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IN THE COURT OF APPEAL

AT BRONTON

Charland Business Solutions Ltd

--- Appellant
v

Rain Enterprises (Ostia) Ltd

--- Respondent

COURT OF APPEAL
AT BRONTON
1.

Bronton, the capital of Honrovia, is one of the most important financial centers in the
world and home to many of the worlds billionaires, from Honrovia and elsewhere. It has
an enviable history and is today regarded as an exemplar of a functioning democracy and
fair Government. In addition, its dispute resolution mechanism is highly respected for
expertise and incorruptibility, and the Commercial Court in Bronton has been the forum of
choice for many an international dispute that has had little to do with Bronton. A country
with which Honrovia has a close relationship is Ostia, a developed country with a
traditionally strong industrial economy. Ostias industries, however, have suffered in recent
times, leading to the introduction of austerity measures and cuts in public spending.
Despite this, a few segments of the economy have flourished, and among these is
information technology, in which the Respondent in this appeal, Rain Enterprises (Ostia)
Ltd [REOL] is the market leader. REOL was founded in 1863 as a financial services firm
and has since the late 1990s diversified into information technology.

2.

Charland Business Solutions [CBS] is likewise the market leader in information


technology in Charland, a developing country. CBS is led by dynamic entrepreneurs whose
vision has contributed in no small measure to the growth of Charlands economy and CBS
international reputation. A substantial component of CBS business consists of business
solutions developed for multinational companies incorporated elsewhere. With a
combination of top quality work and comparatively low pricing, CBS has kept pace with
foreign competitors in this segment.

3.

In 2006, CBS was on the verge of developing two path-breaking software programmes,
known internally as XRQ-3. These were intended to obviate the need for MNCs to install a
management software for each segment of its business operations for example, client
management, sales and accounts. Although software such as this had been developed in the
past, the USP of CBS product was that it was not industry-specific, for it had been coded
in such a way that it could integrate every aspect of any given company, once CBS
engineers obtain access to that companys databases for a period of atleast two months.

This would represent a significant advance for its clients not only for reasons of cost
saving, but also efficiency of operations. The only real drawback of the programme was
that it was considerably more complex than any other in the market, but CBS intended to
offer as part of the package a team of engineers to provide after-sales support for a period
of two years, renewable for a further year at the option of the client.
4.

However, XRQ-3 could not be developed entirely in-house, for the expertise it required
was beyond the capabilities of even some of CBS finest engineers. CBS realised that it
would have to collaborate with a leading multi-national company in a developed country. It
chose Ostia, and also intended to also direct the better part of its marketing activities to
companies in Ostia, some of which were already its customers, but also many others which
were not. The obvious choice was REOL. Negotiations did not prove easy, for the parties
were some distance apart in their expectations, and REOL in particular was intent on
securing a profit sharing arrangement instead of simply developing the remainder of the
software programme for a lumpsum amount. The parties expected that annual sales would
not be below 1 billion. After further negotiations, Mr Pander sent an email to his
counterpart at REOL, Mr Lawrence Kramer. This email is set out at Annexure II. Mr
Kramer replied the same day stating that this proposal was acceptable.

5.

On 12 January, 2008, the two companies signed a Software Sharing and Distribution
Agreement [SSDA]. The material clauses of the SSDA are set out in Annexure III.

6.

The SSDA was signed by the respective principals and came into effect by 21 August,
2008. It took longer than expected to so prepare XRQ-3 that it would survive the scrutiny
of exacting customers, but it was eventually launched on 27 December, 2008. However, as
a result of the recession that gripped the global economy at that time, the results of the first
year of operations were catastrophic, with a turnover of just 340 million and a substantial
operating loss. On 30 September, 2009, CBS made a payment of 34 million to REOL.
Things improved in 2010, as the economy began its slow recovery from the recession, and
the turnover generated by XRQ-3 rose to 590 million, and CBS accordingly made a
payment of 59 million to REOL.

7.

However, there had been a few wrinkles over these two years, principally because of
complaints CBS received that certain employees of REOL were not technically proficient

to the extent necessary to deal with software as complex as XRQ-3. To CBS consternation,
a complaint to this effect was received from one of its biggest clients, although there was
no further adverse consequence. CBS also discovered that an REOL representative had not
visited clients every fortnight as mandated by clause 16. When it raised these matters with
REOL in August 2010, Mr Kramer was of the view that the incidents had been blown out
of all proportion and indicated that he had in any event terminated the services of the six
employees in question. Mr Kramer also assured Mr Pander that fortnightly visits would be
made to the extent practicable and necessary. Mr Pander made it clear that the resumption
of fortnightly visits was an urgent necessity in view of the adverse comments received
from some of its clients.
8.

