necessary to consider the different rights claimed separately.
Copyright in the source code
- The source code for the PDFM labeller consists of nine modules: conveyor.src, encoder.src, main.src, ram.src, registers.inc, stepper.src, text,src, timers.src and unwindrew.src. It is common ground that the source code went through a number of versions, the most recent of which that is extant is the version dated 29 May 2004 referred to above. The Amended Particulars of Claim pleads that each version of each module of the source code is an original literary work in which copyright subsists, but it probably makes no difference whether one regards the source code as one work comprising the whole code or as nine distinct works comprising the individual modules: cf. Navitaire Inc v easyJet Airline Co Ltd [2004] EWHC 1725 (Ch), [2006] RPC 3 at [160]. For convenience I shall refer to it as one work, without deciding whether it is one work or nine. I shall also concentrate on the version dated 29 May 2004 rather than upon earlier or later versions.
- The Amended Particulars of Claims pleads that the source code was created between about 31 October 2002 and 26 August 2004 by Mr Altoft and Mr Chiovitti jointly, alternatively by Mr Altoft alone, acting in the course of their duties as directors and employees, alternatively as directors only. This pleading is consistent with evidence given by Mr Chiovitti (through Mr Llewellyn) that he believed that Mr Altoft had written new software for Vitof "from scratch" as a director and/or employee of Vitof in accordance with specifications laid down by Mr Chiovitti. In the most recent evidence given by Mr Chiovitti (through Mr Llewellyn), however, it is accepted that some of the work on the software may have been performed prior to the incorporation of Vitof. Mr Chiovitti claims that, to the extent that this was done, it was done with a view to the formation of Vitof and on behalf of the to-be-formed company.
- Mr Altoft's final position, as set out in his written submissions for the hearing before me and confirmed in his oral argument, is that the PDFM source code is a modified version of, and substantially the same as, the source code he created for Label-Aire, and therefore the copyright in it belongs to Label-Aire pursuant to clause 4.02 of his contract with Label-Aire set out in paragraph 13 above. To support this contention, Mr Altoft has exhibited some comparative extracts from the two programs which appear to be identical. Furthermore, in a letter to Faegre & Benson dated 1 May 2006 he said that he would bring a copy of the Label-Aire source code to court on 22 May 2006, and invited Vitof to bring the PDFM source code to court to enable me to compare the two. On 18 May 2006 Faegre & Benson replied to this letter asking for the Label-Aire source code to be disclosed to them in advance and stating that they would treat it as confidential and would not disclose it to Vitof until they had secured a signed confidentiality agreement from Mr Chiovitti. Counsel for Vitof told me, however, that after the hearing on 22 May 2006 it had occurred to him that, on Mr Altoft's case, Label-Aire's consent to such disclosure would be required and that he had asked Mr Altoft to seek such consent. Mr Altoft told me that he had already asked Label-Aire this and they would not agree, although they were content for Vitof's advisors and the Court to see the source code. Thus the exercise of comparison proposed by Mr Altoft has not been undertaken.
- Mr Altoft claims that Mr Chiovitti was well aware that the software for the PDFM labeller was largely recycled from the Label-Aire software since this was done at Mr Chiovitti's behest. Mr Altoft says that Mr Chiovitti's knowledge of this is demonstrated by a number of documents. It is sufficient at this stage to refer to one of these, namely an exchange of emails on 10 December 2002 in which Mr Altoft said to Mr Chiovitti:
"I've been looking at the rewind software and just discovered a big fat juicy bug that has been in LabelAire's software since day one and is probably still there now. It is a really stupid mistake and totally obvious but I have looked at it and still not seen it a thousand times before. Just like the spreadsheet calculations were we have both used diameter instead of radius over and over again. Hopefully the rewind software should work much better tomorrow."
Mr Chiovitti replied to this "G[r]eat news on the juicy bug!". Mr Chiovitti (through Mr Llewellyn) says that the explanation for this exchange is as follows:
"Between July 2002 and January 2003, Mr Altoft and Mr Chiovitti used a Label-Aire circuit board and software to test various motors and design configurations. During this exercise, various excel spreadsheets were created to evaluate the performance of the labeller.
the emails
concerned an inconsistency between their mathematical model and the results achieved with the Label-Aire circuit board and software. In fact, it transpired that the problem was in the Label-Aire software and not the newly created spreadsheet."
I have to say that I am unconvinced by this explanation, but this is not a matter that can be resolved at this stage.
- Mr Altoft also relies upon a number of other matters as demonstrating that his account is correct. For example, he says that Vitof did not have a software development tool known as an emulator until about April 2003 (a point which Mr Chiovitti has not disputed) and says that without an emulator it is impracticable to make anything other than small changes to software. He also says that the first Vitof labeller was shipped on 23 May 2003 and it would not have been possible to write new software in the intervening period. Again, these are not matters I can determine at this stage.
- Mr Altoft also says that the references to the software being created before the incorporation of Vitof in his letter dated 30 November 2004 and in Humphries Kirk's letter dated 2 August 2005, and the reference to "reasons well known" to Mr Chiovitti in the latter, were allusions to the software deriving from the Label-Aire software. This receives some support from Mr Chiovitti's reaction as recorded in his letter dated 2 December 2004 and especially in his attendance note of his conversation with Mr Allen. On the other hand, Mr Altoft's claim that the PDFM software is largely the same as the Label-Aire software is inconsistent with his claim to personal ownership of the rights in it.
- Mr Altoft estimates that about 90% of the PDFM source code was originally written for Label-Aire, and that of the remainder about 1-2% was written before the incorporation of Vitof and about 8-9% was written after the incorporation of Vitof. Mr Altoft says that the 1-2% he wrote before the incorporation of Vitof is important because these modifications enable the labeller to operate at high-speed. He also says that the 8-9% written after the incorporation mainly consisted of changes to the user interface.
