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[2009] FCA 1220
Federal Court of Australia
2009-07-01
Original judgment source is linked above.
Background and factual setting 133 By way of reiteration of matters in the "General Chronology", I would emphasise the following. (a) Prior to commencing negotiations for their 1999 Distribution Agreement AMC and Hamilton had previously signed two sequential sole distributorship agreements each for 5 year terms. These both permitted Hamilton to terminate the distributorship by giving at least 3 months notice if sales did not meet the agreed minimum annual sales figures contained in the respective Schedule B to each agreement. (b) While, that the relationship between Dr Keung and the Hamilton officials with whom he dealt prior to 1999 primarily, Mr Koerner and Mr Lock was cordial and constructive and appeared to be one of mutual respect, there were, nonetheless difficulties progressively affecting the distributorship over time. From 1994 Dr Keung began complaining of the effects of increased competition on sales. By 1998 recurrent issues in the parties' relationship were Hamiltons insistence upon introducing regularity in the system for ordering and delivering its products to AMC; the profitability to both parties of prevailing pricing arrangements and the economic downturn in Asia; and the lack of success in securing appropriate licences for Urederm and Rubesal in China and in appointing a Chinese distributor. (c) In 1998 Dr Ovcharenko took over the responsibilities Mr Koerner and Mr Lock had in relation to AMC. (d) On 10 February 1999 Dr Ovcharenko raised the issue of a new "Distribution Agreement" with Dr Keung suggesting misleadingly (see Ovcharenko's email to Keung of 23 January 2002) that all other distributors with whom Hamiltons did business abroad have such an agreement. The meeting took place on 1 and 2 March 1999 but prior to it Dr Ovcharenko had covert meetings with Mr Chung of HMC in Hong Kong. 134 Under cover of his 10 February letter Dr Ovcharenko enclosed copies of "our official Distribution Agreement and also a shorter, simpler version Distribution Terms". Only the latter is in evidence. The Distribution Terms - a 5 page, 32 clause document - reflected the earlier AMC-Hamilton agreements in permitting Hamilton to terminate on 90 days notice if agreed minimum sales figures were not achieved; it embodied a binding order scheme; it dealt with trademarks and trade names and imposed confidentiality obligations on AMC; and it stipulated as follows for the ending of the licence in cl 24: The Licence ends: 24.1 at the end of the Term; 24.2 if Hamilton ceases to hold the rights to manufacture the Products or distribute the Products in the Territory; 24.3 if either party defaults under these Terms and fails to remedy the default within 14 days of being notified by the other party; 24.4 if a party is a body corporate and becomes subject to any form of insolvency administration or legal process applying to any insolvent or bankrupt body corporate or otherwise ceases to carry on business seeks protection from its creditors; 24.5 at the expiration of 60 days' written notice by one party to another. This clause, as will be seen, was clearly a precursor of cl 41.1 of the Distribution Agreement signed by the parties. What should be emphasised about it is that, on its face, its 5 subclauses were intended to operate independently of each other. I would also note that the Distribution Terms did not draw any operative distinction between "the Licence" granted under the Terms and the agreement constituted by the Terms. Neither do the Terms make express provision for the proposed duration (or "term") of the agreement or for its renewal. The possible significance of both of these matters will become apparent when AMC's contentions are considered below. 135 There is a deal of conflicting evidence as between Dr Ovcharenko and Dr Keung concerning what transpired at the meeting and particularly as to what was said in relation to the operation of cl 41.1 and of cl 41.1.6 in particular. It is necessary to deal with this at some length as the meeting and its aftermath is of crucial importance to the principal contract claim. 136 Before turning to the 1-2 March meeting, I should refer, first, to Dr Ovcharenko's Business Report of March 1999 which he gave to Mr Blake towards the end of that month. On its face it appears not to have been finally completed until at least 30 March (as the postscript to it attests). The Report covered a range of topics (not all presently relevant) but it contained the nearest to a contemporaneous account, albeit one-sided, of the meeting. 137 As it stated in its opening, the object of the Hong Kong visit was to increase the profit from product exported to Hong Kong and increase existing sales to A$600,000. It recounts Dr Ovcharenko's meetings with Mr Chung and the intelligence he gained about the market in Hong Kong. In the "General Chronology" I referred to, and will not repeat, Dr Ovcharenko's account of his meeting with Dr Keung. Dr Ovcharenko's Report noted that as a result of all negotiations, Dr Keung agreed to sign the Distribution Agreement "with two insignificant changes". The first related to cl 8 on Renewal, the terms of which were: No1. 8. Renewal "Supplier may extend the Term on the terms of this agreement (or on other terms agreed in writing between the parties) for a period of 5 years, by written notice to Distributor at least 24 months before the end of the Term." This version, though not agreed on 1-2 March, appeared in the draft Distribution Agreement sent to Dr Keung on 23 March. I note in passing that subsequent negotiations resulted in Hamilton's acceptance of what became cl 8.1 in the agreement as executed. At the March meeting there was agreement in principle to the inclusion of a minimum purchase requirement in the Distribution Agreement. This was not a subject of further negotiations and became cl 8.2 of the signed Agreement.
138 The tenor of the Business Report strongly suggests that of the two documents sent to Dr Keung on 10 February 1999, the negotiations were conducted on the basis of the "official Distribution Agreement" and not the "Distribution Terms". As I have noted the Terms did not contain a provision for renewal.
(a) Dr Keung 139 Dr Keung's account of the meeting in his first affidavit was that: 232. On 1 March Mr Ovcharenko and I discussed pricing initially but moved, later on, to discussion of the other terms of the draft distribution agreement, including the Term and the status of the Fuyunhon and Tuotoning Trade Marks. On 2 March we concentrated exclusively on pricing. 233. Apart from the discussion of pricing, the course of the discussion on 1 March 1999 followed the order of the draft distribution agreement which Mr Ovcharenko had provided to me on 10 February 1999. Casebook 106-113 is a copy of the draft distribution agreement, entitled, "DISTRIBUTION TERMS," including the schedule to the draft distribution agreement, which is blank except for Hamilton's address for service. The headings in this schedule roughly correspond with the agenda for and course of the discussion on 1 March 1999. 234. During the discussion on 1 March 1999, I placed special emphasis on the continuing importance to AMC of a "rolling" term of about five years i.e. a term which would periodically automatically be updated so that AMC would always have at least five years notice of the ending, by termination by notice of either party, of the agreement. 235. I said words to the effect, "Promotion and advertising are very expensive and you do not get a profit back on these things straight away. Hamilton has to guarantee AMC a rolling five year term so that AMC will have time to reap a profit on its investment in advertising and promotion. Also, AMC has to be able to guarantee its distributors that they will have time to reap a profit on their investments". I also said words to the effect, "the term of the distribution agreement has to update automatically each year so that the term will always be for a further five years minimum." 236. In this discussion with Mr Ovcharenko on 1 March 1999, and in the course of subsequent telephone conversations or meetings with Mr Ovcharenko the date and circumstances of which I can no longer recall but before the end of July 1999, I also spoke to Mr Ovcharenko about a 60 day period of handover which was to follow the end of the Term of the proposed Distribution Agreement. I recall that the purpose of that period was to permit time for AMC to undertake necessary work associated with the end of the Term of the Distribution Agreement including, for example, running down remaining inventory.
140 In his second affidavit, which was filed and served, prior to the filing of Dr Ovcharenko's affidavit, Dr Keung returned to the 1-2 March meeting. He stated: 67. In addition to the short-form distribution agreement sent to me in the letter from Hamilton dated 10 February 1999, I also received a copy of Hamilton's official Distribution Agreement. This is referred to in Hamilton's letter of 10 February 1999 (Casebook 105). I no longer have a copy of this Agreement, however, I believe it contained the a clause equivalent to clause 41 of the signed Agreement (Casebook 342). This clause appears in a draft Agreement (as clause 43.1). I later received from Hamilton attached to a letter from Dimitri Ovcharenko dated 23 March 1999 (Casebook 129-152). 68. During my discussions with Dimitri Ovcharenko on 1 March 1999 or in subsequent telephone conversations, the date and circumstances of which I can no longer remember but before the end of July 1999, I spoke to him about this clause. In particular, I raised a concern that the 60 day notice of termination clause (clause 41.1.6) appeared inconsistent with the length of the Agreement being a rolling 5 year term. Mr Ovcharenko stated that the 60 day notice of termination would only be effective if one of the preceding paragraphs in that clause applied. I reminded Richard Blake of Hamilton of my discussions with Mr Ovcharenko in an email dated 17 July 2006 (Casebook 592-593) shortly after Hamilton purported to terminate the Agreement.
141 In cross-examination Dr Keung reiterated that the document they worked from and the document they worked through at the 1-2 March meeting was the Distribution Terms. In the discussion as to the term (ie duration) of the proposed agreement, when it was pointed out that no actual term was referred to in the Distribution Terms, Dr Keung said: "it was filled in by [Dr Ovcharenko] later". As to cl 24 (on termination) Dr Keung indicated he "had a discussion with Dimitri". He later went on to say that he had to clarify subclause 24.5 (termination on 60 days notice) - … because there is contradiction between the formal notice of termination or renewal and the clauses, 24.5, that's why I had a meeting with Dimitri on 1 March when, in the meeting, I clarify all this with Dimitri. However, after being taken to the Distribution Terms he then conceded there was nothing mentioned about renewal. Nonetheless, he went on to say:
I asked Dimitri whether we can extend the term every year so that it's a rolling five year term and I think you can see that in the report from Dimitri to Mr Blake. You've read a document passing from Dimitri passing to Mr Blake, have you?---No, I - even without reading that I still remember what I talked to Dimitri about at the term and the renewal because it is so important for all companies. Several questions later Dr Keung was asked:
You asked him specifically about clause 24.5?---Yes. Yes. And Dimitri explained to you that the clause, the purpose of the clause, was to enable either you or Hamilton to terminate the agreement on 60 days notice?---I don't have that answer. The answer is 24.5 is only confined to that paragraph and there is a funny saying from after that - a funny - a proverb from Dimitri, he said, "No one would like to cure a hen laying golden eggs," from that I implied that it means long-term cooperation. He was then taken to [68] of his second affidavit and he reaffirmed that Dr Ovcharenko had stated that the 60 day notice of termination would only be effective if one of the preceding paragraphs in cl 24 applied:
I have already clarified again that Dr Ovcharenko said that this only relates to paragraph 24, because for our position, it's impossible to end the agreement within a short period, even one or two years. We have the distribution agreement with the subdistributors, which Hamilton knows. We have distribution agreement with Canada, two to three years. We have distribution agreement with Zuellig Pharma for three years. We have distribution agreement with HMC, which Hamilton has very good contact, two to three years. How can I promise 60 days' notice, otherwise I will be put into litigation again and again and all these agreements were given to Hamilton as a copy and - - -
142 Later in his cross-examination Dr Keung agreed that at no point in the negotiations did he suggest a change to cl 41 or cl 42. 143 I refer below to the circumstances in which what became cl 50 of the Agreement was proposed by Dr Ovcharenko by facsimile on 27 May 1999 and was agreed to by Dr Keung. That clause, for present purposes, requires that all negotiations between the parties that took place prior to the signing of the Agreement were to be "considered null and void as from the day of its signing". In cross-examination on the burden of this clause, Dr Keung, while acknowledging that the written contract was to be the whole of the contract between AMC and Hamilton, nonetheless said he had had full explanation orally and he presumed "that also includes this". The cross-examination continued: You also understood - you understood that by this [27 May 1999] document, Dimitri was saying to you, you could not rely on any oral explanations of the agreement?---At - that was not my meaning at that time when I read it because, as I said, Dimitri was a Russian and I'm a Chinese. That's why I explain orally to him again and again, about the clauses. And finally, we come to a written version that is fully explained what we said orally.
144 I note in passing that both parties agree that no case is being put that they have given their own dictionary meaning to this clause. AMC affirmed this in final address. 145 As both Dr Ovcharenko's Business Report and a number of passages in Dr Keung's own evidence demonstrate, Dr Keung on a number of occasions expressed concern at the cost of establishing Hamilton's presence in China (especially in relation to the costs of licences) and of the time needed to recoup these costs. Dr Keung wanted to ensure in the Distribution Agreement that, "having invested a lot of money in China … we should be allowed a certain period to get back our investments". This led to the inclusion of cl 31.3 in the agreement (dealing with compensation for benefits to Hamilton from AMC's activities under the agreement in the event of the licence ended before 30 June 2006). 146 I would comment in passing that cl 31.3 is of some importance in the scheme of the Agreement. Hamilton's original proposal (in the then draft cl 33.3) was that at the end of the Licence AMC was "not entitled to payment for any benefit to [Hamilton] from [AMC's] activities under this agreement". AMC objected to this. Its comment to Hamilton on cl 33.3 was: If we have seven years to represent Hamilton products starting from 1 July 1999 we agree to this point. We are still investing on the market of China with the profit we got from Hong Kong. A lot of investment is required in China for the coming two years. If the Term of this Agreement has been extended twice for the coming 24 months as stated in Clause 8, we will not ask for any benefit from Hamilton at the end of the Licence. The wording in Clause 33.3 can remain the same if we have this mutual understanding. Initially Hamilton refused to compromise. In a later draft (of 18 August 1999), it relented and cl 31.3 (as it was now renumbered) assumed its final form which warrants reiteration:
31.3 In the event that the Licence ends on or after 30 June 2006, Distributor is not entitled to payment for any benefit to Supplier from Distributor's activities under this agreement. In the event that the Licence ends before 30 June 2006, the parties agree to negotiate to determine any entitlement Distributor may have.
147 In cross-examination on cl 31.3 his evidence was: Yes. And it was intended to give you compensation if the distribution agreement wasn't renewed or extended?---As I said before, if I had seven years' representation, at least, you know, and we can have a chance to get back all we have spent. … Thank you. And just listen to me put something to you in two propositions, if I might? The purpose of this clause was to give you compensation for hard cash that you outlaid, if either the agreement wasn't renewed, or if it was terminated before June 2006. Do you agree?---Yes. If we have seven years' representation, it's all right. Had you discussed with Dr Ovcharenko, this point, that by 30 June 2006, you thought that you would have been able to recover your initial costs of product registrations. Did you discuss that with Dr Ovcharenko?---I discussed - I haven't given him a fixed date, but as I said, we have at least seven years to represent before we can get back the money we spent. Beginning in June 1999?---Yes. Later he said:
And it was clause [31], wasn't it, which was intended to protect the reward for your investment?---Yes. Yes. Clause 41, you understood, had nothing to do with protecting the reward of your investment?---Clause 41, of course, is the most important to protect our investment. Because it's an international agreement, we have sold so much investment for our distributors, sub-distributors. On about the day after he received the 60 day notice of termination of 13 July 2006, Dr Keung created on his computer a document consisting of cl 41.1, cl 41.2 and cl 42. He underlined the references in cl 42 to cl 41.1.6 and the last two sentences of cl 42.3. He denied that, from his then reading of the clauses, he concluded Hamilton was correct in its assertion in the notice of termination that the Distribution Agreement would come to an end under cl 41.1.6, 60 days after delivery of the notice. 148 For the sake of completeness, on 17 July Dr Keung wrote to Mr Blake concerning the notice of termination. The sequence of exchanges it prompted encapsulated the positions taken in this proceeding. The letter stated in part: Thank you for your fax and E-mail dated 13 July 2006. I think you have to ask Dimitri about the content and minutes of our meeting in 1999 concerning the discussion on Clause 41.1.6. According to the Agreement AMC has to finance millions of dollars on advertisement and promotion and sign the contracts with our sub-distributors with an effective term of 3 to 5 years to maintain the minimum sales, I enquired Dimitri about the conflict between the Term of 5 years and this Clause which could reduce it to 2 months. In response to this enquiry the explanation given to me by Dimitri in our meeting in 1999 was as follows: It is common sense that the Term was fixed for at least five years to protect the reward for our investment. Clause 41.1.6 was inserted and put at the end of Paragraph 41.1 because it followed the conditions listed in Clause 41.1.1 to 41.1.5, i.e. when the conditions in these five clauses happened one party could notify the other one about the end of the Licence. The end would be effective 60 days after the notification. Perhaps you can clarify if conditions listed in the above clauses have occurred. In the meeting on 23 March last year I specifically asked you to fix the term of our Agreement because we have to sign an Agreement with Ling Nam Pharmaceutical for distribution in China for at least three years to let them reap the profits from their efforts in the initial stages, you confirmed again that Hamilton would give us more time to get reward from our investment in the China market by granting a rolling 5 year term at all times for our company. This was documented in the minutes of our meeting printed by Dimitri. How come the Term could be been shortened to 60 days by intentionally misinterpreting one clause out of one paragraph without taking the conditions or reasons leading to the end of the Licence into consideration? I presume you are going to compensate AMC and our distributors for the early termination of our Agreement only on your side. [Emphasis in original.]
149 Mr Blake's response of 20 July stated in part: The Distribution Agreement provides an express right to Hamilton (and to AMC) to terminate the licence (subject to the Distribution Agreement) by giving 60 days written notice (41.1.6). Hamilton has validly exercised its right and consequently AMC's distribution licence will come to an end on 13 September 2006. No compensation is payable to AMC pursuant to the Distribution Agreement (or otherwise). You have referred to a meeting with Mr Ovcharenko in 1999. You acknowledge in your email that at the meeting you were aware of (and discussed) the termination right subject of clause 41.1.6 of the Distribution Agreement. However, you now assert that Mr Ovcharenko told you that that right would only be available to Hamilton in circumstances where all of the "events" set out in clauses 41.1.1 - 41.1.5 had occurred. Such an argument in my view is fanciful and contrary to common sense. Your views about the way in which (Mr Ovcharenko allegedly told you) clause 41.1.6 would operate are, with respect, contrary to good commercial common sense and place a construction on the clause which is contrary to the clear and unambiguous wording of the Distribution Agreement. Even if Mr Ovcharenko had made the comments as alleged (which he vigorously denies) it is difficult for me to believe that you would have accepted and relied upon a construction of the Distribution Agreement which clearly defies commercial common sense. I note that in any event the conversation to which you refer occurred prior to the execution of the Distribution Agreement. Hamilton maintains that the terms of the Distribution Agreement are clearly and unambiguously recorded in the written Distribution Agreement. As such the conversation to which you refer is irrelevant in that it is alleged to have occurred during the period of negotiation which led to the written terms of the Distribution Agreement (which agreement is expressed to be the entire agreement between Hamilton and AMC). Hamilton's position on this issue is supported by clause 45 of the Distribution Agreement. [The "entire agreement" provision.]
150 In an email of 2 August, Dr Keung both reiterated his position and raised a new matter which, as will be seen, looms large in AMC's proposed construction of the Distribution Agreement: Right after you sent me the E-mail about the Termination of the Licence in 60 days' time I knew it was impossible. There are a lot of things that need to be settled to achieve a smooth transition; otherwise there will be interruption of supply of your products on the market. Even though Clause 41.1.6 can be explained in your own way it is impossible for the Licence to end in 60 days. (The evidence I got was that it followed one, not all, of the conditions listed from 41.1.1 to 41.1.5) Another point is that Clause 41.1 provides for the end of the Licence, not the termination of the Distribution Agreement. The definition of the "Licence" is "the right to sell Products in the Territory". This is different from the D.A. which has a rolling 5 year Term. [Emphasis in original.]
(b) Dr Ovcharenko 151 Consistent with the emphasis in his Business Report of his Hong Kong visit (on which it draws), Dr Ovcharenko's affidavit version of the 1-2 March meeting gave heavy emphasis to prices and pricing. Nonetheless he acknowledged there was discussion of the proposed terms for a formalised distribution agreement but they "were very preliminary in nature". His affidavit went on: 90. Dr Keung and I agreed that the term of the agreement should be based on a period of 5 years. This was equivalent to the term provided in the previous Letters of Appointments between AMC and Hamilton … 91. Dr Keung and I agreed that Hamilton should give AMC adequate notice if it intended to renew the term of the distribution agreement and that, in the circumstances, a period of 24 months was reasonable. This would allow AMC to plan the continuation of its sub-distribution relationships and the like. Dr Keung and I proposed to replace clause 8 of the draft distribution agreement as follows: "Supplier may extend the Term on the terms of this agreement (or on other terms agreed in writing between the parties) for a period of 5 years, by written notice to Distributor at least 24 months before the end of the Term."
152 In cross-examination Dr Ovcharenko agreed that there was no such agreement with Dr Keung as that suggested above. Rather it reflected what he proposed. It is, in my view, highly improbable that Dr Keung would then have agreed to such a term. 153 Dr Ovcharenko reiterated in cross-examination that there was discussion about the initial term of the Distribution Agreement being for 5 years. He accepted that Dr Keung wanted automatic extension and his reasons were that because of promotion and advertising costs, he would have to have some guarantee of a rolling 5 year term and that AMC would need to guarantee its distributors that they would have the time to recoup their investments. There likewise was agreement there would be a provision on minimum purchases. 154 Because of its significance it is appropriate to refer at a little length to Dr Ovcharenko's cross-examination on Dr Keung's version of the "rolling 5 year term": Dr Keung talked to you about a rolling five year term, didn't he?---Very briefly. Very briefly. Because, again, it was just our meeting about the distribution agreement and - - - He told you that AMC wanted a rolling five year term which would be periodically, but automatically, extended?---We have talk general that the distribution agreement should be automatically extended, but we haven't discussed about the - like it's - under which conditions this might be, because it's a link to the minimum sales level, etcetera, etcetera. It was, again, very brief discussion. But he told you, didn't he, that he wanted to have a term that would always be at least five years?---Yes. So that it could be terminated but he would have at least five years at any given time before notice was given?---It's - again, it's subject all the other points of the distribution agreement. There weren't other points of the distribution agreement at that stage, were there?---An example, it will be disaster and Hong Kong will be - something happening in Hong Kong doesn't mean we need to automatically extend for the next five years, the next five years all the time. You didn't have that discussion - - - ?---We have discussion - - - - - - in March 1999?---No. We have discussion, and Dr Keung have told me what it wants if it is possible. Again, if it is possible, what our distribution agreement will be automatically extended each time for next couple of years. And you didn't say to him, "Well, that's subject to other terms in the distribution agreement," did you?---No. I told, like, it's - of course, a renovation of the agreement, it is subject of the terms of the discontinuance and termination of the agreement. We will come to the termination issue later. Dr Keung said to you that he had been promoting Hamilton products for a number of years, didn't he?---Yes. And he said that promotion and advertising was very expensive?---That's true. And he told you that to get a profit, that is, back on the investment, he would have to have some kind of guarantee for AMC of a rolling five year term?---Again, subject of - yes, he told me. In your head?---Yes. You thought, "Well, that will be subject to some other terms in the agreement," didn't you?---Yes, of course, and I told him. You did tell him?---Yes. So you told him at that March 1999 meeting, that the other terms - there would be other terms in the agreement which would mean that you might not get a rolling five year term?---No. I haven't told about the particular point, but I told, if our cooperation will be successful for both of us, in that case, of course, we will - if it is not any other ….. , in that case, of course, we agreed to renovate our agreement automatically. Thank you. And he said that AMC would need to guarantee their distributors that they would have the time to recoup their investments?---Yes, he told me. He said, "The agreement had to be updated automatically each year so that there will always be a further term of five years minimum"?---Yes.
155 As to what became cl 41.1 (ie draft cl 43.1), Dr Ovcharenko said in his affidavit [92]: During my discussions with Dr Keung regarding the clauses in the proposed agreement, Dr Keung asked me why a right to terminate on 60 days notice had been included at clause 43.1.6. I explained to Dr Keung that either AMC or Hamilton could use this clause to terminate on 60 days notice. I further told Dr Keung that there would be no point either party terminating if the relationship was running smoothly and said words to the effect that "no one is going to kill the chicken who is laying the golden eggs." In cross-examination he was emphatic that he explained that the various subclauses of cl 41.1 were "totally independent"; were "separate points". He denied telling Dr Keung that subclause 41.1.6 would not be used by Hamilton unless one of the preceding things in cl 41.1 occurred. His affidavit also emphasised that from the time the first draft version of the Distribution Agreement was made available to Dr Keung in February 1999 until the execution of the finalised version in March 2007 the only changes made to the termination provisions were (a) its renumbering as cl 41 and (b) the insertion of the restrictive covenant cl 41.1.7 in July 1999. 156 Hamilton's defence, it should be noted, contains certain admissions in relation both to the rolling 5 year term and to cl 41.1.6. These are, respectively: 84A.2 Hamilton admits that Dr Ovcharenko and Dr Keung had conversations on 1 and 2 March 1999 about the Term of the Distribution Agreement; 84A.3 Hamilton says that Dr Ovcharenko told Dr Keung that at the end of the initial Term of the Distribution Agreement (1 July 1999 - 30 June 2004) the Distribution Agreement could be renewed and extended pursuant to clause 8.1 of the Distribution Agreement: (a) subject always to AMC and Hamilton satisfying clause 8.2 of the Distribution Agreement by agreeing Minimum Purchases and appending the written Minimum Purchases quantities to Schedule 4 of the Distribution Agreement; and (b) subject always to rights of termination available pursuant to the Distribution Agreement to AMC and Hamilton. … 84B.1 Hamilton admits that Dr Ovcharenko and Dr Keung had conversations on 1 March 1999 and 2 March 1999 about clause 41.1.6 of the Distribution Agreement; 84B.2 Hamilton says that Dr Keung raised a concern about the operation of clause 41.1.6 and in response Dr Ovcharenko: (a) confirmed that clause 41.1.6 was intended to give a right of termination to both AMC and Hamilton; (b) did not say that clause 41.1.6 would only become operational subject to one of the preceding subclauses being satisfied; and (c) said that Hamilton would not exercise its right to terminate pursuant to clause 41.1.6 except in circumstances where the Distribution Agreement was no longer commercially viable or acceptable to Hamilton. 157 Dr Ovcharenko touched again on the issue of termination on notice in [165] to [173] of his affidavit. In [165] Dr Ovcharenko said: 165. Further to my discussions regarding clause 43 with Dr Keung in March 1999 (discussed at paragraph 92 above) AMC raised a concern with me, in or about May 1999, regarding the perceived conflict between a 5 year term and the ability of either party to terminate on short notice. Dr Keung conveyed to me that AMC's concerns were related specifically to the money which AMC was outlaying to obtain pharmaceutical product registrations in China when considered in light of clause 33.3 (later in a different form to become clause 3.1 as described below) of the distribution agreement. Clause 33.3 provided: "At the end of the Licence, Distributor is not entitled to payment for any benefit to Supplier from Distributor's activities under this agreement." [Casebook 523 and 541.] In particular Dr Keung told me that AMC was concerned that: 165.1 obtaining pharmaceutical registrations was expensive; 165.2 once obtained, pharmaceutical registrations were only relevant to Hamilton products and were not able to be utilised if AMC lost the licence to distribute Hamilton products; 165.3 if AMC did have the opportunity to recover the costs of those registrations over an extended relationship with Hamilton, then AMC would not profit from the agreement with Hamilton. The affidavit then outlined the negotiations and exchanges leading to the acceptance by both parties of what became cl 31.3 to which I have referred earlier. I would note in passing that Dr Ovcharenko's cross-examination on [165] illustrated one of the difficulties with his evidence: first, he denied that the conversation referred to in the paragraph occurred; when shown his affidavit, he said it did but it was about cl 33.3 not cl 41.1.6.
(c) Additional matters 158 There are four matters to which reference should be made because of their potential significance to the termination issue. The first relates to the inclusion of what became cl 50 in the Distribution Agreement. In May 1999, Dr Keung sought from Hamilton some concession in pricing because of the appreciation of the Australian dollar relative to the Hong Kong dollar. While this request was refused, Hamilton proposed a bonus arrangement. It was in this context that Dr Ovcharenko sent a facsimile to Dr Keung on 27 May 1999 which said (in part): With regard to the bonus products we offered, the amount is of course open to negotiation and we shall be pleased to talk further on this point when you are here. With regard to the Distribution Agreement, this has taken so long to prepare and finalise, but I do believe that now we are agreed on all but a very few minor points. The bonus offer could be included under Schedule 5. We believe it would also be a good idea to include further clauses as under: 52. OTHER CONDITIONS 52.1 All negotiations and correspondence between the parties that have taken place prior to the signing of this Agreement shall be considered null and void as from the day of its signing. 52.2 Any amendments and/or supplements to this Agreement shall be valid only if they are made in writing in Schedule 5 and signed by duly authorised representatives of both parties. Looking forward to your comments in reply.
159 Dr Keung's email in reply indicated that "your points are noted". It went on to say that he would be able to have discussions with Dr Ovcharenko in mid-June "after my lawyer has given me comments about the Distribution Agreement". Dr Keung raised no issue about the proposed cl 52 prior to execution of the agreement: he said there was not "any need to object" and he did not discuss it with his legal adviser. In Dr Ovcharenko's cross-examination on the 27 May fax, the following exchange occurred: Were you saying to him you can't rely on anything that has happened in the past between you and Hamilton, including what might have happened between Dr Keung and Mr Lock and Mr Koerner?---Yes. And you understood, didn't you, that Dr Keung said that many things had happened in the past as between himself, Mr Lock and Mr Koerner in relation to the use of, for example, the Chinese names?---Yes. And he had raised that with you in Hong Kong in March 1999, hadn't he?---Yes. And you were trying to say to him, "You can't rely upon anything I may have explained to you in Hong Kong in March of 1999 by this fax?---Yes. My opinion was as soon as we will sign distribution agreement all points which will be in the signed copy of the agreement they have highest priority compared to all previous negotiations, draft copies, letters, etcetera, etcetera. So the final agreement covers all previous negotiations.
160 To anticipate matters AMC contends that the above answers were dissembling and that in propounding the clause Dr Ovcharenko had, in the circumstances, engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act. 161 Secondly, as Dr Keung's facsimile response to the 27 May fax illustrates, AMC was representing to Hamilton that it was obtaining legal advice on the Distribution Agreement. While representations to this effect were made on at least 5 occasions in May and June of 1999, the most significant for present purposes were contained in a fax of 7 June 1999 to Dr Ovcharenko. It opened with the observation: "Following this fax are the comments by our adviser and further clarified by me." The following 4 pages raised questions and made comments and proposals on 13 clauses of the then draft of the Distribution Agreement. These did not include cl 41.1, cl 45 or cl 50. 162 An order that AMC and Dr Keung discover documents containing, recording etc legal advice relating to the terms of the Agreement or AMC's entry into it, was made on 24 June 2008. No such documents were produced. In cross-examination Dr Keung diminished the significance of legal advice: "It's not the most important issue for me." He went on to say that the only legal advice he had was from a judicial friend; he did not discuss the agreement with any practising lawyer. He only spoke to his friend on 2 or 3 occasions and his friend spoke to him only about three things: duration, the trademark and pricing. 163 Again to anticipate matters, the respondent invites me to disbelieve Dr Keung and to accept that his company did have a legal adviser as he represented was the case. 164 Thirdly, the nature of the relationship between Dr Keung and Dr Ovcharenko and their respective views of the bargaining process have some significance. Dr Keung acknowledged he had been on very friendly terms with Mr Lock and Mr Koerner and their relationships were ones of reciprocal trust. He admitted in essence, though, that from the time of the 1-2 March meeting he did not trust Dr Ovcharenko: "his faith in him has decreased." This was because Dr Keung had learned of Ovcharenko's secret meetings with Mr Chung of HMC and of the strategic advantage in price negotiations that this gave Dr Ovcharenko - as Ovcharenko himself acknowledged in this Business Report of March 1999. There is at least some contemporary evidence indicating that at least by June 1999 Dr Keung was well aware of the covert meetings: see his fax to Dr Ovcharenko of 16 June 1999. What also is apparent from the evidence of both Dr Keung and Dr Ovcharenko is that each on occasion resorted to studied misrepresentation in negotiation. I am left with the very clear appreciation that each saw advantage taking by such means as an acceptable aspect of the negotiating process. 165 Fourthly, in the "General Chronology" I referred to deterioration in the parties' relationship beginning in 2002 over the parallel importation issue and the related cycle of accusatory exchanges of correspondence. By an email of 4 October 2002, Mr Blake made plain he was "having second thoughts" about the continuation of the AMC distributorship. He referred to a proposed meeting with Dr Keung in Sydney on 14 October 2002: The purpose of our meeting will be for Hamilton to assess if Australian Medic-care has the skills and integrity we require for our distributors for it to continue to act for it in HK/China. Dr Keung accepted in cross-examination that Mr Blake was suggesting that, if the correspondence with Hamilton's continued in the terms in which it had been, Hamilton would be terminating the Distribution Agreement. Dr Keung saw this, though, as a threat. He made no mention at the time of Dr Ovcharenko's assurance. 166 I refer to this matter, as Hamilton relies upon it, to support the claim that AMC's claim relating to cl 41.1 is a recent invention.
(d) Additional material on "the rolling 5 year term" 167 This term is not described, let alone defined, in the Distribution Agreement. I referred earlier to the draft cl 8 Dr Ovcharenko included in his Business Report to Mr Blake. That provision, which gave Hamilton (but not AMC) the power to extend the Term for a period of 5 years by written notice to AMC at 2 years before the end of the Term, was included in the draft Distribution Agreement sent to Dr Keung on 23 March 1999. By 14 April 1999, the period of extension was reduced to 12 months (in now cl 8.1) and required the agreement of Hamilton and AMC. Additionally, a new cl 8.2 had been added: 8.2 At the time of extending the Term the Supplier and Distributor must agree on Minimum Purchases for the period of the extension and these shall be appended to Schedule 4. AMC's minimum purchase obligations were imposed by cl 10 of the 14 April draft. 168 On 7 June AMC sent Hamilton a facsimile commenting on (inter alia) cl 8.1. It stated: If the minimum sales in Scheule 4 are realized after each one year period, the Term will be extended automatically for a further period of 12 months to make up the Term for a period of five years. 169 Hamilton then produced several alternative drafts of cl 8.1 for its own purposes. On 29 June 1999 it provided Dr Keung with a further draft of the Distribution Agreement containing a clause 8.1. On 16 July 1999 Dr Keung in turn sent a revised draft agreement with his proposed alterations and comments to Dr Ovcharenko. His draft cl 8.1 was in identical terms to that in Hamilton's draft of 29 June. Hamilton's next draft of 29 July 1999 accepted Dr Keung's proposal without comment. It stated that: 8.1 If, 4 years before the expiration of the Term, neither party notifies in writing of its desire to terminate this Agreement or to alter its terms and conditions, the Terms in this Agreement is automatically extended for 12 months to make up the Term to five years. Though this provision may have had its genesis in Dr Keung's 7 June comment, it obviously differs in effect from that proposal. I note in passing that Dr Ovcharenko's evidence is that he reassured Mr Blake that Hamilton still had rights to terminate under cl 41.1.6. 170 For the sake of completeness I would note, and it seems to be agreed that there were no cl 8.2 minimum purchase agreements at all after the signing of the Distribution Agreement and prior to the purported 2006 termination. 171 Distinctly, as I have noted, one of the justifications Dr Keung advanced for having a rolling 5 year term with a 4 year notification of termination period was the need to be able to guarantee AMC's distributors that they will have time to reap a profit on investments. A deal of evidence was put on in relation to AMC's sub-distributorships and their contractual terms. It is unnecessary to rehearse those contracts here other than to note that none appears to have been for a term of 5 years; they were generally for 2 to 3 years; one at least was for an indefinite term; termination of these agreements was commonly on notice of a designated duration, eg 3 or 6 months. There appears to have been little relationship between the term of the Distribution Agreement and those of sub-distributorships.
174 As these alleged conversations occurred prior to the execution of the Distribution Agreement there arises the further question of whether they can be given contractual effect in light of cl 45 and cl 50 of the agreement. The conversations raise further, discrete questions insofar as it is alleged they gave rise to representations which contravened the Trade Practices Act, or else could found a claim based on estoppel. 175 There is a supplementary question relating both to cl 8.1 and cl 41.1.6. It is that, if either written clause on its proper construction does not accord with the respective oral representation allegedly made by Dr Ovcharenko, on 1-2 March 1990 or subsequently, the Distribution Agreement should be rectified under s 87(2)(b) of the Trade Practices Act. This question is premised upon the proposition that AMC has suffered damage by Dr Ovcharenko's conduct which contravened s 52 of that Act. 176 For convenience in exposition, I will consider this sequence of questions by first considering whether the contract was wholly in writing or was partly oral. I take this course for the reason that the circumstances of the 1-2 March 1999 meeting and a later telephone conversation between Dr Ovcharenko and Dr Keung prior to July 1999 provide part of the factual matrix to be considered both when determining whether or not the contract was wholly in writing and, distinctly, for the purposes of determining whether Hamilton, through Dr Ovcharenko, engaged in misleading or deceptive conduct during the negotiations. 177 What I should emphasise at the outset is that AMC does not rely upon conduct subsequent to the execution of the Distribution Agreement, but which is inconsistent with its terms, to evidence an oral variation of the agreement: cf GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [224]-[231]. Neither has there been any attempt to rely upon subsequent conduct for the purpose of interpreting the Distribution Agreement: see Cheshire and Fifoot's Law of Contract, [10.16] (9th Aust ed). Distinctly, there is no allegation made that in exercising its cl 41.1.6 power Hamilton breached its duty of good faith and fair dealing to AMC or otherwise acted unconscionably: cf 67 Am Jur 2d, "Sales", s343.
(a) AMC's contentions 178 As AMC's submissions as to the inefficacy of the 13 July 2006 notice of termination turns, in the first instance, upon the construction it advances of cl 8.1, it is appropriate to deal with that provision first. 179 The AMC case can be put shortly. It is that cl 8.1 provides the mechanism for setting the "Term" (ie the duration) of the Distribution Agreement. Unless and until either (or both) of the parties gave "the written notice of its desire to terminate" the Agreement, or "to alter its terms and conditions" (such notice to be given 4 years before the expiration of the 5 year term) "the Term in this Agreement was automatically extended for 12 months to make up the Term to 5 years". In other words, subject to the non-occurrence at the end of the first year of the term of the stipulated condition (which, if it had occurred, would have limited the term of the agreement to a further 4 years (the remaining of the initial term), the initial term was automatically extended a further year. In this sense, it allowed for a rolling 5 year term. Further, it provided expressly for four years notification of a party's "desire to terminate" the Agreement. It could not otherwise be terminated (save by later express agreement). Importantly, it could not be terminated under cl 41.1.6. 180 Clause 8.2 (on agreeing minimum purchases for the period of the extension) did not, AMC contends, impose a condition precedent to extending the term. Rather it imposed an obligation on the parties consequential upon the extension effected by the operation of cl 8.1. The significance of this is that at the end of the first year of the Distribution Agreement (ie 30 June 2000), while no cl 8.1 notification was given by either party, neither were minimum purchases agreed for the 12 months 1 July 2005 - 30 June 2005. AMC's contention is that Hamilton "waived"its right to insist (later put as elected not to insist) upon a minimum purchases agreement for that year, and it did likewise in all subsequent years. 181 As to cl 41.1, AMC contends, its concern on its face was with the Licence and with when it ceases. To terminate the Licence, it is said, was not to terminate the Agreement. The premise of this is that the structure of the Distribution Agreement was such as to treat the Licence as a distinct part of the overall agreement. Its termination would still leave the balance of the Agreement on foot. I will refer, further, to this fragmentation of the Agreement below in my own consideration of the parties' contentions. 182 Relatedly, AMC says the scheme of cl 41.1 to cl 41.5 was to identify events which would end the licence. Clause 41.1.6 was intended to provide the mechanism bringing the Agreement to an end on the occurrence of any of those events, i.e. the giving of 60 days notice. It did not provide a separate and independent basis for terminating the licence. An independent reading of the subclause, it is said, is contra-indicated by the terms of the Distribution Agreement, read as a whole, because the Licence and the supply agreement are co-extensive (sic); the length of the Term (even if only for a fixed 5 years) is inconsistent with such a construction; that a long term was vital to AMC in its markets in 2000 was patently obvious; the rolling five year Term is inconsistent with this construction; clause 31.3 was inconsistent with such a construction (a consistent wording of clause 31.3 would have identified the date as 30 June 2004, not 30 June 2006); and the supply arrangement separately agreed between Hamilton and AMC required four months prior notice for orders, ie at least 120 days. 183 Alternatively, if cl 41.1.6 is equivocal, it was submitted it should be interpreted in light of the representation attributed to Dr Ovcharenko concerning the subclause's operation. I need not consider this latter submission as I have found no such representation was made.
(b) Hamilton's contentions 184 I need not dwell at any length upon Hamilton's submissions as I agree, as will be seen, with their essence. First, it is contended that there were no oral terms such as suggested by AMC; Dr Ovcharenko did not qualify cl 41.1.6 as pleaded by AMC, but did in explanation of the subclause indicate that Hamilton would not exercise its right save where the Agreement was no longer commercially viable or acceptable to Hamilton. Secondly, it is said that cl 41.1.1 to cl 41.1.6 created six independent events on the happening of which the "Licence ends". That the subclauses were intended to be independent is self-evident from the terms of cl 41.1 itself, and this conclusion is made the more apparent from the terms of cl 42 which indicated expressly that each of subclauses 41.1.1 to 41.1.6 were independent of each other. Thirdly, Hamilton submits that while cl 41.1 referred in terms to the ending of the licence, that ending on the proper construction of the Agreement was synonymous with the ending of the Agreement. The construction proposed by AMC, which would leave on foot Hamilton's obligation to supply AMC for a further four years after the expiry of the 60 day notice, was, it is said, "bizarre". Fourthly, cl 8.1's concern was with determining the "term" of the Distribution Agreement. It did not address termination as such. Such, inter alia (see cl 10.4.1), was the function of cl 41.1.1 to cl 41.1.6. Fifthly, the power to terminate was effectually exercised in the 13 July 2006 notice. Sixthly, in the alternative, because no minimum purchase agreement was reached under cl 8.1 by 30 June 2000, the Distribution Agreement continued after the expiry of the nominated term (ie 30 June 2004) but on the basis that either party could terminate the licence by the giving of reasonable notice. The premise of this alternative submission is that the reaching of an agreement as to the quantity of minimum purchases of Hamilton's products for the period of the one year extension under cl 8.1, was a precondition to any extension of the term of AMC's licence to distribute. No minimum purchases were agreed for after 30 June 2004. I will consider this alternative submission separately below.