As things turned out, XRQ-3 finally fulfilled its promise in 2011 and began to acquire
immense popularity, despite its high price. By 30 September, it had generated a turnover of
1.2 billion in Ostia. On receiving a sum of 200 million from CBS, Mr Kramer wrote to
Mr Pander pointing out that since the turnover generated had exceeded 1 billion, REOL
was entitled to be paid 50 % or 600 million. Mr Pander, who was taken aback, sent a terse
reply to the effect that Mr Kramer had been badly advised, for PBP under the SSDA
applied only to the difference between the turnover and 1 billion, and not to the entire
sum. He also took the opportunity to raise with REOL his dissatisfaction at having received
a further complaint on 16 September questioning the technical proficiency of REOL
engineers, and at the fact that fortnightly visits had not been made without the odd default
here and there. Mr Kramer reiterated his demand of 600 million, and as to technical
proficiency and fortnightly visits, accepted that default had occurred but maintained that no
harm had been caused to CBS reputation for the default was not serious. Mr Pander had in
the meanwhile instructed his associates to themselves fully investigate the 16 September
incident, in order to ascertain whether Mr Kramers assessment was correct. The complaint
had come from Hughton Dynamics, a mid-size company in Ostia that had first become
CBS client in 2002. On investigation, it emerged that Mr Kramer had chosen a relatively
inexperienced employee as team leader for the project; that this team had made a mistake
during software installation that resulted in a temporary loss of data and productivity for
Hughtons systems; and that while the mistake was by no means elementary, it is likely that
a more skilled team would not have so erred. On 2 October, Hughton terminated its

relationship with CBS and REOL not only in relation to XRQ-3 but also for other projects.
The loss of Hughtons small account caused barely a ripple in CBS for its portfolio had
grown significantly. Nevertheless, CBS was keen to ensure that no such incident would
occur in the future, and Mr Pander was of the view that REOL could have easily averted it
had it complied with the terms of the SSDA.
9.

After internal discussions, Mr Pander realised that the dispute with REOL could prove
expensive for CBS, since the SSDA was to last ten years, and was advised that it was
prudent for CBS to initiate, if necessary, legal proceedings to vindicate its claim that only
200 million was payable. CBS sought the opinion of leading counsel, and was advised
there was an arguable case in favour of its interpretation of clause 8; and that it may be
entitled to terminate the contract as REOL had committed a breach of clauses 16 and 23.
Mr Pander wrote to Mr Kramer advising him of his intention to institute proceedings,
calling upon him to accept 200 million and notified him that the SSDA was terminated
with immediate effect, for REOL had breached clauses 16 and 23. REOL immediately
instituted proceedings in the Commercial Court in Bronton seeking: (i) a declaration that it
was entitled to be paid 600 million and an order directing CBS to do so; and (ii) damages
for CBS unlawful termination of the SSDA.

10. To REOLs surprise, CBS promptly instituted proceedings against REOL and REOL
(Charland) Ltd not in the Honrovian or Ostian courts but in the High Court in Laurd,
the capital of Charland, seeking: (i) a declaration that REOL was entitled to be paid 200
million, not 600 million as it claimed and (ii) a declaration that REOLs breach of clauses
16 and 23 entitled CBS to validly terminate the contract. REOL (Charland) Ltd is a wholly
owned subsidiary of REOL carrying on limited business operations. It is common practice
in Charland to make the local subsidiary a pro forma party in any case involving foreign
corporations. CBS also sought and obtained a temporary injunction restraining REOL from
proceeding in the Honrovian courts pending disposal of the suit. In view of this, REOL
withdrew its suit in the Commercial Court at Bronton with permission to refile should the
injunction cease to operate.
11. REOL instructed Heyman and Hart, a firm of solicitors in Charland, to enter appearance in
the High Court in Laurd for the limited purpose of asking the court to discharge REOL