- Counsel for Vitof accepted that I could not resolve Mr Chiovitti's claim to joint authorship (as to which, see Fylde Microsystems Ltd v Key Radio Systems Ltd [1998] FSR 449). As noted above, he also accepted that I could not resolve the issue as to whether or not Mr Altoft was employed by Vitof. He also accepted that at this stage it had to be assumed that Mr Altoft's account of the creation of the software might be correct. He submitted, however, that even on Mr Altoft's account it was plain that Vitof had equitable title to the copyright in the 29 May 2004 version of the PDFM source code, and that Mr Altoft had no real prospect of succeeding in any contrary claim.
- The first stage in counsel's argument was to submit that, even assuming that Mr Altoft was right that about 90% of the PDFM source code was the same as the Label-Aire source code, Mr Altoft's own evidence was that 10% was different (or at least modified). Furthermore, it was common ground that certain specific modifications had been made, such as the implementation of the asynchronous algorithm and the introduction of a Quickset menu. Counsel submitted that it was clear from this that the 29 May 2004 version of the PDFM source code was an original literary work in which copyright subsisted since it was not a slavish copy of the Label-Aire source code. In support of this he relied upon the most recent statement of the law as to originality by the Court of Appeal in Sawkins v Hyperion Records Ltd [2005] EWCA Civ 565, [2005] 1 WLR 3281. In my judgment this submission is correct.
- The second stage in counsel's argument was to submit that, given that Mr Altoft accepts that 8-9% of the PDFM source code was created after the incorporation of Vitof, although Mr Altoft was the legal owner of the copyright in the resulting literary work (assuming that he was not an employee, so that section 11(2) of the Copyright, Designs and Patents Act 1988 did not apply), Vitof was the equitable owner since Mr Altoft had created that work in the course of his duties as a director and in fulfilment of clause 7.3 of the Shareholders' Agreement. In support of this counsel relied upon Copinger & Skone James on Copyright (15th ed) §§5-15 and 5-176. The latter states (omitting footnotes):
"Where the work is created by someone who stands in a fiduciary relationship with another, such that he cannot be heard to say that he created the work for his own benefit, he will usually hold the copyright in trust for that other person. So, for example, a director or de facto director of a company who is not employed under a contract of service may nevertheless hold the copyright in works he makes for the company on trust and will have to assign the copyright to the company when called upon to do so. This will usually be so because the director will have created the work for the company's business, using the company's property and in the company's property and in the company's time. There is, however, no rule that works created by a director for his company are always held on trust: it will depend on what, if anything has been agreed. In particular, it is always open to the shareholders of a company to agree that a director should retain property he has created or to relieve him of any liability for any breach of duty, provided that to do so is not ultra vires the company or a fraud on its creditors. In the case of a sole shareholder-director, however, it will often be difficult to show that the company has agreed to this. Again, where a work is made by an employee outside office hours, but in breach of his fiduciary duty to his employer, the employer may be entitled to the copyright in equity."
- In support of this analysis the learned editors cite several cases, in particular Antocks Lairn Ltd v I. Bloohn Ltd [1972] RPC 222 and Ultraframe (UK) Ltd v Fielding [2003] EWCA Civ 1805, [2004] RPC 24. To these may be added the unreported case of Charly Acquisitions Ltd v Immediate Records Inc (Pumfrey J, 7 February 2002) at [78]-[79]. The trade mark case of Ball v The Eden Project Ltd [2002] FSR 43, which is mentioned in Ultraframe v Fielding and to which I drew the parties' attention, is also supportive of this analysis. In that case Laddie J cited at [22] the following statement of principle by Viscount Sankey in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 137:
"In my view, the respondents were in a fiduciary position and their liability to account does not depend upon proof of mala fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust."
In that case Mr Ball had applied to register THE EDEN PROJECT as a trade mark while a director of The Eden Project Ltd, a company set up by the Eden Trust to run the now well-known attraction. Laddie J held that this was a clear breach of fiduciary duty, that Mr Ball held that the registration on trust for the company and that he would be ordered to assign it to the company.
- In my judgment counsel's submission is correct for the following reasons:
i) Mr Altoft was one of Vitof's two directors, and as such owed it fiduciary duties. It is common ground that, as recital (B) to the Shareholders' Agreement recites, Vitof was established by Mr Altoft and Mr Chiovitti as the vehicle through which to conduct "a business involving design of labelling equipment". Accordingly Mr Altoft owed Vitof a duty not to place his interests in conflict with Vitof's interests with regard to the design of labelling equipment. For him to retain the copyright in source code written by him for Vitof's labeller would inevitably have that result.
ii) Furthermore, by clause 7.3 of the Shareholders' Agreement Mr Altoft agreed to devote substantially the whole of his time, attention and abilities to Vitof's business. In addition, as a 50% shareholder, by clause 6.3 of the Shareholders' Agreement he agreed to use all reasonable means to maintain, improve and extend Vitof's business and to further its interests. Thus this is not a case where Mr Altoft could say that he legitimately had other business interests which he could pursue in parallel to those of Vitof.
iii) There is no suggestion that Vitof or Mr Chiovitti agreed to Mr Altoft personally owning intellectual property rights relating to the PDFM. On the contrary, Mr Altoft told me that to protect himself he requested that clause 9.4 be incorporated into the Shareholders' Agreement. As he accepted, however, that suggests that the company was to own the rights. Moreover, he went on to make a statement which in my view is revealing: he said that he thought that the company would one day own the intellectual property rights after he had extracted some value from the company.
iv) Mr Altoft says that all modifications to the source code up until around spring 2004 were made on his own computer, but even assuming that this is true it is a minor consideration. Mr Altoft did not dispute that the work was done in Vitof's time.
- I have no doubt that Mr Altoft holds the copyright in the source code on trust for Vitof, and must assign it to the company. I would add that, as counsel submitted, it is irrelevant if (as is implicit in Mr Altoft's case) the source code infringes Label-Aire's copyright: ZYX Music GmbH v King [1995] EMLR 281.
