Device Technologies Australia Pty Ltd v Applied Medical International Inc and Anor

1 Device Technologies Australia Pty Ltd ("DTA") is a distributor of medical devices. Almost all of the products DTA sells are manufactured by overseas manufacturers. Applied Medical International Inc ("AMI") is a manufacturer of medical equipment based in California. AMI manufactures products in three medical product lines: cardio-vascular, urology, and general surgery. 2 DTA acted as distributor for the products of AMI in Australia. This arrangement commenced in about April 1993 and came to an end between November 1999 and February 2000. In February 2000 AMI entered into a distribution arrangement with Gembro Pty Ltd ("Gembro"), the Second Defendant in these proceedings. 3 DTA claims that it had exclusive distribution rights for AMI's products in Australia under a contract which is to be implied from the conduct of the parties since 1993. DTA alleges that the contract, initially terminable only upon reasonable notice, was extended for a fixed term of three years by reason of a further immediately binding oral contract made in a meeting on 15 December 1999 between Mr Ord, the Chief Executive Officer of DTA, Mr Ryan, the Managing Director of DTA, and Mr Molloy, the Vice President of Global Sales for AMI. DTA claims that AMI has repudiated the contract, as varied, and that Gembro intentionally induced that repudiation. 4 Alternatively, DTA alleges that AMI is guilty of breaches of s.52 and s.51A Trade Practices Act, 1974 , in that AMI, through Mr Molloy, represented to Messrs Ord and Ryan in the 15 December meeting that it would extend DTA's exclusive distribution contract for all of its products for three years. 5 By an Amended Cross Claim, AMI seeks an order for payment by DTA of a debt of USD81,287.56 in respect of goods sold and delivered to DTA, together with interest. DTA does not dispute the debt but claims that it is entitled to set the debt off against the damages for which it says AMI is liable. AMI denies that such a set-off is available in law.

6 The issues for determination may be summarised thus: - Immediately prior to 15 December 1999, was there in existence a contract between DTA and AMI for the exclusive distribution by DTA of AMI's products in Australia, that contract being terminable by AMI only upon prior reasonable notice to DTA? - If such a contract existed, was reasonable notice of termination ever given to DTA by AMI?

• Did an immediately binding contract come into existence between the parties on 15 December 1999, whether as a variation to an existing contract or independently, whereby DTA was given exclusive distribution rights in Australia for AMI's products, including the general surgery products, for a period of three years?

• Did AMI represent to DTA on and after 15 December 1999 that DTA would continue to be AMI's exclusive distributor for general surgery products for three years and, if so, did DTA rely upon that representation?

• If any exclusive distribution contract existed between DTA and AMI, was Gembro sufficiently aware of its terms, or else recklessly indifferent to its terms, at the time it commenced selling AMI's products, so that Gembro should be held liable for procuring a breach of that contract?

• If liability on the part of AMI and Gembro is found, what is the quantum of damages for which each is liable?

• Is DTA entitled to set off against AMI's liability for damages, if any, the amount of the debt owed by DTA for goods sold and delivered? The context in which the parties operated

7 DTA's contention that an exclusive distribution contract had come into existence with AMI by a course of dealing between the parties since April 1993 must be seen in the context in which the parties were dealing with each other.

8 Both parties were, and are, substantial trading corporations. AMI conducts its operations world-wide and DTA conducts its business throughout Australia. It may be assumed that AMI is managed by experienced, highly professional and commercial people. Certainly, both Mr Molloy and AMI's Senior Vice President, Mr Hilal, who gave evidence for AMI, conveyed that impression. So also did Messrs Ord and Ryan, who gave evidence for DTA. 9 The subject matter of the business relationship between DTA and AMI - an Australia-wide exclusive distributorship for AMI's products - was a valuable right as far as both parties were concerned. Between 1993 and 1999 DTA made sales of AMI's products in the order of $6.8M although sales of AMI's products never represented more than 10% of DTA's annual turn-over. DTA had distribution contracts with other suppliers. From the evidence of Mr Ryan it appears that distribution contracts with DTA's other suppliers are in writing and, at least in the latter part of the 1990s, commonly contained covenants by DTA requiring a certain level of sales of the suppliers' product. 10 It is now necessary to examine in more detail the history of the parties' dealings.