(Charland) Ltd, as it was a stranger to the contract and had nothing to do with the dispute
between the parties. Unfortunately, Mr Hart negligently assumed that he was to enter
appearance for both REOL and REOL (Charland) Ltd and did so. On behalf of REOL, he
challenged the jurisdiction of the High Court on the basis that the Honrovian courts had
exclusive jurisdiction. Under Charland Civil Procedure, a defendant objecting to the
jurisdiction of the Charland court is required to submit his defence on the merits
simultaneously, for the court decides both issues in a single judgment. As a result, Mr Hart
submitted a defence statement on the merits, pleading that REOL was entitled to receive
600 million and that the purported termination of the SSDA by CBS was wholly illegal.
When REOL discovered Mr Harts serious error, it promptly terminated the services of his
firm and instructed another firm of solicitors. It was advised by its new solicitor that it was
not open to it under Charland rules of civil procedure to withdraw its appearance, and that
it could raise the point of Mr Harts lack of authority in a review application only after the
High Court gave judgment.
12. The High Court, after hearing the parties, dismissed the challenge to its jurisdiction on the
grounds that under the Charland law of contract, which the High Court was required under
Charland rules of private international law to apply, notwithstanding the designation of
Honrovian law in the SSDA: (i) an exclusive jurisdiction clause may not be invoked when
there is a prima facie case that the defendant has willfully committed a breach of contract
and (ii) in any event, the conferral of exclusive jurisdiction on a foreign court in a case
involving a Charland party is opposed to public policy and void. The High Court also
found for CBS on the merits of the case, and granted the relief sought in paragraph 10
above. In addition, the High Court ordered REOL to pay a sum of 293 million as
exemplary damages, under section 6 of the Charland Domestic Business Protection Act,
2007, which provides that a court may order a foreign corporation against which judgment
has been entered to pay a such multiple as the Court deems fit of the average annual sum
it had received under the contract which it breached. The High Court, however, refused to
grant a permanent injunction restraining REOL from instituting proceedings in Honrovia.
13. REOL considered the option of not challenging this judgment, for it had no property in
Charland against which it could be executed, but feared that it would be executed should it

ever begin business operations directly in Charland. Accordingly, REOL filed an


application for review before the High Court on the grounds that the solicitor who entered
appearance on its behalf had not been authorised to do so and that the High Court in any
event manifestly lacked jurisdiction. REOL also filed an additional written submission on
the merits without prejudice to these contentions. The review application was referred to
a three-judge panel of the Court which, after hearing the parties, dismissed the application
and found that REOLs submission was effective under Charlands law of agency. No
further appeal is possible under Charland law.
14. Dismayed at this state of affairs, REOL filed suit against CBS in the Commercial Court in
Bronton seeking exactly the same relief described in paragraph 9 above. CBS filed an
application to strike out the claim and pleaded its case on the merits without prejudice to
that application. CBS also filed a separate suit to register the judgment of the High Court in
Laurd and enforce the decree against REOL for 293 million. It raised the following
contentions:
1. On CBS suit, the decree for 293 million must be enforced because the High
Court had jurisdiction in the international sense and the bar on indirect
enforcement of penal laws is not thereby infringed;
2. On REOLs suit, the judgment of the High Court in Laurd raises issue estoppel
against REOL as to whether REOL submitted and as to the the finding that clause
41 is void or alternatively inapplicable; therefore the Commercial Court has no
jurisdiction; even if the Court has jurisdiction, the judgment of the High Court in
Laurd raises cause of action estoppel or alternatively issue estoppel on each issue
on the merits of the case;
3. In any event, REOL is only entitled to be paid 200 million because:
i. Ordinarily principles of contractual interpretation support this view of clause
8.2;
ii. In the alternative, the email of 19 August, 2007 is admissible, and makes the
meaning of clause 8.2 clear;

iii. In the further alternative, CBS is entitled to rectification of clause 8.2;


4. CBS was entitled to terminate the SSDA for breach of clause 16;
5. CBS was entitled to terminate the SSDA for breach of clause 23.
15. REOL resisted this application and the CBS suit on the following grounds:
1. CBS separate suit must be dismissed because Honrovian courts cannot enforce
penal decrees;
2. On REOLs suit, the judgment of the High Court cannot raise any estoppel because
it cannot be recognised or enforced in Honrovia in the first place:
i. Section 24(1)(a) of the Honrovia Civil Jurisdiction Act, 1979 forbids
recognition; section 24(1)(b) does not apply in view of section 25; even if it
does, the court is not obliged to recognise and should not do so in this case;
ii. In any event the judgment cannot be recognised or enforced under the
common law rules for the recognition and enforcement of foreign judgments;

3. The email of 19 August 2007 is inadmissible; even if it is admissible, the correct


interpretation is that 600 million is payable; CBS is not entitled to rectification.
4. CBS was not entitled to terminate - the proper remedy for the breach of clauses 16
and 23 is damages.
16. In the action before the Commercial Court, Mr Kramer testified that he believed when he
received the email of 19 August 2007 that the agreement was that CBS would pay 50 % of
the entire sum, and not merely 50 % of the difference.