- The third stage in counsel's argument was to submit that, with regard to the 1-2% of the source code which Mr Altoft estimates was created before the incorporation of Vitof, Mr Altoft likewise held this on trust for Vitof because the work was done in contemplation of the incorporation, and for the benefit of, Vitof. This submission is supported by a decision of the Federal Court of Australia in a case cited in a footnote to Copinger §5-176, A-One Accessory Imports Ltd v Off Road Imports Ltd (1994) 34 IPR 306.
- In my judgment counsel's submission is again correct. I consider that it is plain that from at least early July 2002, and probably from mid April 2002, Mr Altoft and Mr Chiovitti intended to set up a company to manufacture and market a new labeller which they or at least Mr Altoft - would design. I also consider that it is plain that both Mr Chiovitti and Mr Altoft started work on the design of the new labeller before the company was incorporated in anticipation that it would be incorporated later. The inference that this work was intended to benefit the company, rather than the individuals personally, is irresistible.
- During the course of the hearing Mr Altoft suggested for the first time that, although he and Mr Chiovitti had agreed that they would have some kind of business relationship in mid 2002, it was not until October 2002 that they had agreed to form a company together. I reject this suggestion, which is flat contrary to Mr Altoft's own evidence in his police statement (which, when I asked him if he was saying that it was untrue, he said was not untrue) and to documents he has disclosed (which include documents which he himself relies upon in support of his account of the creation of the source code): see paragraphs 15 and 16 above. I regard it as clear beyond question that Mr Altoft will not be able to establish this suggestion at trial.
- Accordingly I conclude that Vitof is entitled to summary judgment on its claim that Mr Altoft holds the copyright in the 29 May 2004 version of the PDFM source code on trust for Vitof. I will grant Vitof a declaration to that effect and order Mr Altoft to execute an assignment in favour of Vitof.
The source code as confidential information
- The Amended Particulars of Claim pleads that the PDFM source code constitutes information confidential to Vitof. It is common ground that source code is normally kept confidential, and that in the present case Mr Altoft encrypted the PDFM source code when sending it to Mr Chiovitti. Moreover, Mr Altoft expressly accepted that the source code he had written for Label-Aire was confidential to Label-Aire.
- Vitof contends that Mr Aloft obtained the information represented by the PDFM source code in the course of his duties as a director or employee, alternatively as director only, when he knew, or a reasonable person in his position would have known, that the information was confidential. Accordingly Vitof contends that Mr Altoft owed it an equitable duty of confidence to keep the information confidential. In addition or in the alternative it relies upon clause 15.1 of the Shareholders' Agreement.
- Little time was spent on this issue at the hearing. Counsel for Vitof submitted that, even though the principles applicable to confidential information are somewhat different to those which apply to copyright, realistically this claim it stood or fell with the copyright claim. I did not understand Mr Altoft to dissent from this. I am satisfied that the 29 May 2004 version of the source code is confidential information in respect of which Mr Altoft owes a duty of confidence to Vitof, albeit that 90% of it may be confidential to Label-Aire. Again I will make a declaration to that effect.
Design right in the circuit board designs
- The PDFM comprises eight printed circuit boards: main board, label sensor bottom board, label sensor top board, power board, unwind board, rewind board, rewind dancer and keypad/display. It is common ground that there were one or two revisions to at least the main board.
- The Amended Particulars of Claim pleads that between about 31 October 2002 and 11 February 2004 Mr Altoft and Mr Chiovitti jointly, alternatively Mr Altoft alone, acting in the course of their duties as directors and employees, alternatively as directors only, created "schematic" circuit designs indicating the component to be included in each circuit and their relative interconnections i.e. circuit diagrams.
- Again, this pleading is consistent with evidence given by Mr Chiovitti (through Mr Llewellyn) that he believed that Mr Altoft had designed the circuits "from scratch" as a director and/or employee of Vitof with input from him. Again, however, in the most recent evidence given by Mr Chiovitti (through Mr Llewellyn), it is accepted that some of the work on the circuit designs may have been performed prior to the incorporation of Vitof. Again Mr Chiovitti claims that, to the extent that this was done, it was done with a view to the formation of Vitof and on behalf of the to-be-formed company.
- Mr Altoft claims that a lot of the work on these circuit diagrams was done prior to the formation of the company, although as I understand it the work he refers to was mainly preparatory work such as selecting components and drawing up sub-circuits. I think he accepts that the actual drawing up of the circuit diagrams was done, or mainly done, after the company was incorporated. Mr Altoft says that he drew up the circuit diagrams manually in the first instance, but that Mr Chiovitti then copied them in electronic form using AutoCAD software.
- It is unnecessary for me reach any conclusions with regard to the rival contentions about the circuit diagrams, however, because at present Vitof claims no rights in them.
- It is common ground that Vitof sent the circuit diagrams by email to UKE in about March 2003, and that from the circuit diagrams UKE produced design documents for the production of printed circuit boards. It is these design documents, and the designs they depict, that Vitof claims rights in. Vitof claims design right in the designs depicted in the design documents. It also claims copyright in the design documents themselves as literary and/or artistic works.
- Copies of the design documents relied on are appended to the Amended Particulars of Claim as Annex B. For each circuit there is (i) a "top reference" sheet showing the positioning of the components on the board, (ii) one or more "copper" sheets showing the printed copper connecting layers, (iii) a "drill information" sheet showing the holes in the board, (iv) a "combined layers sheet" showing the preceding sheets superimposed on each other, (v) a "net list" or "connections report" listing in a coded form the interconnections in the circuit, (vi) a circuit diagram (essentially a copy of the input from Vitof received by UKE), (vii) a bill of materials and (viii) an approval form. It is common ground that UKE produced these documents in the form of Gerber files. A Gerber file is a standard format of electronic file which is used for manufacturing printed circuit boards.
- The claim to design right focuses upon the designs shown in the documents in categories (i) to (iv). Counsel for Vitof submitted that these documents record the shape and configuration of the printed circuit boards contained in the PDFM, and that they therefore depict "designs" within the meaning of section 213(2) of the Copyright, Designs and Patents Act 1988. Mr Altoft did not seriously dispute this, and in my judgment it is correct.