Oral terms? 185 The findings each party has pressed upon me are tied to their respective views of the credibility of Dr Ovcharenko and Dr Keung. On this matter the parties differ sharply. While I am satisfied that the reliability of the evidence of both men is questionable for reasons I will give, my conclusions on the alleged oral terms have not been reached simply on credibility grounds.
(a) Clause 8.1 186 I should begin with a note on nomenclature. The description "rolling 5 year term" is not defined in or to be found in any document prior to the execution of the Distribution Agreement. As used in the evidence it clearly is used in a variety of senses. Dr Keung described his two 5 year Letters of Appointment in the 1990's as "the rolling 5 years". This usage seems to refer to no more than back-to-back five year agreements. A second usage refers to an agreement for five years which can be extended recurringly four years before the expiry of the then term for a further year. I will refer to this as the term extending sense. A third usage, which is Dr Keung's (and I will so describe it), adds a new feature to the second. It is that such an agreement can only be terminated by the giving of a notice of termination four years before the end of the term. In his affidavit he refers, curiously, to a rolling 5 year term as being: … a term which would periodically automatically be updated so that AMC would always have at least five years notice of the ending, by termination by notice of either party, of the agreement. (Emphasis added.) This meaning is of no little importance to AMC's proposed construction of cl 8.1. That proposed construction is that cl 8.1 requires four years notice of termination and that it overrides cl 41.1.6. Putting that question of construction to one side, there is, in my view, no evidence that Hamilton ever actually accepted Dr Keung's usage prior to the execution of the Distribution Agreement. 187 Dr Ovcharenko described the 1-2 March discussion of the terms of the proposed Distribution as being "very preliminary in nature" and that the rolling 5 year term was talked about "very briefly, very briefly". This attempt to diminish the significance of this aspect of the meeting is contradicted by his own account of the level of consensus about the Distribution Agreement provided to Mr Blake in his Business Report of late March 1999. 188 I am satisfied that at that meeting it was well understood that the proposed agreement would, as in the past, be for five years in the first instance. I also am satisfied that Dr Keung made known what he was seeking (ie a 5 year term with automatic extensions) and why he was (ie because of promotion and advertising costs and to provide a guarantee to AMC's distributors). However it needs to be said that making known his wants was one thing. Securing Hamilton's agreement to them was quite another. As I indicate below, it was not given. I note in passing that Dr Keung made a similar intimation to Mr Blake in May 1997 in the context of guarantees to Chinese distributors (to which I earlier referred) and that Mr Blake commented in cross-examination that he would not have agreed to that time frame. 189 I am further satisfied that, at the meeting, it was mutually contemplated that the agreement would make provision for its "renewal" or "extension". The Business Report made this much plain, even if it incorrectly asserted that Dr Keung had agreed to the draft cl 8 Dr Ovcharenko set out in the Report (that cl 8 gave Hamilton the option to extend the term for a 5 year period by written notice to AMC 2 years before the end of the term). I am prepared to accept both that the discussion of renewal envisaged that the desired effect of a renewal would be to secure a further 5 year term and, as I earlier indicated, that Dr Keung asked for the term to be extended every year to produce a rolling 5 year term. I have set out at length Dr Ovcharenko's cross-examination on the rolling 5 year term Dr Keung requested. It is clear from it, and I accept the evidence he gave, that while they discussed a rolling 5 year term in the term extending sense, Dr Ovcharenko was probably not ever alerted to let alone did he agree to, Dr Keung's usage and what it would have entailed in relation to termination of the Agreement. For reasons I give below, I consider it unlikely that at the March 1999 meeting any explicit link was made between a rolling 5 year term and a mechanism for preventing further extensions. 190 What I do not accept is that Dr Keung and Dr Ovcharenko then and there agreed at the meeting - and so bound their companies to - a renewal mechanism let alone a process of renewals that produced a "rolling 5 year term" such as Dr Keung requested. The draft of 23 March 1999 (which incorporated the clause 8 of Dr Ovcharenko's Business Report) provided for no such term. As I have noted, it merely gave Hamilton an option to renew so producing, in effect, a 10 year term. I consider it quite improbable that, in the first draft provided to Dr Keung, Dr Ovcharenko would propose a renewal mechanism that was quite so at odds with what AMC alleges was agreed. Accordingly, I reject AMC's submission that, not only was the term to be for 5 years (which was the case), it would also remain for 5 years from year to year. 191 What the 1-2 March meeting did, in my view, was to provide a basis for further consideration and, if necessary, negotiation of renewal. And that was in fact what happened. The cl 8.1 that ultimately emerged was the product of subsequent negotiation, not of prior agreement, and it embodied the actual agreement of the parties. 192 Significantly, that cl 8.1 was based upon, but was not as unqualified as, Dr Keung's comment in his 7 June 1999 facsimile on the then draft cl 8.1. Save that the automatic extension of 1 year could only occur if neither party gave a notification in accordance with the subclause, Dr Keung obtained the provision he was by then proposing. That provision was far removed in its detail and effect both from the clause Dr Ovcharenko included in his Business Report (which was included as well in the 23 March 1999 draft) and from the varied version thereof in the 14 April 1999 draft. The two drafts in particular strongly suggest that the parties were not, as at 1-2 March, ad idem on a proposed rolling 5 year term or that such a term was to be included in the final written agreement. What the drafts do demonstrate (particularly comparing the two) was that Hamilton was actually moving away from any concept of 5 year renewals. To reiterate, the 14 April draft admitted only of a 1 year extension to the original 5 year term if the parties agreed to this 2 years before the end of that term. 193 Importantly, in my view, the allegedly agreed oral term was to be for a rolling 5 year period until expressly terminated. Yet all of the drafts up until that Hamilton provided following Dr Keung's comments of 7 June 1999, were cast in the form permitting, first, Hamilton and, later, the parties by agreement to extend the term. No reference was made to expressly terminating it (whether unilaterally or by agreement). The mechanism of a power to notify of a desire to terminate the agreement, thus preventing further extension and fixing the duration of the term, reflected Dr Ovcharenko's response to Dr Keung's 7 June comment. This drafting sequence is quite inconsistent with a 1-2 March agreement on express termination of the term of the agreement. 194 Dr Keung secured in substance the provision that, by 7 June 1999, he then wanted. It was cast in language he was prepared to accept. It was, I find, unsupported by any collateral or anterior oral term. It was not the subject of a misrepresentation by Hamilton. The only issue that remained for Dr Keung was whether cl 8.1 on its proper construction had the meaning for which AMC now contends.
(b) Clause 41.1.6 195 As I earlier indicated, AMC's case in relation to this clause is not that the parties gave it their own dictionary meaning which differed from its natural and ordinary meaning. Rather it is that an assurance was given by Dr Ovcharenko to Dr Keung in relation to cl 41.1.6 and its operation. While I am satisfied that Dr Ovcharenko did make reassuring - or comforting - comments to Dr Keung at the 1-2 March 1999 meeting as to the type of circumstances in which the subclause might be used to end the Licence, those comments were not to the effect pleaded by AMC. 196 It is common ground that the term which ultimately became cl 41.1 (excluding cl 41.1.7) was raised by Dr Keung with Dr Ovcharenko. Though Dr Keung appeared to be uncertain as to when this occurred (whether at the March meeting or in a subsequent telephone call: see FASOC [8A.1]), in light of Dr Ovcharenko's evidence and of Hamilton's concession (see below), I am prepared to assume that the discussion of cl 41.1.6 occurred at the March meeting. I do, nonetheless, consider it to be of some significance that the assurance founding the alleged agreement was addressed only in Dr Keung's second affidavit. 197 Hamilton's concession, made in [84B] of its FAD, is that on Dr Keung raising his concern about cl 41.1.6; Dr Ovcharenko confirmed that the subclause was intended to give a right of termination to both AMC and Hamilton; but that Hamilton would not exercise its right except in circumstances where the Distribution Agreement was no longer viable or acceptable to Hamilton. 198 As I have already noted, Dr Keung's evidence is that it was the shortform Distribution Terms and not a draft of the Distribution Agreement that was discussed at the 1-2 March meeting and he was cross-examined accordingly. Save for what I have to say below as to the differences between cl 24 of the Distribution Terms and cl 41.1 of the Distribution Agreement, I will as a matter of convenience refer only to cl 41.1. 199 Dr Keung's evidence, both oral and in his second affidavit, was that he raised a concern about the 60 day notice of termination in cl 41.1.6 because it appeared inconsistent with the "length of the Agreement being a rolling 5 year term": Second Affidavit [68]; because "there is a contradiction between the formal notice of termination or renewal and the clauses (sic) 41.1.6": Transcript 437. I have already indicated that there was no rolling 5 year term agreed at the March meeting or prior to July 1999 (which was later than any allegedly relevant telephone call on this matter). I also have indicated that "the notice of desire to terminate" was not introduced into cl 8.1 until June 1999. I am prepared though to assume for present purposes that Dr Keung raised cl 41.1.6 because of concern about its relationship with the Term of the proposed Agreement. 200 Before turning directly to the conflicting evidence of the two men, I should indicate that the five enumerated grounds in cl 24 of the Distribution Terms on which the licence would end were clearly and unmistakeably separate and independent grounds. To foreshadow what I have to say, I am of the same view about the six enumerated grounds in cl 41.1 (which in substance include, but add to, the five of cl 24). 201 It is Dr Keung's evidence that Dr Ovcharenko said that cl 41.1.6's 60 day notice of termination would only be effective if one of the preceding paragraphs of the clause applied. In cross-examination about Dr Ovcharenko's explanation of cl 41.1.6, Dr Keung said there was: … a proverb from Dimitri, he said, "No one would like to cure a hen laying golden eggs," from that I implied that it means long-term cooperation.
202 Dr Ovcharenko in his affidavit evidence confirmed in effect, the substance of the Hamilton concession and said: I further told Dr Keung that there would be no point either party terminating if the relationship was running smoothly and said words to the effect that "no one is going to kill the chicken who is laying the golden eggs". His "proverb", I would note, would have been quite pointless if he had explained cl 41.1.6 as Dr Keung asserts, rather than as he said he explained it. 203 In cross-examination Dr Ovcharenko reiterated that he told Dr Keung that the subclauses of cl 41.1 were "separate" and "independent". It would in my view be cause for surprise had he done otherwise. 204 There are two matters emphasised by AMC as tending to confirm Dr Keung's version of the explanation given of cl 41.1.6. The first was Dr Ovcharenko's unexplained facsimile proposal of 27 May 1999 to include cl 50 in the Distribution Agreement. This clause was designed to rob all prior negotiations and correspondence of contractual significance. AMC has contended that the only reason to include this proposed clause was to protect Dr Ovcharenko from explanations, confirmations and agreements which he had reached orally with Dr Keung in the period from 1 March 1999 to the date of the facsimile. AMC further contended that the timing of the proposal was no coincidence. 205 Reliance as to the latter contention was placed first on a paragraph in Dr Ovcharenko's affidavit, and upon his wholly unsatisfactory cross-examination on it. The paragraph read, insofar as presently relevant: Further to my discussions regarding clause 43 Dr Keung in March 1999 … AMC raised a concern with me, in or about May 1999, regarding the perceived conflict between a 5 year term and the ability of either party to terminate on short notice. Dr Keung conveyed to me that AMC's concerns were related specifically to the money which AMC was outlaying to obtain pharmaceutical product registrations in China when considered in light of clause 33.3 (later in a different form to become clause 31.3 as described below) of the distribution agreement …
206 Dr Ovcharenko's cross-examination on the substance of this paragraph, both before and after he was taken to it, revealed him to be obstructive as a witness - as he characteristically was particularly early in his evidence. He denied Dr Keung raised a concern about cl 41.1.6 and its perceived conflict with a 5 year term; when shown the paragraph he admitted that the matter was raised, but for cl 33.3 purposes. In submissions AMC emphasise that the concern raised was about termination under cl 41.1.6. 207 Neither of the above matters is, in my view, of much assistance to AMC. I accept that no explicit and convincing explanation for the cl 50 proposal has been given by Dr Ovcharenko. But none was asked for. Dr Keung merely noted the contents of the 27 May facsimile and then indicated he would discuss the Agreement with Dr Ovcharenko "after my lawyer has given me comments" on it. Dr Keung represented on a number of occasions to Dr Ovcharenko around this time that he was receiving legal advice on the Distribution Agreement. Dr Ovcharenko accepted in cross-examination that, in the proposed clause, he was saying to Dr Keung that he could not rely upon any explanation he gave to him in Hong Kong in March 1999. As he put it "the final agreement covers all previous negotiations". 208 While the effect in fact of "four corners of the agreement" clauses requires careful scrutiny, they do not by reason of their inclusion in contracts necessarily raise suspicion about what antecedently may have been said by parties propounding such clauses. In the setting in which cl 50 was proposed I consider it unlikely that Dr Ovcharenko was intending to do more than demonstrate he was a hard and prudent negotiator, at least as he saw it, advancing a not uncommon clause. And he had been told by Dr Keung that AMC had legal advisers. Such circumstances were not obviously ones for advantage taking. 209 Equally, Dr Ovcharenko's evidence on the May telephone conversation may have revealed both his limitations as a witness and illustrated the reason for the inutility of much of his oral evidence. Nonetheless, I am satisfied that the discussion he had with Dr Keung, as it developed, related to compensation for costs incurred in establishing the China business which led in fact to the adoption, ultimately, of cl 31.3. Dr Keung's oral evidence appears to confirm this. I would add in passing that I am satisfied that cl 31.3 (which, as I have indicated, was the product of Dr Keung's insistent negotiation) was the primary provision put into the Distribution Agreement to allow AMC to recoup outlays made for Hamilton's benefit if the Agreement was terminated earlier than 30 June 2006, ie within 7 years of its execution. 210 My own conclusion on the alleged oral term is that the explanation of cl 41.1.6 attributed by Dr Keung to Dr Ovcharenko has not been established. Rather, I consider that the explanation propounded was at best an erroneous recent reconstruction, at worst, an invention born either of self-deception or of a sense of grievance and hostility at perceived wrongs done by Hamilton. 211 I am satisfied it is more probable than not that the explanation given was as Dr Ovcharenko's evidence and Hamilton's concession conveyed. It was premised upon the obvious meaning and interrelationship of cll 41.1.1 to cl 41.1.6, but it gave a commercially responsible and realistic explanation of the circumstances which would be likely to prompt resort to cl 41.1.6. It is probable that Dr Ovcharenko made the "laying the golden eggs" comment - it communicated the real constraint which would be likely to circumscribe use of a clause such as subclause 41.1.6 - although I do not discountenance the possibility that Dr Keung's reference to it may have been prompted by his reading of Dr Ovcharenko's affidavit. Further, and consistent with Hamilton's concession, I am satisfied that Dr Ovcharenko's explanation did not differentiate between the licence and the Agreement and that, as I later indicate, the cl 41.6 power if exercised would for practical purposes bring the Agreement to an end irrespective of how long the term still had to run. 212 As to Dr Keung's evidence, I am satisfied not only both from the manner in which this oral term was raised and from his uncertainty as to when the discussion occurred, but also from the manner in which, and terms in which, he gave his evidence, that his memory of the detail of the March 1999 meeting was slight and was confused. I am also satisfied that it would be unsafe not to recognise the real likelihood of his evidence being infected, not only by Dr Keung's distrust of Dr Ovcharenko, but also by personal animus against him and Hamilton. 213 There is a number of final matters to which I should refer. First, it is the case that, four days after the notice of termination on 13 July 2006, Dr Keung in his letter to Mr Blake referred to "the explanation given by Dimitri" at the 1999 meeting. It was the first occasion upon which he had referred to an explanation by Dr Ovcharenko in any communication with Hamilton. This is somewhat surprising having regard to Dr Keung's prolific correspondence with Hamilton and is the more so because, as early as October 2002, the possibility of Hamilton terminating the parties' business relationship had been raised by Mr Blake on account of the accusations etc relating to parallel importing. Dr Keung did not then raise Dr Ovcharenko's "explanation". 214 The 2006 account given of Dr Ovcharenko's explanation may have reflected what Dr Keung had by that time convinced himself was the one given in 1999. But it may well have been a contrivance such as Dr Keung resorted to on occasion in his communications with Mr Blake. In any event, it was premised upon "the Term being fixed for at least five years to protect our investment"; and it involved, not an assurance given, but a construction to be placed upon, cl 41.1. Other than demonstrating the likelihood that Dr Keung was seeking to establish a negotiating position for AMC, I do not consider that the 17 July 2006 letter, or its successor email of 2 August 2006 (both of which are set out earlier in these reasons), have any relevance in relation to the alleged cl 41.1.6 oral term. 215 Secondly, while I have considered the two alleged oral terms separately, it is the case that the issue of the Term of the Distribution Agreement and the power to end the licence under cl 41.1.6 were not wholly discrete, hence the presumptions I have made particularly in relation to the probable reason why Dr Keung raised his concerns with cl 41.1.6. Nonetheless, as I will indicate below, I consider cl 8.1 and cl 41.1.6 to be addressing quite distinct matters. 216 Thirdly, I have referred to Dr Keung's representations in May and June 1999 that he was receiving, then did receive, legal advice on the Distribution Agreement. However, I do not consider it necessary to make actual findings on that matter notwithstanding Hamilton's invitation that I make a positive finding that professional legal advice was being received and acted upon. The significance of the representations for present purposes is that they were an element in the context within which the negotiations were said to be taking place. As such account could properly be taken of them in evaluating the parties' actions in the negotiating process.
Conclusion 217 I am not satisfied that either of the pleaded oral terms have been made out. Neither am I satisfied that the representations which informed those alleged terms were made. I make this latter finding in anticipation of what I have to say of AMC's Trade Practices Act claims. 218 My conclusion is, then, that the signed Distribution Agreement embodied the parties' contract. It is in consequence unnecessary for me to discuss the significance and legal effect of cl 45 (the entire agreement provision) and cl 50.1 (which purports to strip correspondence and negotiations prior to the signing of the Agreement, of any contractual effect).
(a) Clause 41.1.6 220 To reiterate, AMC's remaining submissions on this matter are twofold. The first is that, on proper construction, cl 41.1 identified five events the occurrence of which would bring the licence to an end. Clause cl 41.1.6, provided the mechanism for actually bringing the licence to an end, ie that occurred on "the expiration of 60 days notice by one party to the other". In other words, cl 41.1.6 did not provide a separate "event" that would bring the licence to an end. The second and distinct contention is that cl 41.1 only applied to the Licence. It did not apply to the Agreement as such so that the termination of the Licence would still leave the balance of the Agreement on foot and, in particular, Hamilton's obligation to supply product to AMC. 221 To anticipate my conclusion both of these submissions are untenable. The first - that cl 41.1.6 did not provide an independent basis for the Licence ending - can be dealt with shortly. It flies in the face of the language of the subclause in its setting and defies commercial common sense. 222 I should preface what I have to say by noting that cl 41.1.7 is, as the parties acknowledge, irrelevant to this submission and can properly be regarded as a mis-numbered provision. 223 The first comment I would make of cl 41.1.1 to cl 41.1.6 is this. Considered together, but in isolation from the rest of the Agreement or its context, the subclauses identified six circumstances in which the Licence ended. Such is their natural, and unmistakeable, meaning. Not only is this so, there are obvious reasons why commercial contractors might wish to have these identified circumstances as ones which would end the Licence. I need only refer to cl 41.1.6. It is a matter of world-wide experience that a failure to include in long-term, relational contracts a provision or provisions enabling a party to extricate itself from a situation where a relationship of trust and confidence has broken down irretrievably or where for reasons of hardship or otherwise the contract has become unviable: cf Robertson, "Force Majeure Clauses", (2009) 25 JCL 62 at 70-72; can make securing a fair and reasonable disengagement of the parties an illusory hope. I have referred to this in the opening paragraphs of these reasons. 224 Clause 41.1.6 is a provision for the benefit of each of the parties and it enables them to address, amongst other things, such situations as I have referred to above. It is unnecessary that I refer here to such constraints as the law may place on the exercise of notice provisions for reasons of good faith and fair dealing or to preclude unconscionable conduct: but cf 67 Am Jur 2d, "Sales" s343. What I would say is that cl 41.1.6 is a quintessential example of the type of provision that a prudent commercial party would include in a relational contract such as the Distribution Agreement. It is unsurprising that Dr Keung put like termination on notice provisions in AMC's agreements with its subdistributors. 225 When cl 41.1 is put into the context of the Agreement itself, the intention that cl 41.1.6 was to be a separate and independent ground for the Licence ending is confirmed. Nowhere is this made more clear than in cl 42.2 and cl 42.3 of the Agreement each of which expressly contemplated that the various subclauses of cl 41.1 provided separate bases for the Licence ending. The "contra-indications" on which AMC relies (which are set out at [185] above) simply misapprehend why such clauses are put in long term contracts. There is no inconsistency between a notice term of the cl 41.1.6 variety and a long term contract whether or not its term is a rolling one. To the extent that the distinction between the Licence and the Agreement is said to tell against construing cl 41.1.6 in the manner I consider it should be, I deal with that distinction below. I would also add that the times specified in cl 31.3 and the supply arrangements deal with discrete matters that throw no light on the construction of cl 41.1. 226 I reject the submission. 227 The second submission - that cl 41.1 only applies to the Licence - is similarly untenable in light of the provisions of the Distribution Agreement. 228 In oral submissions counsel for AMC elaborated on the separate operation of the Agreement after termination of the Licence. It is put that what gave the Agreement its commercial value was the exclusive right to resell. If the Licence is ended, nonetheless Hamilton's obligation to supply future orders is said to remain as did AMC's right to resell. What is lost is AMC's "exclusivity". As I will indicate, this contention is at odds with the actual terms of the Agreement. 229 In "Introduction, C" to the Distribution Agreement, the parties state their intentions explicitly: (a) Supplier to appoint Distributor as its distributor of Products in the Territory; (b) Supplier to sell Products to Distributor for resale by Distributor in the Territory; on the following terms. Then follows the 50 clauses and 5 Schedules of the Agreement. As I earlier noted Part 2 of the Agreement is entitled "THE LICENCE". The licence which is granted under cl 3 is, unsurprisingly, defined in cl 1 to mean "the right to resell Products in the Territory". The licence itself is only for the "Term" which in turn means the period specified in Schedule 1 or "that period shortened or extended under this agreement": cl 1. The extension of the term is provided for in cl 8.1. The only candidates for a provision under the agreement to shorten the Term are some of those which deal with the ending of the licence and I refer in particular to cl 10.4, cl 10.5 and cl 41.1.6. AMC's submission, seemingly, would deny them this function. 230 When one looks at Part 2, its provisions do not relate exclusively to the Licence and to Products. Clause 8.1 deals explicitly with the Term of the Agreement. The ensuing Parts 3 to 7 deal with those subjects one characteristically finds in agreements of the present type - "SUPPLY", "MARKETING", "SALES", "RECORDS AND REPORTS" and "INTELLECTUAL PROPERTY". Part 8 is entitled "MISCELLANEOUS" and deals with matters relating to "the agreement" and the "THE LICENCE". Apart from cl 41.1, cl 42 is of present relevance. Put shortly, it deals variously with the rights of Hamilton and of AMC to resell or to return or in Hamilton's case to repurchase Products in AMC's hands or in transit when the licence ended. 231 The Agreement clearly contemplated that certain of the rights and obligations it gave and imposed would subsist beyond the end of the Licence and what I will describe as the operational term of the Agreement. I refer, for example, to cl 28 (which imposes a duty of confidence which subsists "after the Term") and cl 41.1.7 (which imposes a restraint on competition for 2 years "from the date at which the term of this agreement ends"). Nonetheless, what in my view is clear that the "Term" of the Licence and the "Term" of the Agreement are clearly intended to be coterminous. There are a number of quite obvious textual and structural indications that this is so. 232 The central elements of the Agreement were Hamilton's grant of a right to AMC to resell its products which in turn Hamilton obliged itself to supply to AMC under a purchasing regime which envisaged minimum agreed purchases would be made by AMC. These elements were manifestly interdependent. If the right to resell was lost, ie if the Licence was ended, the related obligation to supply likewise was ended. Unsurprisingly the Agreement made express provision for how, after the end of the Licence, product in transit to AMC, or unsold but in AMC's hands was to be dealt with: see cl 42. That clause envisaged that such product might, in stipulated circumstances, be sold by AMC in which case "Supplier grants to Distributor a licence to resell the Unsold Products": cl 42.2.2 and cl 42.3. Given that cl 1 of the Agreement defined "Licence" to mean "the right to resell Products" such a further and limited grant of a licence was obviously necessary after the end of the cl 3 Licence. I am in consequence unable to accept AMC's oral submission that a right to resell, albeit not exclusive, survived the ending of the Licence. Absent that right, the corresponding obligation to supply also ended. Hamilton's sales to AMC under the Agreement were for the purposes of the Licence and not otherwise. Without the Licence the Distribution Agreement lost its raison d'etre. In this sense it was brought to an end, albeit certain rights and obligations were to live on for their respective individual purposes. Hamilton's obligation to supply was not one of these. 233 The Agreement gave "the Term" a pivotal function. The Licence was for the Term: cl 7. It was likewise with the right to use trademarks: cl 31.1. It was the Term which could be extended under cl 8.1. The restraint on competition ran from the end of it: cl 41.1.7. Its usage, in my view, was to define the life of the Licence and, for practical purposes, the life of the Distribution Agreement itself. The termination of the Licence brought the Distribution Agreement as such to an end. 234 The applicant's attempt to splinter the Agreement so as to limit the termination to the Licence alone is artificial and contrived. I reject the submission. 235 I am satisfied that the exercise of the power in cl 41.1.6 to end the Licence would have had the practical consequence of bringing to an end Hamilton's obligations to supply product to AMC under cl 11.1 of the Distribution Agreement. I am also satisfied that, for the purposes of the definition of the "Term", cl 41.1.6 was a power the exercise of which would "shorten" the "period" otherwise specified as the Term in Item 1 of Schedule 1. It would shorten that period to 60 days from the giving of written notice ie to 13 September 2006. This conclusion has direct bearing on the construction of cl 8.1.
(b) Clause 8.1 236 The language of cl 8.1 is not altogether felicitous and I refer in particular to the words "notifies … of its desire to terminate this Agreement". However, given its provenance and considered in context, I consider the subclause's meaning and purpose to be clear and commercially sensible. Despite the words I have referred to above, the concern of cl 8.1 in my view was not with terminating the Agreement as such, but rather was with setting what was to be the future term of the Agreement, this being done four years before the end of the then 5 year term. Put shortly its function was to designate from a specified point of time what was to be the outstanding balance of the term of the Agreement and/or whether its terms and conditions were to remain unchanged - and this could be done recurrently if automatic extensions were made under the subclause, unless and until a written notification was given in which case no further one year extension would be possible. 237 The primary purpose of cl 8.1 was to give the parties the option to extend the already agreed term of the Agreement for 12 months on its then terms and conditions provided both acquiesced in the extension, ie by not giving the prescribed written notification. If no such notification was given what cl 8.1 did was to allow automatically for the term of the Agreement to be extended, the subclause in effect procuring a "rolling 5 year term" in the term extension sense I referred to earlier. In saying this I leave out of consideration such role as cl 8.2 may have in the extension process. This is considered in the next section of these reasons. 238 If a party did give a notification as and when specified in cl 8.1, the existing term would be fixed and frozen and would remain as such because the notification would preclude the extension being made at the time specified in the subclause. Four years later the "Term" would expire and the licence, and for practical purposes, the Agreement would be brought to an end by cl 41.1.2. This raises the fundamental question posed by AMC's submission: Did cl 8.1 on its proper construction impose its own regime for the termination of the Agreement to the exclusion of the other subclauses of cl 41.1 and, in particular, of cl 41.1.6? I think not. 239 The description "notification of its desire to terminate this Agreement", might be thought capable of bearing a variety of possible meanings: first, that the party giving the notification wanted the agreement to terminate at the end of its already agreed 5 year term, ie there would to be no rolling 5 year term; secondly, that that party wished then and there to terminate the Agreement by terminating the Licence under cl 41.1.6 so that any further extension was pointless; thirdly, that that party was giving a four year notice of desire to terminate the Agreement as the subclause required, ie it provided the only basis for terminating the Agreement. 240 When cl 8.1 is considered in the context of the Agreement as a whole, I am satisfied that it is the first of these that reflects its proper, commercial construction. As I indicated above, the Distribution Agreement expressly contemplated that the "Term" could be "shortened or extended under [the] agreement". Clause 8.1 provided the mechanism for extending it. Clause 41.1.6 provided an apparent mechanism for shortening it. AMC, nonetheless, would deny it this function because of what it says cl 8.1 requires. For my own part I can see no justification for so writing cl 41.1.6 out of the Agreement as this submission would require, the more so as it was a specific provision that dealt explicitly with the termination of the parties' business relationship. 241 I am mindful in this regard of what Hoffman LJ said in William Sindall Plc v Cambridgeshire County Council [1994] 3 All E R 932 at 940: It is, of course, a principle of construction that words capable of bearing a very wide meaning may have to be given a narrower construction to reconcile them with other parts of the document. This rule is particularly apposite if the effect of general words would otherwise be to nullify what the parties appear to have contemplated as an important element in the transaction. It is evident that the parties clearly did contemplate that, in appropriate circumstances, the licence should be brought to an end, and that cl 41.1.6 provided an "important element" in that scheme. I need not repeat here what I earlier said of the significance of a power to terminate on notice in long term, relational contracts. 242 The submission that cl 8.1 was intended to guarantee a four year notice period before the agreement could be terminated cannot withstand scrutiny. The Agreement provided that AMC had minimum purchase obligations: see cl 10.2; and that if the Term was extended under cl 8.1, the parties would agree "Minimum Purchases for the period of the extension and these [would] be appended to Schedule 4". Clause 10.4 of the Agreement provided that, if AMC did not purchase products as specified in that Schedule, Hamilton could end the Licence "entirely" by written notice to AMC. There was no guarantee of 4 years notice here. 243 Clause 8.1 was not directed to how the Distribution Agreement could be terminated. Its concern was with its Term - with whether the agreed 5 year term would be frozen or extended. Considered in light of cl 10.4, cl 10.5 and cl 41.1 but particularly cl 41.1.6, the language of notification of desire to terminate the agreement was intended to do no more than to indicate that the party was no longer prepared to extend the Term but rather, wanted the Agreement to terminate at the end of the then 5 year period specified in Schedule 4. This is how a reasonable commercial party would have understood it in its context. 244 Clause 8.1, I conclude, does not override or qualify in any way cl 41.1 in general or cl 41.1.6 in particular.
(a) Additional factual material 249 There is a number of discrete matters that need to be mentioned. For the Distribution Agreement to be on foot on 13 July 2006, it needed three consecutive extensions, 1 July 2004 - 30 June 2005, 1 July 2005 - 30 June 2006 and 1 July 2006 - 30 June 2007, these extensions occurring on 1 July 2000, 1 July 2001 and 1 July 2002. No notification of either parties desire to terminate was given prior to any of the last three mentioned dates. Neither were any minimum purchases agreed for the three extension periods referred to. 250 When Dr Keung made his comments of 7 July 1999 on the then draft of cl 8 he clearly indicated his own appreciation of the significance of cl 8.2. He said: 8.1 Supplier and Distributor may agree to extend the Term of this agreement for a further period of 12 months, 48 months before the end of the Term. Comments: If the minimum sales in Scheule (sic) 4 are realized after each one year period, the Term will be extended automatically for a further period of 12 months to make up the Term for a period of five years. 8.2 At the time of extending the Term the Supplier and Distributor must agree on Minimum Purchases for the period of the extension and these shall be appended to Schedule 4. (Emphasis added.) I refer to this, not for the purposes of interpreting cl 8.2. but to illustrate that the minimum purchases regime was understood to be an important aspect of the parties' relationship and its extension. 251 I referred in the "General Chronology" to the deterioration in the parties relationship from mid-2002 in consequence of the parallel importation issue. I equally referred to the meeting between Dr Keung and Mr Blake and Dr Ovcharenko of 23 March 2005 at Sydney Airport. The minutes of that meeting recorded (inter alia): At the beginning of the meeting both parties agreed that, despite some discrepancies in the views on some issues, they are both satisfied with the long-term cooperation and have a mutual desire to further develop the relationship with a better and more successful future. Both parties agreed that the terms of our Distribution Agreement will continue to be automatically extended each year for a further 12 months, thereby ensuring a rolling 5 year term at all times. The long term nature of this agreement gives both parties the incentive to further develop these important markets. It is Mr Blake's evidence that the subject of minimum purchases was not discussed because of the likelihood of it generating debate and dispute. Mr Blake confirmed the above minutes which were prepared by Dr Ovcharenko before they were distributed. 252 Shortly after the meeting, the parties' relationship began to disintegrate. A catalyst to this was Dr Keung's asking Mr Blake for compensation arising out of the parallel importation and his related intimation that Hamilton was likely to be sued in Australia by AMC. 253 I have in outlining Dr Keung's evidence referred to the correspondence between Dr Keung and Mr Blake consequent upon the sending of the 13 July 2006 notice of termination. I should draw attention to a paragraph in Mr Blake's letter of 20 July 2006 referring to Dr Keung's version of Dr Ovcharenko's explanation of cl 41.1.6 at the 1-2 March 1999 meeting: I reject any suggestion that an agreement to vary the terms of the Distribution Agreement was reached (or indeed discussed) at our meeting on 23 March 2005. The minutes of the meeting support my position and in this regard I note the second paragraph of item 1.1 which commences "Both parties agreed that the terms of the Distribution Agreement will continue …". The minutes clearly reflect that Hamilton and AMC simply discussed and confirmed the existing terms of the Distribution Agreement at the meeting.
Consideration 254 To reiterate, cl 8.2 of the Agreement provided: 8.2 At the time of extending the Term the Supplier and Distributor must agree on Minimum Purchases for the period of the extension and these shall be appended to Schedule 4. If, as Hamilton has contended in its alternative case, this subclause stipulates a precondition to an extension taking effect under cl 8.1, then the Term of the Agreement was fixed to end at 30 June 2004. Yet the parties manifestly conducted themselves as if such was not the case, although by 2004 Mr Blake entertained concerns about the absence of an agreed minimum purchase obligation. While Mr Blake attributed the absence of such an agreement to the parties being in dispute about other issues "during this period", the relevant time for entering into such an agreement under cl 8 was prior to 1 July 2002. 255 It obviously is the case that at the time the Agreement was signed, the parties mutually appreciated that the minimum purchases regime was to be an integral part of their future relationship. But was it a precondition of any cl 8.1 extension? 256 I do not consider that it was. Though it appeared in clause 8 and by so doing emphasised that the minimum purchases regime would run in tandem with extensions granted under the rolling 5 year term, cl 8.1's function lay in its relationship with cl 10. That dealt with making best efforts to meet the requirements of Sched 4, and the consequences of failure to make the purchases specified in that schedule. It was a contingent condition to the performance and enforcement of the rights and obligations created under cl 10.2, cl 10.4 and cl 10.5. The non-fulfilment of the condition excused AMC further performance of its contractual obligations under cl 10.2 and cl 10.4 for the year of the extension: cf Maynard v Goode (1926) 37 CLR 529 at 540; University of Western Australia v Gray [2009] FCAFC 116 at [117]; Cheshire and Fifoot's Law of Contract, [20.1]-[20.2] (9th Aust ed). The failure to agree as required by cl 8.2 would not of itself constitute a breach of contract by either party, although one can envisage circumstances in which one party so conducts itself in relation to the entry into a cl 8.2 agreement as to be in breach of the Agreement or of an implied term necessary to give cl 8.2 business efficacy (eg to enter into "genuine and good faith negotiations for such an agreement": cf United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177. There is no evidence before me to suggest such was the case as at 1 July 2002. 257 I have earlier indicated that AMC has not pleaded that the Distribution Agreement was amended after its execution so as to vary cl 8.2. I need not enter upon the matter of variation or of the possible significance of the agreement apparently made at the 23 March 2005 meeting to continue automatically to extend the Distribution Agreement each year for a further 12 months "thereby ensuring a rolling 5 year term at all times". However I would make the following observations. Neither the entire agreement clause (cl 45) nor the writing requirement of cl 50.2 provided an impediment to an oral variation of the Distribution Agreement if such an agreement was in fact reached. I considered the efficacy of "no oral modification" clauses at length in GEC Marconi Systems Pty Ltd, at [214]-[222]. The rule to be applied to such clauses reflects the observation made by Cardozo J in Beatty v Guggenheim Exploration Co 122 NE 378 (1919): "Whenever two men contract, no limitation self imposed can destroy their power to contract again". I would add, as I said in GEC Marconi (at [220]): (5) The usual objection raised to depriving a no oral modification clause of legal effect is that it involves a failure to give effect to what the parties have agreed. In the present case GEC Marconi has raised just this objection. The vice in it, though, is that a later oral or implied contract is itself an agreement. As a US commentator recently observed (Snyder, "The Law of Contract and the Concept of Change: Public and Private Attempts to Regulate Modification, Waiver and Estoppel" (1999) Wis L Rev 607 at p 640): The question for the court is not whether to honour the parties' original agreement, but rather which of their agreements should be effective. To say that contract law should enforce the parties' agreement, therefore, does not resolve the issue. The question is whether to enforce the first agreement or the second. The common-law courts addressing [no oral modification] issues chose the second. This choice makes a fair amount of sense; the later agreement probably reflects what the parties want better than their earlier agreement does. I would add that the opinion expressed in the second quoted paragraph is particularly appropriate to relational contracts which, as in the present instance, may be evolutionary in character.
258 AMC in its reply pleaded that, if compliance with cl 8.2 was necessary to effect an extension under cl 8.1, Hamilton was estopped from relying upon cl 8.2 or else it elected not to rely upon it. I need not consider either of these responses: on election see generally Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 251 ALR 322 at [56]-[67]; other than to say that the doctrine of election between inconsistent rights seems inapt to circumstances where cl 8, on the assumption being made, is self executing in its consequence. A claim based on estoppel, on the other hand, if it is not simply oral variation in disguise, has real prospects. The circumstances do demonstrate that from 1 July 2000 the parties conducted themselves in a way not envisaged by cl 8.2; that the contractual effect of their so doing was realised on 1 July 2004; but notwithstanding there were no longer agreed minimum purchases, the parties treated the Agreement as remaining on foot with its rolling 5 year term. 259 Even if I am wrong both in the view I have taken both about the consequence of non-compliance with cl 8.2 and about estoppel, my ultimate conclusion would still stand. If the Term expired on 30 June 2004, the parties then continued in a relationship that clearly was contractual in character. No term having been agreed at that time (though this may have been varied by the 23 March 2005 agreement) the licence was terminable on the giving of reasonable notice (which I find 60 days to be in the circumstances), if it was not in fact ended under cl 41.1.6 (on the assumption that the provisions of the old Distribution Agreement were understood to remain applicable to the parties' business relationship insofar as they could continue to apply to it).
Conclusion 260 I find, in the circumstances, that the 1999 Distribution Agreement was terminated under cl 41.1.6 on the expiration of 60 days written notice which notice was given to AMC on 13 July 2006. 261 This conclusion renders it unnecessary to consider the alternate bases advanced by Hamilton to justify termination under the 23 March 2007 notice.
PARALLEL IMPORTATION 262 The backdrop to this group of contract claims was provided by the sale in Hong Kong by persons other than AMC, of Hamilton products identical to those manufactured and packaged for AMC under the Distribution Agreement. 263 As pleaded, AMC alleges that Hamilton breached the Distribution Agreement by: (i) failing to use its best endeavours to prevent the sale of products in the Territory by anyone other than AMC, in breach of cl 6.2;
(ii) selling products in Hong Kong in breach of cl 9.1;
(iii) granting similar rights to those of AMC to third parties in breach of cl 9.2.
Both injunctive relief and damages are sought. 264 Put in précis form, it is alleged that in 2001 and 2002, Hamilton supplied commercial quantities of Urederm and Rubesal to Crafers, an Australian company, and Pharmalines, a company in the UAE. The product so supplied either was packaged in the Hong Kong packaging which incorporated the Chinese characters both for Fuyunhon or Tuotoning marks and the Chinese character and English product indications for these products respectively, or else the English language versions of their product indications. Those marks and product indications were created by Dr Keung and are the subject of intellectual property claims considered later in these reasons. 265 It is asserted that (i) the products so supplied to Crafers and Pharmalines were subsequently sold in Hong Kong by persons other than AMC; (ii) Hamilton was aware that the products it so sold would be on-sold into the Hong Kong market and elsewhere or else it did not make proper inquiries as to whether the products would be on-sold into Hong Kong or else it was reckless as to whether such would occur; and (iii) Hamilton did not notify AMC that the products had been so supplied and there was a possibility of their being on-sold into Hong Kong or elsewhere. 266 There is a live controversy between the parties as to the proper construction of cll 6.2, 9.1 and 9.2. It is appropriate to deal with it at the outset.