11 In April 1993 DTA began selling AMI's products in Australia. It was clearly the expectation of both parties at that time that a formal written distribution contract would be executed. A facsimile of 5 May 1993 from Mr Ryan to Mr Swindle, an executive of AMI, refers to changes to the contract that had been discussed some little time earlier. Negotiations as to the terms of the contract continued with the exchange of proposed amendments. 12 On 25 October 1993 Mr Ryan sent a facsimile to AMI enclosing "the signed distribution agreements" . One may take it that as from that date, at the latest, the parties had entered into a distribution contract the terms of which were to be found in the document which they had executed. That document can no longer be located. 13 It seems that by late May 1994 the parties had discussed variations to their contract. On 23 May 1994 Mr Basler, then the International Marketing Director of AMI, wrote to Mr Ord referring to a meeting between them a few days earlier and saying: "I shall re-write the Distribution Agreement to cover the provisions we discussed" . Again, one may take it that both parties contemplated and intended that the proposed variations to their contractual relationship should be reflected in a formal, executed document. 14 On 2 August 1994 Mr Basler sent to Mr Ord two copies of a formal contract, under cover of the following letter: "Enclosed are the original and one copy of the International Distributor Agreement between Applied Medical and Device Technologies.

Please review it, as I have included all the new products that are released, many of which you haven't seen as of yet.

Please sign both agreements and return the copy to us. I have flagged the pages where signatures are required. Also, initial each page of the price list, as [Mr Hilal] has done.

I am glad to have gotten this agreement formalized. I believe that DTA can be very successful in presenting our products to the Australian marketplace …"

Copies of the letter were sent to other senior executives of AMI.

15 The International Distribution Agreement enclosed with Mr Basler's letter is in evidence. It is almost thirty pages in length. It has, clearly, been drafted by lawyers and is intended to be executed with formality by both parties. Its terms are significant because they show the basis upon which AMI was prepared to grant an exclusive distributorship to DTA in mid-1994. 16 By Clause 2.1 AMI appointed DTA as its exclusive distributor within Australia in respect of "Products", defined in an attached list, which included general surgery products. The appointment as exclusive distributor was "subject to the terms and conditions set forth herein" . 17 The terms upon which AMI was prepared to grant an exclusive distributorship to DTA included the following: a term entitling AMI, at its sole discretion, to change or abandon existing Products on thirty days' prior written notice (Clause 1.1); a term requiring DTA to achieve a certain level of annual sales, failure to do so with respect to any Product being an act of default giving AMI a right to terminate the exclusive distribution right for that Product (Clause 2.3); a term requiring DTA to provide an Annual Operating Plan demonstrating how it intended to promote and increase growth in sales of AMI's products (Clause 6.3); a term providing for automatic termination of the contract after two years unless the parties extended it by mutual written consent (Clause 8.1); a term enabling either party to terminate for default of the other (Clause 8.2(a)); a term limiting the liability of AMI to DTA in consequence of a termination of the contract (Clause 8.3); a term stipulating that the governing law of the contract was that of California (Clause 14.2) and that the written contract contained the entire agreement of the parties and could not be varied except by written consent of both (Clause 14.4).

18 The terms of the Distribution Agreement were not acceptable to Mr Ord. He told Mr Ryan: "I don't think we should sign this contract. There are a lot of clauses in here that I don't like" . Mr Ryan said: "Well, don't send it back then" 19 On 1 September 1994 Mr Basler sent a facsimile to Mr Ord saying that he had not heard anything further from Mr Ord about the Distribution Agreement. Mr Basler continued: "If it's alright, please sign the copy and return it to me. If you have any questions, please give me a ring." 20 On 19 September 1994 Mr Ord sent a facsimile to AMI requesting certain changes to the Distribution Agreement. However, Mr Ord says that after he had sent this facsimile he re-read the Distribution Agreement and decided that DTA would not proceed with the execution of it. He gave this evidence: " Q. Now in the end you didn't pursue negotiations of the drafting of these clauses but rather you decided not to communicate further about this distribution agreement, is that right?

A. Well, in fact the relationship had been going on for a number of years. We didn't see the contract negotiations were going to alter that relationship.