- Mr Altoft argued that no design right subsisted in the designs as distinct from the circuit diagrams, because the former were copies of the latter and the process of converting the former into the latter was largely automatic. He drew an analogy with writing a novel in manuscript and then typing it up. This argument, if factually well-founded, might mean that the designs were not "original" as required by section 213(1). In my judgment, however, it is clear that the argument is not factually well-founded. During the course of his submissions Mr Altoft accepted that the circuit diagrams did not dictate the design of the circuit boards as shown in the design documents and that, on the contrary, UKE had some latitude as to where to position the components on a particular circuit board and as to the layout of the copper connectors.
- At one stage Vitof understood Mr Altoft to be contending that the designs were "commonplace", and thus deprived of design right by section 213(4), but no such contention was advanced before me and Mr Altoft's evidence indicates the contrary (cf. Ocular Sciences Ltd v Aspect Vision Care Ltd [1997] RPC 395 at 429 and A. Fulton Co Ltd v Totes Isotoner (UK) Ltd [2004] EWCA Civ 1514, [2004] RPC 16 at [36]-[38]).
- Vitof's case is that the designs qualify for design right since (a) they were created by UKE for money in pursuance of a commission from Vitof within section 219(1) and (b) Vitof is a qualifying person because it is an English company. Mr Altoft does not dispute either of these points. Accordingly I am satisfied that design right subsists in the designs.
- As to ownership, Vitof relies upon section 215(2) which provides:
"Where a design is created in pursuance of a commission, the person commissioning the design is the first owner of any design right in it."
Vitof contends that, since the designs were created by UKE pursuant to its commission, it owns the design rights in those designs. As noted above, Mr Altoft does not dispute that he commissioned UKE on behalf of Vitof. In particular, he does not dispute that Vitof, rather than he personally, paid UKE.
- In addition, in its last round of evidence before the hearing Vitof asserted that it was usual practice in the trade that, where the commissioning party paid for the work, that party owned all the rights in the designs; and that, where a company like UKE wished to protect its rights, it did not supply the Gerber files to the customer as it had done in this case. In his evidence in reply all that Mr Altoft said about this is it "makes no sense to me. I believe the claimant is utterly confused".
- During the course of the first day of the hearing, however, I noticed and mentioned to the parties that some of the connection reports in Annex B bore a copyright notice in the name of "P.J. Design". On the second day of the hearing Mr Altoft informed me that P.J. Design was the trading name of one Peter C Davis, an individual associated with UKE. He also asserted that UKE had retained the rights in the designs, and said that UKE had quoted him a cheap price for the design work in return for him promising them the manufacturing work. After the hearing Mr Altoft sent me a copy of fax from Mr Howarth on behalf of UKE sent on 29 June 2006. In this fax Mr Howarth states:
"Thank you for your recent enquiry regarding copyright on Cad work undertaken by UK Electronics. As a matter of course UK Electronics retains the copyright in all the diagrams, layouts, and files it produces unless the customer specifically requests otherwise. If the customer does request the copyright then we increase the charge pro-rata as we know at this point that they are likely to go elsewhere for PCB production/manufacturing.
I can also confirm that you did not request that we transfer the copyright to Vitof Ltd or yourself and the work undertaken was priced accordingly. The discounted price we charged was based on the fact that UK would receive any production work that followed, which was honored [sic] by yourself.
In conclusion therefore I can confirm that UK Electronics still retains the copyright for all cad design work undertaken on behalf of Vitof LTD."
- Vitof has submitted that this is inconsistent with the evidence originally in the case and therefore reliance should not be placed upon it. It is also submits that in any event it is irrelevant to the dispute between Vitof and Mr Altoft. In my judgment it cannot possibly be right to conclude that no reliance should be placed on this evidence at this stage. Nor do I consider that it is irrelevant.
- While Mr Howarth does not refer to design right, as opposed to copyright, at this stage it must be assumed that he was not intending to distinguish between the two. While section 215(2) does not say "absent any agreement to the contrary", it must be arguable that this is its proper interpretation. In any event, section 215(2) would only regulate the legal ownership. Thus if there was a contrary agreement the equitable title could lie elsewhere. Accordingly, I conclude that Mr Altoft has a real prospect of establishing that legal or equitable title to the design right in the designs is owned by UKE rather than by Vitof.
- On the other hand, the case now advanced by Mr Altoft is inconsistent with his earlier claims to personal ownership of the rights (although, to be fair to Mr Altoft, some of his earlier claims were directed to the rights in the circuit diagrams). I cannot see any basis upon which Mr Altoft can claim ownership of the design right in the designs. Accordingly, while I am not prepared to make a declaration that Vitof does own the design right, I am prepared to make a declaration that Mr Altoft does not.
Copyright in the design documents
- As noted above, Vitof also claims copyright in the design documents. As to this, my conclusion is the same as in respect of design right. Indeed, Mr Altoft's case on copyright is stronger than it is on design right since Part I of the 1988 Act has no counterpart of section 215(2) in Part III. I would add two points. First, the principal design documents (i.e. those in categories (i) to (iv)) appear to me to be primarily artistic rather than literary works. Secondly, it appears to me that Mr Altoft's argument about automatic conversion is probably correct with respect to the connection reports or net lists, and so I doubt that any copyright subsists in these particular documents.
Infringement of copyright and misuse of confidential information
- Vitof contends that by making copies of the whole and also parts of the source code for the PDFM labeller in the United Kingdom for purposes of sending to Label-Aire, Mr Altoft has infringed its copyright and misused its confidential information.
- Mr Altoft does not dispute that, as set out above, he printed extracts from the source code and took them to Label-Aire and that he subsequently emailed an almost complete copy of the source code to Label-Aire. The latter clearly involved the reproduction of a substantial part of the copyright work in which I have held that Vitof beneficially owns copyright, and thus constituted a prima facie infringement since Mr Altoft's bare legal title would not constitute a defence to this claim: Cableship Ltd v Williams (unreported, Hoffmann J, 18 March 1991) at 24-25. As to the former, however, the extracts in evidence are quite short and the whole program is not in evidence. (Incidentally, Vitof contends that by retaining the extracts of the PDFM source code which he has put in evidence Mr Altoft contravened Evans-Lombe J's Order, but again it has made no application in this regard.) Accordingly I am not in a position to judge whether the extracts constitute a substantial part.