The Contractual Setting and "Best Efforts" Clauses 267 Because of their alleged interaction it is appropriate to refer as well to cll 3, 4, 33.4, 33.5 and 34 of the Distribution Agreement. The clauses provide: 3. Licence Supplier grants to Distributor which accepts a Licence upon the following terms. 4. Wholesale or retail The Licence entitles Distributor to resell Products (on a retail or wholesale basis) to retail pharmacies dermatologists, medical practitioners, dentists, hospitals and scientific customers and to other persons or entities as agreed in writing between the parties from time to time. 5. Product range The Licence is only for the Products. 6. Territory 6.1 The Licence is only for the Territory. 6.2 Each party must use its best efforts to prevent the sale of Products in the Territory by persons other than Distributor (or a sub-distributor appointed in accordance with this agreement). … 9. Exclusive Distributor's rights under the Licence are exclusive and, without Distributor's written consent (which Distributor may refuse without reason), Supplier may not: 9.1 sell Products in the Territory; 9.2 grant similar rights to a third party. … 33.4 Distributor must immediately inform Supplier about any wrongful use in the Territory of Supplier's patents, trademarks, emblems, designs or similar rights of which Distributor learns. 33.5 Distributor must: 33.5.1 use its best efforts to protect the proprietary rights of Supplier; 33.5.2 help Supplier protect the proprietary rights of Supplier. … 34. Co-operation Each party must do everything reasonable to help the other party carry out this agreement.
268 Three aspects of cl 6.2 should be emphasised at the outset. The first is that cl 6.2 imposed reciprocal and, at least in the case of parallel importation, potentially interdependent obligations on AMC and Hamilton. Those obligations could operate upon the same subject matter for the reason that each could relate, as in the present case, to genuine Hamilton products finding their way into the Hong Kong market outside of the Distribution Agreement. Further, when considered together with cl 34, one party's best efforts obligation could require it to do everything reasonable to help the other carry out its best efforts obligation. Secondly, the subclause did not impose a duty on either party to achieve a specific result, rather it was to use best efforts to secure that result: on the difference see Unidroit Principles of International Commercial Contracts: 2004, Art 5.1.4, Comment 1. The content of "best efforts" is considered below. Thirdly, the best efforts obligation was directed at preventing the occurrence of an undesired event, ie the sale "in the Territory" by third parties of products the subject of the Distribution Agreement. In this it was a less common form of the obligation, the more usual form being directed at procuring the occurrence of a desired result, eg the sale or promotion of a product: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 63-64; the exploitation of an invention: Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234; or the advancement of a business: Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451 at 452. 269 In relation to cl 9.1 AMC has submitted that this should be interpreted as encompassing selling products in the Territory "directly or indirectly". Because I have concluded there is no evidentiary basis which would permit a finding that Hamilton has sold its products in breach of para 9.1 on either of the proposed bases, it is unnecessary for me to express a concluded view on this submission. Considered in context, though, it probably is the case that the proposed construction reflects the intent of the contractual provision. 270 The Distribution Agreement itself regulated directly the freedom to trade of both Hamilton and AMC in ways which respectively were designed, so far as they went, to prevent third parties in Hong Kong obtaining access to the Hamilton products for resale in Hong Kong. Clause 4 restricted to whom in Hong Kong AMC could resell the products supplied by Hamilton. Clause 9 not only precluded Hamilton from selling in the Territory, it also prohibited it granting rights to a third party similar to AMC's rights. That the Agreement imposed such absolute restrictions on the parties in respect of their trading is, as will be seen, a matter of which account needs be taken in giving practical content to the best efforts requirement in the context of this agreement between these parties. 271 The "standard of endeavour" prescribed by a best efforts clause is characteristically measured by what is reasonable in the circumstances having regard to the particular contract in its business setting and to what could reasonably be expected of the party subject to the obligation: see Transfield Pty Ltd v Arlo Internation Ltd (1980) 144 CLR 83 at 101; see also Farnsworth, Contracts, s7.17. Or to put it shortly, the party's obligation is "to do what [it] reasonably could do in the circumstances": Terrel, at 237. It is nonetheless important in this setting to emphasise the importance of context in giving practical substance to the prescribed standard of endeavour. As Gibbs CJ said of a best efforts obligation in Hospital Products Ltd (at 64): … it is trite to say that the meaning of particular words in a contract must be determined in the light of the context provided by the contract as a whole and the circumstances in which it was made, and that decisions on the effect of the same words in a different context must be viewed with caution. Today this probably does no more than emphasise the contemporary significance of context in contractual interpretation: see Toll (FGCT) Pty Ltd at [40]; and, relevantly for present purposes, that a commercial contract is to be given "a businesslike interpretation": International Air Transport Association at [8]; or as Lord Steyn put it (Mannai Investment Co Ltd at 771): "a commercially sensible construction".
Factual Setting 272 There is a number of discrete matters to which I need refer.
(a) Hamilton's concessions 273 In its Further Amended Defence (para 33) Hamilton acknowledged that between 13 November 2001 and 25 July 2002, it supplied Urederm and Rubesal products to Crafers in Australia some of which were in Chinese language packaging and some, in English. Insofar as presently relevant, it particularised these as follows: DATE PRODUCT QUANTITY PACKAGING (LANGUAGE) 13 November 2001 Urederm 6048 HK (50g) 14 November 2001 Urederm 1008 AU (100g) 18 December 2001 Urederm 3000 AU (100g) 18 December 2001 Urederm 3400 HK (50g) 17 January 2002 Urederm 6048 HK (50g) 11 February 2002 Rubesal 1200 AU (100g) 5 March 2002 Rubesal 1296 HK (50g) 29 April 2002 Rubesal (1200 credit) AU (100g) 24 June 2002 Urederm 1584 HK (50g) 10 July 2002 Rubesal 1008 HK (50g) 25 July 2002 Urederm 4464 HK (50g) Total Units Supplied 27,856
274 A like concession was made of sales which incorporated Chinese Language Artwork to its distributor Pharma-lines in the UAE. These it particularised as follows:
DATE PRODUCT UNIT QUANTITY SUPPLIED UNIT SAMPLE QUANTITY SUPPLIED 17 June 2000 Urederm 25G 3,456 768 16 September 2001 Urederm 25G 576 192 1 December 2001 Urederm 25G 4,992 1,152 26 April 2002 Urederm 25G 4,992 1,152 1 December 2001 Rubesal 25G 4,992 1,152 16 September 2001 Urederm 50G 576 144 27 February 2002 Urederm 50G 1,440 288
275 There is no other evidence of presently relevant sales of Hamilton's products. The sales to Pharma-lines can be disposed of shortly.
(b) Sales to Pharmalines 276 AMC concedes there is no evidence that any of the products sold to Pharmalines was imported into Hong Kong. Nonetheless, it asserts that the circumstances of sale gave rise to a breach of cl 6.2 of its Agreement with AMC. This assertion is quite misconceived. 277 On 1 February 2001 Hamilton entered into a Distribution Agreement which, save for immaterial differences, had terms similar to cll 3-6, 9, 33.4, 33.5, 34 and 50.2. Importantly for present purposes the Pharmaline Licence to sell was limited to "the Territory" which was prescribed in Schedule 1. Effective from 1 February 2005 an amendment in proper form was made to the Territory and to the "Products". The Products prior to the amendment were non-bulk items. The amendment varied the non-bulk items and added a list of bulk products. These included for presently relevant purposes Urederm and Rubesal, the minimum bulk kilogram size of these being respectively 400kg and 500kg. 278 Clause 4 of the amendment provided: 4. Licence and Territory 4.1 The Licence entitles the Distributor: 4.1.1 to market and resell the non bulk Products in clause 2.1 of this Schedule 5 in UAE, Jordan, Lebanon, Iran, Qatar, Bahrain, Yemen, Oman, Palestine, Saudi Arabia, Egypt and Kuwait; and 4.1.2 to market and resell the bulk products in clause 2.2 of this Schedule 5 ("Bulk Products") in retail size packaging in Egypt and Syria. 4.2 Except as stated in clause 4.1.2 of this Schedule 5, the Distributor must not market or sell the Bulk Products in any other format in any other Territory without the prior written consent of the Supplier.
279 It is perfectly clear that when considered in light of cl 6.1 of this Agreement - "The Licence is only for the Territory" - cl 4.1 did not permit non-bulk products to be on sold outside of the Territory. AMC's contention to the contrary is erroneous. The prohibition in sub-clause 4.2 related to marketing or selling bulk products "in any other format [ie from that of cl 4.1.2] in any other Territory" (ie other than Egypt and Syria) which are only part of "the Territory"). 280 The sales to Pharmalines have no present relevance. There is no evidence that Pharmalines breached cl 6.1 of its Agreement.
(c) Sales to Crafers 281 I should begin with three comments about the persons who did, or could have, given evidence on this matter. The dealings between Crafers and Hamilton were effected through Michael Lanham, the State Manager of Hamilton's Queensland office. Crafers was a Brisbane based company. 282 Mr Lanham gave evidence, the accuracy and impartiality of which has been questioned by AMC. While I consider his evidence was conscientiously given, it needs to be treated with circumspection. He was often overly literal in his understanding of questions and this led to unhelpful sequences of cross-examination because he and the cross-examiner were at cross-purposes. Equally he had poor linear memory (which was understandable). I am, in consequence, left with real doubts as to the accuracy of the temporal sequence of his narrative, the more so because it was by no means consistent. I am also satisfied that with the passage of time he has in some degree engaged in reconstruction of events in a fashion which tends to favour Hamilton. I acquit him of any impropriety in this. As I said above, I consider he gave his evidence conscientiously. 283 Mr Blake gave evidence of his involvement in Hamilton's dealings with Crafers. He only became aware of sales to Crafers in March 2002. As with much elsewhere in his evidence, I cannot avoid the conclusion that his evidence owes more to reconstruction from documents than to a memory jolted by documents. 284 A Hamilton actor in the events to be described was Mr Stafford. He is alleged to have given the original authorisation to supply Crafers and to have obtained from Mr Lanham an undertaking purportedly given to Lanham by Crafers. Mr Stafford, though still a director of Hamilton, did not give evidence. 285 The sales to Crafers originated in what has been described as a "cold call" from Reya Chartres of Crafers to Mr Lanham in early November 2001. She was the only person representing Crafers with whom Mr Lanham had dealings. There is a deal of confusion in Mr Lanham's evidence as to what was said during this telephone call and at a subsequent meeting at Crafers' office on 6 November 2001. I intend to deal with the two synoptically as little purpose would be served in attempting to disaggregate them given what I earlier said of Mr Lanham's evidence. 286 I am satisfied that Ms Chartres communicated to Mr Lanham that: (a) Crafers was interested in supplying 50g tubes of Urederm and Rubesal, mostly in Chinese language packages to ships' passengers and crew, particularly of ships docking in Australia; and
(b) Crafers had an export business and that "they do business" in China or Hong Kong.
While I am satisfied mention so was made of Hong Kong and that Mr Lanham probably mentioned the fact that Hamilton had a distributor in Hong Kong, I am not satisfied there was any discussion of the possibility of, or of any prohibition on, Crafers selling the intended purchases into Hong Kong. Insofar as Mr Lanham understood what was being proposed, it was to be a domestic sale to Crafers which in turn would sell Hamilton's products domestically for provision to ships. 287 Mr Lanham then contacted Mr Stafford who was in charge of overseas marketing and informed him of the approach. There is inconsistency in Mr Lanham's various versions of his conversation with Mr Stafford. I accept he told Mr Stafford that Crafers required Urederm and Rubesal to be supplied mainly in Chinese language packaging. While I also accept that Mr Lanham told Mr Stafford that the sales to and by Crafers would involve domestic sales, albeit to ships for their crew and passengers, I do not accept that Ms Chartres had given Mr Lanham an assurance to that effect. Mr Lanham gave contradictory evidence as to whether he told Mr Stafford such an assurance had been given. Equally I am satisfied that Mr Stafford in authorising the sale required in effect that the product sold to Crafers was not to be sold overseas, ie it was to be the subject of domestic resale. I consider it probable that this requirement was communicated to Ms Chartres when Mr Lanham subsequently provided her with samples of the Products prior to the agreement to the supply being finalised. As I will indicate below, this would have accorded with Hamilton's then terms of trade to domestic distributors, a copy of which was provided by facsimile to Crafers on 7 November 2001. However, I am not satisfied that any express instruction was given prohibiting sales overseas to Hong Kong. I infer that the premise both of Ms Chartres' discussions with Mr Lanham and of Mr Lanham's conversation with Mr Stafford was that the Crafers sales were domestic in character. It was not purchasing products for export. 288 After Hamilton had supplied Crafers samples of Urederm in the Hong Kong packaging the first Crafers order was placed on about 12 November 2001 for 6048 units of U50 and 1008 units of U100. Mr Lanham did not regard this to be a large or unusual order. 289 I would interpolate that it is Dr Keung's evidence (set out below) that there had been a marked drop in sales which led to his making the following request of Hamilton on 20 October 2001: I hope the 28944 units of Urederm 50gm tube can be delivered to Hong Kong in two portions so that there is less pressure on our go-down [warehouse: Tr 1125]. You can send us 15000 units in the November shipment and the remaining in the December shipment. It is Dr Ovcharenko's evidence that, in early November, he had a request from Hamilton's National Sales Manager to sell 50g Urederm stock held by Hamilton for AMC. Dr Ovcharenko understood this was to be for a domestic purchase, although he was unaware of the identity of the purchaser. He telephoned Dr Keung asking whether AMC required delivery of the stock held, or whether Hamilton could sell it to fill a domestic sales request. Dr Keung consent to the sale. Dr Keung, in his own evidence, did not qualify his consent in any way when communicating his assent. 290 On 7 November 2001 Hamilton sent to Crafers by facsimile (the fax printout indicates it was transmitted to Crafers) a copy of its "Terms of Trade" for "Industrial Product Distributor". Despite AMC's objection, I have accepted this document into evidence. Clause 5 of the Terms provided: TERRITORY The Distributor shall not resupply the products outside Australia, and Hamilton reserves the right without notice to the Distributor to discontinue supply of the products or to reduce or discontinue any discount or other concession which may have been granted to the Distributor if the Distributor resupplies or attempts to resupply products outside Australia. It does not appear from the evidence that either Mr Stafford or Mr Blake were aware that this document was sent to Crafers. Because of its late production, the circumstances of its transmission to Crafers were not the subject of direct evidence. I would note in passing that when Mr Blake finally saw the actual language of cl 5 at a meeting on 13 April 2005 he wrote the following:
It is interesting to note that under 'Territory' the wording is "the Distributor shall not re-supply the products outside Australia". I am not sure now this fits when supplying ships but if the ships were supplied in Australian ports for use on those ships, I think our interpretation would have been that this complied with the Trading Terms.
291 Some of the early sales to Crafers were cash sales. Crafers made a credit application to Hamilton on 12 November 2001. This was approved on 20 December 2001 and a customer allocated number was allocated on 3 January 2002. In total ten orders were filled for Crafers, the last being on 25 July 2002. In early September 2002, Mr Blake directed that no further product be supplied to Crafers. At no time did Hamilton and Crafers have a specific written agreement. 292 I will outline below the circumstances leading up to Dr Keung's first explicit claim on 30 July 2002 of parallel importation of Hamilton's product into Hong Kong. The email of that date to Mr Blake said: In the past year the sales of Urederm 50gm tube has dropped sharply (from 90000 to 60000 units) despite the fact that we spent 2.2 million HK dollars for advertising on Hamilton products. Originally I put the blame on the weak economy at the present moment. In the past three months two wholesalers refused to get Hamilton products from Medicare. However, they have Hamilton goods to sell to the retailers at prices that are somewhat lower than our selling prices to the wholesalers. This makes me feel that there should be imitated goods or parallel imports of Urederm 50gm tube getting into the Hong Kong market. If Hamilton has not sold any products bearing the HK packing with our Chinese company name and logo "FUYUNHON" to other places or countries leading to possibility of parallel imports I am certain that these two wholesalers have got imitated goods from somewhere and we shall inform the bureau of commercial crime and take appropriate legal action against them for compensation. I hope you can give me the answer at your earliest convenience so that we can prevent further losses due to copied goods and protect our brand names.
293 I should note that no allegation was made in this communication that Hamilton itself was complicit in the parallel importation. 294 Dr Keung's email prompted a series of internal communications within Hamilton in early August. The copy of the above email which is in evidence has some number of notations on it. These include the note from Mr Stafford to Mr Blake: "It may be that the product we sell to CRAFERS is finding its way to Hong Kong - we should check volume and prices." There was a note from Mr Blake to Mr Stafford and David Dart: "What is the agreement with them [ie Crafers]." And there were two responses from Mr Stafford to Mr Blake: "Michael Lanham tells me there is no specific agreement with them" and "We have supplied over the last six months 21552 of [unintelligible] 50g $2-40". 295 After discussions with Mr Stafford about the possibility of Crafers being a supplier of the imports, Mr Blake contacted Mr Lanham. He inquired about Lanham's "early conversations" with Crafers and he asked him to contact Crafers to reconfirm that it was not selling Hamilton's products into Hong Kong. Mr Lanham did as directed and on 7 August sent an email to Mr Blake which included the following: To day I have spoken to Mrs Reya Chartres purchasing officer at Crafers Brisbane. Reya feels positive that none of their Urederm purchases from us goes into Hong Kong, in fact seemed quite surprised at this. She said that although they buy from us 6 to 7000 tubes at a time, their customer only buys in small quantise at time on a as needed basis, so no big amounts could end up in H.K. Reya said that they will make further enquiries and let us know of any thing that may concern us. They still believe that the Urederm was being used in the shipping industry. They are quite willing to state in writing, that to their knowledge the Urederm is not being supplied into H.K.
296 Mr Blake required that written confirmation. It was provided by Ms Chartres by letter of 15 August which was in the following terms: Crafers Trading is a Ships Providor, which supplies ships world wide. Crafers currently supplies your products to our regular, exisiting customers purely as an additional service to them. We are not actively on selling your products, and thus it is not our intention to realise your products into the retail market. Some of our customers however do not dock in Australia and are subsequently loaded through another countries [sic] port, including Hong Kong.
297 By letter of the same date to Mr Blake, Ms Chartres said that after her initial discussions with Mr Lanham, she made her own enquiries about Hamilton's situation in Hong Kong. She formally requested that - … should that agency become available you would allow Crafers the opportunity to apply for the position. I would note in passing that an informal intimation to the same effect was made to Mr Lanham. While his memory of the timing was, he conceded, uncertain he thought it occurred some time in August. The above letter, Mr Blake said, heightened his suspicion about Crafers. Amongst other steps he took in this matter, on 24 August he gave a direction to one of his staff to make contact with the South Australian Trade Commission in Hong Kong and ask them to attend at 10 pharmacies in Hong Kong and purchase 3 tubes of 50gm Urederm at each store. 298 The purpose of this was to verify AMC's assertion that 7 out of 10 products purchased from retail outlets in Hong Kong (an allegation made in an email of 9 August 2002) were parallel imports and to obtain information on batch numbers and pricing to see if Hamilton could confirm the route of supply that it suspected by then was through Crafers. 299 On 3 September 2002 Hamilton received a package containing tubes of Urederm purchased by the Trade Commission. In the interim Hamilton had obtained further information from Crafers about its business which was said to include a joint venture in China. 300 Mr Blake concluded it was likely that Crafers was the source of parallel imported products in Hong Kong and he gave the direction no longer to supply it. 301 It is AMC's case that the documentary evidence establishes that the product sold to Crafers was imported into Hong Kong through a Hong Kong importer, Teemlink directly or via a Crafers-related company in Australia, Kopurlo. From Teamlink the product went to a Hong Kong company Forward Co and from it to the retail market through a distributor, Wing Keung Medicine Co Ltd. AMC denies any connection with any of these businesses.
(d) AMC and parallel importation 302 By way of background, I would note that it is Mr Blake's evidence that since about 1995 Dr Keung made oral assertions to him at various times that parallel imports or counterfeit Hamilton products were in Hong Kong. I would also note that in his March 1999 Business Report Dr Ovcharenko inserted the observation of HMC made about the Hong Kong pharmaceutical market that it was "very well protected for patented products but not parallel imports". 303 Dr Keung, in his affidavit describes being informed by retailers in Hong Kong in December 2000 that Fuyunhon was available from sources other than AMC. While he then assumed this was counterfeit, he later began to suspect parallel importation. 304 In April 2001 AMC employed Dr Lam to trace the source of what Dr Keung then believed to be counterfeit products and to devise strategies to try to stop such products being sold in Hong Kong. In October 2001 one such strategy that had been devised was to insert a leaflet into each box of Fuyunhon in Hong Kong before it was despatched to an AMC customer. Another was to add a small stick-on holographic label to each box of Urederm by Hamilton. These strategies, though, were not implemented until April 2002 (in the case of the leaflets) and September 2002 (the "stick-ons"). 305 In cross-examination Dr Keung described his October 2001 state of knowledge about parallel imported product in Hong Kong in the following terms: In October 2001, there - because of a drop in sales and our advertising has not decreased, the amount of advertising - and because of the marked drop in sales, leading us to ask Hamilton to delay 20,000 tubes to be sent to Hong Kong. And then I suspected that there must be something wrong on the market; either counterfeit products or parallel imported products. But at that time, because of my faith in Hamilton, of course, you know, I put counterfeit products as the first line of my thought.
306 In December 2001, after Dr Lam discovered instances of Hamilton batches 54 and 56 Urederm in Hong Kong packaging on sale in Hong Kong, Dr Keung says he realised AMC was dealing with parallel imported products and not counterfeits. Hamilton had delivered quantities from the same batches to AMC in 2001. He reiterated this temporal realisation on a number of occasions in cross-examination. 307 Importantly for Hamilton's defence, Dr Keung accepts that, in November/December 2001, he did not raise directly with Hamilton his awareness that parallel imports of Hamilton products were being offered for sale. His apparent reason for this was, as he said in cross-examination: At that time, because we have not printed [the] leaflet and have not printed - used the hologram, and I cannot be definite, especially to say this to Hamilton directly, because it will damage our relationship, you know, I can give some hinting and polite advice first, you know. That's the usual manner for business, you know. Even if you know somebody is doing something bad, you know, you have no proof, no direct proof, you can't say this, otherwise it will damage the relationship.
308 Dr Keung reiterated this approach of "hinting", "advice", "polite warning", etc on a number of occasions. Dr Keung was later to say (in an email to Mr Blake of 19 August 2002) that: … we delayed notifying you of smuggled goods until now because we were not sure whether you were a victim, a collaborator or the culprit. Nonetheless, I am satisfied that AMC conducted itself towards Hamilton on the premise that Hamilton was complicit in the parallel importation, though such was not overtly stated until the above email. I also am satisfied that, apparently in common with Dr Lam, Dr Keung assumed from December 2001 that such was the case. I do not accept his later stated reluctance in being able to arrive at such a conclusion by then. An important consequence of AMC's approach is that it did not distinguish between the known fact of parallel importation and the possibility of Hamilton being complicit in it. 309 In August 2002 Dr Keung conducted market investigations which, in his view, revealed that a significant percentage of Urederm 50g available on the Hong Kong market was parallel imported. AMC identified U50 bearing Hamilton batch numbers 54, 56, 69, 70 and 71 as being parallel imported goods. This was later independently confirmed by business records subpoenaed through Crafers. The above investigation resulted, ultimately, in the institution of proceedings against Forward Co on 21 October 2002 in the High Court of Hong Kong. 310 In its pleading AMC alleges that from October 2001, apart from the 30 July 2002 email, three communications made by it to Hamilton put Hamilton on notice of AMC's concerns about declining sales of Hamilton "Product" and that parallel importation of its Product into Hong Kong was occurring. 311 This correspondence has to be evaluated in light of the approach of AMC I have described above. The first of the three communications was an email of Dr Keung of 20 October 2001 to Ms Carpenelli requesting only partial delivery of an order of U50 from Hamilton. Hamilton agreed to this. This resulted in about 15,000 units being delivered in November and a slightly smaller number in December. Of itself this communication said nothing of parallel importation. 312 The next letter, an email of 30 January 2002 - (ie after the parallel importation had been discovered) - seems to have followed a sequence of communications between Dr Keung and Dr Ovcharenko over the number of units in batches 54 and 56 that were sent to AMC in Hong Kong. Because of its significance, I need refer briefly to that sequence. On 3 January Dr Keung requested Dr Ovcharenko to give him the number of units of Urederm 50g belonging to Batch nos 54 and 56 "sent to Hong Kong previously". He also wished to know if Urederm 50g tubes were sent to other countries as well or only to Hong Kong. Dr Ovcharenko replied the same day that he could give the exact numbers sent to AMC from the two batches the following week. He added that Hamilton's was "regularly exporting" Urederm 50g "to Greece (Greece tubes & Greece Cartons), Canada and small quantity to Middle East countries … (current tubes & Arabian cartons)". Thereafter Dr Ovcharenko apparently informed Dr Keung, mistakenly, that the batch numbers were for 100gm tubes and provided incorrect numbers. These errors were corrected after the 30 January email. There was nothing in the correspondence thus far that suggested Dr Keung's initial inquiry was prompted by apprehended parallel importation. 313 It was against this background that Dr Keung sent the 30 January email. 314 It dealt in the main with problems with the Distribution Agreement. It finished with: A couple of weeks ago I asked you about the number of units of Urederm 50gm tube belonging to Batch Nos 54 and 56 delivered to Hong Kong. Your reply was that all these batches were Urederm 100gm tube. However, we have found a lot of Urederm 50gm tube of these two batches gone to the hands of the dispensaries. Please check this again because I am afraid that there are imitated goods since the sales of this item drops sharply in the past two months despite massive advertising. As AMC implicitly acknowledged in its written submissions the reference here is only to counterfeit goods and dropping sales. These concerns, it is said, were "seemingly ignored by Hamilton". Dr Keung was later to assert quite misleadingly (in an email to Mr Blake of 16 October 2002):
… originally I just mentioned parallel importing in my fax to Dimitri in December last year, asking him to check the batch numbers 54 & 56 for Urederm. Then, I faxed an early warning for Hamilton via Dimitri on 30 January 2002 after I discovered many dispensaries were selling the above batch numbers before Medic-Care distributed her own. Not only that you did not take any action but you shipped an even larger lot of Hamilton products to this locality at the end of March. (Emphasis added.)
315 The third communication pleaded - an email of 18 March 2002 to Dr Ovcharenko - referred only (for present purposes) to a rapid contraction in retail sales in the past half year and to a 30 per cent drop in the over the counter sales of Urederm "[d]espite massive advertising". A request was made for Hamilton to keep a Urederm order and deliver it in September. 316 I will return to these emails below. Suffice it so say for present purposes that neither on their face, nor considered in their context, could they reasonably be said to put Hamilton on notice that parallel importation of its products had been detected by AMC or that AMC had reasonable grounds for believing that parallel importation of Hamilton's products was occurring. 317 Dr Keung held a meeting with Dr Ovcharenko in Sydney on 4 July 2002. While, amongst other things, he discussed the role of Dr Lam on his staff, he did not raise with Dr Ovcharenko his knowledge of parallel imported Hamilton products in Hong Kong. 318 A further meeting was held with Dr Ovcharenko and Ms Carpenelli on 9 July 2002. This appears to have been the annual meeting at which Dr Keung made his "Distributor's Report". The minutes do not record any reference being made to parallel importation. However they do record that "June sales were 28% up on budget"; year to date sales were 11% up on budget; June sales were about A$70,000 lower than expected because of delay in producing Rubesal 25g for Hong Kong; and July "will be very close to budget". 319 There are several other communications to which reference should be made for their bearing on the course of the parallel importation and, importantly, its merger with the intellectual property issues which are considered in the next part of these reasons. 320 After sending an email on 5 August 2002 to Dr Keung foreshadowing further correspondence and expressing he was very concerned about the matters raised by Dr Keung's 30 July email, Mr Blake made his first substantive response by email on 7 August 2002. After reiterating his concern Mr Blake stated: The 50g tube packaging was developed to meet markets in Hong Kong and also where there are other needs for the Chinese packaging. I can assure you that Hamilton have not supplied any other company in the export market with quantities of the order to which you refer, namely 30,000 units, but from time to time smaller amounts, totalling less than 30,000 units have been supplied within Australia. However, we have on all occasions had an undertaking, even if this has been verbal, as to the use of these goods. At no time have we, or would we, agree to supply if we became aware of any units being destined for Hong Kong. We are currently trying to trace some of these supplies to see if Hamilton has been deceived. I can however assure you that any supply of Urederm 50g is at a price well in excess of that charged to Australian Medic-Care so it is difficult to see how they could compete with you and make a profit. I can also assure you that Hamilton has no intention other than to support its distributors and will do what is within its power to protect the interests of Australian Medic-Care in Hong Kong. The email went on to solicit Dr Keung's assistance in surveying a number of retail stores and to send to Hamilton the batch number and expiry date of a cross-section of stock. Dr Keung was asked not to take any further action with the Hong Kong authorities until the matter had been "checked more thoroughly". 321 This email seems to have been the first explicit communication by Hamilton to AMC that the Hong Kong packaging was being used when there were other needs for it. I would add that the second quoted paragraph of it, on the evidence before me, borders on the disingenuous. It betrays a lack of frankness which by this time was becoming a hallmark of the communications of both parties. 322 The email produced the predictable response of merging both the parallel importation issue and AMC's claim to own the Chinese trademark for Fuyunhon. Dr Keung's email of 9 August to Mr Blake was fulsome and hostile on both these themes. I would note in passing that internal communications passing between Mr Blake and Mr Stafford after Dr Keung's 9 August email indicates that Hamilton was still contemplating making further supplies to Crafers. 323 Mr Blake responded on 14 August taking issue with the trademark claim and the use of Chinese language packaging. It stated (in part): I can assure you however, that on the occasions where we have requests for Chinese language on a pack, we take all appropriate steps to ensure to the best of our ability that we know the destination of these products to protect your business and that of our other distributors. … Following my investigations it is very clear that there has certainly been no supply of Hamilton product into Hong Kong other than through Australian Medi-Care dating back as far as 1999. Hamilton has always used its best efforts to ensure the interests of Australian Medi-Care are protected. Should another distributor or customer have broken their undertakings to Hamilton by tracing stock movements of each product and the relevant packaging we can say that this could not have affected your market earlier than December 2001. But there is no evidence that this has occurred. I am also disturbed that you have suspected illegal products had been supplied since 1999 and have only now advised us. I would expect that your sales representatives would have a good relationship with the retailers and this would be advised to them immediately. Mr Blake went on to request that Dr Keung provide the assistance sought in the 7 August email as a matter of "extreme" urgency. I would note in passing that the "assurance" in the first quoted paragraph is rather belied by Hamilton's manner of dealing with Crafers. 324 The response to this was Dr Keung's email to Mr Blake of 19 August 2002 when Hamilton was accused explicitly of being complicit in the parallel importation. It is unnecessary for present purposes to enlarge further on what became an extraordinarily acrimonious correspondence (inflamed by Dr Lam's contributions) other than to indicate that, from August 2002, non-cooperation between the parties on the investigation of parallel importation became marked. From this time all mutual trust and confidence had evaporated. I am satisfied that both AMC and Hamilton contributed to that state of affairs by acts of commission and omission. 325 There are two further emails to which I should refer. The first is that of Dr Lam to Mr Blake of 11 December in which it was indicated while the monthly sales of Urederm 50g in July 2002 was "a mere 762 tubes", in September it was 14,764 tubes. The second communication was from Dr Keung to Mr Blake of 6 January 2003 which said (in part): Looking back at our accounts the sales of Urederm 100gm tube in the OTC sector has been contracting since 1998. That of Urederm 50gm tube has been decreasing since 1995 from a yearly sales of 110000 in 1991 to 90000 in 1995 and 67000 in 2000 despite continuous promotion and advertising. Parallel importation has been progressively expanding for quite some time.
Consideration 326 For ease in exposition, I will refer to the various Hamilton products the subject of the parallel importation claim as being "the Products". 327 AMC's written submissions open with the concession that only comparatively small amounts of parallel importation in 2001 and 2002 can be proved. If there were breaches of the Distribution Agreement in that period, that small amount is advanced as the acorn for a very significant damages claim. I should add as well, though it is not the subject of any concession, that there is no evidence at all of Hamilton's products being parallel imported into Hong Kong prior to, or subsequent to, those products sold by Hamilton to Crafers. 328 Though, as pleaded, AMC has alleged Hamilton has breached cll 6.2, 9.1 and 9.2 of the Agreement, in its submissions this appears to have been confined to cl 6.2 (the "best efforts" clause). In any event, as I will indicate, there is no factual foundation to support claims that Hamilton either sold product into the Territory (cl 9.1) or granted similar rights to a third party to those it gave to AMC (cl 9.2). 329 The case advanced in submissions has moved somewhat from that as pleaded and Hamilton takes objection to this as will be seen. 330 AMC's submissions on parallel importation are encapsulated in the following three propositions. First, Hamilton had insufficient measures in place to prevent Urederm and Rubesal in the Hong Kong packaging being sold in the Territory by other parties. Evidence of insufficiency is demonstrated by the Products subsequently being sold into the Territory by a third party. Secondly¸ Hamilton supplied Crafers in the knowledge that: (1) parallel importation and/or counterfeit products were a particular problem in the pharmaceutical industry and specifically Hong Kong, and AMC's concerns in this regard were known to Hamilton;
(2) AMC had notified Hamilton of its declining sales from about October 2001;
(3) Crafers conducted business exporting to Hong Kong and China;
(4) Crafers were familiar with Hamilton's export products, namely Urederm and Rubesal, in Chinese language packaging in 50g units;
(5) Crafers specifically requested supply of export products that were exclusively manufactured for the Hong Kong market;
(6) Crafers requested Products that contained trademarks and copyright owned by AMC;
(7) Crafers requested to distribute on Hamilton's behalf in Hong Kong and China; and,
(8) Crafers was not supplying the products to the domestic market.
In consequence it ought to have been aware that the products were destined for AMC's Territory but it nonetheless failed to do what it reasonably could to have prevented this. Thirdly, none of the measures Hamilton relied upon were reasonably sufficient to fulfil its obligations under cl 6.2 in the particular circumstances of the sale to a third party of a product exclusively manufactured for a Territory and for its exclusive distributor. Further, AMC relies generally in relation to insufficiency of measures upon (a) the sales to Crafers not being subject to written trading terms excluding sales of the Products overseas, or else the waiver of such terms; (b) Hamilton did not have a "usual practice" in place to deal with the circumstance of export Products being sold in the domestic market (I am asked to reject the evidence of an oral direction not to sell the Products overseas); (c) no written confirmation was obtained from Crafers prior to supply that the product would not be sold overseas; and (d) it was commercially viable for Crafers or its purchasers to sell the Products into Hong Kong as AMC's prices incorporated the significant expense of advertising. 331 Hamilton's defence, put in short form, is that AMC has not proved any breach of contract; has not proved any damages from parallel importation or else damages not caused by AMC itself; and the claim should be dismissed as it was formulated and prosecuted in bad faith and for ulterior purposes. 332 Before expressing my own conclusions, I should mention two preliminary matters. First, the "Product" referred to in cl 6.2 and cl 9.1, while including Product packaged for Hong Kong with Chinese language characters, was not defined by reference to Product so packaged. Rather, it encompassed Products fitting the general description in Schedule 2 of the Distribution Agreement of the Products to which the Agreement applied. Secondly, I find in the next part of these reasons that the Fuyunhon and Tuotoning trademarks and the Chinese language product descriptions used on the Hong Kong packaging did not belong to Hamilton's but belonged to AMC or to Dr Keung. What needs to be emphasised for present purposes is that I am not concerned here with whether the Hamilton's sale to third parties of product in packaging with Chinese language characters, infringed AMC's intellectual property rights in some fashion. My concern is with cl 6.2. 333 To the extent that it is an implication in the first of the three AMC propositions above that it was Hamilton's duty to prevent sale of the Products in the Territory by a third party which was not an AMC sub-distributor, I reject that implication. Clause 6.2 did not oblige Hamilton to secure a particular result. Its duty was to use its best efforts to secure that result. 334 Hamilton was, and was known by AMC to be, an international exporter of its Products. AMC in consequence could not reasonably have expected that Hamilton would desist from exporting its Products in whatever labelling elsewhere in the world because of the possibility that Product so exported might ultimately find its way to Hong Kong for sale. Hamilton could not be expected to guarantee there would not be perfidy abroad. What AMC could reasonably expect is that Hamilton would take reasonable steps to ensure that the distributors to whom it supplied product overseas would not themselves resell, or facilitate resale, into the Territory of an exclusive Hamilton distributorship. The evidence before me is that Hamilton did this. In both the AMC (cl 6.1) and Pharmalines (cl 6.1) Distribution Agreements, the Licences given to resell were only for the respective Territories of each distributorship. Furthermore, each Licence (cl 4) limited the classes of persons to whom AMC and Pharmalines respectively could resell in their Territory. In other words, the distributor/purchaser was contractually regulated both as to where and to whom, it could sell. 335 Insofar as AMC seeks to derive evidentiary support for its case from what it alleges were insufficiencies in Hamilton's "best efforts" in relation to preventing Pharmalines selling outside its Territory, that support is not there to be had. Not only is there no evidence that Product supplied to Pharmalines was sold outside the "Territory" agreed in the Hamilton-Pharmaline Distribution Agreement, there is nothing to suggest that the contractual measures taken by Hamilton did not, in the circumstances, satisfy the standard of endeavour by which the best efforts obligation was to be measured. 336 This leaves the dealing with Crafers. This involved a domestic sale by Hamilton, not a sale to a distributor operating in a foreign country. Crafers' purchase was known by Hamilton to be primarily for Product with Chinese language packaging; it was a purchase for purposes of resale; and if the Product was to be sold to Crafers, it would have to be of Product that was being made for AMC. I infer this from what I have found Mr Lanham said to Mr Stafford and from knowledge Mr Stafford probably possessed concerning Chinese language packaged Products. I have also inferred that the premise of Ms Chartres' discussions with Mr Lanham and of Mr Lanham's conversation with Mr Stafford was that the Crafers sales were domestic in character. Crafers was not purchasing product for export by it, albeit the sales were believed by Hamilton to be for use by way of provisions for ships' crews and passengers. I have also concluded that Mr Stafford imposed the requirement on any supply to Crafers that the goods were to be resold in Australia and not overseas and that this requirement was communicated to Ms Chartres. Mr Stafford was at the relevant times a director and senior executive officer of Hamilton and his knowledge when authorising the sale to Crafers (which I infer fell within his managerial function) was Hamilton's. 337 I would note that, in consequence of my findings above, Hamilton has no case to answer for an alleged breach of cl 9.2 because of the sale authorised by Mr Stafford. The contract did not give Crafers similar rights to those granted AMC. 338 The second of AMC's propositions in support of its case seeks to fix Hamilton with liability for breach of cl 6.2 on the basis that, because of what Hamilton is alleged to have known, it ought to have been aware that the Products were destined for AMC's Territory yet it failed to do what it reasonably could in the circumstances to have prevented this. It is this version of the case as put in submissions to which Hamilton takes objection. I have considerable difficulties with how AMC ascribes knowledge to Hamilton as such and with how it purports to aggregate that knowledge: cf Australian Competition and Consumer Commission v Radio Rentals (2005) 146 FCR 292 at [177]-[183]. The information to which it refers and which I earlier listed was not, at all relevant times, shown to have been possessed by any one corporate officer. Nor was it all relevantly possessed at the times the initial supplies were made. Mr Blake, for example, only became aware of the sales to Crafers in March 2002, some months after the first sales. Some, but not all of the listed matters may have been known to Mr Stafford. The basis upon which information (held by various corporate officers over time) was to be aggregated to produce the information base for the allegation that Hamilton ought to have been aware that the products were destined for Hong Kong has not been addressed: cf Radio Rentals. Nor is it said at what time Hamilton had that information base. Some of it, for example, was only acquired after the last supply had been made: eg (8) above. I agree with Hamilton's submission that some number of the pieces of knowledge propounded are, as put, unsupported by the evidence or, in my view, are misleading: eg paras (5), (6) and (8). 339 The evidence falls far short of establishing that Hamilton actually knew that the product sold to Crafers was destined for Hong Kong. It equally does not establish that the relevant proper officers of Hamilton were at any time recklessly indifferent to how Crafers dealt with the Product. Nor did it demonstrate Nelsonian blindness to the Product's likely destination. For reasons I give below, it may properly be said that the circumstances known to Mr Stafford may have called for greater vigilance than was demonstrated. What I do not understand, though, is why a concept akin to constructive notice - for such is what seems to be being advanced - should in the manner proposed be sufficient to provide the knowledge platform to establish liability in the way sought. This is not to say that the knowledge actually possessed by a person subject to a best efforts clause may not be such as to require further inquiry to be made if the person is to do all that he or she reasonably can in the circumstances to secure the covenanted result. 340 I should note in passing that a consequence of the view I have expressed on Hamilton's state of knowledge necessitates the conclusion that it was not guilty of selling its Products into Hong Kong "directly or indirectly" in breach of cl 9.1. 341 In the end I agree with Hamilton that this second proposed basis for establishing a breach of cl 6.2 should not be countenanced. It would be unfair to require Hamilton to respond to a claim which is so vague, potentially misleading and wanting in explicit, doctrinal underpinning. I would add, it addresses a possible factual state of affairs which need not be established to make out a breach of cl 6.2 in a case such as the present. 342 AMC has pleaded that it put Hamilton on notice of AMC's concerns about declining sales of the Products by AMC and that parallel importation of the Products into Hong Kong was occurring. The particulars given of the communications giving rise to this notice are the 30 July 2002 email and the three emails of 20 October 2001, 30 January 2002, and 18 March 2002 to which I earlier referred. 343 The 30 July letter clearly had the effect pleaded and it led eventually to Mr Blake's direction not to supply Crafers. It should be noted, though, that no Products were in fact supplied to Crafers after 24 July 2002. I have already discussed the content of the other emails. They do not make out the pleaded notice AMC seeks to rely upon. 344 The final way the claim has been put relates to the insufficiency of the measures relied upon by Hamilton to fulfil its obligations under cl 6.2. 345 I have earlier indicated my findings as to (i) Mr Stafford's knowledge of Crafer's Product requirements and of the purpose of their acquisition; and (ii) the basis of his authorisation of the supply and the territorial limitation on resale he imposed, which limitation was communicated to Ms Chartres. I have made no finding as to whether Mr Stafford was aware of the Terms of Trade being sent to Crafers, or required this to be done. I am satisfied that there was no specific written agreement for the first or any other sale to Crafers. Insofar as the evidence goes, Mr Stafford's authorisation was of a contract of sale - in the event probably partly oral and partly written - which was subject to the Territorial limitation that Crafers was not to resell the Products overseas, ie it was to resell only in Australia. I simply note that the burden of the territorial limitation Mr Stafford imposed in fact matched that contained in cl 5 of the Terms of Trade. 346 In these circumstances did Hamilton, through Mr Stafford, satisfy the "standard of endeavour" prescribed by the best efforts clause? Did it do all it reasonably could do in the circumstances to achieve the contractual object of cl 6.1: Hospital Products, at 64? I think not. Hamilton was supplying to Crafers identically, and very distinctively, presented Products to those supplied to AMC. The best efforts clause did not as of course require it to abstain from so doing. What it did require, though, was that Hamilton do all that it reasonably could to prevent the Product sold to Crafers being resold by a third party in AMC's Territory. 347 Mr Stafford sought contractually to regulate where the Product was to be resold. However, unlike in Hamilton's international distributorship agreements, Mr Stafford did not seek contractually to regulate to whom the Products could be sold. For him to rely upon what Crafers (via Mr Lanham) indicated was the purpose of their acquisition was clearly insufficient in the circumstances. Hamilton had had no prior dealings with Crafers. Theirs was not a relationship of trust. Crafers, on the material before me, did not indicate how it would effectuate its purpose. It could, for example, have sold the Product to an exporter. Further there is not, in the circumstances, any proper basis for concluding that Crafers had contractually bound itself to effectuate its purpose. 348 Given that the Products sold to Crafers were intended for use out of Australia (even if resold in Australia), it could reasonably be expected of Hamilton that it stipulate by type the person or classes of person (consistent with the understood purpose of the purchase) to whom the Products could be resold and this with the object of preventing the Products from finding their way into the export trade. If they did, given their Hong Kong packaging, there would be a likelihood of their finding their way into AMC's territory as parallel imports. And that is what occurred. 349 Though I have dealt with AMC's final proposition somewhat differently from the precise way it was propounded, I agree with the essence of it. The measures Hamilton relied upon in its dealings with Crafers were not reasonably sufficient to fulfil its obligations to AMC under cl 6.2. It is no answer to this to say that, even if resale had been contractually regulated, Crafers could still have breached its contractual obligation. It is a matter of speculation as to how Crafers would have acted if presented with such a requirement. I find that Hamilton in selling to Crafers in the manner it did in November 2001 breached the best efforts clause of the Distribution Agreement. That breach was a continuing breach until supplies to Crafers were halted. However, this is not the end of the matter.
