As reported in ADM on 5th August 2021 in the case of Madritsch KG v Thales Australia (‘Madritsch’), the Queensland Supreme Court found in favour of the Madritsch/NIOA team.
Among other issues the Madritsch case opens up the question as to when (or should) the Commonwealth step into business negotiations, especially where they are heavily involved as they were here?
There are arguments both ways for this, but with a critical piece of equipment there is a good argument that the Commonwealth should insist on being across all negotiations with key suppliers, and should be across the status of all sublicences or subcontracts.
As a matter of course the Commonwealth should mandate (and enforce) that Contractors are fair in dealing with suppliers and subcontractors.
As the case may go to appeal it is impossible to comment on the final outcome, but it is possible to look at the general situation, and possible outcomes or remedies in similar situations.
As background, the issues in Madritsch were:
- Who owned the Intellectual property (‘IP’) in a technical solution to solve problems found with the capability of the AusSteyr EF88 rifle firing a round after firing grenades; and
- Had Thales behaved in a manner that was ‘misleading and deceptive’?
Background
There were two main issues discussed by the Court in Madritsch.
Firstly there is the issue as to whether Thales used the ‘Madritsch KG IP’ in their own, internally developed solution. The Court found that they had and said that (Para 405): “Thales made use of the confidential information to modify its own V3 and V5 designs to create V6 and incorporate it in the new model of the Austeyr supplied to the ADF as part of the L125-3C program. This was to the detriment of Madritsch. Madritsch did not authorise it.”
The second issue that was alleged (by Madritsch/NIOA) was that Thales acted in a manner that comprised ‘misleading and deceptive conduct’ under s18 of the Australian Consumer Law Act. Thales was found by the Court to have done so (Para 436): "by leading them (the Coa) to believe that Thales had a continuing interest and even an intention to enter into a sub-licence agreement with NIOA for the Madritsch Solution. By engaging in that conduct, Thales contravened s18 of the Australian Consumer Law Act.”
The Court went further however, also stating (Para 438): “I am also satisfied that Thales’ conduct served its intended purpose. It had the effect of misleading the plaintiffs to believe that Thales had a continuing intention to negotiate and enter into an agreement permitting it to manufacture the Madritsch Solution”. The court went on to say that the deceptive and misleading conduct also had the effect of stopping Madritsch from approaching the Commonwealth directly, with what could have been a (potentially) superior solution.
On the facts as they stand to date:
- there is a potential breach of ASDEFCON terms (on Thales part) in that they don't (hypothetically) own the IP in question and therefore cannot grant any license to use this IP to the Commonwealth; and
- there is a possibility Thales could be liable for damages to Madritsch/Nioa (if another commercial solution could not be found).
Obviously, liability will depend on the success of any appeal that Thales may wish to set in motion.
Potential Issues – ASDEFCON
Now whilst I make no comment on the existing Thales case (as said earlier it may go to appeal) a case like this would raise several possible contractual issues.
Whilst the sections of the ASDEFCON contract templates have gone through several revisions since the contract in question was entered into some years ago, this discussion is around the old principals of ownership of what is now known as TD/IP.
Intellectual Property (IP) Rights
In this scenario, the Contractor does not own the IP or hold a licence for the IP in question and therefore by extension cannot grant any license to use this IP to the Commonwealth.
Whilst as discussed above, the IP sections of the contract templates have gone through several revisions, every version of ASDEFCON has required a Contractor to obtain all necessary licences from Subcontractors for any Third Party IP used in the delivery of the Contract. These licences must ensure the Commonwealth is granted a Licence to use the IP for any Defence Purpose, and to be able to grant a sublicence as required. This obviously could not occur in a case where there was no licence agreed between the subcontractor and the Contractor.
Intellectual Property (‘IP’) Warranties
Contractually the Contractor is required to warrant that in respect of all IP licensed to the Commonwealth, the relevant licensor has the right or authority to grant a license, and has been made aware of, the rights granted in respect of IP in question.
There is also a warranty that at the time of delivery the Contractor has no notice of any challenge, claim or proceeding in respect of any such IP. In a situation such as this the Contractor could not give such a warranty.
Indemnities
Every version of ASDEFCON has required a Contractor to indemnify the Commonwealth against a variety of acts or omissions of the Contractor.
If the Subcontractor in a situation like this sued the Commonwealth (and was successful), the Contractor could well be liable to indemnify the Commonwealth against any loss or damages awarded for an infringement or alleged infringement of the third party’s IP rights that were purportedly permitted by or under a licence of the IP rights in question. This would be in addition to any damages the Commonwealth may seek for a breach of the contract.
Commonwealths Options / Remedies
A failure to give the required licenses would at a minimum lead to the right of the Commonwealth to require a rectification of a breach (most likely by issuing a breach notice) and could lead to damages if not rectified. It is also important to note that damages (for an IP rights breach) do not fall under the damages limitation cap.
However, like all cases of this kind where you have an ongoing reliance on the Contractor, enforcing the contractual remedies may just poison the well or make the relationship unsustainable. This must be weighed up.
There is also the issue that if the Commonwealth contributed to the situation (leading to the breach) any damages payable may be lessened or alleviated entirely. In a situation like this any prudent Contractor will be examining the conduct of the parties and all communications with the Commonwealth and with the third party very closely indeed to see if they were aware of (and did not require rectification of) the issues in question.
Where to for the Commonwealth?
At a minimum, the Commonwealth could and should (I suggest) request a Contractor in this situation correct the breach by obtaining required licences for the IP in question. The Contractor would most likely not be able to reclaim this from the Commonwealth and it could prove quite costly.
If the Contractor could not or would not obtain the required licences, the options open to the Commonwealth would be to either breach the Contractor and / or terminate the contract or, vary the Contract to remove the supply of the offending item (and allow the IP owner to supply directly).
The other thing the Commonwealth should examine is how the situation arose, why it was not picked up or dealt with, and how to avoid the situation in future.
In closing, the Commonwealth and CASG, as well as other agencies, are asking contractors and subcontractors to collaborate and work together more and more. The days of ‘the Prime’ dictating how a subcontractor must work need to end where it is possible and safe to do so as this is the only way to will deliver what is required.
Note: David Heasley is a Melbourne lawyer, Co-Founder and Director of Alongside Defence Consulting.