- Does Mr Altoft have a defence in respect of the making of the emailed copy? I have set out in paragraph 104 above Mr Altoft's stated reasons for making and sending this copy. By the time that he made it, these proceedings had already been commenced and it appears that Mr Altoft was aware of this. Furthermore, his second reason suggests that he may have been trying to provoke Label-Aire to sue Vitof and/or Mr Chiovitti. Section 45(1) of the 1988 Act provides that "Copyright is not infringed by anything done for the purposes of
judicial proceedings". In A v B [2000] EMLR 1007 Lloyd J (as he then was) held that it was arguable that this extended to the making of copies before the commencement of proceedings and in particular in circumstances in which it could be foreseen that proceedings were likely and the documents in question would or might provide evidence on a point which might be in issue in such proceedings. This suggests that the words "for the purposes of" should be given a generous interpretation. Accordingly, I conclude that Mr Altoft just about has a real prospect of establishing this defence. Another possible route to the same conclusion is provided by section 171(3) of the 1988 Act, which provides a limited public interest defence to claims for infringement of copyright: see Hyde Park Ltd v Yelland [2001] Ch 143.
- For similar reasons I conclude that Mr Altoft also has a realistic prospect of establishing a defence to the claim for misuse of confidential information.
- While on this subject, I would add that the only specific plea of misuse of confidential information pleaded by Vitof in the Amended Particulars of Claim concerns the sending of the PDFM source code to Label-Aire. Despite this, paragraph 2(d) of Mr Kallipetis' Order restrains Mr Altoft from disclosing any confidential information of Vitof to anyone. Paragraph 2(d) is also objectionable since it entirely fails to specify the confidential information which Mr Aloft must not disclose (see Ocular Sciences v Aspect, cited above, at 359-361).
Claims in respect of company property
- As noted above, Evans-Lombe J made final orders for delivery up of the hardware inventory and Vitof's books and records. Originally Vitof sought summary judgment for damages to be assessed in relation to Mr Altoft's alleged conversion etc of the hardware inventory, but this aspect of its application is no longer pursued.
The "holding out" claim
- Paragraph 3(b) of Evans-Lombe J's Order contained an injunction restraining Mr Altoft from holding himself out as in any way acting with the authority and/or on behalf of Vitof. This injunction was continued by paragraph 3(b) of Mann J's Order and paragraph 2(b) of Mr Kallipetis' Order. In the skeleton argument of counsel then appearing for Vitof for the hearing on 6 April 2006, it was conceded that this injunction was no longer required. Accordingly I discharged it without prejudice to the question of whether it was correctly granted.
- Nevertheless Vitof maintains that Mr Altoft has held himself as acting with the authority of, or on behalf of, Vitof when he was not entitled to do, and seeks summary judgment on this claim. The claim is not clearly pleaded in the Amended Particulars of Claim. To the extent that it is pleaded, it is based on the letter from Humphries Kirk's letter dated 15 August 2005 quoted in paragraph 91 above and in particular the passage I have italicised. At the date of that letter Mr Altoft was no longer a director, and Vitof contends that as a shareholder he had no authority to act on behalf of Vitof.
- When I pointed out to counsel for Vitof that Vitof's own evidence was that Mr Altoft had remained company secretary of Vitof until 22 August 2005 and an employee of Vitof until 31 August 2005, however, he shifted his ground. Instead of relying upon the letter dated 15 August 2005, he relied upon the letter from The Stokes Partnership dated 7 September 2005 quoted in paragraph 105 above, and in particular on the first sentence I have italicised. He submitted that this amounted to a threat by Mr Altoft to hold himself as entitled to represent the company at a date when Mr Altoft was no longer company secretary or an employee. I shall overlook the fact that this letter is not pleaded, and proceed on the basis that Vitof will seek to re-amend its Particulars of Claim to plead it.
- In my judgment, the letter dated 7 September 2007 would at best from Vitof's perspective found a claim to an injunction on a quia timet basis. It is not evidence that Mr Altoft had actually held himself out as entitled to represent the company after 31 August 2005. Furthermore, the very next sentence after the one relied on by counsel offers an undertaking on behalf of Mr Altoft not to hold himself out in this way. In such circumstances it is at least arguable that the letter would not even justify an injunction on a quia timet basis: cf. Monsoon Ltd v India Imports of Rhode Island Ltd [1993] FSR 486 at 496-496.
- Accordingly I conclude that Mr Altoft has a real prospect of successfully defending this claim.
The restrictive covenant
- Vitof also relies upon the letter dated 15 August 2005 as constituting a threat to act in breach of clause 10.1.1 of the Shareholder's Agreement by dealing with Vitof's distributors without Vitof's consent, and claims an injunction on a quia timet basis. Vitof again seeks summary judgment on this claim
- Mr Altoft's pleaded defence to this claim is that the Shareholders' Agreement is no longer binding on himself or Mr Chiovitti. The basis for this defence advanced in Mr Altoft's written submissions is that Mr Chiovitti has acted in repudiatory breach of the Shareholders' Agreement and that he (Mr Altoft) accepted this repudiation in his letter dated 11 July 2005 quoted in paragraph 79 above.
- Counsel for Vitof submitted that it was not entirely clear that Mr Altoft did accept any repudiation by Mr Chiovitti given the slightly equivocal terms of paragraph 4(c) of Humphries Kirk's letter dated 2 August 2005 quoted in paragraph 88 above. He also submitted that Mr Altoft's defence was inconsistent with his counterclaim in which he seeks damages for a breach of the Shareholders' Agreement alleged to have been committed in late September 2005 (as to which, see below). The latter point has force even if the former does not, but in my judgment a possible answer to both points is that, if the correct analysis is that Mr Chiovitti did commit a repudiatory breach of the Shareholders' Agreement and Mr Altoft accepted that in his letter dated 11 July 2005, the Shareholders' Agreement ceased to be binding at that point regardless of what happened subsequently.