Hamilton's defence to breach of cl 6.2 350 A multilayered set of defences has been advanced by Hamilton to negate or minimise its liability to pay damages for its breach of cl 6.2. For present purposes I need only refer to those that are premised upon my finding that, because of its failure to notify Hamilton immediately of the parallel importation (of which it had knowledge from at least 30 January 2002), AMC itself was in breach of cl 6.2: para FAD cl 35BA.2 and para 35BA.3. It is claimed that (i) cl 6.2 did not operate against Hamilton if AMC was in ongoing breach of cl 6.2; (ii) alternatively, AMC was not entitled to enforce cl 6.2 against Hamilton or to seek damages for its breach; or (iii) it was unconscionable for AMC to assert liability and claim damages on the basis of facts which were not disclosed by AMC in a timely manner; or (iv) AMC was estopped from relying on cl 6.2 or else from relying on any sales by Hamilton to Crafers after 30 January 2002. 351 I would note there are further defences based on breach of cl 6.2 which is tied to AMC's alleged breach of cl 33 of the Distribution Agreement relating (a) to its sales to persons other than those permitted by cl 4 of the Agreement or (b) by subdistributor's not appointed in accordance with cl 37: FAD paras 39.8 to 39.10. These were not the subject of written submissions. Given the view I take of Hamilton's defences, it is unnecessary that I consider these latter defences.
(a) Fact Findings 352 The relevant factual material has been incorporated in the general account of parallel importation above. Insofar as presently relevant I make the following findings. (i) If Dr Keung did not accept that parallel importation was occurring prior to December 2001 - despite his often repeated assertions that it was occurring much earlier - he realised, in that month, that genuine parallel imported products were in Hong Kong.
(ii) The evidentiary foundation of that realisation was Dr Lam's detection of instances of 10% urea cream from Hamilton's batches no 54 and 56 being on sale in Hong Kong.
(iii) Though he claims he gave "hints" of, and "polite" advice about, parallel importation on a number of occasions between October 2001 and 30 July 2002 - he later inappropriately described these as "red flags" etc - I find that nothing he said or did would reasonably have put Hamiltons on notice that the parallel importation of its products had been detected by AMC or that AMC had reason to believe that parallel importation of the Hamilton Products was occurring.
(iv) Between December 2001 and 30 July 2002 Dr Keung had regular electronic, and occasional face to face, communication with Hamilton officials. He did not disclose his discovery.
(v) The reason for his so acting was that he believed Hamilton itself was a participant in the parallel importation, or was at least complicit in it, and he wanted substantial evidence of this - seemingly so as to be able to allege Hamilton was in breach of the Distribution Agreement.
(vi) Unaware of Dr Keung's discovery, Hamilton continued to sell the Products to Crafers.
(vii) While asserting in the 30 June 2002 email that imitated goods or parallel imported Hamilton goods were for sale in Hong Kong, Dr Keung did not disclose the evidentiary basis for his personal view that parallel importation was occurring, ie Dr Lam's December 2001 discovery. That disclosure was only made, and then quite obliquely, in the 19 August 2002 email to Mr Blake by which time inflammatory accusations were being made against Hamilton.
(viii) While in that 19 August email Dr Keung referred to the possibilities of Hamilton being "a victim, a collaborator or the culprit", in his actions he did not differentiate between these. Importantly, there is no evidence to suggest that he ever considered making Hamilton aware of the fact of parallel importation substantiated by his evidence of it, without at the same time accusing Hamilton of complicity in it.
(ix) It may properly be said that it took Mr Blake a little over a month to direct that Crafers not be supplied. Nonetheless, I am satisfied that if Mr Blake had received such a notification as I have indicated from Dr Keung shortly after Dr Keung had obtained Dr Lam's evidence, he would not have permitted Crafers to have been supplied until further inquiries had been made.
(x) The evidence does not permit a finding to be made as to when precisely in December 2001 Dr Keung came to his realisation. Hamilton, for present purposes, bears this onus. However, I am satisfied such notification could at least have been given at the end of December shortly prior to 3 January 2002 when Dr Keung commenced his communications with Dr Ovcharenko concerning batch nos 54 and 56.
(xi) If such notice had been given around that time I am satisfied Hamilton would not have supplied Crafers as it did on 17 January 2002 or thereafter.
(xii) Apart from the shipments made to Crafers which found their way to Hong Kong, there is no evidence at all of parallel importation of the Hamilton products into Hong Kong prior to, or after, the Crafers shipments. In consequence the only breaches for which Hamilton can be held responsible relate to those shipments.
(b) Was AMC in Breach of cl 6.2 353 Hamilton's contention is that cl 6.2 imposed reciprocal and cooperative obligations on the parties. There comes a time, it is said, when a party to an agreement such as the Distribution Agreement, knowing or believing that the other party is in breach (particularly a passive breach) of a substantive obligation within that agreement, must give notice of breach to the other party, as part of employing the first party's "best efforts" to prevent breach, or further breach by the second party. 354 It is a matter of degree when that stage is reached in a particular case. The relevant state of mind on the part of AMC was knowledge or belief that genuine Hamilton products were being distributed in Hong Kong, being products which AMC itself had not sold. 355 Hamilton's primary submission is that that stage was reached by late October 2001 and that, thereafter, until August 2002, the applicant was in breach of clauses 6.2, 33.4, 33.5 and 34 of the Distribution Agreement in failing to report to Hamilton its knowledge or belief about parallel importation. 356 While AMC has put Hamilton's defences in issue it has not made detailed submissions on them. 357 It is in my view clear that AMC was in breach of its cl 6.2 obligation from at least the end of December 2001. As I indicated when considering the construction of cl 6.2, not only are the parties' "best efforts" obligations reciprocal, they are likely to be independent particularly in parallel importation cases. The reason for this is that, while it is likely to be the distributor who detects the parallel importation, it is equally likely that it will be the supplier who has the greater capacity to identify the source of the parallel importation and/or to prevent the future sale of the product into the relevant area. In such cases - and I consider the present to be one - unless and until the supplier is made aware of the fact of the parallel importation, it may well not be in a position to do all that it reasonably could in the circumstances to prevent the products sale in that area in the future. Hence the distributor's "best efforts" to prevent the sale of the product could require at least that it notify the supplier of the fact of, and what was known about, the parallel importation. Especially considered along with the duty to cooperate, AMC's cl 6.2 obligation required it so to notify Hamilton. It failed to do so. 358 I am satisfied it demonstrably did not do all it reasonably could in the circumstances to prevent the sale of the Products in Hong Kong from at least the end of December 2001.
(c) The defences 359 The three ways in which Hamilton now puts its defence as I understand them are as follows. 360 First, AMC was in breach of its obligation under cl 6.2. This disentitled it from recovering damages from Hamilton for breach of cl 6.2. The reason for this, it is said, is that being ready, willing and able to perform at the appropriate time is a condition precedent to a cause of action in contract, whether for damages or otherwise. Reliance in this is placed upon Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 esp at 298 and upon some number of well known specific performance decisions. 361 Secondly, by its failure to inform Hamilton of its knowledge, AMC caused the sales that occurred after "31 January 2002" (sic). 362 Thirdly, "the applicant is not able to take advantage of its own wrong". As I understand this in light of Hamilton's pleading and submissions, this defence, in essence, is one of failure to mitigate. 363 None of these defences were enlarged upon significantly in submissions. In light of my findings as to when AMC became aware of the reality of parallel importation but then failed, unreasonably to notify Hamilton thereof (ie in December 2001), its breach of cl 6.2 post-dated that of Hamilton's first sale to Crafers (which was on 12 or 13 November 2001). There is nothing to suggest that, as at the time of Hamilton's breach of cl 6.2, AMC was not ready, willing and able to perform its reciprocal obligation assuming it was relevantly a "concurrent obligation": cf Cohen & Co at 298. As put in its submissions, Hamilton's first defence is that, contrary to my findings, AMC became aware of the parallel importation and failed to notify this, in October 2001, ie prior to Hamilton's breach. It is unnecessary for me to consider the defence further although I would add that I express no view on the question whether it is an available defence for breaches of a provision such as is presently in question. 364 The second and third defences, in substance, raise issues of causation and of mitigation. There have been no submissions made on the applicable legal principles, but neither are they controversial for present purposes. It is well accepted that (i) the party claiming compensation for loss has the onus of showing the loss was caused by the breach relied upon; (ii) the criteria of causation applied is a common sense one; and (iii) "the act [or conduct] of the claimant may be considered so unreasonable that it operates to break the chain of causation with the consequence that the claimant recovers nothing" for loss thereafter: Furmston (ed), The Law of Contract, 8.86 (3rd ed, 2007); see also Mallesons Stephen Jacques v Trenorth Ltd [1999] 1 VR 727; Cheshire and Fifoot's Law of Contract, [23.34]-[23.35], [28.38] (9th Aust ed). As for mitigation, damages are not recoverable for any loss which could have been prevented by the reasonable mitigating action of the injured party: Cheshire & Fifoot, at [23.41]; Carter on Contract [41-340]; see also Farnsworth, Contracts, s12.12. It is for the party in breach to show the claimant has failed to mitigate its damage: TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130 at 138. The claimant is not required to take all possible steps to mitigate its loss, but only those which are reasonable: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 at [134]. 365 In this matter, it probably is immaterial whether the claimable loss is approached through the principles of causation or of mitigation. They yield a like result. While it is misleading to speak of a "duty" to mitigate loss: see Carter at [41-340]; Farnsworth s12.12; AMC was in fact subject in cl 6.2 to a contractual obligation to take reasonable steps which, if taken, would have prevented a quite significant part of its loss being occasioned. Whether AMC's failure to do so be described as breaking the chain of causation or as failing to take reasonable mitigating action, the consequence is the same. From at least the end of December 2001, AMC's conduct disentitled it from claiming compensation for loss occasioned by Hamilton's continued supply of the Products to Crafers thereafter in breach of cl 6.2. 366 As no cross-claim has been made by Hamilton in respect of AMC's failure to disclose its knowledge of the parallel importation once it became aware of it, it is unnecessary for me to consider whether that non-disclosure itself was in the circumstances independently actionable as, for example, under s 52 of the Trade Practices Act: cf Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213. 367 I should make the additional observation that while Hamilton had advanced a positive case of breach of cl 6.2 by AMC, this was for the purpose of establishing that AMC should have given it explicit notice, as of the end of December 2001, of its knowledge of the reality of parallel importation. Hamilton, though, did not go on to show that, having the knowledge it did, AMC otherwise failed to use its best efforts as required by cl 6.2. Of this latter matter all I will say is this. AMC devised a strategy in October 2001 to use leaflets in, and holographic labels on, Urederm boxes to differentiate its product from parallel imported product. Notwithstanding the knowledge it acquired in December, it did not implement the leaflet strategy until April 2002, and the holographic strategy until September 2002. Equally, when Dr Keung conducted his market investigations in August 2002, parallel importation was quickly detected leading to proceedings against Forward Co in October 2002. 368 Before turning to the question of AMC's entitlement to recover damages for loss resulting from Hamilton's breaches prior to the end of December 2001, there is one further matter raised by Hamilton's to which I should refer. It is alleged that AMC had ulterior purposes, and acted in bad faith from August 2002 in asserting Hamilton was involved in the parallel importation. While I accept that Dr Keung knowingly made unsubstantiated and occasionally knowingly false assertions and representations which do him little credit, I do not accept that such subsequent conduct and the climate in which it occurred, have any real bearing on the questions I have to determine in light of my findings.
Damages for breach of cl 6.2 369 I should state at the outset that the financial years in Hong Kong run from 1 April to 31 March and a particular financial year is described by reference to the year which ends on 31 March, ie the 2002 financial year runs from 1 April 2001 to 31 March 2002. 370 A quite large body of expert evidence, in places quite arresting in its content, has been put on by AMC in support of its damages claims. Such of it as relates to parallel importation is of virtually no assistance to me, save in relation to providing a convenient source of some arithmetical calculations. Given my findings on liability and the narrow compass of the damages inquiry they open up, I have been left to do the best I can with the available evidence. I should add that my findings on liability were a possible outcome raised directly by Hamilton in its submissions. 371 AMC's claim as put is for loss of profits, these being made up by (a) the direct loss of profits on the goods sold to Crafers and (b) the consequential loss of profits as a consequence of the run down in sales in Hong Kong. The latter loss, as it relates to parallel importation, is claimed for the period of the 2003 financial year until into the 2007 financial year (ie from 1 April 2002 until 13 July 2006). While in closing oral submissions AMC pressed fully its claim for direct losses, it was accepted that I probably would be minded to say that it can't be the whole of the consequential loss claimed. Those losses were claimed, for example, to be $1,280,075 in the 2003 financial year and $3,454,463 in the 2006 year. 372 Hamilton disputes both claims. 373 Before dealing with each of the claims it is appropriate to refer to a deal of background material.
(a) Dr Jorgensen's first report 374 It is sufficient for present purposes that I refer only to Dr Jorgensen's first report. While for reasons which I will later give, I am only concerned with, at the most, possibly two of the financial years dealt with by Dr Jorgensen, it is appropriate to refer to certain aspects of his report, and to indicate why the report itself is not helpful to me. 375 I should refer first to the instructions given Dr Jorgensen. In relation to AMC's lost profit on the products sold to Crafers, the assigned task was to report: 7.1 … my opinion on the value, at the date of my report, of the gross profit AMC would have made on its sale of the products supplied by Hamilton to Crafers had these products ultimately been purchased by AMC and not Crafers and then sold in Hong Kong by AMC. (Emphasis added.) Further, Mr Jorgensen was instructed that:
AMC's gross profit on sales (before tax) in Hong Kong would have grown by 8% per financial year from the beginning of the 2002 financial year until the end of the 2011 financial year. The hopes and expectations built into this historically neutered figure have not, for any presently relevant purposes, been enlarged upon, nor have the means of its achievement in the counterfactual world to which it would have related. 376 The significance of the 8% becomes apparent in the calculation of consequential loss. Mr Jorgensen had access to AMC's profits and loss statements to the 2007 financial year. These he tabulated from 1997 onwards: For the year ended 31 March 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000 HK$'000
Turnover 2,813 3,504 5,342 5,961 5,405 8,888 7,516 7,265 6,040 5,319 3,490 less cost of sales (602) (1,913) (3,003) (2,903) (2,347) (3,303) (3,288) (3,394) (2,610) (3,292) (1,879) Other Income 13 - - 14 58 11 6 27 0 12 23 Total Income 2,223 1,591 2,339 3,072 3,115 5,596 4,234 3,898 3,430 2,039 1,633 79% 45% 44% 52% 58% 63% 56% 54% 57% 38% 47% … Total Expenses 1,248 1,125 1,497 1,850 2,436 3,868 2,425 2,498 2,234 2,203 2,150 Net Profit/(Loss) 975 466 842 1,222 679 1,728 1,808 1,400 1,196 (163) (517) 32% 13% 16% 21% 13% 19% 24% 19% 20% -3% -15% (Emphasis added.)
377 I should note in passing that the "turnover" and "total income" figure for 2003 understate the true position by HK$1.08 million. 378 Taking as his starting point for future calculations the actual figures for the 2002 financial year, he proceeded to calculate the Hong Kong sales and gross profit margin into the future as follows: Increase in Sales Sales Increase in Gross Profit Gross Profit Gross Profit Percentage
2001 3.4% 7,521,949 9.1% 4,233,958 56.3% 2002 18.2% 8,888,114 31.9% 5,595,424 62.8% 2003 8.0% 9,599,163 8.0% 6,032,258 62.8% 2004 8.0% 10,367,096 8.0% 6,514,839 62.8% 2005 8.0% 11,196,464 8.0% 7,036,026 62.8% 2006 8.0% 12,092,181 8.0% 7,598,908 62.8%
379 This produced a difference of over $4 million in turnover which was then translated into Lost Gross and Lost Net Profit/Total Loss: Lost Sales Lost Gross Profit Lost Net Profit
2003 4,194,472 2,975,003 1,664,884 2004 3,943,547 2,993,980 1,998,959 2005 5,582,902 4,425,260 2,662,262 2006 8,297,277 5,716,752 3,454,463
380 The Lost Net Profit is then translated into the present value of the lost cashflows: Lost Net Interest/Discount Present Value Profit/Total Loss Rate
2003 1,664,884 8.5% 2,307,294 2004 1,998,959 8.5% 2,553,249 2005 2,662,262 8.5% 3,134,081 2006 3,454,463 8.5% 3,748,092
381 Needless to say the above methodology has been criticised by Hamilton both as disregarding known events after the 2003 financial year (eg the SARS outbreak) and for the lack of indication of which products would have earned increase turnover and how. 382 The final part of Mr Jorgensen's report which I should mention is the assumptions he was asked to make about parallel importations. These included: · it takes usually about 60 days for parallel imports to have an impact on legitimate and exclusive distributors' sales because: · the consequences for a parallel importer of being caught can be severe both legally, because of the risk of civil or criminal legal action, and administratively, because of the risk that the relevant health authorities will view the parallel importer's conduct unfavourably and make it difficult for it to meet regulatory requirements in the future; · to avoid serious consequences, parallel importers supply small quantities of parallel imported product at first and only increase the quantities when they are confident there will be no consequences; and · it takes until larger volumes of parallel imports are supplied into the market for legitimate and exclusive distributors to notice a trend of lost sales among normal fluctuations in sales levels; and · this impact on sales will continue for at least as long as wholesale and retail customers have stocks of and can sell the parallel imported product i.e. for the shelf life of the product.
(b) The Market and the Products 383 For present purposes it is sufficient that I note the following matters. 384 When he commenced business in 1988, the markets Dr Keung targeted were consumers, retailers and doctors who spoke Chinese as a first language and who might or might not speak English. For that reason, as he said in his first affidavit, "every aspect of the presentation, promotion and marketing of AMC's products was and is designed … to appeal to Chinese speakers exclusively". I note in passing that, in the November and December sales to Crafers, two of the invoices were for Urederm 100g in English language packaging. 385 When AMC's relationship with Y C Woo ended, AMC sold directly to a number of wholesalers in Hong Kong. It also sold direct to chain stores and took telephone orders from dispensaries. Its own salespersons visited dispensaries and medical practitioners. 386 Dr Keung's evidence is that up until July 2006 the 10% urea cream and Rubesal were on sale in over 95% of pharmacies in Hong Kong and 280 retail outlets of the large retailers, Watsons and Mannings. 387 Urederm 50g and Rubesal 25g and 50g were made only for the Hong Kong market. Ninety-five per cent of the R25g was sold into the Hong Kong government sector and the sale to government had a favourable flow-on effect on the sales of other Rubesal products. Urederm, for its part, was mainly a winter product and its sales were influenced by weather conditions. It had 8 to 10 competitors in the market. 388 In early 2003 the SARS epidemic occurred in Hong Kong. It is Dr Keung's evidence that, for the most part, the government closed its clinics from February to May, and it asked for supply of Rubesal to be stopped; and, but for SARS, the sales of Rubesal should have gone up. Nonetheless, he agreed that in 2002 and 2003 he was telling Hamilton that the sales of Rubesal were falling because of competition.
(c) Dr Keung's perception of the market for Urederm 389 In an email to Mr Blake of 6 January 2003 Dr Keung gave his retrospective view of AMC's Urederm sales: Looking back at our accounts the sales of Urederm 100gm tube in the OTC sector has been contracting since 1998. That of Urederm 50gm tube has been decreasing since 1995 from a yearly sales of 110000 in 1991 to 90000 in 1995 and 67000 in 2000 despite continuous promotion and advertising. Parallel importation has been progressively expanding for quite some time. This also needs to be compensated. The sales figures for U50g given in AMC's pleading, as also the figures which were prepared for Dr Jorgensen of AMC's purchases from Hamilton and sales by it, are presently instructive. First, the pleaded figures of which the following suffice for present purposes, were: Financial Year ending 31 March Annual Sales (50g tubes) 1993 99,000 (est) 1994 108,900 1995 119,790 1996 89,192 1997 85, 736 1998 88,906 1999 94,168 2000 84,014 2001 66,567 2002 67,480 2003 49,048 2004 61,722
390 The purchase and sale figures of present relevance prepared for Dr Jorgensen, and which refer to financial years, were these:
Purchase (Hamilton) for the years 1 April 1999 to 31 March 2007 U10 U25 U50 U100 R25 R50 R100 Year 1999 9000 27648 79680 13930 445920 17712 5184 2000 17960 56256 113904 14244 456192 20736 3504 2001 0 9984 41220 20448 665280 23472 7824 2002 0 34176 71136 20832 429888 18864 10368 2003 9000 24576 40320 13104 242880 28965 15840 2004 13759 0 55584 19924 251587 23328 11136 2005 0 19776 30672 14784 72192 15984 12096 2006 0 29952 0 6096 0 3312 5136 Total 49,719 202,368 432,516 123,362 2,563,939 152,373 71,088
Sales (Hamilton) for the years 1 April 1999 to 31 March 2007 U10 U25 U50 U100 R25 R50 R100 Year 1999-00 1778 8196 84018 12496 405504 17683 3493 2000-01 5613 25744 66567 15777 465183 21660 4780 2001-02 21683 39295 67480 19760 664112 22007 6770 2002-03 7453 28520 49048 18708 429549 20802 9734 2003-04 5650 18155 61722 15115 265078 24692 13163 2004-05 6781 11648 45729 18484 201739 26378 13742 2005-06 8968 19211 37202 16618 36750 15885 9632 2006-07 3176 37442 16588 6789 24921 7924 6240 Total 61,102 188,211 428,354 123,747 2,492,836 157,031 67,554
391 There are several matters I would note in passing about the sales and purchases figures. First, the sales of U50 and R25 drop sharply from the '02 financial year to the '03 year. That drop increases in '04 for R25 but is reversed for U50. Secondly, the purchases from Hamilton in the '01 and '02 financial years reveal that at the end of the '02 year, AMC held significant excess inventory - 32,593 units of R25 and 16,739 of U50 (down from 42,999).
392 Earlier I referred to Dr Keung's cross-examination in which he indicated that, in October 2001, he had detected a "marked drop in sales" which led to his request to Hamilton to delay sending a portion of the November delivery of U50g. That "drop" pre-dated by about 1˝ months the introduction into the Hong Kong market of Products sold by Hamilton to Crafers. The earliest date on which this occurred on the evidence appears to have been around 11 December 2001 when Teemlink made its first sale to Forward Co. I would emphasise that there is no evidence to support any allegation that Hamilton-sourced Products were parallel imported into Hong Kong before December 2001 or after its last sale to Crafers on 25 July 2002 was delivered to Hong Kong (if such was the case).
393 On 30 January 2002 Dr Keung again reiterated there had been a sharp drop in sales of U50g "in the past two months despite massive advertising".
394 In cross-examination Dr Keung accepted that the sales in R25 fluctuated from 2000-2007 and in some years they fluctuated a lot; the sales of it to government agencies were at discount prices; and there had been no relative downturn in the sales of Rubesal in 2001 and 2002.
(d) The Products sold to Crafers 395 In the period for which I have found Hamilton bears present responsibility for its sales to Crafers (ie November-December 2001), 9448 units of U50g in Hong Kong packaging and 4008 units of U100g in English language packaging were purchased by Crafers. There is clear evidence of part at least of each of these being sold in the Hong Kong Market. Invoices to, amongst others, Forward Co demonstrate this. The balance of Crafers purchases which were onsold (or for which credits were not later given by Crafers) consisted of 12,060 units of U50g in Hong Kong packaging and 2296 units of Rubesal 50g also in Hong Kong packaging. Hamilton cannot be held liable in this proceeding for their sale and resale into Hong Kong of these products. 396 There is a degree of opacity concerning the actual sale prices of AMC's Products in Hong Kong. Because I do not consider there would have been any likelihood of AMC purchasing the English language packaged U100g stock that Hamilton sold to Crafers (see below), I will confine my consideration of prices to U50g. For the 2002 financial year its list price was $39.50. This, according to Dr Keung. was the over-the-counter price but the sale price to government institutions was $24.00. There is some evidence as well of other discounting in 2001-2002 at prices across the $36.50 to $20.00 range. The average price Mr Jorgensen adopted was $28.54. I will assume a similar figure. The market value of the U50g sold to Crafers in November-December 2001 so valued was, to adapt Mr Jorgensen's figures, HK$269,635. 397 The evidence of the sales from Forward Company in Hong Kong, while in large measure incomplete, is sufficient for present purposes given the narrow corridor of time with which I am concerned. It is clear that U50g was sold to WKM in December 2001 at $18 per unit and in April 2002 at $19.40 per unit. As to the latter, it is by no means clear how much, if any at all, of the Crafers sales for which Hamilton is responsible found its way into this sale to WKM. It would also appear from sales invoices of Forward Company that it otherwise sold U50g between 12 December 2001 and 1 February 2002 at varying prices which would seem to average at about $28 per unit. The respondent has called into question the extent to which the Crafers sales were exported to Hong Kong and were sold into the retail market in direct competition with AMC. Though the evidence of sales by Forward Company in Hong Kong is incomplete, I am satisfied, having regard to the invoices of Forward Company and of WKM that definitely a large proportion, but probably all, of the sales to Crafers of U50g for which Hamilton is responsible were sold into the Hong Kong market. 398 Finally, it is probable that all of the U50g tubes that Hamilton sold to Crafers in November-December 2001 came from the stock, the delivery of which was delayed by Dr Keung, in October 2001 and which Dr Ovcharenko was authorised to sell in Australia in November 2001.
(i) The "lost opportunity" 399 The lost opportunity for which AMC claims damages as put in its written submission, was the opportunity to sell the Product Hamilton sold to Crafers and thereby it has been deprived of potential profits from such sales. 400 As I have foreshadowed, I do not consider that there was any prospect at all of that possibility being realised in relation to the 4008 units of English language packaged U100g sold to Crafers in November and December 2001, or that the opportunity to buy those units was a valuable one to AMC. From at least February 2001 AMC sold its U100g in Hong Kong packaging. Prior to that it was sold with stick-on Chinese character labels applied to English language packaging. Having its own tailored packaging and, more importantly, a target market of consumers, retailers and doctors who spoke Chinese as a first language, I am not satisfied that AMC would have countenanced the possibility of purchasing such a quantity of English language packaged U100g. 401 I turn now to the 9448 units of U50g. 402 By way of general background, I would emphasise that AMC's sales of U50g peaked in the 1995 financial year (119,700 units), troughed in 1997 (85,736 units), recovered in 1999 (94,168 units) and then began a decline. In 2000, 84,014 units were sold; in 2001, 66567 units; and in 2002, 67,480 units. I would also note that in the 2001 financial year AMC had 42,999 units by way of excess inventory - a number equivalent to about two thirds of its sales for that year and slightly greater than its purchases in the 2002 financial year (which is the year of present interest). Dr Keung's explanation for the build up of excess inventory was because, from 2000, the China market seemed to have "signs of opening up". Be this explanation as it may, in the 2001 financial year AMC was obviously running down its inventory as also its purchases from Hamilton. 403 It is Dr Keung's evidence that from December 2000 he believed that counterfeit Hamilton U50g products were available in the Hong Kong market. In April 2001 he employed Dr Lam to trace the source of these and to devise strategies to try to stop their sale in Hong Kong. In October 2001 he had detected a "marked drop" in sales, a drop which (from his correspondence) he maintained continued at least until the end of January 2002. 404 Whatever the causes of Dr Keung's concerns about the state of the market during 2001 until mid-December, any drop in it could not be attributed to Hamilton's parallel imported product. Its impact (if any) in late December and into the early months of 2002 was unlikely to have been marked as I will later indicate. 405 The effect of Dr Keung's discerning the marked drop in sales induced him to request delaying the shipment of what proved to be about half of the November shipment of nearly 29,000 U50g units. And then he acquiesced in the sale in Australia of the delayed delivery stock in November 2001. 406 The starting point in considering whether, and if so in what amount AMC, is entitled to damages for the claimed lost opportunity is, as it was put in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 (at 355): … the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.
407 Neither AMC nor Hamilton have sought to differentiate the questions (a) whether AMC could and would have purchased and resold the U50g tubes sold to Crafers at or around the time the sales were made to Crafers? And (b) whether and in what amount, if at all, it would have made profits from such sales and resales? Authority binding upon me would suggest that such differentiation is necessary in a case such as the present for the reason that the realisation of the chance to make the lost profit would have depended on AMC's own decision to have purchased and resold the product. Proof on the balance of probabilities that it could and would have done so was necessary if AMC was to show that Hamilton's conduct "has caused a valuable loss of opportunity" see Price Higgins & Fidge v Drysdale [1996] 1 VR 346 at 355 (Full Court of Victoria); G W Sinclair & Co Pty Ltd v Cocks [2001] VSCA 47; see also Cheshire and Fifoot, [23.16] (9th Aust ed).
408 Ordinarily I would invite further submissions on this matter, the more so because of the apparent likelihood that AMC would not have contemplated purchasing that stock at the relevant time. The reason I refrain from taking this course is that I am satisfied, in any event, that the value of the opportunity lost to AMC was negligible for the same reason, ie the chance of AMC attempting to realise profit from such additional purchases and resales was so low as to be speculative. In saying this I have not considered it necessary to consider the additional more general factors also relied upon by Hamilton for purposes of discounting.
409 Dr Keung did not become aware of the parallel importation until after both the November and December sales of U50g to Crafers - hence it does not complicate my view of the counterfactual I need to consider. Given (a) his apprehensions about the state of the market; (b) his deferral of part of the November delivery "so … there is less pressure on our go-down"; (c) his November acquiescence in the sale of the delayed delivered product in Australia; (d) his own appreciation of the generally declining market of U50g since its peak in 1995; (e) the fact that AMC's orders at this time were demand driven and Hamilton had the capacity to satisfy its forecasts for U50g; and (f) AMC's diminished purchases from Hamilton in the 2001-2002 financial year and its possession of a significant carry forward of excess inventory for the product from the preceding year - I am satisfied for these reasons alone that AMC would not at the relevant time have envisaged purchasing the 9448 units of U50g to be sold in addition to the purchases and orders it had by then made, notwithstanding the shelf life of the product.
410 Even if I am incorrect in regarding the value of the chance to AMC as negligible, the percentage figure I would put on it is in the order of 10 per cent of the net profit the sale of the 9448 units would probably have yielded. Adapting Mr Jorgensen's calculations, I would accept for present purposes both that the market value of the U50g tubes in Hong Kong was HK$269,635 and that an appropriate percentage profit per unit of 47.4% as proposed by Dr Jorgensen (though criticised by Hamilton as suitable especially for the entire period claimed by AMC), this would produce a net profit figure in the order of HK$126,728. I would in consequence have ordered Hamilton to pay damages in the order of HK$12,500.
(ii) Consequential loss of profits because of run down in sales 411 This matter will be dealt with shortly. The claim for loss of profits on sales lost on account of parallel importation is a major part of a more general claim for loss of profits from the 2003 financial year to the 2011 financial year. Its rationale is that the losses to AMC commenced in late 2001 as a consequence of the parallel importation of Hamilton products into the Hong Kong market and that, thereafter, there was an ongoing impact upon AMC's sales, and therefore, its profits. 412 Significantly no particularised claim is propounded for loss from parallel importation in the 2001-2002 financial year. This is of particular present importance. Hamilton, as I have found, was responsible only for the two sales of U50g made in November and December 2001. Those sales were received by Forward Co on 11 December 2001 and 12 January 2002. The 2002 financial year ended on 31 March 2002. While the subsequent sales of the U50g in the retail market may have created the risk of loss of sales and, therefore, of injury to AMC for a period, I cannot on the evidence before me infer that that injury was in fact caused or over any particular period. As is evident from the Jorgensen report, AMC has not attempted to prove its consequential loss of profits in its parallel importation case in so particular a way. Nor has any particularised claim at all been made for loss in the period prior to 1 April 2003. Given both the very limited responsibility, if any, Hamilton has for such loss as AMC may have suffered by way of run down of sales and the evidentiary silence, I am not prepared to speculate as to the actual loss, if any, AMC may have suffered on the sale of the 9448 U50g units. That loss has not been proved. To the extent that AMC suffered significant loss from the parallel importation of Hamilton products - if it did at all - it was primarily the author of its own harm and probably exclusively so by the beginning of the 2003 financial year. 413 I will reject its claim for damages for consequential loss of profits.
CONCLUSION 414 Having concluded that AMC has not proved it has suffered substantial damages as a result of Hamilton's breach of cl 6.2 of the Distribution Agreement, I will award nominal damages for that breach of $100. 415 My conclusion has relieved me of the need to consider a significant body of evidence, expert and otherwise, and very detailed submissions from Hamilton in particular on AMC's alleged loss of profits. I make no comment on that material beyond what has already been said.
REFUSAL TO SUPPLY 416 As pleaded AMC's claim is that Hamilton failed on four occasions to deliver Products ordered, in breach of cl 11.1 of the Distribution Agreement. I have already found that the Agreement was terminated under cl 41.1.6 on the expiration of 60 days written notice, which notice was given to AMC on 13 July. The actual termination date was 13 September 2006. Two of the four orders post-dated the termination date and can be disregarded. I again note I have rejected AMC's submission that the termination related only to the Licence so leaving Hamilton's cl 11.1 supply obligation on foot. 417 The claims involve, in the first instance, an issue of construction of the Distribution Agreement.
The contractual setting 418 Clause 11.1 of the Agreement provided: 11.1 Supplier must, to the extent it is able, sell to Distributor which must buy all Products needed for resale. Clause 13 dealt with "Orders" and provided:
13.1 Distributor must order Products direct from Supplier in writing 4 months before date of shipment. After an order is accepted by Supplier, it is binding on Distributor and cannot be changed without Supplier's written consent. Supplier may refuse to accept an order if: 13.1.1 Supplier is unable (for any reason) to supply the Products ordered; or 13.1.2 Distributor's trading account with Supplier for Products previously supplied is not current. 13.2 Within 7 days of the end of each month, Distributor must provide Supplier with a written non-binding forecast of Distributor's proposed orders for the next 6 months. (Emphasis added.)
419 AMC in its written submission has simply assumed from Hamilton's failure to supply it in respect of the two orders which predated the written notice of termination, both that Hamilton had accepted the orders and that it had no justification for the failure to fulfil the orders. That submission would seem to proceed upon a particular, but unstated, view of the proper construction of cl 11.1 when considered in light of cl 13. 420 Hamilton's contention is that its obligation to supply did not crystallise until it had accepted AMC's orders as envisaged by cl 13.1. It recognises that cl 13 specified two grounds upon which it could refuse to meet an order. But it also appears to assert that the "unable (for any reason) to supply" ground for refusing to accept an order should be considered in the context of the Agreement as a whole including the provisions of cl 42 and cl 16 which, it says, provide in the circumstances a "justifiable commercial reason" for its being unable to supply the two orders. 421 Clause 42 provides, insofar as presently relevant: 42.1 If the Licence ends, then Distributor must immediately at Supplier's cost, return to Supplier or Supplier's nominee, all Products in transit or delivered for which Supplier has not been paid. 42.2 If the Licence ends under Clause … 41.1.6 (as a result of notice given by Supplier), then Distributor, at its option, may either: 42.2.1 resell to Supplier, at cost, all Products for which Supplier has been paid but which Distributor has not sold or agreed to sell ("Unsold Products"); or 42.2.2 sell the Unsold Products to third parties. Supplier grants to Distributor a licence to resell the Unsold Products in these circumstances. 42.3 If the Licence ends under Clause … 41.1.6 (as a result of notice given by Distributor), then Supplier may, at its option, repurchase, at cost, the Unsold Products from Distributor. If Supplier does not wish to repurchase the Unsold Products, then Distributor is responsible for reselling them. Supplier grants Distributor a licence to resell Unsold Products in these circumstances.
422 Clause 16.1 required the Distributor to pay for Products by telegraphic transfer within 30 days of their receipt into the Distributor's premises. 423 The two orders in issue were made on 9 May 2006 and 5 July 2006. Both, as I have said predated the notice of termination of 13 July. 424 Hamilton's "justifiable commercial reason" for being unable to supply is put thus. The products ordered by AMC in May were, even on AMC's argument, due for delivery to AMC by no later than 15 September 2006. Relevantly, AMC would not have been obliged to pay for the May and July Orders until 9 October 2006 and 5 December 2006. The products would have therefore been delivered to AMC at a time when AMC's licence to distribute Hamilton products had ended. With the Distribution Agreement having ended on 13 September 2006, AMC, pursuant to clause 42.1 of the Distribution Agreement, would have been obliged to immediately return the products subject of the May and July Orders as soon as they landed in Hong Kong. It is clear that at the time that the licence ended, the products subject of the May and July Orders would have either been in transit or not paid for (triggering an obligation pursuant to Clause 42.1 on AMC to immediately return those products to Hamilton at Hamilton's cost).
The construction of cll 11.1 and 13.1 425 Hamilton may have been unwilling to supply the two orders made, but was it unable to supply for cl 13.1 purposes? The scheme of cl 11.1 and cl 13.1 was such that Hamilton was obliged, "to the extent it is able" (cl 11.1) to sell to AMC all products needed for resale. The cl 13 order system was the vehicle for AMC to express its needs. While cl 13.1 envisaged that for an order to bind the Distributor, it needed to be accepted by Hamilton, it specified the two circumstances in which Hamilton could refuse to accept an order. The first reflected the qualification in cl 11.1: an order could be refused if Hamilton was unable for any reason to supply the Products ordered. The second was if AMC's trading account for Products previously supplied was not current. The exceptions, it should be noted justified a refusal "to accept an order", not a refusal "to supply on an order accepted". This produced the somewhat unusual consequence that inability to supply after an order had been accepted or the trading account becoming not current after acceptance, would not relieve Hamilton of its supply obligation. Such consequences, though, seem to be consistent with the scheme of ordered planning for the future through binding commitments, and forecasts of supplies and orders that the Distribution Agreement instantiated: see not only cll 13.1, but also cl 12 and cl 13.2. 426 While an actual acceptance of an order was envisaged (so binding AMC), the clause obliged Hamilton to accept orders save in the excepted circumstances. The sub-clause did not specify by when the acceptance had to be notified. However, consistent with the object of regularity and predictability which clearly informed cl 13, I am satisfied that cl 13.1 would, properly construed, contain an implied obligation to give such notice of acceptance as was reasonable in the circumstances. 427 Turning to the cl 13.1.1 exception of being "unable (for any reason) to supply", does Hamilton's "justifiable commercial reason" (founded on its construction of cl 42) satisfy the sub-clauses requirement? Not, I think, to the extent Hamilton proposes. 428 Clause 42 had two quite distinct modes of operation when the Licence ended. The first, in cl 42.1, dealt with Products in transit or delivered for which Hamilton had not been paid. AMC was obliged "immediately" and at Hamilton's cost, to return such Products to Hamilton or its nominee. This at least countenanced the possibility that payment may in fact have been made for such Products in which case it would be the second mode of operation which governed how the parties were to act. Though subcl 42.1 dealt expressly with the return of goods "in transit or delivered" for which the Supplier had not been paid, it did not deal with goods ordered, but not shipped or paid for at the time the Licence ended. The clear contemplation of the provision in the context of the Agreement was that on termination of the licence there was no obligation to ship such goods at all, hence no need to make provision for them - unless, of course, they had been paid for in advance. 429 Given that cl 13.1 required orders to be made 4 months before date of shipment, but that cl 41.1.6 provided for the Licence to end only at the expiration of 60 days written notice, there was always the possibility that orders could have been made in the roughly two month period prior to the giving of notice of termination. Subclause 42.1 clearly envisaged both that Product shipped in respect of such orders could be in transit or delivered but not paid for and that such Product was so shipped after the giving of the notice. In other words, the giving of the notice did not of itself terminate the Suppliers' obligation to supply even though the contingencies stipulated in cl 42.1 were foreseeable in a given instance at the time of notice. I would interpolate that such evidence as there is of shipments from Adelaide to Hong Kong suggest a voyage time of about two weeks. 430 The second mode of operation of cl 42 was premised upon AMC having paid for, but having unsold, Products on its hands. How the subclauses worked in such a case turned, for present purposes, on whether the Agreement was terminated under cl 41.1.6 by Hamilton or by AMC. What this did was to give the party who did not give the notice of termination an election which was designed in each instance to suit that party's own advantage. In the present case, cl 42.2 gave AMC the options of reselling the unsold Products to Hamilton at cost, or of selling the unsold Products to third parties. 431 Importantly, while cl 16 stipulated by when payment "must" be made for Products received (ie within 30 days of receipt), it did not preclude any earlier payment. If a Distributor chose to pre-pay for Products ordered, it would have had the above election. In a given case, where the Distributor was involved in the orderly winding up of a part of its business consequent upon termination by the Supplier, it may well have been in its interests to have Products for sale after termination of the Licence to facilitate that process with its customers.
