Couple turns "dream home" into nightmare: copyright in house plans

What you need to know

• The Federal Court has awarded substantial compensatory and additional damages, as well as legal costs, to Henley Arch against a couple and their builder for infringing Henley’s copyright in its house plans.
• This case validates lost profits (on a loss of opportunity basis) as a measure of damages where the infringement of copyright in a house plan has resulted in the loss of a contract to build (as opposed to assigning a particular value or share of profit to the infringed copyright or imposing a counterfactual licence fee).
• Additional damages may be available where:

1. the Court finds that the respondents either knew, or had reason to suspect, that their conduct amounted to copyright infringement;
2. in the course of the dispute the respondents initially deny using the copyright materials as the basis of their work; and
3. the respondents later provide unreliable evidence aimed at diminishing the culpability of their actions, which conduct can be taken as demonstrating an ongoing “consciousness of guilt”.

What you need to do

• When someone provides materials for you to work from, always take steps to verify the ownership of the materials rather than simply relying on representations or contractual warranties. You should also retain copies of documents evidencing the ownership of the materials.
• If you are asked whether it is permissible to use or adapt third party materials, seek legal advice.

Background

In April 2013, Henley Arch was engaged by a couple, the Mistrys, to design a house based on one of Henley’s standard designs. It was the parties’ intention that the Mistrys would sign a building contract with Henley once the Mistrys had taken ownership of the land on which they wished to build. The Mistrys paid a deposit to Henley and throughout 2013, Henley prepared multiple versions of plans and tender documents in accordance with the Mistrys’ instructions. However, the Mistrys suddenly terminated their dealings with Henley in November 2013, a matter of days before the Mistrys were due to sign a building contract with Henley. It was later established that, some weeks earlier, the Mistrys had met with another builder, Lucky Homes, and had signed a building contract with Lucky Homes for the construction of the same home.

In late 2014, as a result of an unsuccessful VCAT claim by the Mistrys for a refund of the deposit paid in 2013, Henley became aware that the Mistrys might have utilised the services of Lucky Homes to construct a house in accordance with Henley’s plans. However, in response to letters of demand, and despite the existence of an almost identical set of plans that Henley had obtained from public records and enclosed with its letters of demand, both the Mistrys and Lucky Homes initially denied that they had made any use of Henley’s plans. However, by the trial it had become clear that those denials were untrue.

In 2015, Henley commenced proceedings in the Federal Court against the Mistrys, Lucky Homes and the sole director of Lucky Homes, Muhammed Mohsin Shafiq, for copyright infringement. Henley sought compensatory damages for the profit it would have made if it had constructed the house, and additional damages for, among other things, the flagrancy of the respondents’ infringement.

In their pleadings, both the Mistrys and Lucky Homes conceded that Henley’s plans were in fact used as the basis for the design of the house that was built, although Lucky Homes still denied infringement. At that time, the respondents blamed each other for what had occurred, with the main point of contention between them concerning what was said and done at their first meeting.

Respondents’ positions

Lucky Homes denied that copyright subsisted in Henley’s plan, denied copyright infringement and cross-claimed against the Mistrys for breaching a warranty in their building contract to the effect that they owned the plans they provided to Lucky Homes. Lucky Homes also argued that sufficient changes had been made to the plans to avoid infringement and that, in any case, the Mistrys had represented at their meeting that they had purchased the plans, or had a licence to use them. Lucky Homes also stated that the Mistrys had provided plans with no identifying markings on them.

However, on the first day of trial Lucky Homes changed its position and admitted that it had received the plans bearing identifying markings. Later during trial, the director of Lucky Homes gave incredible evidence about how the identifying markings may have come to be removed from Henley’s plans at the first meeting, and prior to their provision to a new draftsperson for redrawing (perhaps by accident or due to the actions of some unknown person in his office). That evidence was not accepted.

The Mistrys, on the other hand, had admitted copyright infringement but pleaded a defence of innocent infringement on the basis that they were not aware that using Henley’s plans “as an example” (which they said was all they had asked Lucky Homes to do) constituted infringement. The Mistrys also cross-claimed against Lucky Homes for misleading them about what conduct would amount to copyright infringement, arguing that Lucky Homes told them that making “15 to 20 changes” was sufficient to avoid infringement. The Mistrys also stated that the plans provided by them to Lucky Homes at the first meeting bore all original identifying markings and they did not know how a set of plans without those markings had come into existence and been provided to the draftsperson.

Liability

Justice Beach found that Henley Arch owned copyright in its plans as an original artistic work and that its copyright had been infringed by both sets of respondents. His Honour found that a substantial part of Henley’s plan had been reproduced, despite the changes made by the respondents, because the substance and essential features of Henley’s plan had been copied.