- Counsel for Vitof also invoked clause 10.4 as trumping the rule in General Billposting Co Ltd v Atkinson [1909] AC 118 that a party who commits a repudiatory breach of a contract cannot thereafter enforce a restrictive covenant against the innocent party. In my view it is clear from Rock Refrigeration Ltd v Jones [1997] 1 All ER 1 that this submission is at least arguably correct; but it is also evident from that case that this is an uncertain and developing area of the law, and so I consider that the contrary is also is arguable.
- In addition to the question of repudiation, there is the question of whether the covenant is unenforceable as being in restraint of trade. It appears that prior to the hearing before me Mr Altoft was not aware that he could challenge the enforceability of the covenant. When I asked him whether he wished to do so, his response was quite sophisticated: he said that, if clause 10.1.1 was narrowly interpreted, he would accept that it was reasonable and enforceable; but not if it was broadly interpreted.
- As to the interpretation of the clause, Mr Altoft said that it only applied if what he was proposing to do amounted to persuading the distributor, supplier etc to transfer its business from Vitof to him (or, I presume he would accept, simply ceasing to deal with Vitof). Thus he said that it did not prevent him from independently dealing with distributors, suppliers etc with also dealt, or had dealt, with Vitof.
- As to the reasonableness of the clause, Mr Altoft said that, if it covered independently dealing with distributors, suppliers etc, it was unreasonable. Thus he said that there were only two suppliers of motors suitable for labelling machines that he would seriously consider using, both of which had supplied Vitof, and that it would be unreasonable to prevent him from dealing with both of them.
- Counsel for Vitof disputed Mr Altoft's interpretation of clause 10.1.1 and argued that it was reasonable. So far as reasonableness is concerned he emphasised that it applied to both shareholders equally and that it was only of one year's duration although it was geographically unlimited. He also protested that the point had been raised late and that there was no evidence as to such matters as the numbers of motor suppliers. To my mind these submissions emphasised the unsuitability of this issue for summary determination.
- My conclusion is that it is not possible for me to resolve either the repudiation or the interpretation and enforceability issues at this stage. I consider Mr Altoft has a real prospect of successfully defending the claim in respect of the restrictive covenant.
- I would add that paragraph 2(c) of Mr Kallipetis' Order is unsatisfactory since it is unlimited in time. The restrictive covenant expires one year from the Termination Date. At present the Termination Date is unclear, but it appears to be between 23 September and 23 October 2005.
Mr Altoft's application for reverse summary judgment on Vitof's claims
- To the extent that I have already concluded that Vitof is entitled to summary judgment on its claims, Mr Altoft's application for reverse summary judgment must fail. So far as the balance of Vitof's claims are concerned, I am satisfied that it has established a real prospect of success. As I have already commented a number of times, the success or failure of these claims depends on the resolution of a considerable number of conflicts of evidence and other issues which I cannot properly determine at this stage but which must be tried.
- This includes an allegation made by Vitof in the Amended Particulars of Claim that by requesting Northfield to pay monies to Teknimek Engineering Mr Altoft acted in breach of his duty of good faith as an employee and/or his fiduciary duty as a director and/or in breach of clause 6.1 of the Shareholders' Agreement. As noted above, Mr Altoft's evidence is that the monies were paid for manufacturing work carried out by Teknimek Engineering and this is supported by an invoice from Teknimek Engineering. Nevertheless this is not an issue that can be summarily determined.
Vitof's application to strike out paragraphs 1-6 of the Counterclaim
- As noted above, Mr Altoft advances two counterclaims, the first concerning the valuation of his shareholding and the second for repayment of loans which he says he made to Vitof. The first claim was originally pleaded in paragraphs 1-6 of the Counterclaim. Vitof applied to strike these paragraphs out on the ground that they disclose no cause of action against Vitof. Vitof contends that, if they disclose any cause of action at all, it is against Mr Chiovitti. As noted above, Mr Altoft has served an Amended Counterclaim. Vitof resists these amendments for the same reason.
- In the Amended Counterclaim Mr Altoft alleges as follows:
i) Under Article 7.3(e) of Vitof's Articles of Association he and Mr Chiovitti had 60 days from his resignation as a director on 29 July 2005 in which to agree a price for his shares, but Mr Chiovitti made no offer for the shares. (Mr Altoft does not, however, allege that this amounted to a breach of the Articles of Association.)
ii) Vitof by a resolution of the board attempted to remove Albert Goodman as auditors in breach of clause 4(1) of the Shareholders' Agreement. (This allegation is supported by Mr Chiovitti's letter dated 19 September 2005 quoted in paragraph 114 above, although I note that in Faegre & Benson's letter dated 22 August 2005 quoted in paragraph 91 above it was said that Albert Goodman had resigned.) Although Mr Altoft has not expressly pleaded that this was done without his written agreement, this is implicit.
iii) This was also "not in accordance with" Article 7.3(e) since that required the shares to be valued by the company's auditors.
iv) Vitof by a resolution of the board purported to appoint Rees Pollock as the company's auditors.
v) In their letter dated 23 September 205 Rees Pollock valued his shares at £1 in reliance on material provided by Vitof through its directors. The letter was accompanied by a £1 coin.
vi) "It appears that the material provided by Vitof Ltd to Rees Pollock was deliberately inaccurate. Vitof Ltd has therefore avoided payment of the sums due to me for my 50% shareholding in the company."
vii) The true value of his shareholding was £370,000.
- Counsel for Vitof submitted that clause 4 of the Shareholders' Agreement was binding on Mr Chiovitti and not on Vitof, and therefore only Mr Chiovitti could have committed a breach of clause 4 by removing Albert Goodman without Mr Altoft's agreement. As for Article 7.3 of the Articles of Association, while this might be a contract between the members, it was not a contract to which Vitof was a party.