Factual Setting 432 I preface this account with Hamilton's admission in its submissions that, on the evidence available to the Court, Hamilton rejected the May and July orders. 433 The 9 May 2006 was for delivery in September 2006, the expected date of its arrival in Hong Kong being before 15 September 2006. The 5 July order was for delivery in November with the expected date of arrival being before 15 November. Neither order was prepaid. 434 On 13 July 2006 the notice of termination of the Distribution Agreement was given. On 20 July 2006 Dr Ovcharenko sent an email to Dr Keung stating: I need to inform you that following our 60 days notice of termination of our Distribution Agreement, we will not be supplying the September and November orders as delivery would be after the termination date of the agreement. By email reply of 21 July, Dr Keung indicated he considered the refusal to supply in the circumstances to be another breach of contract. He also indicated he regarded Hamilton as being responsible for AMC being unable to sell a certain quantity of product in the Philippines. He considered Hamilton should have a duty to purchase the product and indicated: "Their cost can just be off-set by the AU$35,091 in your [invoice] EXP1768." I note in passing that a separate claim is made by Hamilton in this proceeding in respect of that invoice. 435 Mr Pritchard, to whom Dr Keung's email was copied replied in turn: Hamilton is not, has not been, and does not intend to be, in breach of the distribution agreement. In particular, Hamilton has no obligation after the termination of the distribution agreement to supply any products to Australian Medic-Care. However, if it would assist AMC in the current situation, Hamilton might consider trying to supply the products ordered in May and July 2006, subject to availability of raw materials, etc and subject to payment by AMC in advance. If you would like Hamilton to consider this option, you must treat it as a matter of urgency and advise us accordingly.
436 Dr Keung's response to this was: Thank you for your prompt reply. To prevent the interruption of the supply of Hamilton products so that we have time to consider the remedy imposed on AMC due to the Termination on Hamilton's side I accept your offer to supply goods to AMC for the orders made in May and July 2006. I shall send the money for the goods by Letter of Credit or Telegraphic Transfer before the goods are delivered to Hong Kong. I am a person acting according to the Law and my conscience. I agree to pay Hamilton the amount on the invoice EXP/1768 forty-five days after 22 June 2006, the date the goods arrived at HK.
437 On 25 July Mr Pritchard in turn replied indicating that Hamilton had not offered to supply any of the goods ordered in May and July. He reiterated what he had said but also provided a list of products and quantities which "we could make reasonable endeavours to supply". The email went on: In addition, Hamilton must receive payments of A$74,000 by 31 July 2006 and approx $1,200 by 31 October 2006. If Hamilton does not receive those payments in full by those dates, the quantities of products that can be supplied will be further reduced. Of course, Hamilton will not supply any of those products unless full payment of A$35,091.12 for EXP1768 is received by the due date of 6 August 2006.
438 In its written submission (at [525]) Hamilton has provided a table of the orders and of the products specified in Mr Pritchard's email. It is fair to say that they were substantially the same in their listings, save for a product Hamilton no longer made (Dr Keung was aware of this) and for a batch of Rubesal 50g. 439 Neither Dr Lam on 27 July nor Dr Keung on 31 July 2006 responded specifically to Dr Pritchard's offer which was reiterated on 28 July. In his 31 July email Dr Keung did, though, raise the issue of returning unsold Hamilton products for refund (presumably under cl 42) and for off-setting EXP1768 against this. 440 On 2 August 2006 in an email to Mr Blake, Dr Keung acknowledged AMC had previously offered to pay in advance for the May and July orders. He went on: However, in the E-mail dated 25 July 2006 Geoff required AMC to pay before 31 July 2006, i.e. before the manufacture of the goods. I find that deviated too much from the Agreement and refused to order the goods and off-set EXP/1768 with the stock to be returned to Hamilton.
441 At this time a new disagreement emerged which was focussed on cl 42 and Hamilton's obligation to purchase at cost Products for which AMC had paid but which had not been sold or agreed to be sold. AMC, it would appear, was taking returns of stock at its direction from sub-distributors and retailers. On 3 August Mr Pritchard sent a facsimile to AMC indicating Hamilton's understanding of its cl 42 obligation. It proposed a protocol for the purpose of establishing: … an orderly and commercially sensible process which will be initiated at the conclusion of the Distribution Agreement, to determine the quantity and cost of the products that AMC is entitled to "resell". The issue of sale and return later became a matter between the parties' solicitors. 442 On 7 August Mr Pritchard advised Dr Keung that AMC's payment of A$35,091.12 for EXP1768 had not been paid. It was due on 6 August. On 25 August AMC forwarded an invoice to Hamilton to offset EXP1768. Hamilton did not accept the invoice.
Consideration 443 Hamilton's submissions are that: (i) its obligation to supply pursuant to the terms of the Distribution Agreement did not crystallise until Hamilton accepted AMC's order;
(ii) it was entitled to reject an order from AMC if AMC's trading account was not current;
(iii) the terms of the Distribution Agreement entitled Hamilton to reject AMC's May and July orders because:
(a) the products subject of the May and July orders would have been delivered to AMC at a time when AMC had no right to distribute Hamilton products in the Territory;
(b) in any event, AMC's trading account with Hamilton was in default before the scheduled date of delivery of the May and July orders; and
(iv) even if Hamilton was obliged to supply the products subject of the May and July orders, AMC failed to mitigate its loss by rejecting an offer by Hamilton to supply products on terms which fairly reflected a transaction between parties whose business relationship had been terminated. 444 Given the view I take of the proper construction of cll 11.1, 13.1 and 42.1, it may have been necessary to differentiate between the May and July orders. The latter order was for delivery in November, with an expected arrival before 15 November 2006. The Distribution Agreement terminated on 13 September 2006 and, consistent with my interpretation of cl 41.1, any obligation Hamilton had to make a future supply to AMC in respect of an outstanding order would have been discharged on and from that date, Dr Keung not having prepaid for that order as he indicated at one time that he would. 445 Hamilton in its written submissions (at [515] and [516.2]) accepts that the Products subject to the July order would have been in transit on 13 September. If such was the case - I am unaware of any evidence to this effect - then Hamilton's liability for not supplying falls to be determined on the same basis as for the May order. I would add that, but for that acceptance I would, on the available evidence on shipping times, have been likely to have inferred to the contrary. However I will not now differentiate between the two orders for cl 42.1 purposes. 446 It is clear that on 20 July 2006 Hamilton had decided to, and communicated to AMC, its refusal to supply the September and November orders. Could that refusal be brought within the "unable (for any reason) to supply" exception of cl 13.1.1? The May order could well have been delivered by 13 September (depending on shipping availability) and it may or may not have been paid for by that date, thus providing Dr Keung with the election of cl 42.2 - although I consider it unlikely that Dr Keung would have rushed to payment. Nonetheless, each such order, if despatched by Hamilton, would have fallen within the express provisions of cl 42 one way or another. It was the function of that clause, and not of cl 13.1.1 to determine what the parties' responsibilities were in respect of goods in transit or delivered and whether paid for or not. That was the chosen means of the Distribution Agreement. It may have resulted in Hamilton needlessly incurring cost, but the term itself was what Hamilton required of AMC. Hamilton was able to, but was seemingly unwilling to, supply. That was not sufficient to attract the cl 13.1.1 exception. 447 Turning to the cl 13.1.2 exception, it authorises the refusal to accept an order if the Distributor's trading account with the supplier for products previously received is not current. What it does not do is authorise the refusal to supply on an accepted order. As I earlier indicated cl 13.1 when construed in light of cl 11.1 obliged Hamilton to accept orders subject to the two specified exceptions. As I also indicated, while orders required positive acceptance, cl 13.1 contained an implied obligation to give such notice of acceptance as was reasonable in the circumstances. 448 Each of Dr Keung's orders contained the underlined requirement: "Please return by same fax if order cannot be fulfilled." It was not open to Dr Keung unilaterally so to dictate to Hamilton when it was to notify its acceptance or refusal of an order. Nonetheless Hamilton freedom was not unconstrained and, consistent with the implied obligation I have noted, it would have been reasonable to have expected relatively prompt notification of acceptance or refusal. 449 In the case of the May order, I simply note that I consider such notification was not given. Be that as it may the refusal to supply and the reason for it were communicated on 20 July, misguidedly as I have indicated. While it was a week earlier that Dr Keung first began to raise the issue of the "off-set" for the invoice EXP1768, default on that invoice did not occur until 6 August 2006. 450 The cl 13.1.2 exception, no less than the cl 13.1.1 exception, requires a decision to be taken prior to the acceptance or refusal of the order in question. It cannot be held dangling over the distributor's head until the last moment against the contingency that its trading account may cease to be current. It is for this reason that it is tied to a refusal to accept the order, not to a refusal to supply on an order. The clause cannot be so construed so as to allow an after occurring lack of currency in a trading account to be used either to feed a prior refusal or to reverse a prior acceptance. This would be quite inconsistent with the scheme of ordered planning established in the Distribution Agreement. Nonetheless, such is what Hamilton has sought to do in its submissions. 451 I conclude, then, that Hamilton's failure to supply on the May and July orders was in breach of cl 11.1. This, though, is not the end of the matter and for two reasons.
(i) Clause 42 and damages 452 The basic premise of AMC's submissions is that the notice of termination was unlawful given its construction of cl 41.1.6 which I have rejected. This seemingly explains why damages for the loss said to have been suffered in consequence of the breaches was calculated on the basis of loss of profits on the sales of the Products: see Second Report P V Jorgensen [14.4]. This loss is put at HK$1,550,414. 453 What this all overlooks is the possibility that the Distribution Agreement was validly terminated on 13 September. Assuming the orders were met both would have been subject to the provisions of cl 42 of the Distribution Agreement. Neither party has addressed this eventuality. Ordinarily, I would have invited the parties to provide further submissions on this matter. However, given the course of this litigation and that I am satisfied for other reasons that only nominal damages should be awarded for the breaches of the Distribution Agreement, I do not intend taking this course. I would also note that, if cl 42.1 would have been the operative provision, in the circumstance the damages for the breaches would have been nominal in any event.
(ii) Mitigation of damages 454 Hamilton has submitted that it offered AMC a supply of alternative products in lieu of the May and July orders. AMC could have accepted that offer and mitigated the loss and damages that it now has allegedly suffered by reason of the so called failure to supply. AMC instead chose to reject Hamilton's offer. 455 I agree with this submission. The four matters I would emphasise are, first, that Hamilton had lawfully given notice to terminate the Distribution Agreement; secondly, its refusal to supply was a breach of cl 11.1 (which Dr Keung accepted), albeit the deliveries in question were only to be made in September and October: see Furmston (ed), The Law of Contract, 8.103 (3rd ed, 2007); thirdly, the parties' rights and obligations arising out of those deliveries (if they had been made) would have been governed by cl 42 of the Distribution Agreement; and fourthly, Hamilton had made an alternative offer of supply which AMC had rejected. 456 While an innocent claimant is under no positive duty to take action to mitigate losses resulting from another's breach of contract, that party may not recover damages for that breach in respect of losses which it might reasonably have been expected to avoid: see generally Furmston (ed), at 8.96-8.103; Cheshire and Fifoot's Law of Contract, [23.41]-[23.44] (9th Aust ed, 2008); Carter on Contract, 41-340 ff. The onus of proof is upon the party in breach to show that the claimant ought reasonably to have taken certain mitigating steps: Wenkart v Pitman (1998) 46 NSWLR 502. The claimant is not bound to take all possible steps to mitigate its loss, only those which are reasonable: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 at [134]. As noted in Furmston (ed) at 8.100-8.101, many of the reported cases which have considered whether the claimant has acted reasonably to reduce its loss have involved the refusal of offers made by the party in breach. While it will be regarded as unreasonable to require a claimant to take steps which are likely to injure its commercial reputation: James Finlay & Co Ltd v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] V R 507; in commercial contracts, as Scrutton LJ commented in Payzu Ltd v Saunders [1919] 2 KB 581at 589, "it is generally reasonable to accept an offer from the party in default. However, it is always a question of fact." In judging what is reasonable in relation to such offers in a commercial matter, the claimant can be expected to view the matter dispassionately without "indulgence in far-fetched resentment": Payzu, at 586. 457 In this matter the supply offered by Mr Pritchard was substantially similar to what AMC had required in the May and July orders. The payment arrangements were quite different to what was the parties' usual course of business and to what cl 16 of the Distribution Agreement required. Because the Agreement had been effectively terminated on 13 September, if AMC was to obtain the benefit of the orders, it would in all likelihood have had to pre-paid for both orders because of cl 42 of the Agreement. Dr Keung was prepared to prepay before delivery when he mistakenly considered Mr Pritchard was offering to supply on the two orders. He resiled from this objecting that the terms proposed deviated too much from the Agreement, the efficacy of the notice of termination of which he would not accept. If he did wish "to prevent the interruption of the supply of Hamilton Products" he was given a reasonable opportunity. His rejection of the offer which would have averted the loss he alleges he suffered from Hamilton's failure to supply on the two orders, was unreasonable in the circumstances. AMC failed to mitigate its loss (assuming that under cl 42 it could have sold the Products had they been delivered). 458 AMC is entitled to nominal damages of $10 for each of Hamilton's two breaches of its obligation to supply.
CONCLUSION ON THE CONTRACT CLAIMS 459 I have found that: (i) Hamilton was in breach of cl 6.2 (the "best efforts" clause) but AMC was entitled to nominal damages its claimed losses of profits not having been proved; (ii) Hamilton was in breach of cl 11.1 in consequence of its refusal to supply Products ordered on 9 May and 5 July 2006 but that AMC was entitled only to nominal damages for each breach because it failed to mitigate its losses; and (iii) the Distribution Agreement having been terminated lawfully on 13 September 2006 under cl 41.1.6, AMC's claim for damages for Hamilton's alleged repudiatory termination of the Distribution Agreement must be rejected.
B. THE INTELLECTUAL PROPERTY RIGHTS CLAIMS AND CROSS-CLAIM 462 For ease in exposition I will deal, first, with Hamilton's cross-claim in which it seeks an order under s 87 of the TP Act that AMC prepare and execute documents necessary to effect transfer of ownership of the Fuyunhon and Tuotoning trademarks to Hamilton. I will then consider AMC's claims against Hamilton for infringement of copyright arising from its allegedly unauthorised use of what is described as the "Hong Kong packaging" (ie in Chinese characters) of Hamilton's products which packaging included (inter alia) the above two trademarks. 463 By way of preface I should note that up until final written submissions the case had been prosecuted by Hamilton on the basis that AMC, as Hamilton's fiduciary, held the two trademarks as constructive trustee for it, the marks having been obtained by it in breach of its fiduciary duty to Hamilton. The constructive trust claim - and with it, seemingly, the allegation of breach of fiduciary duty - were abandoned in Hamilton's written submissions. I say "seemingly" in relation to the fiduciary claim because it was scarcely addressed in submissions yet it is anything but non-contentious in the propositions it asserts: see Hospital Products Ltd; Rickel v Schwinn Bicycle Co 192 Cal Reptr 732 (1983); Glover, Commercial Equity: Fiduciary Relationships, 3.48-3.51 (1995); and for the causes of contention in this area of the law see my "Fiduciary Principle" in Youdan (ed), Equity, Fiduciaries and Trusts, 1 (1989); see also Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569 at [11]-[16]. I will return to this in the context of AMC's copyright ownership claim. 464 That the fiduciary claim was made in the first place highlights an aspect of this matter I noted at the outset and which will become more apparent in the evidence below. While the 1999 Distribution Agreement characterised the parties' relationship as that of supplier and distributor, there was more to it than that. In reality as it evolved it can properly be said to have been one of co-venturers seeking to develop markets for Hamilton's products in the Chinese reading communities of Hong Kong, Taiwan and China and they contributed accordingly. Dr Keung's contributions were his language skills, medical knowledge, local knowledge and marketing abilities. As will be seen, their contract, which in critical respects ordained their rights and responsibilities, did not reflect this.
The contractual setting 465 The Distribution Agreement required AMC to market and sell the products "only under a label or product name designated in Schedule 3:" cl 23.1. That schedule, headed "Trademarks", referred to: UREDERM No: 01428/92 STINGOSE NO: 619/81 RUBESAL NO: 9905240 (Application) Clause 23.2 prohibited AMC from registering any corporate or business name or trademarks incorporating the Schedule 3 trademarks or an adaptation of them. While cl 31.1 gave AMC an unrestricted use of the Trademarks for the purposes of the agreement during its term, cl 31.2 provided that the agreement did not confer on AMC any goodwill or interest in the products or the trademarks. Finally, cl 21.1 required (a) all therapeutic claims included in advertising or promotion of Hamilton's products have Hamilton's prior approval in writing; and (b) AMC warrant that all such claims "made in languages other than English … be identical to the approved therapeutic claims". 466 As mentioned in the "General Chronology", the Chinese characters used in the Fuyunhon and Tuotoning trademarks did not, and designedly did not, have any linguistic, phonetic or transliterative relationship with the words "Urederm" and "Rubesal" respectively.
Hamilton's cross-claim 467 Put briefly Hamilton's case as pleaded alleged (i) AMC engaged in misleading or deceptive conduct in breach of s 52 of the TP Act in that it represented to Hamilton and acted on the strict understanding with Hamilton that it would perform a literal Chinese translation of the product name and product description for each product; and (ii) AMC's representations were false or misleading and were relied upon by Hamilton which allowed Chinese words to be displayed on packaging for its products that were not literal translations of its English language product names and product descriptions: see Second Further Amended Cross-Claim[17], [18.2]; Further Amended Defence [17.5.7]-[17.5.13]. The pleading's elaboration and particularisation of the misleading and deceptive conduct run over eight pages. The essence of Hamilton's complaint is set out below: see "Consideration". 468 In its written submissions Hamilton sought to make additional and unpleaded allegations of s 52 contraventions, these being AMC's failures to advise Hamilton (a) of its application for registration of the Fuyunhon trademark in Hong Kong; and (b) of its true intentions as to ownership of intellectual property in the Hong Kong packaging prior to execution of the Distribution Agreement. The conduct informing these allegations was the subject of extensive cross-examination, demonstrably for reasons of credit as the respondent's written submissions amply show: see Respondent Submissions, "Section 2.1 - Veracity of Dr Keung - Evidentiary Use of Lies", pp 18-32. 469 While counsel for Hamilton contends that the factual allegations made against Dr Keung have, in aggregate, been pleaded at various places in its defence, it is the case that no cause of action as such was founded upon them in the pleading. AMC objects to this being done at this stage, the more so because there has been no opportunity to cross-examine Mr Blake on purported reliance on the non-disclosure. Moreover, it is said, the claim is statute barred. The problem, in my view, is compounded by Hamilton seeking apparently to use its pleaded, but abandoned, constructive trust case as part of the matrix of matters which it says justifies their claim that this cause of action is sufficiently pleaded: see Transcript 1965 ll 15-18; 1966 ll 40-41 (both cl 34.1.3 and cl 34.5 were abandoned in its written submission although, in response to a request from me subsequent to the hearing for clarification of its concession, it requested that the reference in its written submissions to its abandonment of cl 34.5 be deleted). 470 To allow this matter to be raised in this manner and at this stage would be unfair to AMC. I will not entertain it. In any event, as will be seen for reasons I give below, I am satisfied that this claim would fail in any event.
Applicable Principles 471 Section 52 has, over the last 35 years, been the subject of considerable judicial exegesis. The burden of its injunction that a corporation shall not in trade or commerce, engage in conduct that is misleading or deceptive, is not in dispute between the parties. Suffice it for me to say the following. First, conduct is misleading or deceptive if, in the circumstances, it induces or is capable of inducing error: see generally Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564 at [63]. Secondly, the omission to do a thing is a species of conduct such that silence can in particular circumstances constitute or be part of misleading or deceptive conduct: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 and 40. As French J observed in Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193 at 53,195: The cases in which silence may be so characterised [as contravening s 52] are no doubt many and various and it would be dangerous to essay any principle by which they might be exhaustively defined … [U]nless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that that fact does not exist. Thirdly, there will be no contravention of s 52 unless error or misconception results from the conduct of the alleged contravenor and not from other circumstances for which that person is not responsible: Equity Access Pty Ltd v Westpac Banking Corporation (1989) 16 IPR 431 at 440. Fourthly, the state of mind of the contravenor is immaterial unless the conduct in question involved a statement about its state of mind. It is sufficient that, tested objectively, the conduct in question was misleading or deceptive or was likely to mislead or deceive: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88. Fifthly, where, as here, the alleged misleading or deceptive conduct was that of one party to a business relationship and in the course of it and that conduct is the subject of complaint by the other, the complainant must establish a causal link between the impugned conduct and the loss or damage suffered by that conduct: cf TP Act s 87. In so doing, as indicated in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at [37], it is necessary to consider the character of the particular conduct of, here, AMC, in relation to Hamilton:
… bearing in mind what matters of fact each knew about the other as a result of the nature of their dealings and the conversations between them, or which each may be taken to have known.
Factual Setting 472 The early dealings of Dr Keung with Hamilton have been outlined in the General Chronology. They led to a meeting in Adelaide with Mr Blake and Mr Lock on 29 March 1990 at which the first Letter of Appointment was signed. The minutes of that meeting are in evidence. For present purposes they record that: A 4. UREDERM PRODUCT BOX Medic-Care through Dr Keung to develop a bi-lingual "Product Box". Dr Keung to arrange artwork. … 7. UREDERM TRADEMARK R.K. Maddern & Associates to arrange Hong Kong Trade Mark registration for UREDERM. B 1. STINGOSE GEL 25G TUBE Medic-Care propose to launch STINGOSE GEL in Hong Kong as the next product … 2. LAUNCH STRATEGY Dr Keung to advise Hamilton of the strategy to be used for product launch. 3. STINGOSE GEL PACKAGING Dr Keung asked that the product be packed in a "product box" rather than "blister pack". Product box to be same style as UREDERM with Chinese artwork to be developed by Medic-Care, if deemed necessary. … C 1. OTHER PRODUCTS - OTHER BUSINESS Dr Keung to provide a Strategy of Products to be introduced to the Hong Kong market, after registrations have been completed. 2. TAIWAN MARKET Dr Keung to produce information on the Taiwan market and its development.
473 I will not refer to Mr Blake's affidavit evidence of this meeting. I am satisfied that, while he can recall the fact of it, he has no reliable independent memory of what transpired at it. His affidavit is a reconstruction from the minutes, albeit one interpreted in a fashion favourable to Hamilton's case. 474 Dr Keung's affidavit evidence of the meeting was that: 196. During the meeting on 29 March 1990 either Mr Blake or Mr Lock (I cannot now remember which) said words to me to the effect, "Why is Urederm so popular in Hong Kong? Why are there so many sales?" To this I replied with words to the effect, "I am using a new brand name, 'FUYUNHON," on the labels on the packaging and in advertising for Urederm. It means 'moisture your skin to become healthy.' It is a very pleasing phrase to Chinese speakers and it suggests superior quality and specific indications." I explained to Mr Blake and Mr Lock about the new uses I advocated for 10% urea cream, such as for Housewife dermatitis, winter itching and cracking of the skin. In reply to this, Mr Lock said to me words to the effect, "We'll just leave it to you." 197. At the meeting on 29 March 1990, also, I showed Mr Blake and Mr Lock examples of the Chinese language advertising and promotional catalogues which I had been using in relation to Fuyunhon 10% urea cream and Tuotoning analgesic balm. This advertising incorporated the Fuyunhon Trade Mark and the Tuotoning Trade Mark, both of which I pointed out to Mr Blake and Mr Lock. In response to this, one of Mr Blake or Mr Lock repeated, "We'll just leave the Chinese names to you." Casebook 17-18 is a letter from Mr Lock to Dr Choi dated 10 April 1990 in which Mr Lock confirms that he had seen AMC's advertising at this meeting. (Emphasis added.)
475 I note in passing that Mr Lock's 10 April 1990 letter described the 29 March meeting as "fruitful"; confirmed Hamilton was prepared "to cooperate with" AMC in the promotion of Urederm in the Hong Kong market; indicated Hamilton was considering financial assistance for advertising and that it had sighted "samples of magazine and newspaper advertisements already placed." 476 Dr Keung's evidence in cross-examination had its difficult aspects due in part to his being obstructive to the point of counter-suggestiveness and, on occasion, of his evidence being colourable. Nonetheless I accept, for reasons I give below, the thrust of his evidence as revealed in the following two passages: (1) The stickers that you were putting on the Hamilton products at around about the beginning of 1990. Were they just in Chinese?---At first, it's purely Chinese, yes. Just in Chinese. And what did they say?---Housewife dermatitis, winter itch in the age, and winter chafing, because these are the laymen terms, you know. Thank you. And the Chinese on the stickers was a literal translation of each of those conditions that you've just described to his Honour; yes?---It's the Chinese translation of the layman terms: Tr 657. (2) At no time between 1990 and 19 August 2002 - have you got that period? 1990 to 19 August 2002 - at no time did you tell Hamilton that you regarded the Chinese characters "[Fuyunhon]" as being a brand name or a trademark, do you agree or disagree with that?---I disagree with that, because on the first day, you know, when I met Hamilton's people on 29 March to explain to them about the surge in sales, you know, they - we are - I am bombarded by a lot of questions, you know, about the sales, and how can - you know, 10 per cent urea can suddenly become some prominent. I am bound to explain everything, including the name of the trade - of Fuyunhon meaning, including the indications I put on the box in English and Chinese, and how I advertise - actually I have explained to them I - at first, when I advertise in the newspaper, I just explain housewife dermatitis, winter itching and winter chapping on the newspaper without mentioning any name. And after a couple of such advertising, I then introduce the product on our advertisement. And I explain fully, you know, because, you know, any pharmaceutical firm, upon receiving such big sales in a short time, they usually ask a lot of questions, and it is the practice, you know, why such a product become prominent suddenly, from zero to about 40,000 tubes, you know, in four months, you know. It doesn't needs for me to say anything. I must have been asked a lot of questions about this, you know, by a pharmaceutical firm. I explained fully about the mark. I explained fully about everything related to the surge in sales: TR 672-673. He also emphasised that Mr Lock asked him a "lot of questions about how the sales can go up suddenly for Urederm" and that he showed their Chinese language advertisements that prominently displayed the Fuyunhon mark in its Chinese character form. 477 Though I do not accept the reliability of Mr Blake's recall of the 29 March meeting, I do accept the substance of the following aspects of his evidence even though it may well involve some conflation of what he learned across the period 1990-1992. Mr Blake acknowledged he had seen Chinese newspaper advertisements carrying the Fuyunhon mark: Do you remember Dr Keung saying he was using a new brand name, Fuyunhon?---I don't recall him saying he was using a new brand name, I recollect him saying he was using a Chinese name. Do you recollect him saying Fuyunhon, that sound?---I can't but I won't dispute that he would have used that if that's the Chinese pronunciation. He showed you that by reference to the characters on the advertisement, didn't he?---Yes, I believe that was how he attempted - how he's shown it to me. He pointed to the characters and said, "It means moisture, your skin to become healthy", didn't he, "moistures your skin to become healthy"?---He could have done, yes. He told you that that was a phrase which was appealing to Chinese-speaking people?---He told us that the name was appealing to Chinese people and a name they would understand. That it imparted some kind of sophistication or superior quality?---I don't recollect that at all. Did he explain to you that he was advocating the use of it for different purposes than which you had previously indicated on the tubes and on the packaging of Urederm?---I can't recall that. Didn't he tell you that he was marketing or seeking to market the product by reference to phrases such as "housewife dermatitis"?---Yes, that was - I can recall that. "Winter itching"?---Pardon? "Winter itching"?---I can't recall "winter itching" specifically but I accept that he did. "Cracking of the skin"?---Yes. None of which were appearing as product indications on Urederm at that time, were they?---They weren't appearing as indications but they were very consistent indications for any moisturising product … Sure. Those indications which I've - - -?---On the Australian pack? Yes, which I've read to you, were consistent with the colloquial version, such as "housewife dermatitis" and the like, which Dr Keung put to you in March 1990?---Yes, they were consistent. The terms used on the Australian pack were terms used because it was listed as a pharmaceutical benefit item so it was sold as - primarily sold at that time as a - on a doctor's prescription. It was listed on the PBS. Thank you?---So it was positioned differently in the market but the indications were a common indication for any emollient product that he was suggesting. … MR ROBERTSON: Well, Dr Keung also explained to you by reference to the advertisements the word Tuotoniing. He pointed to the Chinese characters and used the word Tuotoniing, didn't he?---I can't recollect that but I wouldn't deny that he would have but it wouldn't have meant anything to us, it was a Chinese word. Thank you. He told you that it means, "take away pain, marvellous and effective thing"?---I can remember the "take away pain", which is very consistent to what the products' action is. It is descriptive of it, in a sense? Descriptive of its use?---Descriptive of its use, yes. .. Thank you. Dr Keung didn't say that he would arrange the Chinese version of the product indications in a literal translation from English to Chinese, did he?---No, because I think prior to that we had a agreed with putting - with him using the other indications - the more consumer orientated indications which made sense because he was putting the product through retail pharmacy rather than the Australian pack which was a pharmaceutical benefit item going through on prescription. … HIS HONOUR: You just explained to me about the use of Chinese words though. I had understood from what you had said before that because you were going to consumer orientation and product indications rather than pharmaceutical benefits language Dr Keung was in effect being invited to change the words?---I think he suggested - in discussion he suggested a change which we didn't oppose when that took place. In other words, we agreed that it was appropriate words to use for a consumer market. MR ROBERTSON: When did that happen? Relative to this meeting, before or after?---It could have been after and it could have been - it could have been some time after. But it didn't happen during this meeting?---I can't recollect it happening during this meeting. Yes, Is it fair to say - I withdraw that. Mr Blake, you left the meeting on 29 March 1990 with an understanding of what Dr Keung was going to do?---In terms of generating a bilingual pack? Yes?---Yes. Did that understanding draw upon your prior experience as to use of bilingual indications on products?---It was - I think I gave some evidence earlier, it was not uncommon for Hamilton's to be asked to have bilingual descriptions of the product and the indications in another language and we had certainly experienced that prior to that occasion. It wasn't something that was unusual. Was the answer to my question, yes, you did draw on that experience for your understanding?---Sorry, did - - - You did draw on that experience for your understanding?---Yes.
478 The correspondence and documents passing between the parties in the ensuing few years had none of the torrential character it was later to acquire. Relevantly for present purposes it included the following: (i) minutes of a meeting in Adelaide of 26 February 1991 which recorded that "copy of all advertising tabled by Dr Keung",
(ii) minutes of a further meeting in Adelaide of 11 March 1992 which recorded that (a) Dr Keung presented a 30 second advertising video for Urederm; and (b) the bottle label and packet design for another Hamilton product (Econozole Schampoo) "to be jointly done by Dr Keung (Chinese) and Hamilton";
(iii) a facsimile from Mr Lock to Dr Keung of 27 March 1992 concerning box packs of "Stingose Gel" tubes which said:
Should you "Box Pack" the tube in Hong Kong, Hamilton must vet and approve the artwork of the product box as Hamilton carries the "product liability" consequently must reserve the right to approve all artwork and statements made on such artwork.
(iv) a facsimile from Dr Keung to Mr Lock of 20 May 1992 requesting the change of a paragraph of the English language product indications for a Urederm sachet so as to read as Dr Keung specified;
(v) a reply from Mr Koerner to the 20 May facsimile which said:
Before finalising the artwork for the sachets, would you please clarify which "Indications" you want on the sachets? In your letter dated 20th May 1992, you set out a different wording under "Indications" compared to the "Indications" contained on our current product box - of which a copy is sent herewith for your comparison. While the difference in the wording is only slight, I think you will agree that it would be better if the wording on the product box and the sachet were the same, preferably as currently shown on the product boxes which are now being printed with the bar code.
It went on to advise that trademark for the brand name Urederm had been registered in Hong Kong;
(vi) a facsimile of 18 November 1992 reminding Dr Keung that the artwork for the English-French labelling for a product for Canada had to be approved by Hamilton "as was done for the Chinese/English 50 g labelling on the product box";
(vii) a facsimile to Mr Lock of 16 December 1992 which stated that the "local population is becoming familiar with the names Urederm and Stingose";
(viii) minutes of the Adelaide meeting of 14 April 1993 which recorded that Chinese labelling for Stingose and Hong Kong Urederm advertising to be supplied by Dr Keung and reference was made to the parties working "jointly" of the Econozole Shampoo "project" (later facsimiles illustrated that joint working in action);
(ix) a facsimile from Mr Koerner of 18 June 1993 regarding Dr Keung's proposed changes to the Stingose backer cards "which feature additional Chinese words" and which expressed agreement in principle with the design for two reasons one of which was:
(x) a facsimile to Mr Lock of 5 September 1993 noted that Dr Keung had been asked by three companies that imported 10% urea cream into Hong Kong "to sell the Chinese name of Urederm to them on a commission basis … I gave them a negative reply without even informing Hamilton … I fully understand that loyalty and faith are essential to a successful Manufacturer-Agency relationship";
(xi) a report of Mr Koerner of a visit he made to Hong Kong on 25-27 November 1993 in which he reported, amongst other things:
It is obvious that in Dr Keung we have found a real marketer. Although we refer to him as "distributor" this is really a misnomer because he uses J.C. Woo & Co to do the distribution.
The report described the volume and content of Dr Keung's advertising.
(xii) A facsimile of 27 September 1994 signed by Mr Koerner and noted by Mr Blake concerning the Canadian label for Urederm which stated:
We have noticed that the word "HAMILTON". Previously shown in bold letters on the pack has now been deleted and replaced with the distributors name, and the words "manufactured by" are to be added in the line preceding the Hamilton Laboratories details. This is OK by us as long as it is understood that Hamilton retains the right to the trade name UREDERM.
479 I would note in passing that in his affidavit Mr Blake made the observation: I would not knowingly have allowed AMC to advertise Hamilton's products by reference to a brand or mark which was not owned by Hamilton. To do so would allow that brand or mark (owned by a third party) to be associated with quality Hamilton products and, therefore, build goodwill in that name (rather than in the name of Hamilton's products). There is no sensible commercial reason why I would allow this to occur. I consider this to be no more than a self serving statement. I would note the following cross-examination of Mr Blake:
Now can I take you back in time further? You knew that the name which sounds like Fuyunhon or Tuyotoniing were being used as a brand name before June of 1999. You agreed with me before, didn't you?---Yes, on Hamilton products. Yes, on Hamilton products. Thank you. Can you now recall when you first became aware of that? Just tell me if you can't?---I'm sorry, I can't recall. Well, you would have known by March 1999 when Dr Ovcharenko went to Hong Kong, wouldn't you?---Yes, I was certainly aware that they were being used by AMC on the products.
He was taken to Dr Ovcharenko's business report which indicated Hamilton's products were not well known in Hong Kong pharmacies by their English name "as their Chinese names are totally different both in pronunciation and meaning". While acknowledging he read this, he attempted to explain away its significance by saying that he wasn't sure that Dr Ovcharenko "had interpreted it correctly". Mr Blake also acknowledged that Mr Koerner had told him some time before 1999 - and I infer this was probably in the early 1990's - that Hamilton products in Hong Kong were known by their Chinese, not English, names. 480 Sporadic exchanges similar to the above occurred over the next two and more years. The only five matters I need mention are, first, Hamilton was informed that the "Chinese name of Urederm" could not be used in Taiwan as it was monopolised by a brand of ointment; secondly, in AMC's correspondence with Hamilton there are occasional references to the "reputation of Urederm", "the brand name of Urederm", etc.; thirdly, in distributorship agreements with two of Mr Chung's HMC companies (HMC Canada and HMC Hong Kong) AMC described the intellectual property rights relating to the products etc as being AMC's (in the case of the Canadian company) and Hamilton's (in the Hong Kong case); fourthly, a theme in all of the correspondence was the need for the Chinese and English translations of product descriptions to match for the purposes of certification under the Australian Therapeutic Goods Administration scheme; and, fifthly, with the advent of Dr Ovcharenko in 1998 correspondence between AMC and Hamilton took on a much more formal tone and became increasingly voluminous. 481 There are two further matters to which it is necessary to refer. The first relates to the negotiation of the Distribution Agreement; the second, to AMC's registration of the two Chinese character marks in Hong Kong.
(a) The negotiations 482 Reference has already been made to Dr Ovcharenko's Business Report of late March 1999 following his visit to Hong Kong to open negotiations for the Distribution Agreement. In his meetings with Mr Chung of HMC prior to the 1-2 March meeting with Dr Keung, Dr Ovcharenko clearly acquired a detailed understanding of AMC's business and some at least of its practices. Or as he put it, "confidential information concerning the commercial channels and chain politics of [AMC]." For present purposes the Report noted: Our products are in stock of most pharmacies, however they are not well known by their English names, as the Chinese names are totally different both in pronunciation and meaning, and are based on play-on-words well received by the Chinese population.
483 The two presently relevant clauses are what became cl 23 and cl 31 in the executed Distribution Agreement. For present purposes it is sufficient to refer to cl 23 and cl 31.1 and 31.2 in their final form and, to avoid confusion, I will not refer to their numbering in earlier drafts. Clause 23 for all practical purposes remained unaltered from the version of the agreement sent to Dr Keung on 23 March 1999; cl 31 was altered significantly, as has been seen already, by the deletion of the then 31.1.3 and the substitution of a new subclause. They provide respectively: 23. Trade name 23.1 Distributor may market and sell the Products only under a label or product name designated by Supplier in Schedule 3. 23.2 Distributor may not register any corporate or business name or trademarks incorporating the Trademarks (or an adaptation of those names). 31. Trademarks 31.1 Supplier grants to Distributor the exclusive and unrestricted right during the Term to use the Trademarks in connection with marketing and selling Products in the Territory. 31.2 This agreement does not confer on Distributor: 31.2.1 any goodwill in the Products or the Trademarks; 31.2.2 any interests in the Products or the Trademarks.
484 I should note in passing that the insertion of the words "in Schedule 3" was done by Dr Ovcharenko in the 14 April 1999 draft revision. As is apparent on the face of the clause, the words give Schedule 3 uncommon importance in the scheme of the Distribution Agreement. Dr Keung was quick to appreciate the significance of this as his comment (below) on cl 23 in the 16 July 1999 draft version revealed. 485 The 23 March 1999 version received by Dr Keung is in evidence. It has on it handwritten notations made by him, he thought, around the end of March. Above cl 23.1 he wrote "Chinese name", below cl 23.2, "Chinese company name". As noted in the "General Chronology", in January 1997 AMC changed its Chinese name to, in Chinese characters, "Australian Fuyunhon Pharmaceutical Co Ltd". There was considerable marking around cl 31. As noted when considering the Contract claims, Dr Keung had considerable concern in not having any entitlement to compensation at the end of the licence for benefits to Hamilton from AMC's activities. That concern was evident in much of the handwritten notation on cl 31 and resulted ultimately in the new cl 31.1.3 being agreed. For present purposes I would note that written above cl 31.1 were the words "after this agreement is signed, trademarks of Chinese name for other products". In the margin beside cl 31 Dr Keung wrote "middle of the play, rules are set". He explained that "play" meant "game". In cross-examination he enlarged on this: … it's the middle of the play, the rules are set - because we have been advertising our Chinese marks and designed all the marks and correct all the uses on Hamilton products that now, if it changed, you know, about the trade marks, it's in the middle of the play and then we have to settle all this first, you know? Have to have a big discussion with Hamilton first which marks are ours and what do you mean by "their marks" and what goodwill and the goodwill belong to the 1 July 1999, the good year after 1 July 1999 we have to all clarify that and because, by 1 July 1999, AMC has gained a lot of goodwill. We have to clarify these points.