In respect of the Mistrys, his Honour found that they had infringed copyright by copying and reproducing Henley’s plan, authorising Lucky Homes to copy and reproduce Henley’s plan, and by reproducing Henley’s plan in three dimensions with the construction of their house. He also found that Lucky Homes had similarly infringed and authorised the draftsperson to infringe copyright in Henley’s plan, and that the company’s director had authorised Lucky Homes to infringe copyright.

His Honour found that Lucky Homes could not rely on the warranty in the building contract or the Mistrys’ representation as to ownership, because Lucky Homes at least suspected that the Mistrys did not own the plans, being the foundation for its suggestion that “15 to 20 changes” be made. Justice Beach also found that the identifying markings (title block) on the plans had been removed deliberately by the company’s director with a clear motive to ensure that the draftsperson would not ask any questions.

Justice Beach rejected the Mistrys’ innocent infringement defence, finding that their reliance on the assurances of Lucky Homes did not mean that they had no reasonable grounds for suspecting that their conduct would infringe Henley’s copyright. In fact, the Mistrys had signed multiple documents during their dealings with Henley in which Henley reserved its copyright in the plans, and had built a prior home with Henley. Justice Beach also noted that a deliberate untruth can negate the innocent infringement defence:

"If an infringer tells a deliberate untruth because they perceive that the truth is inconsistent with the relevant innocent state of mind in question … the untruth can be taken as springing from … “consciousness of guilt” … The untruth could be constituted by the infringer’s actual statement after the act(s) of infringement whether verbally, in correspondence or in written or oral evidence. It could also be inferred from false instructions given to lawyers which are then incorporated into correspondence or pleadings." (emphasis added)

However, his Honour upheld the Mistrys’ cross-claim of misleading and deceptive conduct against Lucky Homes on the basis that they had incurred liability to Henley in reliance on the incorrect advice of Lucky Homes about what constituted copyright infringement.

Compensatory damages

Justice Beach ordered the Mistrys and Lucky Homes to pay compensatory damages to Henley based on the lost profit Henley would have enjoyed had it been contracted to build the Mistrys’ house. His Honour also ordered that Lucky Homes pay to the Mistrys the share of damages paid by them to Henley.

Justice Beach accepted that lost profit was an appropriate measure of loss in this case, and that two questions had to be answered: whether there was a lost opportunity, and what was the value of that opportunity? His Honour found that a lost opportunity existed because the Mistrys likely would have contracted with Henley, absent the infringing conduct. Justice Beach also accepted Henley’s calculation of lost profit, with no deduction for fixed overheads as Henley’s overheads would not have been affected by the construction of one house.

Finally, Justice Beach disposed of the notion that lost profit in such a case could or should be apportioned to assess the part attributable to the copyright or design aspect. He said: “[p]utting to one side the artificiality of such an exercise, the fact is that because of the infringing conduct, Henley Arch lost the opportunity to earn the entirety of the lost profit.”

Additional damages

Justice Beach ordered Lucky Homes and Mr Mistry (as distinct from Mrs Mistry) to separately pay additional damages to Henley. His Honour took into account: the flagrancy of the infringing conduct by Lucky Homes, the need for general deterrence of the infringing conduct, the profit received by Lucky Homes for constructing the house, the conduct of Lucky Homes and Mr Mistry after the infringing conduct (which included attempts by both to cover up the infringement, including by a failure to be frank in solicitors letters, the director of Lucky Homes attempting to conspire with the draftsperson, and making false denials in pleadings, as well as the provision of “unsatisfactory” evidence), and the fact that they had the capacity to pay additional damages.

In relation to the director’s conduct, Justice Beach accepted the following evidence of the draftsperson which he set out in full in his judgment:

"Later, on or about 17 March 2015, [the director] came to see me at my office and at that meeting said words to the effect that “you need to co-operate with us otherwise you will be in big trouble”. At the time, I understood [the director’s] reference to “us” to be a reference to both himself and the homeowner. [The director] asked me to agree that certain hand-drawn sketches were the beginning of our conversation and relationship in relation to the project. He said words to the effect “I want you to confirm this [the sketches] was the beginning of our relationship on this project” to which I replied “no, this is the plan you brought me” while handing him a copy of the floorplan he provided to me on 21 October 2013 … [the director] also said words to the effect that “the homeowner is prepared to backdate these sketches and to say these sketches were the start of the project”..." (emphasis added)

Justice Beach held that the Mistrys’ successful cross-claim also applied in respect of additional damages. However, his Honour only ordered Lucky Homes to pay Mr Mistry half of the additional damages he owed to Henley, given that much of Mr Mistry’s post-infringement conduct was of his own volition and was not sufficiently connected to the misleading conduct of Lucky Homes.

* Ashurst acted for Henley Arch in this proceeding.

Authors: Will Scott, Lawyer; Kellech Smith, Partner