- In my judgment counsel's submission with regard to the Articles of Association is correct. The position with respect to the Shareholders' Agreement is less clear, however, since not only is Vitof a party to the Agreement, but also recital (C) and clause 2 expressly provide for Vitof to be bound by it. Furthermore, Mr Altoft pointed out that it was Vitof which had (on his case) removed Albert Goodman as auditors, not Mr Chiovitti personally, even though Mr Chiovitti was one of the directors who passed the resolution.
- When I put these points to counsel for Vitof, he shifted his ground and submitted that, even if it was arguable that Mr Altoft had a claim against Vitof for breach of clause 4, it was plain that (i) this breach had not caused the loss claimed by Mr Altoft but at most had provided the opportunity for it, alternatively (ii) the loss was too remote since it was not foreseeable. In support of submission (i) he cited Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360. In support of submission (ii) he cited Chitty on Contracts (29th ed) §26.047.
- In my judgment submission (i) is correct. On Mr Altoft's case the cause of his loss was the inaccurate material provided by Vitof to Rees Pollock. Mr Altoft may feel that Rees Pollock were appointed because they would be more "pliable" than Albert Goodman, but he accepted that he was not alleging that Rees Pollock had behaved improperly. Even if he did allege this, that would mean that the (or a) cause of the claimed loss was Rees Pollock's improper behaviour, not their appointment as the company's auditors. It seems to me that the highest it could be put on Mr Altoft's behalf is that Rees Pollock did not have the background knowledge of the company's affairs which Albert Goodman had and thus were more vulnerable to being misled. In my judgment, however, that is not enough to make the alleged breach of clause 4 the cause of the claimed loss.
- It is therefore unnecessary for me to consider submission (ii).
- My acceptance of submission (i) is not the end of the matter, however. This is for two reasons. The first is that, even though I consider that it is clear that the alleged breach of clause 4 did not cause the loss claimed by Mr Altoft, it does not follow that the claim for breach of clause 4 is strikable. Mr Altoft would still be entitled to nominal damages if he succeeded in establishing a breach. For the reasons given above, I consider that Mr Altoft has an arguable case that Vitof has breached clause 4.
- The second reason is that, as I have said, on Mr Altoft's case his loss was caused by Vitof providing inaccurate material to Rees Pollock. The question which remains is whether this allegation discloses a cause of action in tort against Vitof (whether for deceit or for negligent misstatement). Counsel for Vitof submitted that it did not, because it was clear from Article 7.3(e) that in carrying out the valuation Rees Pollock were acting on behalf of the members (i.e. Mr Chiovitti and Mr Altoft) and not on behalf of the company. He also pointed out that Rees Pollock's letter dated 23 September 2005 was addressed to the members and directors of the company, expressly stated that the valuation was in accordance with Article 7 of the Articles and expressly stated that Rees Pollock had relied upon material provided by the company's directors (rather than on material provided by the company).
- While I am slightly troubled by the non-disclosure of Rees Pollock's letter of engagement, I have come to the conclusion that counsel's submissions are correct. The claim that Mr Altoft wishes to advance lies against Mr Chiovitti and not against the company.
- Accordingly, I will not strike out Mr Altoft's allegation of breach of clause 4 of the Shareholders' Agreement, but I will strike the remainder of the counterclaim in respect of the shareholding. I will, however, entertain an application by Mr Altoft to bring the claim against Mr Chiovitti instead.
Mr Altoft's application for summary judgment on his counterclaims
- So far as Mr Altoft's claim in respect of his shareholding is concerned, for the reasons I have just given his application for summary judgment must fail.
- I turn to consider Mr Altoft's claim for the repayment of his loans. The total sum claimed by Mr Altoft is £42,032. Before looking at how this sum is made up, it is convenient first to record that note 10 to Vitof's financial statements for the year ended 31 July 2004 prepared by Albert Goodman states that £42,023 is due to Mr Altoft as an interest free loan. The note also states that corresponding figure for 31 July 2003 was £28,090. Mr Altoft relies upon this evidence as substantiating his claim. Vitof's pleaded response to this is firstly to allege "Messrs Albert Goodman were at no time the auditors of Vitof". This, of course, is simply wrong: they were the company's auditors at the time of preparing both the 2003 and 2004 statements. Vitof also plead that Albert Goodman's opinion as to the validity of the accounts is of no relevance and undermined by their filing with Companies House accounts which falsely stated that they had been approved by the board of Vitof on 13 May 2005 (actually 10 May 2005), and that the accounts were based on evidence which had not been presented to Vitof. In my judgment Albert Goodman's acceptance of the validity of Mr Altoft's claims is relevant, though not conclusive. More to the point is the fact that, as Mr Altoft has said and Mr Chiovitti has not disputed, Mr Chiovitti approved the 2003 statements. The point about the false statement in the 2004 accounts is a fair one, but it does not affect the 2003 accounts. As for the allegation that the evidence had not been presented to Vitof, this again is simply wrong: as noted above, Mr Altoft sent Mr Chiovitti full details of his claims with his letter dated 30 November 2004 (and, of course, he sent them to Albert Goodman).
- Mr Altoft's claim is made of two elements: first the cash advances which Mr Altoft says he paid directly into Vitof's account, and secondly the expenses he says he incurred on behalf of Vitof.
- Before considering these two elements, I should record that counsel for Vitof disclaimed reliance upon Vitof's resolution of 5 October 2005 deeming the value of Mr Altoft's loan to be nil.
- So far as the cash advances are concerned, Mr Altoft has exhibited the statements for Vitof's Weymouth HSBC account for the relevant period. On their face these clearly substantiate his claim to have paid in a total of £29,000. Mr Chiovitti has not disputed this claim despite numerous opportunities. When I asked counsel for Vitof about it, his only real answer to it was to rely upon Vitof's plea that it is entitled to set-off its claims. Leaving aside the question of set-off, I have no doubt that Mr Altoft's claim in respect of the cash advances is justified. Technically the counterclaim was slightly premature since the debt did not fall due until 30 November 2005 (i.e. a year after Mr Altoft's letter dated 30 November 2004 which gave 12 months' notice to repay), but that is not a defence to the claim: see A. Fulton Co Ltd v Grant Barnett & Co Ltd [2001] RPC 16 at [116].