486 When he sent his 7 June 1999 comments on the Distribution Agreement, Dr Keung added the following after cl 23.2: 24.3 (This Chinese Trade Mark & Tradename on the product box is the property of Distributor.) After cl 31.1.3 he added a lengthy comment about compensation which opened with the sentence: "The Chinese tradenames are the property of Medic-care". 487 On 15 June, in the context of expressing concerns about advertising a particular Hamilton product in Hong Kong, Dr Keung commented in a facsimile to Dr Ovcharenko that: If our Chinese company or brand name "Fu Yuen Hong" is not well known by our consumers the sales would be much affected and we have to start the advertisement for Body Wash all over again. In his affidavit, Mr Blake commented of the above that it was "of particular concern". He went on to comment that AMC was unwilling to meet, so he instructed Dr Ovcharenko to send a further marked up version of the agreement to Dr Keung containing Hamilton's comments in response to his 7 June comments. Mr Blake's explanation in cross-examination on his "concern" and on Dr Keung's "unwillingness" was, to say the least, unconvincing. That marked up version was an attachment to an email of 29 June 1999. 488 In the interim, on 11 June, Hamilton instructed its patent attorneys to obtain a trademark in Hong Kong both for the English and the Chinese name ("Tuotoning") of Rubesal. As to the Chinese name, the attorneys were provided with AMC's Chinese characters for this purpose. An application for registration of the Tuotoning mark was lodged in Hong Kong on 26 June 1999. It is Mr Blake's evidence that Hamilton intended as well to register the Chinese character name for Fuyunhon. The Tuotoning application was unsuccessful, the Examiner indicating that mark was directly descriptive of the goods in question. This rejection occurred on 10 December 1999, but apparently was not conveyed to Dr Ovcharenko until 1 March 2000. I simply note that Mr Blake did not inform Dr Keung of the application or of its outcome. 489 Dr Ovcharenko's covering email to Dr Keung in response to his 7 June comments is curious. It indicated that several changes had been made to the draft agreement "in accordance to your remarks for you to confirm as requested". The response to cl 23 made no reference to AMC's comment (cl 23.3); it repeated cl 23.1 and cl 23.2 and commented under cl 23.2: We can't agree to deleting this because according to international law the Distributor may sell the products but the Manufacturer's name remains because it is our property and refers to critical trade mark issues. The apparent intent of this comment was to affirm cl 23.2 as it stood. The response to cl 31 related only to cl 31.3 (the no compensation clause). It said: "We cannot agree to change this." 490 On 16 July 1999 Dr Keung forwarded a revised version of the agreement to Dr Ovcharenko with "minor changes together with the explanations". 491 After cl 23.2 now appeared: [23.2] (This Chinese Tradename on the product box is the property of Distributor.) In fact the Chinese names on most of the products of Hamilton are our company name ever since we start trading with Hamilton. We acknowledge that all the trademarks in Schedule 3 are the intellectual property of Hamilton and will not make use of them in case Medic-care ceases to be the representative of Hamilton. The sentence in parenthesis only differed from that in Dr Keung's 7 June comments insofar as the word "Chinese" was now highlighted. The subclause itself was followed by Hamilton's comment in its 29 June version relating to cl 23.2 492 As to Dr Keung's comment on cl 31.3 a quite new comment appeared. It now made no reference to the Chinese tradenames and dealt directly with the compensation issue. As with cl 23.3, this comment was followed by Hamilton's 29 June comment on cl 31.3: "We cannot agree to change this." 493 Having received no response to his comments, Dr Keung asked Dr Cheng of AMC to follow up the matter with Dr Ovcharenko on 28 July 1999. A reply from Dr Ovcharenko was received the same day. It noted (inter alia) that the Distribution Agreement was with Mr Blake and he (Mr Cheng) would be contacted shortly. 494 Now occurred a sequence of events that allegedly have considerable importance in this matter in relation both to Dr Keung's credit and to the Chinese trademarks. 495 On 29 July 1999 Dr Ovcharenko sent an email to Dr Keung. On its face the email stated: Herewith please find my letter and last copy of Distributor's Agreement which we have changed. The email purported to have two attachments. The one was described as "Email 29.07.09 Dr Keung.doc", the other was the Distribution Agreement. It is Dr Ovcharenko's evidence that the 29 July letter referred to in the email also was signed by him and posted to AMC. 496 Dr Keung's affidavit evidence is that the Distribution Agreement was the only attachment to the email sent to him. He also said he first saw a copy of the 29 July letter in August 2006. It was provided to him by his solicitors and it was unsigned. His evidence about receipt of the email was that he was in China at the time and that he opened the version of the Distribution Agreement in his hotel's business centre. He returned to Hong Kong on about 5 August. 497 The 29 July letter was substantially composed by Dr Ovcharenko for comment by Mr Blake. As sent it was to be signed by Dr Ovcharenko (and it reads as such). In its final form the letter, which is curiously oblique, stated, insofar as presently relevant: · Rules and regulations on the Chinese Trade Name. Having analysed similar agreements signed by various international pharmaceutical companies with their distributors, we have discovered that in the importer country, the trade name of a pharmaceutical product is, as a rule, the property of the manufacturing firm, even in the cases where (for a number of reasons which we will not consider here for brevity) there exists a discrepancy between the initial name of the pharmaceutical product and the new name under which this pharmaceutical product is sold in the importer country. For example, the pharmaceutical product of the firm Janssen-Cilag familiar to you, SPORANOX (itraconazol 100mg) is imported to Russia under the Russian trade name of ORUNGAL (itraconazol 100mg). In both cases the trade name of the pharmaceutical product is considered the property of Janssen-Cilag. Otherwise, after the drug has obtained some popularity in the importer country, the distributor company, owning the rights to the trade name, could order itraconazol 100mg from some manufacturer company of a third country, and sell it under the Russian trade name - ORUNGAL with no legal difficulties whatsoever. As an example of legal security, let us consider the situation with our Rubesal. While studying the Hong Kong pharmaceutical market, I have discovered that the majority of sellers in pharmacies do not know the English name of Rubesal, and I suspect it is unknown to the majority of buyers. Therefore, if say, Australian MedicCare were to sell the Chinese tradename Rubesal to some company X, then our distributor's agreement would not be infringed, as Australian MedicCare would have sold only its intellectual property, which is not discussed in the Distributor's agreement (and not the actual pharmaceutical). At the same time, the company X, having established production of Rubesal using its Chinese trade name Rubesal, the technology of the manufacture of which has no patent protection, would be able to sell it easily in volumes of former sales of Australian MedicCare, thus obviously damaging the interests of the manufacturing company - Hamilton Pharmaceutical. At the same time, Hamilton Pharmaceutical, owning the rights to the Chinese trade name Rubesal would not be able to sell it to anybody without infringing point 9. 9. Exclusive The Distributor's rights under the Licence are exclusive and, without the Distributor's written consent (which the Distributor may refuse without reason), the Supplier may not: 9.1 sell Products in the Territory; 9.2 grant similar rights to a third party. (exclusive sub points (9.1, 9.2)) of the Distributor's Agreement. Hence the Distributor's rights are protected here. (Emphasis added.)
498 I should interpolate that, in cross-examination, Dr Ovcharenko accepted that in referring to the Russian trade mark name of a Janssen-Cilag product in the second and third paragraphs of the above quotation, he was drawing upon his prior experience in that company. 499 Dr Keung's evidence on the letter itself was that since it was so "striking … the content, if I've seen it I must have read it at least a few times … and then replied to Hamilton … I won't just remain silent." These responses, I would interpolate, are quite consistent with the behaviour demonstrated by Dr Keung from the advent of Dr Ovcharenko. 500 I would comment in passing that the paragraph of the 29 July letter which I have highlighted probably provides the explanation for Hamilton's covert attempt to obtain trademark registration in Hong Kong of the Chinese character name for Tuotoning which was used on the Rubesal packaging. 501 The Distribution Agreement sent by Dr Ovcharenko on 29 July set out cl 23 in its final form without making any comment and without including cl 23.3 from Dr Keung's 16 July draft to Hamilton. The proposed cl 31.3 in turn was no longer of any present relevance. 502 Dr Keung's evidence of his response to the draft was that he was not necessarily intending a cl 23.3 because cl 23 was concerned with the English marks; as long as Schedule 3 remained unchanged, there was no deadlock between AMC and Hamilton. The agreement related only to the English trademarks. He claimed that the cl 23.3 was automatically formatted as it was by his word processing system. I am asked by Hamilton to reject all of this as a deliberate lie and to find that the cl 23.3 was in fact intended to be a clause in the Distribution Agreement. 503 To complete the matter of contract negotiation insofar as presently relevant, Dr Keung sent an email to Dr Ovcharenko on 11 August 1999 which said that there should be "no problem for us to sign your final version of the Distribution Agreement".
(b) Registering the Chinese character marks 504 I have already referred to Hamilton's unsuccessful attempt, initiated on 11 June 1999, to register AMC's Chinese character marks for Tuotoning. It was likewise in the negotiation period that AMC sought to, and finally did, secure registration of the Fuyonhon mark, albeit it after it inserted the Chinese characters for "Australian" before the word mark. It subsequently registered the Chinese characters for "Australian Tuotoning". 505 Dr Keung's evidence is that in June 1999 he instructed his accountant, Simon Lui, to make an application for registration of the Fuyunhon trademark. However, in AMC's reply it had been pleaded that the instruction had been given to "AMC's trademark attorneys". Dr Keung's evidence in explanation of this discrepancy was unconvincing but, contrary to Hamilton's submission, I do not consider that it throws light on the question whether Dr Keung in fact received the 29 July letter. On 11 August the trademark application was lodged in Hong Kong. It was registered on 16 May 2000 with a priority date of 11 August 1999. He said it was coincidence that the application was lodged when it was. He had told his accountant to file it a long time ago. He did not tell Hamilton until August 2002 that he had registered the mark but this was not a deliberate delay. Hamilton should have known "it was ours" - "It's our trademark all along."
(c) A 2002 postscript 506 As will later be seen, the issue of ownership of the Chinese character marks and packaging came to a head in the context of the parallel importation issue. Hamilton having informed Dr Keung that it had supplied Urederm with Chinese characters to other customers, Dr Keung sent a facsimile to Mr Blake on 9 August 2002 indicating he "never dreamt" it would have so sold Urederm because AMC owned "the trade mark". Mr Blake countered that it was his understanding that the Chinese lettering on the labelling for use in Hong Kong was a translation of the English wording originally approved as part of the registration process. He added he was not aware that AMC had included any material on the products that it considered was its trade mark. Dr Keung's rejoinder of 19 August 2002 included the following: When you referred to our trade-marked logo, "Fuyunhon" in Chinese, you must realize that by signing a contract with our company, you have automatically recognized and accepted our name and Chinese logo because that is part and parcel of our entry in the HK Governmental Company Registry describing this legal entity called Australian Medic-Care Co Ltd. I explained the meaning of our logo to Brian, Fred, Dimitri and you in a few of our meetings in the past twelve years. The fact that we have also trade-marked our name and logo in Hong Kong is outside the scope of our two companies' contractual contents. Our trade-marking effort does not negate, alter or, in any way, release us from our two companies' contracts. The correct thing for Hamilton to do is not selling to third parties any products bearing our company's legal name and logo, not in Hong Kong, not in UAE and not even in Australia. Mr Blake responded in turn on 27 August 2002 that, if AMC claimed the Tuontoning (ie Rubesal) trade mark this was not acceptable to Hamilton and added:
It is most unusual for a distributor to add their own trade mark other than a company name and this can only be done with the prior agreement of the supplier. A Distributor is distributing the product of the Supplier. No trade marks or goodwill related to the products attaches to the Distributor. I am prepared to see if we can find a solution to this problem, but not under threat of legal action.
507 It is unnecessary to recount further the downward spiral in the parties' relationship over this matter. However, there are several other matters I should note for the sake of completeness. 508 First, as noted in the "General Chronology", Albert Chung of HMC reopened discussions with Hamilton with a view to replacing AMC as its Hong Kong distributor. A marketing plan HMC prepared and which was discussed with Hamilton in January 2003 acknowledged (i) the importance that AMC's Chinese Trade name had in marking out "the importance of the therapeutic effect" of Urederm, and in helping to create its popularity; (ii) that trade name was AMC's; and that if HMC was to take over the distribution of Hamilton's products, a new Chinese trade name would be needed. During the discussions with HMC, Mr Blake acknowledged there was an issue with AMC and the trademark. As the minutes recorded him saying: "Australian Medic-Care is taking control of our brand." 509 Secondly, consequent upon the emergence of the parallel importation issue and Dr Keung's allegations against Hamilton, the dimensions of Dr Keung's claims to intellectual property rights associated with the distributorship became apparent. On 6 January 2003 he said in an email to Mr Blake: To treasure our years of co-operation we propose to maintain the following with regard to our company logo: As long as AMC remains to be the sole distributor of Hamilton products in Hong Kong and China AMC will put our Chinese trademark FUYUNHON, my version of Chinese translation and my design in English on Hamilton products sold by our company. However, Hamilton should not sell any products bearing this logo and my copyright to any third parties unless prior approval has been obtained from AMC and the quantities delivered to them as well as their destination reported to AMC. Hamilton will be held responsible to safeguard that parallel importation cannot exist.
510 Finally, in two email communications with Mr Blake (one on 9 March 2005, the other on 4 April 2006), Dr Keung referred to "the communication" from Mr Lock telling him that Hamilton had registered Urederm as an English trademark in Hong Kong in 1992 and asking him if he should protect his Chinese mark or logo. In cross-examination he said that at each instance "the communication" was oral although that is hardly the sense in which the term is used in each email. While the statements made in these emails may well be untrue, I do not consider they have any bearing on the question to be determined by me. Nonetheless, I do think they bespeak, albeit in an improper way, the grievance felt by Dr Keung about Hamilton's claims to the marks.
Consideration 511 The substance of Hamilton's claim is captured in the following propositions drawn from the respondent's submissions. (i) AMC represented to Hamilton that, to maximise profit from the sale of Hamilton products in Hong Kong, it was necessary to display on the packaging for the products a Chinese language translation of Hamilton's English language product name and the product description. The representations were made orally by Dr Keung on behalf of AMC during meetings with Hamilton representatives and in the course of telephone conversations between 1990 and 1995. The fact of those meetings is common ground.
(ii) The applicant expressly represented to Hamilton that Fuyunhon was simply "the Chinese name of Urederm … because it is better for Mr Lock to understand". On the applicant's present case, that assertion is incorrect. That representation was repeated consistently.
(iii) Dr Keung represented to Hamilton that the Chinese language translations were literal translations of Hamilton's English language product names and product descriptions. AMC expressly or by its conduct represented to Hamilton that the Chinese words incorporated in the Chinese language artwork were a direct Chinese language translation of the English words displayed on Hamilton's products.
(iv) Dr Keung must have understood from his knowledge of the therapeutic goods scheme and other matters that Hamilton required him to perform a direct Chinese translation of the English language Hamilton product names and product descriptions when preparing the Chinese language artwork.
(v) Dr Keung was aware that Hamilton was exposed to product liability claims in respect of its products, and deduced that it carried product liability insurance. Because Hamilton had this exposure, it expressly reserved the right to approve all artwork and statements made on the artwork which was applied to its products. This reservation of rights was inconsistent with an assertion of rights in the artwork on the part of the applicant.
(vi) The Court can infer that, in reliance on AMC's conduct, Hamilton used the Chinese language translations, believing them to be literal translations of Hamilton's English language product names and product descriptions on the packaging of Hamilton's products sold to AMC pursuant to the Distribution Agreement. The Court can, in addition, infer that Hamilton permitted the applicant to put (and assisted the applicant in putting) the Chinese language trade names on its products not knowing that the applicant intended to assert, or was entitled to assert, proprietary rights in those names. Finally, the Court can infer that Hamilton relied, and reasonably relied, on AMC to perform a literal Chinese language translation of Hamilton's English language product names and product descriptions and to otherwise deal with Hamilton's intellectual property on behalf of Hamilton strictly for purposes authorized by Hamilton (pleaded at paragraph 17.5.2 of the Further Amended Defence).
(vii) The applicant must have appreciated between 1990 and March 2000 that Hamilton asserted, or believed that it was entitled to, ownership of the Chinese language translations of Hamilton's English language product names and product descriptions. The applicant should have disclosed its true intentions to Hamilton no later than 9 March 2000.
(viii) The representations induced, and were calculated to induce, certain conduct on the part of Hamilton. Specifically, they were intended to induce Hamilton to give its permission to the addition of Chinese language characters, and the Chinese language product indications, on Hamilton packaging and on Hamilton products, before they left Hamilton's premises in Australia.
(ix) Hamilton was misled and deceived. Hamilton clearly was not aware of the applicant's true intentions, as they have now emerged. Hamilton authorised AMC to perform the Chinese language translation on the strict understanding that AMC would perform a literal Chinese translation of the English language product name and product description for each product.
512 By way of preface, I should indicate that, as AMC has claimed both ownership of the Chinese character marks and copyright in the Hong Kong packaging, Hamilton's s 52 case makes allegations of contravening conduct in relation to both of these matters. The relief it seeks in relation to its cross-claim under s 87 of the TP Act relates only to the trademarks. For this reason my consideration of Hamilton's claim will focus primarily on the allegation of misleading or deceptive conduct in relation to the marks. AMC's copyright claim in relation to the packaging and Hamilton's defence to it will be considered separately below. 513 My own view of Hamilton's s 52 case can be stated relatively shortly. That case requires the finding of facts which I consider mischaracterise significant aspects of the context, dealings and exchanges of Dr Keung and Mr Blake and other Hamilton officers; it necessitates the drawing of inferences which I consider to be inappropriate or unavailable in the circumstances; and it is founded upon an all but blanket rejection of Dr Keung's evidence for reasons of credit. While I accept, that objection properly can be taken to particular aspects of Dr Keung's evidence in this matter, my criticisms of him do not warrant, and the character of the totality of his evidence neither permits nor justifies, the general rejection of his evidence (save where it has compelling independent corroboration). Dr Keung may, on occasion, have been less than truthful. He was not invariably and systematically so. In relation to the trademark aspect of this proceeding in particular, I have in the main accepted his evidence. 514 The 29 March 1990 meeting of Dr Keung with Mr Blake and Mr Lock in Adelaide is of critical significance to a proper understanding of the "trademark" issue. But that meeting itself needs to be put into context. Over the two years which preceded it, Dr Keung had established there were the makings of a market for Urederm in Hong Kong; had achieved significant sales of the product; had experimented with Chinese character brand names for Urederm and had settled upon the Fuyunhon name; had developed simplified, Chinese character, product indications which were put on Hamilton's products with stickers; and had, from early 1990, engaged in advertising and other promotional activities for Urederm: see "General Chronology" [36]-[46]. Throughout this period he was in no formal relationship with Hamilton, other than that of an occasional purchaser for resale. It was against that background that in early 1990 Dr Keung wished to explore the possibility of a long term relationship with Hamilton and this led to the 29 March meeting. 515 I am satisfied that, in presently crucial respects, the events at that meeting were such as described by Dr Keung in his evidence. The meeting itself was one at which Dr Keung had every incentive to cast himself in a favourable light as an innovative marketer who had an ability to use Chinese characters to sell products. He was given the opportunity to do so. I find he was questioned about his success in selling Hamilton products and the bases of it. I equally am satisfied he gave a fulsome account by way of response. This included an explanation both of his use of the Fuyunhon name and of its meaning; the use of the simplified Chinese character product indications which were attached with stickers to Hamilton's products; and of his advertising materials, copies of which were provided at the meeting. Mr Blake's evidence in cross-examination tends to confirm aspects of this as did Mr Lock's 10 April 1990 letter to Dr Choi. Further, I consider that the possibility that Dr Keung would have engaged in what can only be described as elaborate deception of Mr Blake and Mr Lock at this stage, is quite remote. 516 I equally am satisfied that Mr Blake was aware of, and happily acquiesced in, Dr Keung's development of "more consumer orientated indications" and that, having been told its meaning, he did not demur in any way to the use of the Fuyunhon character on Hamilton products. I infer that Mr Blake was more than willing to embrace the opportunity Dr Keung and his methods presented to Hamilton. It is unlikely that Mr Blake at that time considered what might be the practical consequence of this over time. 517 It was well understood at the meeting that Dr Keung's distributorship was to be directed at the Chinese reading community and that that necessitated the use of Chinese characters on Hamilton's products and packaging. What did not occur at that meeting or thereafter was that AMC was authorised to perform Chinese language translation on the strict understanding that it would perform a literal Chinese translation of the English language product name and product description for each product. Mr Blake and Mr Lock were made aware at the 29 March meeting both that the Fuyunhon character was not a Chinese translation of Urederm, and that the Chinese character product indications were Dr Keung's own creations. It was understood thereafter that the English language and Chinese language product indications should match in translation, but as subsequent practice more often than not indicated, it was the English language which Dr Keung matched with the Chinese and not vice versa. As with the "consumer orientated indications" discussed at the 29 March meeting, Hamilton was aware of this and both acquiesced in it and, on occasion, cooperated with Dr Keung subject to two provisos next to be noted. 518 As the 29 March meeting minutes exemplify, Dr Keung was ordinarily expected to develop the bi-lingual "product box" and artwork for Hamilton product (see eg the facsimile of 20 May 1992 and the reply to it at [478] above) though there clearly was intended to be varying levels of cooperative participation by Hamilton in this, as the Econozole Shampoo "project" demonstrated. Nonetheless, there were two well understood constraints upon the latitude given Dr Keung. These were, first, the need for the two language versions of the product descriptions to match for the purposes of certification under the Australian Therapeutic Goods Administration scheme; and, secondly, the right Hamilton retained to approve all artwork and statements made on it because of its exposure to product liability. Both of these constraints were reflected in cl 21.1 of the Distribution Agreement. 519 Nothing which transpired between the 29 March 1990 meeting and Dr Ovcharenko's visit to Hong Kong in March 1999 indicates any significant overt change in the respective understandings of the parties concerning the Chinese character names. Rather there is evidence which I consider is confirmatory of Dr Keung's explanations at that meeting. 520 Mr Blake was made aware by Mr Koerner in the early 1990's that Hamilton products in Hong Kong were known by their Chinese, not English names. Mr Koerner had visited Hong Kong in 1993 and met and dined with Dr Keung on several occasions. Dr Keung's evidence, which I accept, is that he told Mr Koerner then by reference to his advertising materials the meaning of most of the characters in the Fuyunhon mark. I should also emphasise that the mark as it appeared on Hamilton products was both stylised and prominent. Mr Koerner, who was a director of Hamilton at the time and whose knowledge for present purposes was Hamilton's knowledge, was not called by Hamilton to give evidence. I would also reiterate that, contrary to what Mr Blake said in his affidavit, both he and Mr Koerner approved AMC's use of its name on the packaging of Hamilton products and the deletion of Hamilton's name on the understanding "that Hamilton retains the right to the tradename UREDERM": facsimile of 27 September 1994 from Koerner to Keung. 521 Dr Keung on some number of occasions referred to the "Chinese name of Urederm" or, rarely, of other products (eg Stingose) in communications with Hamilton officers. Hamilton places no little reliance upon this usage. Considered in context and against the background I have described, I consider that, far from involving misleading or deceptive conduct, this usage reflected no more than an obvious device for referring to Hamilton products by reference to the Fuyunhon mark that appeared prominently on them. That association might have provided reason for pause for other reasons but, in the context of what was then a cordial, cooperative and deepening relationship, it did not do so. Given their knowledge of the true state of affairs about the meaning of Fuyunhon, none of Mr Blake, Mr Koerner or Mr Lock could have been induced into error by Dr Keung's shorthand language. It is, in consequence, unsurprising that there was no questioning in response from Hamilton when Mr Lock was informed by Dr Keung on 5 September 1993 that he had been asked by three companies that imported 10% urea cream into Hong Kong "to sell the Chinese name of Urederm to them". 522 I should also note in passing that Hamilton seeks to derive comfort in its case from an email of 24 October 2003 from Dr Keung to Dr Ovcharenko in which he said: With regard to trademark of Urederm in Canada, I must say again that I am the type of person who respects intellectual property of other people. Even in HK this belongs to Hamilton even if you did not trademark it. We sell your products only. We have no other intention apart from increasing sales through promotion. We do not reap the effort of other people by any means. Credibility is very important to me. Dr Keung was aware that Hamilton had registered "Urederm" as a trademark in Hong Kong. This email in my view is clearly referring to the trademark of this word. The comment "even if you did not trademark it" has to be understood accordingly. 523 I should indicate as well that I attribute no material significance to the varying ways in which Dr Keung referred to the ownership of intellectual property in his sub-distributorship agreements with Dr Chung's HMC companies. 524 The point at which the parties' relationship underwent significant change, as I earlier indicated, was when Dr Ovcharenko took over Hamilton's managing of the AMC relationship and Mr Blake's involvement in that was, seemingly, heightened. A cordial, relational contract was transformed quickly into a distrustful, formal one. 525 I have referred on a number of occasions to the observation of Dr Ovcharenko in his Business Report to Mr Blake of late March 1999 to the effect that Hamilton's products were not well known in Hong Kong by their English names and that the "Chinese names" were totally different in pronunciation and meaning and were based on a "play-on-words" well received by the Chinese population. While the full significance of that state of affairs may not have been apparent to Dr Ovcharenko at the time of the Report - I express no view on that - it clearly became so when he received Dr Keung's 7 June 1999 comments on what became cl 23 and cl 31. Dr Keung's comment in parenthesis after cl 23.2 was: "(This Chinese Trade Mark & Tradename on the product box is the property of Distributor)". A substantially similar comment opened the comment on cl 31. By 11 June Hamilton had instructed its patent attorney to obtain trade marks in Hong Kong for Rubesal and for AMC's Chinese character name for Tuotoning. To put it shortly, Hamilton was trying to steal a march on AMC. It failed in that endeavour. However, the concern it now entertained found expression (albeit confusedly) in Dr Ovcharenko's email letter of 29 July 1999 to Dr Keung: see below. 526 While Dr Keung later successfully obtained registration of marks incorporating the Tuotoning and Fuyunhon characters, it is quite clear that on 7 June he was again asserting that at least as between Hamilton and AMC those characters belonged to AMC. I would add they could properly be so described from before the first letter of appointment in 1990 and Mr Blake and Mr Lock ought reasonably have appreciated as much at the 29 March 1990 meeting. 527 There was considerable cross-examination by both sides relating to whether what I will call the Fuyunhon and Tuotoning marks were "product names", "brand names", "trade names" or "trademarks". I have not found this to be of particular help in the matter. Whatever their precise legal status in Hong Kong prior to their registration as trademarks - a matter on which there is no evidence before me - there is in my view no room for doubt that they were, and as between the parties were known to be, Dr Keung's creations. As I have found, he explained their meaning to Mr Blake, Mr Koerner and Mr Lock. Mr Black and Mr Koerner were well aware that they provided the names by which Hamilton's products were promoted and known in Hong Kong and that those names were not translations of Urederm and Rubesal. They acquiesced in this state of affairs. 528 Mr Koerner, as I have indicated, did not give evidence. If it be the case - and I consider it likely - that Mr Blake's knowledge and appreciation of the above matters had passed from memory and was later replaced with a quite different attitude and understanding more favourable to Hamilton's interest, this can be of no avail to Hamilton. Whatever had by 1999 (or, more probably, by some later date) induced Hamilton's alleged errors or misconceptions about the marks and the process of translation to be followed, AMC bore no responsibility for it. 529 These conclusions, together with my findings in relation to the manner in which the English and Chinese translations of the product indications/descriptions were matched by Dr Keung are sufficient to dispose of Hamilton's pleaded claim of misleading or deceptive conduct. I consider it appropriate, though, to add the following observations given the attention that has been devoted in this matter to the negotiations leading to cl 23, to the 29 July 1999 letter; and to the lodging of a trademark registration application for Fuyunhon on behalf of AMC on 11 August 1999. 530 Whatever their legal status in Hong Kong when Dr Keung made his 7 June 1999 comments (no trademark application had by then been made by Dr Keung), Hamilton had been put on notice of Dr Keung's claim to the Fuyunhon and Tuotoning marks. Hamilton was in no position to add these names to its Schedule 3. They were not its trademarks. Equally it had no existing contractual rights with which to counter AMC's claims. Without warning to Dr Keung, Hamilton sought to take advantage of him and of a state of affairs it had acquiesced in for over a decade. It sought registration of the Chinese character Tuotoning mark. Whether its conduct would have been actionable if it had succeeded in obtaining registration is not a matter on which I need express a view. I would note, though, that contract law's implied duty of good faith and fair dealing tends to have its greatest salience in sanctioning opportunistic behaviour in long term, relational contracts. 531 I do not consider that the exchanges between the parties in relation to the various drafts of what became cl 23 and cl 31 of the Distribution Agreement are of particular present significance save for putting Hamilton clearly on notice of AMC's claimed entitlement to the two marks. Dr Keung's explanation may be thought unconvincing as to why his 7 June 1999 comment on cl 23 was prefaced with the numbering [23.3], the words he added, it should be noted, were in parenthesis in any event. Hamilton's later comment, "We can't agree to deleting this" etc while seemingly a response to cl 23.3 was, on analysis of the sequence of drafts, clearly related to changing cl 23.2 (which is not presently relevant). It can be disregarded. Dr Keung's 16 July 1999 comment after cl 23.2 is, in my view, revealing. It warrants repetition: [23.3] (This Chinese Tradename on the product box is the property of Distributor.) In fact the Chinese names on most of the products of Hamilton are our company name ever since we start trading with Hamilton. We acknowledge that all the trademarks in Schedule 3 are the intellectual property of Hamilton and will not make use of them in case Medic-care ceases to be the representative of Hamilton. 532 Hamilton deleted this proposed cl 23.3 in its 29 July draft. I should add, though, that I am not satisfied that Dr Keung actually was prepared to press the first sentence of the above quotation as a sub-clause. His evidence was that he was not necessarily intending a cl 23.2. My own view is that while he would have welcomed its inclusion, he would not object to its rejection. The third sentence contained AMC's safe haven as Dr Keung well appreciated. 533 The 29 July 1999 email letter (which Hamilton claims was sent as an attachment with the draft Distribution Agreement of that date) is oblique and confusing. It clearly conveys a rejection of any proposed clause in the Distribution Agreement which would admit, or acknowledge AMC's ownership of "Chinese tradenames" used for Hamilton products. However, it does not expressly deny AMC's claimed entitlement to those tradenames. It refers to the agreements of international pharmaceutical companies and, inferentially, to what they provide in relation to products being sold under a new name in an importer country. However, no positive proposal is advanced in the letter for a provision which would put Hamilton in the same position as the international pharmaceutical companies to which reference is made. If a present entitlement to AMC's marks was being claimed here even absent some express provision to that effect, it was quite oblique to say the least. Then there are these curious paragraphs: As an example of legal security, let us consider the situation with our Rubesal. While studying the Hong Kong pharmaceutical market, I have discovered that the majority of sellers in pharmacies do not know the English name of Rubesal, and I suspect it is unknown to the majority of buyers. Therefore, if say, Australian MedicCare were to sell the Chinese tradename Rubesal to some company X, then our distributor's agreement would not be infringed, as Australian MedicCare would have sold only its intellectual property, which is not discussed in the Distributor's agreement (and not the actual pharmaceutical). At the same time, the company X, having established production of Rubesal using its Chinese tradename Rubesal, the technology of the manufacture of which has no patent protection, would be able to sell it easily in volumes of former sales of Australian MedicCare, thus obviously damaging the interests of the manufacturing company - Hamilton Pharmaceutical. At the same time, Hamilton Pharmaceutical, owning the rights to the Chinese trade name Rubesal would not be able to sell it to anybody without infringing point 9. (Emphasis added.) This could well be read as describing what could occur if the Distribution Agreement gave the Chinese character tradename for Rubesal to AMC. But, contrarily, it could be read as describing the then status quo as asserted by AMC - hence the possible significance of the first highlighted clause. Or it could be read as an assertion by Hamilton to "ownership" of the rights to the Chinese name Rubesal - hence the second of the highlighted sentences. Of course what the email does not do is reveal Hamilton's outstanding trademark application for that very tradename. 534 Despite what Hamilton in its submissions says the letter made clear to Dr Keung (beyond rejecting the proposed cl 23.3), the letter itself is confused and confusing and made the more so in light of Dr Keung's clear appreciation of the significance of Schedule 3 when he made his 16 July comments on cl 23.3. 535 Dr Keung accepted there would be no cl 23.3 in the Agreement as his acquiescence in the form cl 23 took in the 29 July draft - an acquiescence confirmed in his email to Dr Ovcharenko of 11 August 1999. That acceptance cannot be tortured into an agreement at the time that he had no rights to the Chinese marks or that Hamilton did. That was left as a matter untouched by the proposed agreement. 536 What can be said of the email, though, is that if it had been received by Dr Keung it would, I consider, have alarmed him as to the security of his claimed entitlements to the marks. 537 This brings me to the much agitated question of whether Dr Keung received and/or read the 29 July letter said to be an attachment to the email of that date, and the hard copy version of it said to have been posted to him. I would have to say that, despite Hamilton's submissions on this issue, I do not attribute to the email letter the significance Hamilton ascribes it - save possibly in relation to the issue of Dr Keung's credit. Dr Keung's evidence is that he did not receive the hard copy letter. Equally, he says that while he received an email of 29 July 1999 the draft distribution agreement alone was attached to it; there was no attached letter notwithstanding, I would note, that the email listed and referred to two attachments. 538 It is unnecessary for me to determine whether either form of the letter (or both) was in fact received by Dr Keung. If a version was received, then Dr Keung gave untrue evidence on this matter. As I earlier indicated that would not be the only instance when such occurred. I would say, though, that by this time Dr Keung's loss of confidence in Dr Ovcharenko was increasing and receipt of the email/letter would have compounded this. While I would not in any way condone his resort to untruth (if such was the case), I consider explicable his taking steps to protect and retain that which he considered belonged to AMC. 539 Receipt of the email letter or the hard copy would have alerted Dr Keung to the vulnerability of his claim to the marks and, I consider, would probably have been the catalyst to his then applying to have the Fuyunhon character mark registered. While that action would have been a step in consolidating his position in relation to the mark, his claimed entitlement vis-ŕ-vis Hamilton remained unchanged. Far from engaging in deceptive conduct he would, unknowingly, have been protecting AMC from Hamilton's opportunistic behaviour. If misleading or deceptive conduct was being engaged in the circumstances, it would have been by Hamilton. 540 I would add that Hamilton submits that the 29 July letter called for an answer: "Silence in the face of it was inappropriate." While silence may have been an uncharacteristic response from Dr Keung (assuming he received it), he was neither obliged to reply, nor as I earlier noted, could he be taken as having acquiesced in what the letter said beyond the rejection of a cl 23.3. If Hamilton engaged in self-deception because of Dr Keung's silence, he cannot be held responsible for that. In any event, Hamilton was prosecuting its own strategy to protect its own interests, a strategy which failed when its trademark registration application was refused. 541 I earlier indicated that I would not permit Hamilton to prosecute its unpleaded s 52 claim relating to Dr Keung's non-disclosure of his application for registration of the Fuyunhon mark. Though my reasons above are skeletal, they indicate in short form why I consider that claim would have failed. 542 I should add for the sake of completeness that, given the provenance and use made of the Chinese character marks from 1989, the present would in any event be an inappropriate one for the making of a transfer order of them to Hamilton under s 87 of the TP Act, even if Hamilton, contrary to my view, could have achieved some measure of success on its unpleaded case. 543 I reject Hamilton's TP Act claim.
AMC'S COPYRIGHT CLAIMS 544 These claims are part of a number of claims arising out of sales made by Hamilton to customers other than AMC, of Urederm and Rubesal products which used what are described in AMC's pleading as AMC's "Hong Kong Packaging" and "Australian Packaging". 545 They are said in the FASC (at paras 28A and 28B) to be: 28AThe Hong Kong Packaging comprises at least the following material works: 28A.1 the Chinese language product indications for Fuyunhon 10% urea cream (Urederm); 28A.2 the Chinese language product indications for Tuotoning analgesic balm (Rubesal); 28A.3 the Fuyunhon Trade Mark; 28A.4 The Tuotoning Trade Mark; and 28A.5 the design, layout and get-up of the Hong Kong Packaging. 28B The Australian packaging comprises at least the following material works; 28B.1 the English language product indications for Urederm. (Emphasis added.) Copyright is claimed in both of these: FASC paras 29-30A. For ease in exposition, I will refer to them collectively as "the AMC Packaging" although it will on occasion be necessary to differentiate between the two. 546 Two matters should be emphasised at the outset. First the AMC packaging for any given product consisted of an exterior, usually box, component and a separate, usually tube, component. The AMC Packaging was for the most part, but was not exclusively, confined to the box component. Some tubes carried material in which copyright is claimed. 547 Secondly, the complete packaging for products that used the AMC Packaging itself had two components. These were (i) at least some elements of the AMP Packaging and, (ii) in major part, the packaging and artwork Hamilton employed for its products. 548 Thirdly, no copyright claim has been made in respect of the English language product indications of Rubesal, though sales of Rubesal are otherwise a subject of complaint in the other causes of action noted below.
The Claims 549 Put somewhat inexactly, AMC asserts that Dr Keung designed and created the AMC Packaging and did so for AMC (both prior to and after its formation). It was the copyright owner. In selling product (a) to Crafers, (b) to Pharmalines (in the United Arab Emirates) and (c) otherwise in Australia using the Hong Kong Packaging and/or the English language product indications of Urederm, Hamilton both infringed AMC's copyright (Copyright Act 1968 (Cth), s 36(1)) and was guilty of conversion in relation to the infringing copies sold (Copyright Act, s 116). 550 It will be necessary to deal with these separately below. I would note at the outset, though, that the loss and damage pleaded to have resulted from these wrongs is identical and is said to be (FASC paras 62 and 69): 62.1 AMC has lost the benefit of the profit on the gross sales which AMC would have made from 2000 but for Hamilton's infringement of AMC's copyright in the Hong Kong Packaging. 62.2 AMC has not marketed the Products as aggressively as it otherwise would have and has, as a result, lost the benefit of the profit on the gross sales which AMC would have made but for the reduced marketing expenditure. 62.3 AMC has lost the advertising expenditure wasted and thrown away. 62.4 Further particulars will be supplied after discovery, inspection and the service of expert reports. 62.4 AMC relies on the expert report of Mr Jorgensen dated 13 December 2007. I should add that the same loss and damage is particularised for four further causes of action alleged to arise out of the circumstances of Hamilton's supply to Crafers etc of product using elements of the AMC Packaging. These claims were for breach of contract (FASC paras 39-40), two distinct contraventions of s 52 and s 53 of the TP Act (paras 41-44; paras 45-48) and for passing off (paras 49-56).
Factual Background 551 In his first affidavit Dr Keung provided an extended outline, with accompanying English language translations of his adoption of the Fuyunhon and Tuotoning marks and of their use; of the evolution of the Chinese language product indications and of their translation back into English; and of his request for colour changes in packaging. The process he employed in relation to product indications reflected that which I described when dealing with the trade mark claim above. Within the constraints that (a) the two language versions of the product indications needed to match (a TGA scheme requirement); (b) Hamilton retained the right to approve all statements made on the packaging because of its exposure to product liability; and (c) the product indications were contrived by the nature of the product manufactured by Hamilton, Dr Keung exercised the authorial freedom and responsibility to develop the "more consumer oriented indications" he was afforded at the 29 March 1990 meeting. As I have already found he had by then developed his Fuyunhon and Tuotoning marks, the meaning of the former at least being explained at that meeting. 552 Indicative of the evolution in the product indications he inherited from Hamilton and then recast were those for Urederm. Up until 1990 Hamilton's version was: A pleasant soothing, lubricating cream as an aid in the treatment of chronic dry skin conditions including Ichthyosis, Xeroderma, Hyperkeratosis, Atopic Eczema. By 1992 the new English version developed by Dr Keung as translated from the Chinese characters he then employed on the packaging was:
For the treatment and prophlaxis of Housewife Dermatitis (Contact Irritant Dermatitis), "Winter Itch" in Aged Patients, Pruritus due to Chronic Dry Skin, Winter "Chapping", Infantile Eczema, Atopic Eczema, Ichthyosis and Hyperkeratosis.
553 Small but significant adaptations were later made to the indications either because of requests from the Hong Kong regulatory authorities or because Dr Keung saw utility in a further refinement. The 1992 indications reflected the conditions and the markets Dr Keung had in mind in marketing Urederm. As he indicated in an email to Mr Blake of 20 June 2000, he added new uses for Urederm such as Housewife Dermatitis, Winter Chapping, etc - … after I had read the clinical papers related to them and got the advice from the dermatologists, otherwise we cannot achieve the present sales of this item. The email went on:
All brands of urea cream sold in Hong Kong have our version of the indications on their cartons now, including that one manufactured by Upjohn.
554 Independent evidence of the inspiration informing the indications selected, especially when used along with the Chinese trade name in the early advertising of Urederm, is to be found in comments of HMC in its 2003 market plan which it presented to Hamilton, as it sought to replace AMC as Hamilton's Hong Kong distributor. It noted (at 2.2.1): Though its major indication is for dry skin care, it began in catching patients with contact dermatitis, in particular, the housewives who are sensitive to detergent. In Hong Kong, it is a common skin problem to the great concern among the female. Before that, skin lotion seemed to be the only choice but not a right agent. … Afterwards, when promotion extended to the elderly, its real effect on the ichy skin problem in winter, made it more popular. It was the first urea cream to concentrate at this market niche, through the direct approach to the end users, not from the effect of doctor's prescriptions. Then came the Chinese trade name, has marked out the importance of the therapeutic effect, helped to create popularity through the media propaganda.