17. The Commercial Court heard both actions together and held that: (i) it was not, in view of
the HCJA, obliged to recognise the judgment of the High Court and declines to do so; no
question of issue estoppel arises (ii) in any event, the award for 293 million cannot be
enforced; (iii) the email of 19 August 2007 is inadmissible and REOL is correct as a matter
of interpretation of clause 8.3; however, CBS is entitled to rectification and Mr Kramers
subjective belief described in paragraph 16, though honestly held, is irrelevant for this
purpose; (iv) REOLs breach of clause 16 and clause 23 each entitled CBS to terminate the
SSDA. The judge gave REOL leave to appeal and cross-appeal to the Court of Appeal on
all issues. The case is now posted for arguments.
18. It is stipulated that Honrovia is a common law jurisdiction, and that the decisions of the
English courts are highly persuasive. The laws of Ostia and Charland are not relevant
except to the extent stated above. None of Honrovia, Ostia and Charland is a member of
the European Union and nothing in European law is relevant to these proceedings.

ANNEXURE I
Honrovia Civil Jurisdiction Act 1979 (extracts)
24 Foreign judgments given in proceedings instituted in breach of a dispute settlement
agreement
(1) Subject to the provisions of this section, a foreign judgment shall not be recognised or
enforced in Honrovia if
(a) the bringing of those proceedings in that court was contrary to an agreement under which the
dispute in question was to be settled otherwise than by proceedings in that court; and
(b) those proceedings were not brought in that court by, or with the agreement of, the person
against whom the judgment was given; and
(c) that person did not submit to the jurisdiction of that court.
(2) Subsection (1) does not apply where the agreement referred to in paragraph (a) of that
subsection is illegal, void or unenforceable or incapable of being performed for reasons not
attributable to the fault of the party bringing the proceedings in which the judgment was given
(3) In determining whether a foreign judgment should be recognised or enforced in Honrovia, the
court shall not be bound by any decision or finding of the foreign court relating to any of the
matters mentioned in subsection (1) or (2).
25 Certain acts not to amount to submission to jurisdiction of foreign court
(1) For the purposes of determining whether a foreign judgment should be recognised or
enforced in Honrovia, the person against whom the judgment was given shall not be regarded as
having submitted to the jurisdiction of that court by reason only of the fact that he appeared
(conditionally or otherwise) in the proceedings for all or any one or more of the following
purposes, namely
(a) to contest the jurisdiction of the court;
(b) to ask the court to dismiss or stay the proceedings on the ground that the dispute in
question should be submitted to arbitration or to the determination of the courts of another
country.

ANNEXURE II

Subject: XRQ-3
Date: Sun, 19 Aug 2007 16:03:00
From: abel@cbs.com
To: lk@reol.co.os
Dear Larry
My company is prepared to offer the XRQ-3 contract to you on terms that I hope you will agree
are considerably more generous than the industry average. We are willing to make an annual
payment to you of 10 % of the revenue generated by the sale of XRQ-3 in Ostia, and, should the
copies you manage to sell generate revenue in excess of our present estimates, 50 % of the
difference. It goes without saying that we will retain complete ownership rights over XRQ-3,
including any part of the software which you develop.
I look forward to hearing from you.
Yours

Abel

ANNEXURE III
Software Sharing and Development Agreement (extracts)
8 Consideration: In consideration of REOLs obligations under this Agreement, CBS agrees to
pay REOL Guaranteed Minimum Payment [GMP] and Performance Bonus Payment
[PBP].
8.1 GMP means an amount equivalent to 10 % (ten percent) of the total turnover of
XRQ-3 in Ostia
8.2 PBP, where such turnover exceeds 1 billion, means an amount equivalent to 50 %
(fifty percent) of such sum.
16 Marketing and Promotion by REOL: It shall be a condition of this agreement that REOL
shall send a representative of a designation not lower than Chief Engineer (Technical) atleast
once every fortnight to visit and interact with the eighteen companies listed in Annexure and
such other companies as CBS may from time to time designate, for the purpose of soliciting
future orders, providing after-sales support where applicable, imparting training to the clients
employees and such other purposes as CBS may specify.
23 Performance Obligations of REOL: In addition and without prejudice to any specific duty
on REOL that may arise by virtue of other provisions of this Agreement, REOL undertakes to
discharge its obligations satisfactorily.
41 Dispute Resolution: Any dispute arising out of, in connection with, or in relation to this
Agreement shall be subject to the exclusive jurisdiction of the Honrovian courts. Both parties
hereby waive any objection that the Honrovian court is forum non conveniens.

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