- As to the plea of set-off, counsel did not press this strongly. In my judgment he was right not to do so. Mr Altoft's claim is for repayment of a debt while Vitof has yet to establish any claim even for unliquidated damages. Moreover, the only connection between Mr Altoft's claim and Vitof's is that they both concern the company. In my judgment Vitof has not established that it has a defence of set-off or that its claims provide a reason why Mr Altoft's claim should be dealt with at trial. Accordingly I conclude that Mr Altoft is entitled to summary judgment on this element of the claim. I will, however, entertain an application by Vitof for a stay of enforcement pending the trial of its claims.
- Turning to the expenses, as I have already said Mr Altoft provided Mr Chiovitti with full details of these as long ago as 30 November 2004. Mr Chiovitti has had ample opportunity to query them but has not done so. At the hearing before me Mr Altoft waved an envelope which he said contained all the receipts. It is fair to say, however, that the receipts are not in evidence and it does not appear from the evidence that Mr Altoft has ever provided them either to Mr Chiovitti or to Vitof since Mr Chiovitti acquired control of it. Counsel for Vitof submitted that Vitof should have the opportunity of inspecting the receipts and satisfying itself that the sums claimed are properly due. I consider that it is highly likely that Mr Altoft's claim is justified, but in my judgment counsel is right to say that Vitof should have the opportunity to check it. Accordingly, I will not grant Mr Altoft summary judgment on this element of the claim at this stage. I shall, however, grant Mr Altoft liberty to renew this part of his application once Vitof has inspected the receipts.
The reserved costs
- The combined effect of paragraph 7 of Evans-Lombe's Order, paragraph 5 of Mann J's Order and paragraph 4 of Mr Kallipetis' Order was to reserve the costs of Vitof's application for interim relief save for Mr Altoft's costs of the hearing before Evans-Lombe J. Vitof now seeks an order that Mr Altoft pay its costs of the application.
- So far as the applications for delivery up of the hardware inventory and business records are concerned, I consider that Vitof is entitled to its costs. Evans-Lombe J made final orders on admissions, and so it is clear that Vitof was the successful party. Moreover there can be no dispute that Vitof had sought delivery up in correspondence and Mr Aloft had not volunteered it.
- As to the application for delivery up of the source code to Faegre & Benson, it follows from my conclusion that Vitof is the beneficiary of a duty of confidence owed by Mr Altoft in respect of the source code that Vitof was entitled at least to delivery up of a copy of the source code: cf. Surface Technology plc v Young [2002] FSR 25 at [25]. Again, therefore, Vitof can be seen to be the successful party.
- So far as the balance of the application is concerned, however, it seems to me that the position is different. It is clear that Evans-Lombe J's Order was made to preserve the status quo. There is no reason to interpret Mr Altoft's consent to the Orders of Mann J and Mr Kallipetis as having been given on any different basis. The Court of Appeal held in Desquenne et Giral UK Ltd v Richardson [2001] FSR 1 that, where an interim injunction was granted or continued on the basis of the balance of convenience to hold the ring until the dispute between the parties could properly be decided at trial, it was not possible to say until trial who was the successful party, and accordingly that the costs should normally be reserved to the trial. When I drew this to the attention of counsel for Vitof, he did not press Vitof's application other than in respect of the applications for delivery up. Accordingly I will reserve the balance of the costs to trial.
Mr Altoft's application for security for costs
- Mr Altoft seeks security for costs under CPR rr. 25.13(2)(c) and (g). Vitof accepts that the first ground is made out and that, subject to the outcome of the applications for summary judgment, it should provide security. It has offered to provide security in the sum of £12,000 by paying £2,000 per month into court for six months. I have not yet heard argument on quantum, but my provisional view is that this is an appropriate sum. If Mr Altoft does not accept it, I will hear further argument.
Summary of conclusions
- In summary I conclude that:
i) Vitof is entitled to summary judgment on its claims that Mr Altoft holds the legal title to the copyright in the 29 May 2004 version of the source code for the PDFM labeller on trust for Vitof and that the source code comprises information in respect of which Mr Altoft owes Vitof a duty of confidence;
ii) Vitof is not entitled to summary judgment on its claims that it owns the design right in the circuit designs or the copyright in the design documents produced by UKE, but is entitled to a declaration that Mr Altoft does not own these rights;
iii) Vitof is not entitled to summary judgment on its claims for infringement of copyright and misuse of confidential information;
iv) Vitof is not entitled to summary judgment on its claims in respect of "holding out" and the restrictive covenant;
v) Mr Altoft's claim that Vitof breached clause 4 of the Shareholders' Agreement should not be struck out, but his claim against Vitof in respect of the alleged undervaluing of his shareholding should be struck out;
vi) Mr Altoft is entitled to summary judgment on his claim for repayment of his cash advances to Vitof amounting to £29,000;
vii) Mr Altoft is not entitled to summary judgment on his claim for repayment of his expenses;
viii) Vitof is entitled to its costs of its application for interim relief so far as they relate to the applications for delivery up of the hardware inventory, business records and source code, but the balance of the costs should be reserved to the trial judge;
ix) As Vitof accepts, Mr Altoft is entitled to security for costs in an appropriate amount.
Costs and further directions
- I will hear argument as to the order which should be made in the light of this judgment, including argument as to costs. It may be helpful if I express my provisional view as to the costs of the two adjournments of these applications which have been reserved, which is that Mr Altoft should pay the costs of and occasioned by the adjournment on 6 April 2006 and Vitof should pay the costs of and occasioned by the adjournment on 22 May 2006. I will also make directions for the further conduct of these proceedings.
- I would add that this dispute cries out for mediation if a settlement cannot be achieved through direct negotiations. Now that some of the more pressing issues have been determined I hope that the parties will be able to reach an accommodation. In case they are not I am minded to order a stay with a view to mediation.