555 The first occasion upon which Dr Keung appears explicitly to have asserted copyright in the AMC packaging was on 19 August 2002. Prior to the issue of parallel importation this seems not to have been a matter of conscious attention by the parties. 556 It is important to emphasise Mr Blake's understanding of the copyright question. He says in his first affidavit (at para 231): As set out in correspondence between Hamilton and AMC, Hamilton held the view that Hamilton was the owner of the bilingual packaging for its products and that, accordingly, Hamilton was entitled to sell products in bilingual packaging to any customer so long as that customer was not located in an exclusive distribution territory (i.e. a territory subject of a distribution agreement between Hamilton and one of its distributors) or, alternatively, so long as Hamilton did not grant rights to that customer to sell the Hamilton products into an exclusive distribution territory.
557 The final factual matter to which I need refer is that on 28 October 2006 Dr Keung and AMC entered into a deed under which Dr Keung, as "author" and "beneficial owner" of the copyright of various versions of the AMC Packaging for Urederm created between 1992 and 1999, assigned all his intellectual property rights in those works to AMC. The assignment extended to Dr Keung's rights "to sue for all past infringements of copyright in the works and to retain all damages and costs awarded". Though the tender of the assignment was a late one, I have admitted it over Hamilton's objection.
Copyright ownership 558 As pleaded AMC's case is that it is the copyright owner of both the Hong Kong Packaging and the English language product indications for Urederm. It is claimed that Dr Keung was a director of AMC and designed and created the respective works on behalf of and for the benefit of AMC and/or its predecessors. AMC, as earlier noted, was incorporated on 21 December 1990. 559 AMC's copyright in Australia in the Hong Kong packaging is said to subsist by virtue of the fact that (FASC para 29): 29.1the Hong Kong Packaging was first published in Hong Kong; 29.2Hong Kong is a member of the World Trade Organisation; and 29.3 in the premises, and in accordance with Reg 4(1) of the Copyright (International Protection) Regulations 1969 (Cth), the provisions of the Copyright Act apply to the Hong Kong Packaging as though it were an Australian work. See also FASC para 30 for an alternative basis founded on Dr Keung being a citizen of Hong Kong. 560 AMC's copyright in the English language product indications for Urederm was said to subsist by virtue of their first publication in Australia. 561 Hamilton's defence in substance reflects its defence to the trademark claim and, in particular, that AMC was only authorised to perform literal translations into Chinese characters of Hamilton's English language product name and product indications. It goes on to assert that the Chinese language artwork was a direct translation of copyright work owned by Hamilton or, else if it went beyond a literal translation it was, and "improvement or adaptation" of the "Products" for the purposes of cl 30.2 of the Distribution Agreement and so belonged to Hamilton. It admits that copyright subsists in the English language product indications for Urederm by virtue of their first publication in Australia. It generally denies AMC's claim, but proposes cascading possibilities of ownership of either or both of the Hong Kong packaging and the English language product indications. 562 These possibilities, seen in the context of Hamilton's defence, assert, first, that Hamilton is the owner because the translations were literal translations or else were improvements for adaptations of "Products" for the purposes of cl 30.2 of the Distribution Agreement: see FAD paras 25.5, 26.2 and 31.4. Clause 30.2 provides that any improvement or adaptation of Products made or discovered by Distributor (whether or not patentable) is the property of the Supplier. "Products" in turn are defined to mean products defined in Schedule 2. That schedule identifies the various products the subject of the Distribution Agreement. 563 The second possibility - that copyright is jointly owned by Hamilton and Dr Keung: FAD para 32.3 - seems to suggest, implausibly, that the works either are "works of joint authorship" which s 10(1) defines to mean - … a work that has been produced by the collaboration of two or more authors and in which the contribution of each author is not separate from the contribution of the other author or the contributions of the other authors. or that, in some unexplained fashion, Keung had bound himself in preparing the artwork and product indications, to act in the joint interest of himself and Hamilton. Again I emphasise that the case has not been pleaded by any party on the basis that there was a joint venture in which, for some purposes at least, they agreed to advance their mutual as distinct from their several interests: cf Gibson Motorsport Merchandise at [11]-[16]. 564 The third possibility - ie Dr Keung is the owner: FAD para 32.4 - is considered below: see "Consideration". 565 Hamilton has pleaded that AMC was in a fiduciary relationship with Hamilton in virtue (a) of Dr Keung's authorisation to translate literally, his alleged representations and non-disclosures relating to the Chinese marks and literal translations and (b) of the trust and reliance placed on AMC by Hamilton and of its corresponding position of vulnerability: FAD para 17.5. Hamilton has gone on to plead that if intellectual property was created in the "Chinese Language Artwork", AMC holds that on constructive trust for Hamilton: FAD para 28.4. I would emphasise that this claim is limited to the Chinese Language Artwork and does not extend to the English language product indications. A like claim to the trademarks was abandoned prior to final submissions. The written submissions on the above fiduciary relationship and consequential constructive trust claim are slight to the point of being perfunctory.
Applicable principles 566 For the purposes of the ownership claims that the material works comprising Hong Kong packaging for Urederm are artistic and/or literary works and the English language product indications for Urederm are a literary work, only the following matters require note. First, subject to the question whether the Chinese language product name and product indications are simply direct translations from the English language name and indications, it appears to be conceded that the Hong Kong Packaging and English language product indications for Urederm were original artistic and/or literary works for the purposes of s 32(2) of the Copyright Act. This acceptance reflects, as I will indicate, my own view of the matter. Secondly, it is conceded that as the Hong Kong packaging was first published in Hong Kong and as Hong Kong is a member of the World Trade Organisation, the provisions of the Copyright Act apply to the Hong Kong Packaging as though it were an Australian work: see regs 4(1) of the Copyright (International Protection) Regulations 1969 (Cth); see also reg 4(3) which is also relied upon in relation to Dr Keung as a citizen of Hong Kong. Thirdly, it is also conceded that copyright subsists in the English language product indications for Urederm by virtue of their first publication in Australia: FAD para 30.7.
Consideration 567 The evidence is clear that the Chinese language product name for Urederm and its product indications were not simply literal translations of the English language name and indications originally compiled by Hamilton. It equally is clear in relation to the English language indications used after 1992 for Urederm, that the process of translation was from Chinese to English and not vice versa. 568 I have referred on a number of occasions to the latitude given Dr Keung in developing "consumer orientated product indications" in Chinese characters. I am satisfied that the Chinese Language product indications were an original literary work. While they consisted essentially of sequentially listed indications in a literary form, obvious skill, judgment and some research were employed in the choices made of some number of the Chinese characters used. The language of science was supplemented with that of popular communication. The compilation had the requisite degree of "originality": see generally, Ricketson, The Law of Intellectual Property: Copyright, Designs and Confidential Information, [7.40] ff; Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465. The English language indications are far from a "slavish copy" of Hamilton's initial indications: cf Interlego AG v Croner Trading Pty Ltd (1992) 25 IPR 65 at 96-97. 569 Dr Keung clearly was the author of what I have collectively called the AMC Packaging. It is not necessary for me to enter upon whether such works as he may have produced prior to AMC's formation in December 1990 were held on trust for a company to be formed: cf A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478 at 491-2. I simply note there is no evidence to this effect. I likewise have no evidence of his having a contract of service with AMC after December 1990 pursuant to which the AMC Packaging was created: cf Copyright Act, s 35(6). However, I am satisfied that works presently in issue relating to packaging for Urederm were created after 1990. It is, for example, Dr Keung's evidence that the real departures in the Urederm product indications were only implemented in 1992. Importantly, I am not prepared to infer that in creating the works, Dr Keung did so as trustee for AMC. There is no documentary evidence corroborating any declaration of trust. There is, in contrast, documentary evidence prior to the October 2006 assignment of the Urederm copyright works in which Dr Keung clearly asserted his own copyright. So, for example, in the email to Mr Blake of 6 January 2003 he said: As long as AMC remains to be the sole distributor of Hamilton products in Hong Kong and China AMC will put our Chinese trademark FUYUNHON, my version of Chinese translation and my design in English on Hamilton products sold by our company. However, Hamilton should not sell any products bearing this logo and my copyright to any third parties unless prior approval has been obtained from AMC. (Emphasis added.)
570 The evidence does not disclose any assignment by Dr Keung, or any surrender, of his copyright ownership to Hamilton. Subclause 30.2 of the Distribution agreement dealing with any improvement or adaptation of "Products" is of no avail to Hamilton. Construed in its context, what the subclause deemed to be the property of Hamilton was any adaptation or improvement of the particular commodities (Urederm, Rubesal, etc) that were the subjects of the Distribution Agreement. 571 I equally am not satisfied that Hamilton is entitled to assert beneficial ownership of the AMC Packaging in consequence of any breach of fiduciary duty owed it by AMC. To analyse this matter in any depth would require a disproportionately lengthy treatment of the relevant law, the more so because the alleged fiduciary is not Dr Keung. AMC has not addressed the issue at all. Hamilton has made no cross-claim in relation to the copyright works. Its submissions on this matter are in essence, encapsulated in the following paragraph: [T]he parties intended that Hamilton was to be the beneficial owner of the work that Hamilton and AMC undertook in preparing the product indications and packaging. AMC agreed to act for Hamilton's benefit in revising the form of the packaging. It would be inequitable and against good conscience for the Dr Keung to assert ownership of the copyright against the respondent: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [102]. Given all the surrounding circumstances, Hamilton could reasonably have expected that Dr Keung would act in Hamilton's best interests with respect to the alterations to the packaging. Hamilton placed its trust and confidence in Dr Keung: Bulun Bulun and Another v R&T Textiles Pty Ltd (1998) 86 FCR 244 at 261 per von Doussa J. In the alternative, AMC was to act only for Hamilton's and AMC's mutual advantage: Bulun Bulun and Another.
572 This submission was based primarily upon the same types of dealing between Dr Keung (for AMC) and Hamilton and upon the alleged non-disclosures, that I earlier found could not support Hamilton's s 52 claims in respect of the literal translation of the product names. 573 It was open to Hamilton and AMC to cast their contractual relationship in a way which could, for certain purposes at least, have obliged AMC to act in Hamilton's interests alone or, distinctly, in their joint interests: cf Gibson Motorsport Merchandise at [7]-[16]. They chose to formalise their relationship as one of supplier and distributor, a type of relationship which characteristically is designed, subject to contractual limitations, to serve the several interests of the participants: see Hospital Products Ltd v United States Surgical Corporation; Rickel v Schwinn Bicycle Co. The Distribution Agreement, and the parties conduct under in it in relation to the packaging was quite characteristic of this. Dr Keung was permitted to serve AMC's interests in selling products it acquired from Hamilton, by utilising artwork and language which he considered would facilitate the sale of those products in the area of the Agreement, so furthering AMC's own interests. Hamilton, in turn, would thereby have its own interests served to the extent that enhanced sales by AMC would be likely to lead to enhanced orders from Hamilton. While AMC was given latitude in the language so used, Hamilton in turn was able to protect its own interests in this matter. It retained for itself a right to approve all statements made on the packaging because of its exposure to product liability and it insisted that the two language versions had to match (to comply with requirements of the TGA scheme). There was nothing fiduciary in this arrangement though it doubtless required elements of trust, cooperation and reliance by the parties if it was to work effectively. But these element of themselves did not turn a non-fiduciary contractual relationship into a fiduciary and personal one outside of, and potentially inconsistent with, the contract itself: cf Gibson Motorsport Merchandise at [11]. 574 The parties were so circumstances by their contract and in their relationship in consequence of it, that Hamilton had no entitlement reasonably to expect that AMC would act in Hamilton's interests to the exclusion of AMC's own self interest in relation to the Hong Kong Packaging or the English Language product indications for Urederm: see News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 at 538-541. 575 Finally, Dr Keung was the original owner of the copyright works. If he had remained such, AMC's copyright claim would have had no foundation. However, some at least of the copyright works (ie those relating to Urederm created between 1992 and 1999) were assigned to AMC in October 2006. In respect of these AMC can maintain its copyright claims. For ease of exposition I will hereafter call the assigned material "the Urederm Labels". These I would note contain, amongst other things, both the English language and Chinese character versions of the product indications.
BREACH OF COPYRIGHT 576 AMC's claim, as so reduced to the copyright works assigned to it, is that Hamilton made unauthorised reproductions of what I have called Urederm Labels and so breached Dr Keung's copyright in those labels for which AMC now sues as assignee. AMC acknowledged, though, that since 1992 it authorised Hamilton to reproduce such labels for the purpose of packaging products to be supplied to AMC. As put in its submissions, AMC claims that each unauthorised sale Hamilton made of Urederm was a publication within s 31 of the Copyright Act. The sales to Crafers, Pharmalines and "[o]ther undisclosed persons in Australia were infringements". AMC also submits that Hamilton should be ordered to discover all of its records of Urederm "incorporating the product descriptions authored by Dr Keung and sold to third parties (ie not AMC)". 577 Hamilton's response to the breach claim for present purposes is twofold. First, the pleaded breach is of "reproduction" of the Urederm Label without the licence of AMC, ie a contravention of s 36(1) of the Act, reproduction being an exclusive right comprised in the copyright: s 31(1)(a)(i). Hamilton contends that (i) there is no evidence that Hamilton itself reproduced the Labels, though there is slight evidence from which it could be inferred it "authorised" reproductions; (ii) AMC has neither particularised nor proved that any acts of reproduction that were done without its licence, ie its "permission" or "consent": Computermate Products (Aust) Pty Ltd v Ozi-Soft Pty Ltd (1988) 20 FCR 46 at 49; and (iii) if Hamilton was authorised to reproduce the labels for the purposes of packaging products to be supplied to AMC and did this, if it later sold those products to a third party, it would not have contravened s 36(1) by reproduction without licence. 578 Secondly, it is contended that AMC should not be permitted to amend its case in final submissions to raise a breach of s 38 of the Copyright Act arising from the unauthorised sale of products. The premise of this contention (contrary to AMC's written submission) would seem to be that such a sale would not in the circumstances have been a "publication" - ie a first publication in Australia: see Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88 at 93 - for the purposes of s 31(1)(a)(ii) of the Act. 579 Section 38(1) provides insofar as presently relevant: 38(1) Subject to Division 3, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, in Australia, and without the licence of the owner of the copyright: (a) sells … an article; … if the person knew, or ought reasonably to have known, that the making of the article constituted an infringement of the copyright … (Emphasis added.)
580 Hamilton submitted it did not address the case now put at trial, but that in any event AMC has neither pleaded nor proved the elements of s 38 and in particular that Hamilton knew, or ought reasonably to have known, that the "making" of the packaging embodying the Urederm labels constituted an infringement of the copyright. 581 AMC did not respond to Hamilton's submissions on breach of copyright in any of the above respects in its oral or written reply submissions.
Consideration 582 I should indicate at the outset that I will not permit AMC so late in the day to raise what it curiously claims is infringement by "publication". It has not established that any sale infringed its right of "first publication": cf Avel Pty Ltd, at 93. The claim, as Hamilton correctly suggests is for a contravention of s 38(1). I am satisfied that that claim would fail in any event. It is subject to the same vice as the "reproduction" claim. 583 As to the claim of infringement by reproduction without licence, I agree in substance with Hamilton's submissions. The parties obviously did not turn their mind in any way collectively to the question of copyright in the Urederm labels or for that matter the packaging generally. It is reasonable to infer that Hamilton proceeded wrongly on the assumption that copyright in the packaging belonged to it. Be this as it may, the parties so conducted themselves in relation to Dr Keung's copyright as resulted in Hamilton in fact having Dr Keung's licence to reproduce the AMC packaging, oblivious though they may have been to this legal characterisation of the matter. The question whether or not permission or consent has been given to reproduction is an objective one. The scope of the licence so given by Dr Keung is a matter of inference. While it is the case that no express limitations on reproduction were conveyed to Hamilton prior to Hamilton's sales to Crafers and Pharmalines, I consider it improbable that Dr Keung could reasonably be said to have consented to reproduction other than for the purposes of their relationship, ie for sale to AMC. I find accordingly. 584 AMC has not attempted to show when the offending reproductions without permission or consent occurred. The onus in this is on it: cf Nationwide News Pty Ltd v Copyright Agency Ltd (1995) 55 FCR 271 at 288. The limited evidence that could be said to bear on this matter, does not suggest that the product sold otherwise than to AMC was produced for the purposes of such sales. On the contrary some such sales appear to have been drawn from stock made for AMC. It has not been suggested that Hamilton increased its production so as to accommodate the need to meet its AMC sales. 585 In the circumstances I am in no position to find that when Hamilton reproduced the Urederm labels on its packaging it did so otherwise than in accordance with Dr Keung's licence. Its later conduct in effecting sales of such product may have been an actionable wrong to AMC. It was not the wrong pleaded against Hamilton. 586 I reject AMC's breach of copyright claim.
CONVERSION: SECTION 116 OF THE COPYRIGHT ACT 587 AMC's pleaded claim is for a form of statutory conversion pursuant to s 116 of the Act. The claim, seemingly, is in respect of allegedly infringing copies of articles incorporating the Urederm labels. For present purposes it is only necessary for me to refer to s 116(1)(a). It provides: 116(1) The owner of the copyright in a work or other subject-matter may bring an action for conversion or detention in relation to: (a) an infringing copy …
588 Section 10(1) of the Act defines "infringing copy" to mean: (a) in relation to a work - a reproduction of the work, or of an adaptation of the work, not being a copy of a cinematograph film of the work or adaptation; being an article … the making of which constituted an infringement of the copyright in the work.
589 It is unnecessary for me to outline the submissions of the parties on this claim. In light of my conclusion on the infringement claim that the making of Hamilton's reproduction of the Urederm labels on the products sold otherwise than to AMC did not constitute an infringement of the copyright, the s 116 claim must fail. 590 It would appear that the s 116 claim had, in some unexplained way, spawned a common law claim for conversion. I need not delve further into that matter. It was abandoned in oral submissions.
MISLEADING OR DECEPTIVE CONDUCT: CLAIMS 3 AND 4 591 As is not uncommonly the case, several of the misleading or deceptive conduct claims AMC has made have been twinned with passing off claims. It is appropriate in this setting to refer to observations of the Full Federal Court in Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (2007) 159 FCR 397 at [98]-[99] which bring out the distinction between these two species of action: 98 There is an overlap between causes of action arising under Pt V of the Trade Practices Act and the common law tort of passing off. However, the causes of action have distinct origins and the purposes and interests that both bodies of law primarily protect are contrasting. Passing off protects a right of property in business or goodwill whereas Pt V is concerned with consumer protection. Part V is not restricted by common law principles relating to passing off and provides wider protection than passing off. 99 Whether or not there is a requirement for some exclusive reputation as an element in the common law tort of passing off, there is no such requirement in relation to Pt V of the Trade Practices Act. The question is not whether an applicant has shown a sufficient reputation in a particular get-up or name. The question is whether the use of the particular get-up or name by an alleged wrongdoer in relation to his product is likely to mislead or deceive persons familiar with the claimant's product to believe that the two products are associated, having regard to the state of the knowledge of consumers in Australia of the claimant's product.
592 There are two claims made of contraventions of s 52 and s 53 of the Trade Practices Act. 593 The first is that in the supply ofthe Products subject to the Distribution Agreement to Crafers for sale into the Hong Kong market, constituted a representation to Crafers that Hamilton was authorised to supply those Products for that purpose. It was not so authorised and the representation was false, hence it contravened s 52 and s 53(c) of the Act. Having rejected the parallel importation claim upon which this is premised, it too must fail at least as pleaded. 594 The second is that the supply of Products bearing the Fuyunhon and Tuotoning trademarks to Crafers and Pharmalines in Hong Kong packaging, which products were subsequently resold in Hong Kong, constituted a representation that the Products were the products of AMC or, alternatively, that Hamilton had AMC's approval for such use of the trademarks. The Products were not the products of AMC and Hamilton did not have AMC's approval. Consequently, it is said, Hamilton engaged in conduct in contravention of s 52 and s 53(a), (aa), (c) and (d) of the Act. 595 In relation to both claims, it is said AMC suffered loss or damages which is particularised in identical terms to the copyright infringement claim to which I earlier referred. That loss and damage was suffered in Hong Kong. Damages are sought under s 82 and s 87 of the Act. 596 Hamilton denies making the representations alleged. 597 In relation to both of the claims the alleged representations were made in the supply ofthe Products to Crafers. I emphasise this because, in the "Passing Off" claim next to be considered, the misrepresentation is pleaded to be to Crafers and to "end-users of the Products". 598 In its reply submissions AMC sought to extend its claims to representations made by Hamiltons "to the ultimate consumers of the products in Hong Kong". Even if I were to permit this extension to be made - which I am not - no attempt has been made to surmount the difficulties it would raise given that the claim would now extend to engaging in misleading or deceptive conduct in Hong Kong. I need only refer, by way of example, to s 5 of the Trade Practices Act. 599 While s 5(1) extends the provisions of Part V of the Act to (inter alia) the engaging in conduct outside Australia by bodies corporate incorporated in Australia that extension is a qualified one. Subsection 5(3) and 5(4) respectively provide: (3) Where a claim under section 82 is made in a proceeding, a person is not entitled to rely at a hearing in respect of that proceeding on conduct to which a provision of this Act extends by virtue of subsection (1) or (2) of this section except with the consent in writing of the Minister. (4) A person other than the Minister or the Commission is not entitled to make an application to the Court for an order under subsection 87(1) or (1A) in a proceeding in respect of conduct to which a provision of this Act extends by virtue of subsection (1) or (2) of this section except with the consent in writing of the Minister. There is no suggestion that the requirements of either of these provisions have been satisfied notwithstanding the damages claims that have been made. 600 Equally, given that the alleged conduct engaged in Hong Kong would not have been that of Hamilton as such, no basis has been suggested for how Hamilton could have had liability for that conduct sheeted home to it under the Trade Practices Act. Neither s 75 nor s 84 have been invoked. In any event as I have indicated, Hamilton was not in any way complicit in the parallel importation of the products into Hong Kong. At no stage did it seek to address representations of any sort to the Hong Kong public. Such were not the end users users contemplated in the sale to Crafers. 601 I turn to the allegation that Hamilton engaged in misleading or deceptive conduct in supplying Hamilton's own products to Crafers which products were in the Hong Kong packaging or which bore (inter alia) the Fuyunhon or Tuotoning trade marks. I note in passing that the priority date in Hong Kong of the second of these was after the sales to Crafers, ie 8 October 2002. 602 There is a short answer to the claim. The alleged representations implicit in the supply to Crafers related to what in the circumstances was conveyed by the Chinese language characters, be these the trademarks or the Hong Kong packaging. The evidence does not suggest that the dealings between the parties were other than in English. There is no evidence that the representee, Crafers, had any comprehension of the significance or proprietorship of the Chinese language characters or sought any translation of them or inferred anything from them. 603 Given the actual dealings of Mr Lanham with Ms Chartres, it could properly be inferred, first, that the Urederm and Rubesal sold to Crafers were represented to Crafers to be manufactured by Hamilton and were Hamilton's to sell and, secondly, it was represented that the Chinese characters explained adequately what the product was to Chinese language readers. I do not consider that the circumstances of the supply conveyed any implied representation to Crafers that was likely to mislead or deceive it as to intellectual property rights in the Chinese language characters or as to Hamilton having AMC's approval to use the Hong Kong packaging or Chinese language trademarks. There is nothing in the evidence to suggest that such rights or approval were of any concern to Crafers or were the subject of any representation express or implied. 604 Obviously the product sold to Crafers was intended for resale to a class of persons whom the Chinese language characters could address. On the findings I have made that intended class, insofar as Hamilton was concerned, was not that of Chinese language reading Hong Kong consumers. Hamilton did not supply Crafers for the purpose of resale in Hong Kong. The Product was to be resold in Australia. The intended addressees were crew and passengers on ships docking in Australian ports. There is no evidence to suggest that "a not insignificant number" of members of these classes were likely to be misled or deceived by the Chinese characters: see Hansen Beverage Co v Bickfords (Australia) Pty Ltd (2008) 171 FCR 579. Rather, Crafers sold the Products (seemingly directly and indirectly) to a Hong Kong importer for resale. This was without Hamilton's knowledge or consent and contrary to the understanding it had with Crafers as to resale. Hamilton bore no responsibility for the conduct thus engaged in in Hong Kong. I say this quite independently of the s 5 problem which AMC would have had if Hamilton could otherwise have been found responsible for representations made to Hong Kong consumers. 605 I reject both of the misleading or deceptive conduct claims.
PASSING OFF 606 AMC claims that the supply by Hamilton of products bearing the Fuyunhon and Tuotoning trademarks constituted a misrepresentation calculated to deceive its prospective and actual Hamilton customers and the end users of the Products, that the Products were the products of AMC. Such representation was made in the course of trade. As with the preceding misleading or deceptive conduct claims, AMC's pleading of, and submissions on, this cause of action are brief to the point of being unhelpful. Hamilton's in contrast are exhaustive. Here again, AMC has not sought to engage with what has been put against it. 607 There are a significant number of difficulties which doom this claim. I will refer to several of these. By way of preface I refer to the description of the tort of passing off given by Lord Diplock in Erven Warnink BV v J Townsend & Sons [1980] RPC 31 at 93 - and do so as AMC's pleading of its claim tracks this description: My Lords, Spalding v Gamage and the later cases make it possible to identify five characteristics which must be present in order to create a valid cause of action for passing off: (1) a misrepresentation (2) made by a trader in the course of trade (3) to prospective customers of his or ultimate consumers of goods or services supplied by him, (4) which is calculated to injure the business or goodwill of another trader (in the sense that this is a reasonably foreseeable consequence) and (5) which causes actual damage to a business or goodwill of the trader by whom the action is brought or (in a quia timet action) will probably do so. See generally, Shanahan's Australian Law of Trade Marks & Passing Off, Ch 20 (3rd ed, 2003); Kerly's Law of Trade Marks and Trade Names, Ch 15 (14th ed, 2005); see also Trindade, Cane and Lunney, The Law of Torts in Australia, 6.5 (4th ed, 2007). It will be necessary to refer below to other elaborations of elements of the tort. 608 It is well accepted that the concern of the tort is to protect a claimant's trading reputation or goodwill. Importantly for present purposes, the reputation or goodwill "must extend to the geographical area in which [the alleged tortfeasor] is making the representation and to the class of purchaser to which the representation is addressed": Shanahan [20.75], Targelto Pty Ltd v Targetts Australia Pty Ltd (1993) 26 IPR 51; Monaco Willows Pty Ltd v Greenbax Pty Ltd (1996) 36 IPR 387 at 394; W A Gilbey Ltd v Continental Liqueurs Pty Ltd (1960) 103 CLR 406; on the territorial scope of goodwill and reputation see Wadlow, The Law of Passing Off, 2.30 ff (2nd ed, 1995); ConAgra Inc v McCain Foods (Australia) Pty Ltd (1992) 33 FCR 302. 609 The representation pleaded was to Hamilton's customers and to "end users of the Products". In written submissions the representation was limited to that made to "Crafers, Pharmalines and undisclosed others in Australia". Pharmalines can be ignored for present purposes. In its Reply, AMC has resiled from its submissions by asserting that there is no legal requirement that the relevant misrepresentation be made to persons "in the law area of the forum". 610 Considering first the misrepresentation allegedly made in Australia to Crafers, I commence with the well accepted proposition that: The law of passing off does not confer protection on the owners of goods who have no reputation in a particular jurisdiction: Con Agra Inc, at 343. Or, as it is sometimes put, an applicant in "a passing off action" must establish that it had "the requisite reputation in the name or goods in the jurisdiction of the respondent": Hansen Beverage Co, at [34]. 611 Whether an applicant has developed a particular reputation is a question of fact. There is no evidence that either AMC as an entity or the Chinese language marks had any reputation at all in Australia at the relevant date let alone that a substantial number of people in Australia were aware of the Chinese language marks on the goods they distinguished: Hansen Beverage Co, at [34]-[35]. This alone would be sufficient to reject the Australian based aspect of the passing off claim. 612 For the reasons I gave in dealing with the misleading or deceptive conduct claim, I am not satisfied that any operative misrepresentation was made to Crafers by Hamilton's misuse of the Chinese language marks. Further, no attempt has been made by AMC to make out a case of passing off by reference to those persons who, on my findings, constituted the classes of purchasers to which any representation made in the supply to Crafers was addressed, ie the passengers and crew of ships, not consumers in Hong Kong. I would note in this that it is well accepted that if a product packaged in such a way as will deceive the ultimate consumers to be addressed by the packaging, it is no defence that wholesalers or retailers with whom the deceiver deals, are not themselves deceived: see Singer Manufacturing Co v Loog (1880) 18 Ch D 395 at 412; Shanahan at [20.175]; Kerly at 15-201. 613 As to the claim of passing off to Hong Kong consumers, consistent with what I said in the misleading or deceptive conduct claims, such misrepresentations as may have been made (I make no finding to that effect) were not the responsibility of Hamilton. The Hong Kong market was not the relevant market in which the product sold by Hamilton to Crafers was to be sold. Crafers assumed responsibility for such misrepresentation when it sold to a Hong Kong importer. 614 Importantly for present purposes, AMC's claim in any event is for passing off in Australia - hence its reliance on the observations of Beaumont J in Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553 at 583 that: The cause of action for passing off is complete as soon as the relevant misrepresentation is made, even though no actual deception and damage to the plaintiff can be shown to have resulted from it. See also British Telecommunications PLC v One in a Million Ltd (1998) 42 IPR 289 at 295 but cf 302: see also Kerly, at 15-201 - 15-203. 615 As I have already indicated, AMC has no cause of action for passing off in Australia. 616 While the respondent has raised a considerable number of, often complex, responses to AMC's claim, they have not been addressed by AMC. I do not consider it necessary to deal with the respondent's further submissions. 617 I reject the passing off claim.
THE REMAINING CROSS-CLAIMS 618 I have already considered and rejected Hamilton's claim that AMC engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act in relation to representations allegedly made about the Chinese language translations. 619 Three further claims need to be considered. These relate to (i) an unpaid invoice; (ii) product registrations of Hamilton's products held in AMC's name; and (iii) an alleged breach of confidence.
(i) The Unpaid Invoice 620 This relates to the invoice EXP1768 to which reference was made in passing in AMC's "Refusal to Supply" claim. AMC accepts it is liable to pay the amount of the invoice ($35,091.12) and does not pursue its plea of set off. 621 I will order that AMC pay to Hamilton the above amount.
(ii) The Product Registrations 622 The premises of this claim as pleaded (see Second Further Amended Cross-Claim, paras 4-13) are that (i) pursuant to the Hong Kong Pharmacy and Poisons Ordinance (Cap 138) the Products the subject of the Distribution Agreement had to be registered before they could be sold in Hong Kong; and (ii) the Product Registrations had to be held by a company registered in Hong Kong. It is then asserted that it was an implied term of the Distribution Agreement that AMC was obliged to transfer the Product Registrations to Hamilton or Hamilton's nominated agent at the end of AMC's licence (subject to the Distribution Agreement) to allow Hamilton to carry on distribution of the Products in the Territory. AMC has refused so to transfer the Product Registrations. Additionally it is said AMC was Hamilton's fiduciary in applying for and holding the Product Registrations. AMC breached its fiduciary duty to Hamilton by refusing to transfer them to Hamilton or its agent and it holds the Product Registrations as constructive trustee for Hamilton. 623 I do not intend to enlarge upon this claim for the following reasons which I foreshadowed during final submissions. Other than containing an acknowledgment by the parties that the Products have been registered under Hong Kong law in AMC's name (see cl 25), the Distribution Agreement contains no other provision dealing with the Product Registrations. Importantly, I do not have evidence before me of the provisions of the Poisons Ordinance, or of the purposes of the registration system it established: cf Evidence Act 1995 (Cth), s 174. I do not know, for example, whether the Ordinance permits the transfer of a registration and, if so, subject to what, if any, requirements. I do not know if there can be multiple registrants in respect of the same product. I do not know if a registration is, for example, something personal to the registrant or whether it could in the scheme of the Ordinance be the subject of a trust. Yet I am mindful, to use the words of Mr Blake: Regulatory issues vary from country to country. Every country has their own specific regulatory requirements on the registrations of products.
624 I am, in short, in no position to consider the claim made by Hamilton whatever its underlying merit may be. All I can say is that, without knowledge of the Ordinance and its scheme, I cannot proceed to determine whether a term such as Hamilton suggests could or should be implied into the Distribution Agreement, assuming the "entire agreement" provisions of cl 45 of that Agreement did not preclude such an implication: see Hart v MacDonald (1910) 10 CLR 417; Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 at 363; Etna v Arif [1999] 2 VR 353; and see generally Cheshire and Fifoot, [10.7] (9th Aust ed). Absent knowledge of the legislation, its context and purposes, I equally am in no position to determine whether there was any relevant relationship between Hamilton and AMC in relation to the Product Registrations, let alone a fiduciary one. I would also add that absent some express contractual stipulation, it is not altogether obvious to me in any event why, on termination of the Distribution Agreement, AMC ought reasonably to be expected to cooperate with Hamilton in facilitating the distribution of its products in Hong Kong by transferring its Product Registrations to a person capable of holding them under Hong Kong law. 625 I reject this claim.
BREACH OF CONFIDENCE 626 In February of 1996 Hamilton sent to Dr Keung three documents which related to the production of Urederm. They were (i) a production formula which listed the ingredients of the product and their proportions; (ii) a one page statement of the manufacturing method for Urederm; and (iii) a 6 page product specification. The purpose of this communication was to enable AMC to procure (through a subdistributor), the product registration of Urederm products in Vietnam the documents being required for that purpose. 627 After the termination of the Distribution Agreement on 15 September 2006, Dr Keung subsequently had discussions with Roger Shahani of Sphere Healthcare Pty Ltd, a company which contract manufactured, amongst other things, healthcare creams. On 27 October Dr Keung sent to Mr Shahani an email attaching two of the three documents he had received a decade earlier from Hamilton, albeit with altered headings. These were the production formula and the manufacturing method. The purpose of his so doing was to see if Sphere could "produce the same product". A Urederm cream was subsequently produced, use having been made of the production formula in that process. 628 Hamilton's claims in respect of those disclosures and use are made against AMC and Dr Keung personally. Two are against AMC, the one for breach of its equitable duty of confidence to Hamilton; the other, for breach of cl 28 of the Distribution Agreement. The claims against Dr Keung were for breach of confidence in his own right and in respect of his directing and procuring AMC's breach of confidence. An account of profits is sought against AMC and, I would note, Dr Keung of profits earned by them from all sales of products containing urea cream manufactured by Sphere. No claim, in the alternative, for damages has been pursued.
Applicable Principles 629 As the contractual duty of confidence contained in the Distribution Agreement is in this matter parasitic upon the equitable duty of confidence it is necessary only to refer to the latter. 630 The principles to be applied to a case such as the present are not, save in one respect, controversial. I defer mention of the matter of controversy - that of accessorial liability of a director for a corporate breach of confidence - until I deal with the alleged personal liability of Dr Keung. 631 The accepted basis in this country of the equitable jurisdiction to relieve against an actual or threatened abuse of confidential information lies - … in the notion of an obligation of conscience arising from the circumstances in or through which the information was communicated or obtained. Moorgate Tobacco Co Ltd v Phillip Morris Ltd [No 2] (1984) 156 CLR 414 at 438. 632 The agreed elements of the action for breach of confidence are, for present purposes, that: (i) the information in question must be confidential in character: it must have "the necessary quality of confidence about it": Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 at 215;
(ii) it must have been imparted in circumstances importing an obligation of confidence: Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47; Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 40; and
(iii) there must have been an actual or threatened unauthorised use or disclosure of that information: Smith Kline & French Laboratories (Aust) Ltd v Department of Community Services and Health (1990) 22 FCR 73 at 87, 111-112; Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222.
See generally, Dean, The Law of Trade Secrets and Personal Secrets (2nd ed, 2002); Toulson and Phipps, Confidentiality (2nd ed, 2006).
633 The essential attribute of confidential information is what has been described as "relative secrecy": Franchi v Franchi [1967] RPC 149, at 153; Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales [1975] 2 NSWLR 104 at 119. Whether this attribute exists in a given case will be often a question of degree and a variety of criteria have been invoked in varying contexts to sharpen the inquiry to be made: (i) is the information in question widely known, or publicly available in the relevant industry, trade, etc: Coco at 51; cf Ansell Rubber Co at 50; Titan Group Pty Ltd v Steriline Manufacturing Pty Ltd (1990) 19 IPR 353 at 381;
(ii) has the confider made the information public by using it in its manufactured products and placing it on the market, or would the ascertainment of the information from the manufactured product by reverse engineering or otherwise require the expenditure of time, effort, money or experimentation: see eg Ackroyds (London) Ltd v Islington Plastics Ltd [1962] RPC 97; Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1985) 5 IPR 357 at 379;
(iii) did the confider produce or obtain the information only after the expenditure of time and/or money by way of research or in the application of skill and ingenuity; Saltman Engineering Co Ltd; cf United Sterling Corporation v Felton [1974] RPC 162; Interfirm Comparison (Australia) Ltd, at 117; could another person acquire or duplicate the information only by going through a like process: Cranleigh Precision Engineering Ltd v Bryant [1966] RPC 81 at 89-90; Ansell Rubber Co at 49;
(iv) what steps has the confider taken to preserve the secrecy of the information and to prevent it becoming public knowledge: Amber Size & Chemical Co Ltd v Menzel (1913) 30 RPC 433 at 438; Dean, at [3.165]-[3.175];
(v) is the information intrinsically valuable or is it valuable to the confider or to a competitor or other interested party: Surveys & Mining Ltd v Morrison [1969] Qd R 470; Measures Brothers Ltd v Measures [1910] 1 Ch 336; and
(vi) would a reasonable person in all the circumstances recognise the information to be the "property" of the confider: Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 at 191; Printers & Finishers Ltd v Holloway (No 2) [1965] RPC 239 at 255.
634 There is no single test for determining when the communication of confidential information will import an obligation of confidence. As Gowans J said in Ansell Rubber (at 40): That obligation may come into existence by reason of the terms of an agreement, or what is implicit in them, by reason of the nature of the relationship between persons, or by reason of the subject-matter and the circumstances in which the subject-matter has come into the hands of the person charged with the breach.
635 By way of background I should note that cl 28 of the Distribution Agreement did impose a duty of confidentiality of a qualified variety and its terms presaged that there could be confidential information about the Products imparted during the parties' relationship. 636 There are two tests that have been employed commonly enough in commercial settings to determine whether a duty of confidence arises by reason of the subject matter and the circumstances in which the subject matter has come into the hands of the person said to be subject to the duty. The first is the "reasonable person" test and derives from Megarry J's judgment in Coco (at 48): If the circumstances are such that any reasonable person standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given in confidence, this should suffice to impose on that person the equitable obligation of confidence: see Dean, [3.275]; see also Toulson and Phipps, 3-007 - 3-010.
637 The alternative test - the "purpose" test - asks: Has confidential information been imparted for what was known, or ought reasonably to have been known, to be only for a particular purpose? If it has, its use must be limited to that purpose.
This approach has commonly been used in cases in which confidential industrial information has been disclosed (usually under contract) to a manufacturer either by way of licence for a period or so as to manufacture a product for the confider: see Saltman Engineering, at 213; Nichrotherm Electrical Co Ltd v Percy [1956] RPC 272 at 280; Ackroyds (London) Ltd at 104; Torrington Manufacturing Co Ltd v Smith & Sons (England) Ltd [1966] RPC 285. Its use extends beyond that context: see Interfirm Comparison (Australia) at 117; and Gurry "Breach of Confidence" in Finn (ed) Essays in Equity, 118 (1985); Smith Kline & French, at 96. 638 Insofar as remedy for breach of confidence is concerned, those that are now sought in this matter are an account of profits and an order for the delivery up and/or destruction of the originals and copies of two documents in the possession of AMC and Dr Keung. It is unnecessary to comment on these remedies at this stage.
The factual setting 639 The relevant facts fall within a narrow compass and can be stated shortly. I would preface my account with these comments. First, while material in two of his affidavits touch on the circumstances giving rise to the breach of confidence claim, Dr Keung did not give oral evidence in defence of it. Secondly, two affidavits of Wendell Wait, the product development chemist of Sphere at the relevant times, were read by AMC. Mr Wait gave oral evidence. There were some marked dissimilarities between his oral and written evidence. Where they have occurred I have preferred his oral evidence which I consider to be the more reliable and considered. 640 As Dr Keung's fourth affidavit made plain (para 2), he was well aware of the purpose for which Hamilton was disclosing the documents to AMC. They were required to meet Vietnam's product registration requirements and had been requested by AMC's Vietnamese subdistributor which, in its letter of request to AMC, noted unsurprisingly that it understood the production formula and production process could be "highly confidential". 641 When two of these documents were sent to Mr Shahani, they were forwarded to Mr Wait "for analysis, and pricing if we are able to produce it". While Mr Wait has maintained he did not receive the manufacturing method document, I am satisfied he did, but made no use of it. Mr Wait had previously begun to develop a 10% urea cream for Sphere. Within three hours of receiving the production formula he had prepared a quote for Mr Shahani. It was, he accepted, based on the production formula document. To quote he needed to know the proportions it specified. In the process of deciding whether Sphere could produce the cream, Mr Wait investigated whether the product was subject to any patent or trade mark. It was not. And he said in cross-examination that "there didn't appear to be any great intellectual property associated with that particular formulation". He also did a literature search to see if Sphere could make a commercially viable product. He made no use of the manufacturing method document: "It has no relevance to quoting a job". He said, in oral evidence, that the production formula would have been put on Sphere's database at that time and would have provided the basis for subsequent work. 642 Mr Shahani sent a reply email to Dr Keung on 27 October 2006, indicating Sphere could do the urea cream; he had a quote; and he asked for a tube of cream and the packaging. A tube and packaging was supplied. 643 Mr Wait then commenced laboratory trials to produce an initial batch of product. It is his evidence, which I accept, that he devised from scratch his own method of manufacture. He did not use the manufacturing method document. As he put it in his first affidavit, the document was a very condensed overview of a manufacturing method: Any manufacturing method, even of a simple substance like a cream containing 10% urea, requires much more detail than those contained in this document to be of any practical help in manufacture.
644 By the time he was conducting laboratory trials (if not earlier), Mr Wait knew the product Sphere was being asked to replicate was being manufactured by Hamilton. This was obvious from the packaging supplied. He was well aware Dr Keung wanted him "to pretty much stay" with product formulation he supplied. The only substantial change he made to Hamilton's ingredient list was to change the preservative used. 645 While it can be inferred from Mr Wait's oral evidence that he was given a tube of Rubesal and was asked to reverse engineer it, it is unclear whether the tube of U50g Dr Keung supplied was so used. I will return below to reverse engineering. 646 The initial batch of product produced from the trials on 24 January was found to be "totally unsatisfactory". Another trial method of manufacture was commenced with the same ingredients and on 26 February 2007, Mr Wait produced something more acceptable to himself and Dr Keung. A change to the water content specified in the production was made around this time. Further trials were held up until May 2007 to finalise details of the manufacturing method. TGA approval was sought and later Sphere, or else Tabco Pty Ltd (a related company), began producing commercial quantities of 10% urea cream for AMC. AMC sold it in Hong Kong under its Fuyunhon label in packaging combining English language and Chinese language versions of product indications etc. 647 In March 2008 Dr Keung informed Mr Wait that he and customers had been unhappy with the finished product. Mr Wait proposed various alternatives to change the Sphere manufacturing method and formula. These alternatives included the addition of sodium chloride or sodium citrate. Ultimately, it was decided to make a lactic acid addition to buffer and soften the formula. Sphere or Tabco began to supply AMC with commercial quantities of this new product in September 2008. 648 It is Mr Wait's evidence that, if he had not been given the production formula, but had been asked to make a 10% urea cream with similar or the same properties to Hamilton's, he could have done so. In his affidavit (at para 22) he described "properties" as including the product's "appearance, feel, smell, pH, viscosity". 649 The 1996 production formula is no longer that used by Hamilton. Neither is the manufacturing method (the equipment having been changed in some areas). It is common ground that the ingredients listed in that formula were in the public domain. They were printed on its packaging. Confidentiality now is claimed for the proportions - or ratios - of the ingredients used in the formula. 650 Mr Wait's evidence was that the ingredients in the production formula represented those of a standard cold cream or extemporaneous cream base formula which he believed would have been used for many years in many products. He indicated that ingredients were "old", well known pharmacy ingredients. He considered it likely that in creams he described as cetomacrogol creams because of their well known and reliable emulsion system, many formulations would have the same ingredients and concentrations of the same ingredients as the Hamilton formula. He indicated that that emulsion system is mentioned in the British and the United States Pharmacopeias. He elaborated upon this evidence in evidence in chief: A product, given that - when it's labelled that is containing paraffin, paraffin wax, cetyl alcohol, cetyl sterile alcohol, cetomacrogol. Those materials have very defined properties. If you mix them in a certain ratio you get a cream. If you start moving away from that ratio you no longer have a cream. If you dilute it you end up with something like a lotion. If you apply far too much wax into the system you will end up with something that is very waxy and it's almost like a balm. Or if you don't emulsify it properly the thing will fall apart. So within a construction mechanism you've got fairly predefined ratios by which those materials would have to go together.
651 I would note in passing no evidence of other manufactured products has been tendered to support the likelihood of similarity of ratios suggested by Mr Wait. 652 In his evidence, Mr Blake accepted that creams had five components: the active ingredient (in this instance 10% urea), an emulsifier, a thickening agent, water and waxes, and a preservative. He was then asked: whether you could reverse engineer the Urederm product: You'd agree that you could reverse engineer the Urederm product: buy it off the shelf and analyse its components?---Extremely difficult. Extremely difficult. A lot of people think that it can be done very simply, but because there are a lot of structural similarities in the long chain components - because the Cetomacrogol is a long chain component. Now, your cetyl and your cetostearyl alcohols have got quite long carbon chains on them. It's not easy technology to reverse engineer, and I won't say you couldn't do it, but it would be very time consuming, expensive and you'd require very sophisticated equipment to actually - to be able to totally reverse engineer. Hamilton considered reverse engineering the Sphere product but discounted doing so for reasons of cost and because of the equipment required. Mr Wait did not give evidence directly on reverse engineering of Hamilton products. 653 Mr Blake also accepted that the end product of a manufacturing process could be affected by variables in manufacturing such as the equipment used, the temperatures employed, the order in which steps are taken. The cross-examination went on: So if you had the ingredients but you didn't have the manufacturing method, you could end up with the same product or a similar product via a hit and miss application of the methodology?---If you had the ingredients and the ratios of that ingredients, you would have a head start and then a competent formula would be able to work through. And when you say you would have a head start, you would have a head start at producing a 10 per cent urea cream. Is that what you're saying?---Yes. So you accept, don't you, that the ingredients for urea creams, including a 10 per cent urea cream, are widely known simply by reading the side of the box of any urea cream?---When I say ingredients, I'm talking also about the ratios of those ingredients. That's where a lot of time is spent, in formulating, is to getting the balances between the different ingredients.
654 Later I asked Mr Blake the following: Even assuming that the ingredients aren't in the same ratios, are you saying that really there is a standard operating procedure to produce a product at the end of the day? It may not have the same characteristics, but roughly it would all go through a similar type of process to produce a cream containing those ingredients at the end?---I think I had probably best answer that this way, your Honour. The Urederm is an oil-in-water emulsion, so there are standard procedures for putting together oil in water emulsions, and those guidelines are certainly followed with that product, and most oil in water emulsions would follow the same. As an alternative, we actually make a lot of sun screens that are water in oil emulsions, they are around the reverse way. The manufacturing protocols for those are quite different. Thank you. MR ROBERTSON: And in respect of either of those products, the standard operating procedure, to use his Honour's term, can be found readily by going to any number of text or reference sources?---Yes, there are certainly - there would be plenty of sources specifying or talking about compounding oil in water emulsions in particular, less commonly water in oil.
655 In re-examination the preceding two questions were revisited. He considered "standard operating procedure" was the wrong terminology to use in the pharmaceutical industry. It referred there to a routine or repetitive task. He was then asked: To produce a cream containing those ingredients at the end. Now, focussing on Urederm as an oil in water emulsion, are there, to use his Honour's phrase, do all creams of that kind go through a similar type of process or if you like, are there general principles which affect the production of an oil in water emulsion?---Yes. There's a general process which would involve the oils and the waxes melting - taking those to a temperature when they're liquefied. Taking your water, aqueous phase to a similar temperature, combining those two and then stirring and then mixing, so that was the sort of generic type process that I was referring to.
656 It is Mr Blake's evidence that Hamilton developed the production formula and manufacturing method for Urederm in its laboratory in the late 1970's and early 1980's. He went on to say that there have been only minor changes to the formula and manufacturing method since that time. No evidence was given concerning the time, effort and expenditure entailed in that development process. The product was first sold in 1983. 657 There has been no evidence put on by Hamilton to indicate that it has in place practices and procedures both in-house and in dealings with third parties, to maintain the confidentiality of information which it considers to be confidential. A letter written to Dr Keung in April 1996 by Mr Stafford was marked "Strictly Confidential". I do not consider that this suggests anything other than the author's own view of how the particular communication should be treated. I would note that Hamilton's February 1996 communication with Dr Keung enclosing the three documents of present concern made no mention at all of confidentiality. It has not been suggested any oral communication was made indicating the confidentiality of that material.
The Distribution Agreement 658 Clause 28 of the Agreement provides: 28. Confidential Information During and after the Term, Distributor may not use or disclose confidential information (including the contents of this agreement) about: 28.1 Supplier; 28.2 the business of the Supplier; 28.3 the Products; except as required by law or this agreement.
659 While cl 28 has contractual effect it does so only to the extent that information falling within the three stipulated species is itself confidential information under the general law. If any of the information communicated to AMC in February 1996 then had that character and had retained it when AMC disclosed it to Sphere on 27 October 2006 that disclosure would have been in breach of the clause, the relevant information being information about "the Products".
Consideration 660 I will first consider the claims against AMC. I have already foreshadowed my findings in relation to two of the three documents sent by Hamilton to AMC. I am satisfied that Dr Keung disclosed the manufacturing method document to Sphere in his 27 October 2006 email. That document was forwarded to Mr Wait who made no use of it either at the time of giving his quote or in conducting his trials, for the reasons he gave. I accept he probably forgot he ever received it. Accordingly while both cl 28 and the equitable duty of confidence were breached by the disclosure made, no loss (other than nominal damages for breach of contract) was suffered by it, nor was any profit made using it. 661 As to the 6 page product specification, I am not satisfied any unauthorised disclosure or use of it was made by AMC. 662 This leaves the production formula. Was it confidential information when disclosed by Hamilton in 1996? Was it still confidential information when disclosed by AMC in 2006? The ingredients used in the manufacture of the Urederm cream when that formula was used by Hamilton were in the public domain. They were listed on the packaging. What was not known was the ratios or proportions of the ingredients. 663 I am satisfied that (a) there was a reasonable level of general understanding in the pharmaceutical industry about the manufacture of creams of the type used by Hamilton as the "carrier vehicle" (to use Mr Wait's term) for the active ingredient, urea; (b) information about the available ingredients was widely known; and (c) there was significant industry knowledge about reliable combinations of ingredients and the use of those combinations would ordain in some degree the appropriate ratios of the ingredients to be used in the manufacture of a product such as a 10% urea cream. 664 This said, I equally am satisfied that there remained an area, albeit a circumscribed one, in which through experimentation and choice - through "the application of the skill and ingenuity of the human brain": Coco, at 47 - a product formula could be devised for the production of a 10% urea cream having distinctive, desired properties and that knowledge of that ratio would give a "head start" to use Mr Blake's description, to a person later seeking to produce a cream with such or similar properties. 665 The same, I would add, could be said of a method of manufacture devised for a product with such an ingredient ratio, though this is not presently relevant. 666 It could well be said, as Mr Wait did, "that there didn't appear to be any great intellectual property associated with [Hamilton's] formulation", or, to adapt Lord Denning's formulation in Seager v Copydex Ltd (No 2) [1969] 2 All ER 718 at 719, it bordered on there being "nothing very special about it". Nonetheless, tested by the indicia of confidentiality to which I earlier referred, the ingredient ratios were not, on the evidence, in the public domain in 1996, or, for that matter, in 2006; they were valuable to Hamilton when used by it and, in 2006, they were valuable to AMC who was by then a prospective competitor; the formula resulted from Hamilton's research and experimentation and, as the evidence here indicated, for another person to acquire the same information would require it to go through a like process of experimentation; and the urea cream product was not, on the evidence, easily reverse engineered. While it was suggested to Mr Blake that it could be reverse engineered in a short time - a suggestion with which he did not agree- AMC did not adduce positive evidence to that effect. It had the opportunity to do so. Mr Wait was its witness. 667 While the Distribution Agreement clearly contemplated that there could be confidential information associated with the Products, what is surprising is that Hamilton appears not to have taken positive steps to preserve the secrecy of the formula in the hands of third parties to whom it was supplied. This said, it cannot properly be asserted that Hamilton so conducted itself in relation to AMC as reasonably to create the impression that it was making a fairly open invitation to AMC to make use of it: Amway Corporation v Eurway International Ltd [1974] RPC 82 at 87. 668 This brings me to the second matter. I am satisfied the production formula was confidential information for equitable and contractual purposes, but was it imparted in circumstances importing a duty of confidence? Again I think so. 669 Notwithstanding that there was no express reference to confidentiality when the three documents were provided to AMC in 1996 and that the documents on their face made no claim to confidentiality, I am satisfied that Dr Keung would at the time have appreciated the sensitive character of the documents and that they were being supplied to him for a particular purpose and no other and that he could only use them for that purpose. Equally, the circumstances were such that any reasonable man standing in Dr Keung's shoes in 1996 would have realised upon reasonable grounds, as his Vietnamese sub-distributor anticipated, that the information was being given to him in confidence: Coco, at 48. Whichever test is applied, the conclusion is inevitable that the production formula was received by AMC in confidence. 670 In the event that I made such findings, AMC has conceded that (i) the information was provided to Sphere/Tabco by AMC; (ii) Mr Wait used the formula (only in part) to provide a quotation for the manufacture of a 10% urea cream; and (iii) he used the formula (only in part) as a basis for manufacturing a 10% urea cream. It is said, as well, that in the trials and production of commercial batches, there were differences in the ingredients and ratios used. My only comment on the concession is that I consider it rather underplays the use made of the formula by Mr Wait. He was at Dr Keung's insistence keeping close to the formula, though some adjustments were made before commercial quantities were produced. I do not accept AMC's submission that Sphere did no more than use the formula as a reference point for manufacturing a 10% urea cream. 671 This brings me to the contentious subject of remedy. That sought is an account of the profit made on the sale of the Sphere manufactured products containing urea cream. Damages have been disclaimed. 672 Hamilton has quite accurately characterised AMC's conduct in the relation to the breach of confidence in its oral submission: Dr Keung had on his hands, prior to our termination of the distribution agreement, a product that he'd been selling, with, more or less, success in Hong Kong, and that's what he wanted. He wanted continuity. He wanted not only continuity in packaging, but he wanted continuity in feel, and texture, and all sorts of other things. So, your Honour, it wasn't a case where any other cream would do. It had to be a specific cream with specific texture and specific qualities.
673 Dr Keung had no reason at all to expect after the termination of the Distribution Agreement, that Hamilton would licence AMC to use its production formula. So it was he sought simply to misappropriate it. In the event he was not wholly successful and he had produced a product for which, as Mr Wait said, Sphere's manufacturing team constantly got different results leaving Dr Keung's distributors not very happy with the results. Nonetheless, the product was sold seemingly at a profit and it is the gain so made that Hamilton claims. 674 The grant of this form of relief in breach of confidence cases is in the end a matter for the Court, notwithstanding a party's election for an account: see e.g. Seager v Copydex Ltd (No 1) [1967] RPC 349; see also Conveyor Co of Australia Pty Ltd v Cameron Bros Engineering Co Ltd [1973] 2 NZLR 38 at 44. An apparent reason for this is that, given the variable character of confidential information, its misuse even in a profit making activity may not realistically be able to be said to result in any profit being attributable to it, the misuse merely effecting what was in effect a saving of time and trouble: see Dean[8-320]. 675 While Mr Wait may over time have been able to devise an acceptable production formula for Dr Keung, I do not consider the present to be a case in which it properly should be said that the only appropriate remedy in the circumstances would be damages for the saving of "time and trouble": Seager (No 1), at 368. Dr Keung, in my view, designedly was trying to replicate a product for which he had previously established product goodwill. An account is in the circumstances an appropriate form of relief: AMC should not be "permitted to gain from [its] wrongdoing": Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 at 262. 676 I am satisfied that the period for which the account should be taken ought commence when AMC began to sell products manufactured in breach of confidence. It should end when sales of those products ceased in 2008 when AMC adopted the alternative formulation incorporating lactic acid. By that point the advantage gained for its misappropriation of the formula was practically spent. It had been overtaken by Sphere's independent endeavours to produce an acceptable product. Hamilton should not be given the benefit of those endeavours. If there was some residue of advantage remaining with AMC from the misuse of the formula, it is inappropriate to attempt to make some apportionment of profits in recognition of it. To attempt that would inevitably be burdensome and unrewarding. Significantly, Hamilton has, because of the product change, abandoned its claim for a permanent injunction. 677 While the accounting remedy is not without its known difficulties (see Dean [8.325]), I do not have material before me - nor have I had considered submissions - which would suggest that such might emerge here. That in any event is a matter for Hamilton. It can have obvious costs implications: cf Nokia Corporation v Liu [2009] FCAFC 138. If an account is to be taken I will direct it be before the District Registrar of the Court and I will give liberty to apply for directions in relation to the taking of the account. 678 Hamilton also seeks an order that AMC deliver up the originals and copies of two of the three documents it "holds". No such order is sought against Sphere in respect of the two documents it received. AMC converted the hard copy versions of the documents into electronic form for sending to Sphere. I have not been addressed on the "delivery up" or "destruction" of the electronic versions. I will invite further submissions on this matter: see also Prime Creative Media Pty Ltd v Vranjkovic [2009] FCA 1030 at [17]. 679 Insofar as concerns the claim for breaches of cl 28 of the Distribution Agreement, I am satisfied such breaches have been established. No claims for damages have been advanced. In light of the considered dictum of the Full Court of this Court in Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 at [155]-[159], I ought not entertain consideration of whether the contractual breach of confidence could itself be remedied by an account of profits: cf Attorney-General v Blake [2001] 1 AC 268; and see generally Cheshire and Fifoot, [23.2] and esp fn 5 (9th Aust ed). 680 Turning to the claims against Dr Keung, it is asserted in the alternative that he owed a duty of confidence directly to Hamilton in virtue of the disclosure actually being made to him and breached that duty by the disclosure he made, or that he knowingly participated in AMC's breach of confidence in that he directed or procured AMC's breach and was liable therefore. I am prepared, for present purposes, to assume that Dr Keung owed a duty of confidence directly to Hamilton. He was the actual recipient of information which he had reason to know was to be kept confidential, albeit he received it for AMC which in turn owed a duty of confidence directly to Hamilton. If, for example, he used such information for his own private purposes which resulted in a gain for him or a loss to Hamilton, he would have been liable therefore at the suit of Hamilton: see Saltman Engineering Co Ltd v Campbell Engineering Co Ltd, at 213; and without the need for any circularity of action by joining AMC as a party. I need not consider AMC's liability in such a case for present purposes: cf Coulthard v South Australia (1995) 63 SASR 531 at 535. Equally, I am prepared to assume that he would be liable to Hamilton on an accessorial liability basis for his intentional procurement of AMC's breach of confidence to Hamilton. In this I recognise that there is a significant body of discordant case law across the common law world on the question of the liability of directors who are participants in the wrongs of their company, whether that wrong be a breach of contract, a tort, or an equitable wrong: see the helpful discussion of this in relation to tortious liability in Anderson, "The theory of the corporation and its relevance to directors' tortious liability to creditors" (2004) 16 Aust Jo Corp Law 73; on the small company problem for directors, see Finn, "Opening Remarks" (1999) 27 Fed L Rev 171 at 177-180; see the discussion in Root Quality Pty Ltd v Root Control Technologies Pty Ltd (2000) 177 ALR 231 at [113]-[147]; and see Mortimore QC Company Directors Ch 27 (2009 OUP). 681 I have already indicated the only claim made against Dr Keung is for an account of profits. The evidence before me is that to the extent that confidential information has been misused to generate profit, that has been done by and for the benefit of AMC. If profit has been made, it was AMC's profit. No form of proprietary relief has been sought against Dr Keung or AMC in respect of the breach of confidence. There is no evidence of Dr Keung, as distinct from AMC, deriving profits which are attributable to the information misused. I can see no basis at common law or in equity for an order requiring Dr Keung to account for profit he has not made. I do not consider that Dr Keung's position in this matter can properly be analogised to that of a director of a company diverting a profit making opportunity to his own company such as would render him liable to account for profits derived by that company from the exploitation of that opportunity: cf CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704; Premium Real Estate Ltd v Stevens [2009] 1 NZLR 148 at [89]-[91]. 682 I will dismiss this claim.
Conclusion 683 Having found AMC to have breached its equitable duty of confidence to Hamilton in disclosing the production formula and the manufacturing method to Sphere and having had the former used in the manufacture of 10% urea cream which it then sold, I will order an account of the profits made by AMC in selling that cream from when it commenced so doing in 2007 until it ceased so doing in 2008 when it adopted a different formula. I will order that the account be taken by the District Registrar and I give liberty to apply for directions in respect of the account. 684 While I have found AMC to be in breach of cl 28 of the Distribution Agreement no claim for damages has been made. 685 I dismiss the claims made against Dr Keung for an account of profits. 686 I invite further submissions on the orders for delivery up having regard to the fact that, on the evidence, the documentation containing the confidential information has been converted into an electronic form by AMC.
REASONS FOR A RULING ON EVIDENCE 687 On 4 September 2008 I ruled inadmissible the report of Derek Wong, which was being put forward by AMC as an expert's report. In substance, the report was just over two pages in length and consisted of 19 answers to two sets of questions provided to Mr Wong in two letters of instruction. It traversed a range of subjects which could be described, flatteringly, as general evidence about the structure and nature of the pharmaceutical industry in Hong Kong as Asia; methods of advertising of pharmaceutical products within the industry; the effect of parallel importation; Australia's certification of pharmaceuticals etc; and sales growth rates within Hong Kong and China. The answers were in the main ex cathedra statements, often essentially factual in character. To the extent that opinions were expressed they were generally devoid of factual foundation or of any declared process of reasoning. While Mr Wong had over twenty years experience in the pharmaceutical industry primarily in the sales, marketing and production of pharmaceuticals, his curriculum vitae provides no significant basis for inferring that he was possessed of specialised knowledge based on his training, study or experience, that would qualify him to give opinion evidence on the various topics I have mentioned: see Evidence Act 1995 (Cth), s 79. On the contrary, his opinions on parallel importation, for example, and his references to it in his C.V., suggest reliance on anecdotes and speculative generalisation. 688 Mr Wong's report was due originally in January 2008. Extensions were given and it was provided to Hamilton in April. The substance of the objections made to it - which related to the central elements of the report and in particular to parallel importation, the 10% urea cream market and sales rates of growth - were notified on 30 May 2008. 689 Confronted with well taken objections to the report, AMC sought either to put on a further report to remedy the deficiencies of the present document or to have an oral report given. 690 I ruled that I would not permit an oral report to be given. It would be inherently unfair given the agreed basis upon which the trial had been conducted in relation to expert evidence - ie of a written expert's report that could be considered and responsed to by the opposing party. As to permitting a supplementary report to be prepared, I was not prepared to allow this given the point already reached in the trial. What would have been required was an elaboration of virtually each and every paragraph but in circumstances where I entertain considerable doubts as to Mr Wong's expertise to venture the opinions that would be necessary to rescue the report. 691 In these circumstances, and as the report as it stood was not one upon which AMC could properly be asked to conduct a cross-examination, I ruled it inadmissible.
CONCLUSION 692 As I foreshadowed at the outset, both AMC and Hamilton have enjoyed varying levels of success and reverses. I will give directions for the parties to bring in Agreed Minutes of Order to give effect to these reasons within 14 days of the date of publication of these reasons. If they cannot so agree, I direct the applicant to file Proposed Minutes of Order within that time. 693 While Hamilton alone has secured orders for other than nominal pecuniary relief, I do not consider that this matter is one in which it is appropriate to make an apportionment of the costs on an issue by issue basis. While I will give the parties the opportunity to put on submissions on costs, I should indicate my present inclination is to make no order as to costs. The submissions on costs are to be filed within 14 days of the publication of these reasons. I certify that the preceding six hundred and ninety-three (693) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.
Associate: Dated: 30 October 2009 Counsel for the Applicant/Cross-Respondents: Mr I Robertson SC with Ms A Barnett
Solicitor for the Applicant/Cross-Respondents: Piper Alderman
Counsel for the First Respondent/Cross-Claimant: Mr P McNamara QC with Mr T Cox
Solicitor for the First Respondent/Cross-Claimant: Crawford Legal
Date of Hearing: 7-11 July 2008, 14-18 July 2008, 21-23 July 2008, 28 July - 1 August 2008, 2-5 September 2008, 8-12 September 2008, 18 December 2008, 11-13 February 2009
Date of Judgment: 30 October 2009
Annexure 1 A. TABLE OF PERSONS AND COMPANIES Person Abbreviation Description
Australian Medic-Care Company Ltd AMC Applicant and First Cross-Respondent
Richard Blake Previous Managing Director and current Chairman of the Respondent
Faten Carpinelli 2IC in the Export Department of the Respondent
Reya Chartres An employee of Crafers
Keith Cheng A clerk at AMC, resident in Hong Kong
Albert Chung A director of HMC
Crafers Trading Services Pty Ltd Crafers Purchaser of product from the Respondent in 2001-2002, including products in Hong Kong Packaging
"Forward Company" Forward Co See Hong Kong Tung Tak Tong Ltd
Hamilton Pharmaceutical Pty Ltd Hamilton Respondent and Cross-Claimant
Health Medic-Care (Hong Kong) Ltd HMC Sub-distributor of AMC for Rubesal in Hong Kong from 1996
Hong Kong Tung Tak Tong Limited t/a "Forward Company" Forward Co Hong Kong Distributor that purchased the respondent's products from Teemlink Ltd for resale in the Hong Kong retail market
Kenneth Keung (Keung Kin Wah) A Director and shareholder of the Applicant and Second Cross-Respondent
Alfred (Fred) Koerner Previous International Sales Manager and director of the Respondent
Kopurlo Pty Ltd Kopurlo Related company to Crafers
Calvin Lam Former employee of the Applicant. He Supervised the investigation into parallel importation
Mark Lanham Queensland Sales Manager of the Respondent
Brian Lock Previous Export Manager/Consultant of the Respondent (deceased)
Mak Chu Keung The proprietor of Far East Co (deceased)
Medic-care (Far East) Company Far East Co An unincorporated company, used by Dr Keung as his agent to enter the Hong Kong Market
Dimitri Ovcharenko Current Export Sales Manager of the Respondent
Pharmalines Pharmalines A distributor for Hamilton in the United Arab Emirates
Geoff Pritchard Financial Manager and Company Secretary of the Respondent
Graham Sedunary National Sales Manager of the Respondent in 2001
Richard Stafford Director of the Respondent from 23 August 2001 and its Technical Director
Teemlink Limited Teemlink Hong Kong importer that purchased the Respondent's products from Crafers and/or Kopurlo
Wing Keung Medicine Company Ltd WKM Hong Kong distributor that purchased the Respondent's products from Forward Company for resale in the Hong Kong OTC market
Y C Woo & Co Ltd YC Woo First sub-distributor of AMC in Hong Kong appointed in 1990
Zuellig Pharma Zuellig Sole sub-distributor appointed in 1995 for Taiwan
B. TABLE OF PRODUCTS AND TRADEMARKS Product Abbreviation Description
STINGOSE Product manufactured by the Respondent; trade marked, inter alia, in Hong Kong
FUYUNHON Fuyunhon Hong Kong trade mark of the Applicant used, inter alia, to sell Urederm
RUBESAL Rubesal (or R25, R50 or R100, depending on the size of the tube) Analgesic balm manufactured by the Respondent; trade marked, inter alia in Hong Kong
TUOTONING Tuotoning Hong Kong trade mark of the Applicant used, inter alia, to sell Rubesal
UREDERM Urederm (or U100, U50, U25, depending on the size of the tube) 10% urea cream manufactured by the Respondent; trade marked, inter alia, in Hong Kong
Australian Medic-Care Company Ltd
Hamilton Pharmaceutical Pty Limited
Australian Medic-Care Company Ltd v Hamilton Pharmaceutical Pty Limited (ACN 008 204 635) [2009] FCA 1220 CONTRACT - long term exclusive distributorship between Australian supplier and Hong Kong distributor - parties' written agreement not adequately expressing the true character of all aspects of their relationship - contract terminated by supplier - allegation of repudiation by distributor. CONTRACT - claim that contract was partially oral and partially written - principles to be applied in deciding this question - contract found to be written only. CONTRACT - construction of terms dealing with extension and termination of the agreement - negotiations over an extended period - principles of construction of such a contract - extent to which evidence of pre-contractual negotiations admissible. CONTRACT - exclusive distributorship - allegations of parallel importation into Hong Kong - both supplier and distributor subject to a "best efforts" clause to prevent the sale of the supplier's products in Hong Kong by persons other than the distributor - construction of "best efforts" clauses and the "standard of endeavour" required - the parties' obligations found to be reciprocal and interdependent - supplier found in breach of the clause by not taking all reasonable steps to prevent its product being sold into Hong Kong - distributor also in breach for failing to notify supplier of the parallel importation - failure by distributor to mitigate loss. CONTRACT - alleged refusal to supply in accordance with the agreement - offer of supply unreasonably rejected by distributor - failure to mitigate - nominal damages. INTELLECTUAL PROPERTY - distributor selling to Chinese reading market using Chinese character trade mark and Chinese language product indications - claims by supplier to the trade marks under s 87 of the Trade Practices Act 1974 (Cth) on account of alleged misleading or deceptive conduct by Distributor - claim by distributor to copyright in Chinese character product indications and get up. COPYRIGHT - Chinese language product indications found to be original literary works - claim they were or were represented to be direct translations of English language product indications rejected - distributor not trustee of copyright works for supplier. COPYRIGHT - breach of copyright by supplier alleged arising out of parallel importation - alleged unauthorised reproductions by supplier - whether reproduction authorised - additional statutory conversion claim under s 116 of the Copyright Act 1968 rejected. PASSING OFF - sale and resale of product bearing distributor's trade mark and copyright work - alleged misrepresentation calculated to deceive customers and end users - claim rejected - sales made in Australia - no evidence that distributor or Chinese language marks had any reputation at all in Australia. BREACH OF CONFIDENCE - after termination distributor provided third party manufacturer with supplier's production formula and manufacturing formula - similar product manufactured and sold using production formula - claim for breach of confidence - account of profits sought - awarded for a limited period - claim against Director of distributor for profits rejected. Corporations Act 2001 (Cth) s 461(k) Partnership Act 1891 (SA) s 35(d) Trade Practices Act 1974 (Cth) ss 52, 53, 87 Fair Trading Act 1987 (SA) s 56 Evidence Act 1995 (Cth) ss 79, 174 Copyright Act 1968 (Cth) ss 16, 31, 36(1), 38 Copyright (International Protection) Regulations 1969 (Cth) reg 4(1), 4(3)
Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234 applied Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 applied Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 applied Synergy Protection Agency Pty Ltd v North Sydney Leagues Club [2009] NSWCA 140 cited Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 cited International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 applied Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 cited Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 cited FAI Traders Insurance Co Pty Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343 cited GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 applied Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 cited William Sindall Plc v Cambridgeshire County Council [1994] 3 All E R 932 applied Maynard v Goode (1926) 37 CLR 529 cited University of Western Australia v Gray [2009] FCAFC 116 cited United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 cited Beatty v Guggenheim Exploration Co 122 NE 378 (1919) applied Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 251 ALR 322 cited Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 applied Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 cited Sheffield District Railway Co v Great Central Railway Co (1911) 27 TLR 451 cited Transfield Pty Ltd v Arlo Internation Ltd (1980) 144 CLR 83 cited Australian Competition and Consumer Commission v Radio Rentals (2005) 146 FCR 292 cited Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 applied Mallesons Stephen Jacques v Trenorth Ltd [1999] 1 VR 727 cited TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130 applied Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 applied Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213 cited Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 applied Price Higgins & Fidge v Drysdale [1996] 1 VR 346 cited G W Sinclair & Co Pty Ltd v Cocks [2001] VSCA 47 cited Wenkart v Pitman (1998) 46 NSWLR 502 applied James Finlay & Co Ltd v NV Kwik Hoo Tong Handel Maatschappij [1929] 1 KB 400 cited Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] V R 507 cited Payzu Ltd v Saunders [1919] 2 KB 581cited Rickel v Schwinn Bicycle Co 192 Cal Reptr 732 (1983) cited Gibson Motorsport Merchandise Pty Ltd v Forbes (2006) 149 FCR 569 cited Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564 applied Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 applied Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] ATPR (Digest) 53,193 cited Equity Access Pty Ltd v Westpac Banking Corporation (1989) 16 IPR 431 applied Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 applied Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 cited Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 All ER 465 cited Interlego AG v Croner Trading Pty Ltd (1992) 25 IPR 65 cited A-One Accessory Imports Pty Ltd v Off Road Imports Pty Ltd (1996) 65 FCR 478 cited News Ltd v Australian Rugby Football League Ltd (1996) 64 FCR 410 cited Computermate Products (Aust) Pty Ltd v Ozi-Soft Pty Ltd (1988) 20 FCR 46 cited Avel Pty Ltd v Multicoin Amusements Pty Ltd (1990) 171 CLR 88 applied Nationwide News Pty Ltd v Copyright Agency Ltd (1995) 55 FCR 271 applied Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (2007) 159 FCR 397 cited Hansen Beverage Co v Bickfords (Australia) Pty Ltd (2008) 171 FCR 579 cited Erven Warnink BV v J Townsend & Sons [1980] RPC 31 applied Targelto Pty Ltd v Targetts Australia Pty Ltd (1993) 26 IPR 51 cited Monaco Willows Pty Ltd v Greenbax Pty Ltd (1996) 36 IPR 387 cited W A Gilbey Ltd v Continental Liqueurs Pty Ltd (1960) 103 CLR 406 cited ConAgra Inc v McCain Foods (Australia) Pty Ltd (1992) 33 FCR 302 cited Singer Manufacturing Co v Loog (1880) 18 Ch D 395 cited Pacific Dunlop Ltd v Hogan (1989) 23 FCR 553 cited British Telecommunications PLC v One in a Million Ltd (1998) 42 IP 289 cited Hart v MacDonald (1910) 10 CLR 417 cited Hope v RCA Photophone of Australia Pty Ltd (1937) 59 CLR 348 cited Etna v Arif [1999] 2 VR 353 cited Moorgate Tobacco Co Ltd v Phillip Morris Ltd [No 2] (1984) 156 CLR 414 applied Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 applied Coco v A N Clark (Engineers) Ltd [1969] RPC 41 applied Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 applied Smith Kline & French Laboratories (Aust) Ltd v Department of Community Services and Health (1990) 22 FCR 73 applied Prince Jefri Bolkiah v KPMG (a firm) [1999] 2 AC 222 cited Franchi v Franchi [1967] RPC 149 cited Interfirm Comparison (Australia) Pty Ltd v Law Society of New South Wales [1975] 2 NSWLR 104 cited Titan Group Pty Ltd v Steriline Manufacturing Pty Ltd (1990) 19 IPR 353 cited Ackroyds (London) Ltd v Islington Plastics Ltd [1962] RPC 97 cited Aquaculture Corporation v New Zealand Green Mussel Co Ltd (1985) 5 IPR 357 cited United Sterling Corporation v Felton [1974] RPC 162 cited Cranleigh Precision Engineering Ltd v Bryant [1966] RPC 81 cited Amber Size & Chemical Co Ltd v Menzel (1913) 30 RPC 433 cited Surveys & Mining Ltd v Morrison [1969] Qd R 470 cited Measures Brothers Ltd v Measures [1910] 1 Ch 336 cited Deta Nominees Pty Ltd v Viscount Plastic Products Pty Ltd [1979] VR 167 cited Printers & Finishers Ltd v Holloway (No 2) [1965] RPC 239 cited Nichrotherm Electrical Co Ltd v Percy [1956] RPC 272 cited Torrington Manufacturing Co Ltd v Smith & Sons (England) Ltd [1966] RPC 285 cited Seager v Copydex Ltd (No 2) [1969] 2 All ER 718 cited Amway Corporation v Eurway International Ltd [1974] RPC 82 cited Seager v Copydex Ltd (No 1) [1967] RPC 349 cited Conveyor Co of Australia Pty Ltd v Cameron Bros Engineering Co Ltd [1973] 2 NZLR 38 cited Attorney-General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109 cited Nokia Corporation v Liu [2009] FCAFC 138 cited Prime Creative Media Pty Ltd v Vranjkovic [2009] FCA 1030 cited Hospitality Group Pty Ltd v Australian Rugby Union Ltd (2001) 110 FCR 157 cited Attorney-General v Blake [2001] 1 AC 268 cited Coulthard v South Australia (1995) 63 SASR 531 cited Root Quality Pty Ltd v Root Control Technologies Pty Ltd (2000) 177 ALR 231 cited CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 cited Premium Real Estate Ltd v Stevens [2009] 1 NZLR 148 cited Douglas, "Modern Approaches to the Construction and Interpretation of Contracts" (2009) 32 Aust Bar Rev 158 Lewison, The Interpretation of Contracts, 3.08 (4th ed, 2007) Restatement of Contracts, Second, s214(c) Farnsworth, Contracts, s7.12, 7.17, 12.12 (4th ed, 2004) Unidroit Principles of International Commercial Contracts: 2004, Art 4.3, 5.1.4 Comment 1 Cheshire and Fifoot's Law of Contract, [10.7], [10.16], [10.43]-[10.46], [20.1]-[20.2], [23.2], [23.16], [23.34]-[23.35], [28.38], [23.41]-[23.44] (9th Aust ed, 2008) 67 Am Jur 2d, "Sales", s343 Carter on Contract, 41-340 ff Glover, Commercial Equity: Fiduciary Relationships, 3.48-3.51 (1995) Finn, "Fiduciary Principle" in Youdan (ed), Equity, Fiduciaries and Trusts, 1 (1989) Ricketson, The Law of Intellectual Property: Copyright, Designs and Confidential Information, [7.40] ff Shanahan's Australian Law of Trade Marks & Passing Off, Ch 20 (3rd ed, 2003) Kerly's Law of Trade Marks and Trade Names, Ch 15 (14th ed, 2005) Trindade, Cane and Lunney, The Law of Torts in Australia, 6.5 (4th ed, 2007) Wadlow, The Law of Passing Off, 2.30 ff (2nd ed, 1995) Dean, The Law of Trade Secrets and Personal Secrets (2nd ed, 2002) Toulson and Phipps, Confidentiality (2nd ed, 2006) Gurry "Breach of Confidence" in Finn (ed) Essays in Equity, 118 (1985) Mortimore QC Company Directors Ch 27 (2009 OUP) Furmston (ed), The Law of Contract, 8.86, 8.96-8.103, 8.100-8.101 (3rd ed, 2007) Robertson, "Force Majeure Clauses", (2009) 25 JCL 62
(ii) Interpretation 116 First, it has for some time now been indicated "with tolerable clarity" (Masterton Homes, at [1]) that, in interpreting a contract, one is entitled to consider context, background and surrounding circumstances without the need first to find some textual ambiguity: see Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; Synergy Protection Agency Pty Ltd v North Sydney Leagues Club [2009] NSWCA 140 at [22]; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 at 573-547; Douglas, "Modern Approaches to the Construction and Interpretation of Contracts" (2009) 32 Aust Bar Rev 158. 117 Secondly, the rights and liabilities of the parties to a contract are determined by the "principle of objectivity": Pacific Carriers Ltd, at [22]. As was explained in Toll (FGCT) at [40]: It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
118 Thirdly, if a written agreement has a history, "that history is part of the context in which the contract has its meaning": International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at [8]. Nonetheless, evidence of prior negotiations is, as a rule, to be excised from the "context". The orthodoxy in this country - and the orthodoxy recently reaffirmed in English law: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 - is that the negotiations of the parties prior to their contracting and their statements of their subjective intentions are, as a general rule, excluded by the parol evidence rule and cannot be used in the interpretation of the contract: see generally Lewison, The Interpretation of Contracts, 3.08 (4th ed, 2007). Given the recent decision of the House of Lords, I would note without disrespect that this rule does not as of course commend itself in all parts of the common law world and, in particular, in parts of the United States: see Restatement of Contracts, Second, s214(c); and generally, Farnsworth, Contracts, s7.12 (4th ed, 2004); Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 at [76]-[78]. 119 Fourthly, although the present state of the law in this country is not yet settled on whether it is possible to use post-contractual conduct as an aid to construction of a written contract, the more favoured view is that it is not: see Masterton Homes, at [114]; FAI Traders Insurance Co Pty Ltd v Savoy Plaza Pty Ltd [1993] 2 VR 343. The criticisms of this view are, in the main, directed at its inflexibility particularly in relational contract settings: see eg GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at [351]; see also Unidroit Principles of International Commercial Contracts: 2004, Art 4.3. 120 Fifthly, a commercial contract is to be given "a businesslike interpretation": International Air Transport Association v Ansett Australia Holdings Ltd at [8]; or as Lord Steyn put it (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771); "a commercially sensible construction". 121 Finally, I would comment that in a case such as the present where there are both a dispute as to whether the contract is or is not partly oral and claims as well of misleading or deceptive conduct in the negotiations for the contract, the evidence of the parties' negotiations can be admitted on those issues and can result in the court obtaining an informed appreciation not only of the object and intent of the contract itself but also of individual clauses of it. Where it is found that the contract is, in fact, wholly written, to require the parol evidence rule to be applied to the construction of the contract in disregard of that informed appreciation does sit rather oddly with the concept of party autonomy.
[2001] VSCA 47
(2004) 218 CLR 451
(2004) 219 CLR 165
(2005) 223 ALR 560
(2008) 234 CLR 151
(2003) 128 FCR 1
(1926) 37 CLR 529
(2008) 251 ALR 322
(1984) 156 CLR 41
(1980) 144 CLR 83
(2005) 146 FCR 292
(1917) 24 CLR 288
(1963) 180 CLR 130
(1998) 192 CLR 603
(1994) 179 CLR 332
(1998) 46 NSWLR 502
(2006) 149 FCR 569
(2000) 104 FCR 564
(1992) 39 FCR 31
(1989) 16 IPR 431
(1984) 2 FCR 82
(2004) 218 CLR 592
(1992) 25 IPR 65
(1996) 65 FCR 478
(1996) 64 FCR 410
(1988) 20 FCR 46
(1990) 171 CLR 88
(1995) 55 FCR 271
(2007) 159 FCR 397
(2008) 171 FCR 579
(1993) 26 IPR 51
(1996) 36 IPR 387
(1960) 103 CLR 406
(1992) 33 FCR 302
(1989) 23 FCR 553
(1910) 10 CLR 417
(1937) 59 CLR 348
(1984) 156 CLR 414
(1990) 22 FCR 73
(1990) 19 IPR 353
(1985) 5 IPR 357
(2001) 110 FCR 157
(1995) 63 SASR 531
(2000) 177 ALR 231
(2001) 208 CLR 199
(1998) 86 FCR 244
(1998) 42 IPR 289