Q. You thought that even without signing this agreement, Applied Medical would probably continue to …

Q. And that's why you didn't pursue any further negotiations about the drafting of these particular clauses that you've indicated you would have wanted to take advice or renegotiate before actually signing a written contract?

A. I think there was some further correspondence for a time where in fact I'd got back to the President of the company who was fairly difficult to contact and to speak to. But apart from that, as time went on, it was business as usual."

21 The position between the parties as at September 1994 may therefore be summarised thus. DTA had commenced selling AMI's products in April 1993, the common intention of the parties being that a formal Distribution Agreement would be executed. A formal Distribution Agreement was in fact executed in October 1993. No one suggests that that Agreement continued indefinitely. 22 In mid-1994, the parties recognised that a new Distribution Agreement was required and they entered into negotiations. AMI proffered a Distribution Agreement setting out the terms upon which it was prepared to grant to DTA an exclusive distributorship for a period of two years. That Distribution Agreement imposed certain obligations on DTA in consideration of the grant. DTA did not want to accept those terms so that it did not execute the Distribution Agreement. 23 Thereafter, and until December 1999, AMI continued to supply products for sale in Australia to DTA alone. No one suggests that it did so pursuant to and in accordance with the terms of the Distribution Agreement which had been executed in October 1993. DTA's specifically denies that its relationship with AMI between 1994 and 1999 was governed by any of the terms in the Distribution Agreement which had been sent to it in 1994 but not executed by it. 24 The question, therefore, is: in light of the fact that in 1994 AMI had proffered to DTA a contract upon the terms of which AMI was prepared to grant exclusive distribution to DTA for two years and DTA had rejected that contract, did the conduct of the parties thereafter evidence a common intention to be bound by an unwritten contract whereunder AMI granted to DTA exclusive distribution rights for an indefinite period and upon no terms other than that AMI would give reasonable notice to DTA prior to terminating that exclusive distribution.

25 It almost goes without saying that simply because parties continue in some sort of commercial or business relationship for a long time, dealing with each other on the same terms, that does not, in itself, bring into existence a contract which creates legal obligations on them to continue dealing with each other in the same way. 26 To give a somewhat facile example: if I have bought a copy of The New Yorker magazine from the same newsagent every month for the past fifteen years on my way to the station so that the newsagent, knowing me as a regular customer, always takes care to order in the magazine for me even though I have never asked him to do so, does that mean that I am contractually bound to keep on buying the magazine from him until I bring the contract to an end by giving him the appropriate notice of termination? Surely not. Both of us are acting only on the basis of mutual expectation, not on the basis of mutual obligation. Of course, if I had made a point of asking him specially to get the magazine in for me and, to my knowledge, he complied with that request, different considerations would arise. 27 In the present case, after DTA refused to accept AMI's terms for an exclusive Distribution Agreement, DTA and AMI continued to deal with each other for another five years until 1999. AMI did not supply its products to any other distributor in Australia and DTA did not acquire products of the type supplied by AMI from any other supplier. As I have said, selling AMI's products was only a small part of DTA's business. Apparently, between 1994 and December 1999, both parties regarded their relationship as commercially advantageous. Can DTA point to anything which elevates the relationship from one in which both parties had an expectation of continuance during mutual advantage into one which is governed by contractual obligation?

28 Mr Wood, who appears for DTA, submits that the following matters indicate that a contract for exclusive distribution came into existence between the parties: Final Submissions Section A.3. He says that absence of contractual relationship is: - antithetical to the long history of DTA acting as distributor in Australia of AMI's products. He refers to the evidence which shows that, in fact, AMI did not supply products to any distributor in Australia other than DTA prior to 2000; - contradicted by AMI in 1996 awarding DTA its "International Distributor Top Sales Award";

• inconsistent with DTA's rejection of offers to represent products which competed with those supplied by AMI;

• inconsistent with the statement by AMI in a facsimile dated 2 December 1993 responding to a Swiss company's enquiry about a certain product: "We have a distributor in Australia" ;

• inconsistent with the advertising and promotional material of DTA which included the name and logo of AMI;

• inconsistent with a statement in a facsimile dated 15 March 1995 from AMI to DTA in which pricing of a certain product was discussed, AMI saying that it did not understand how the pricing could have an adverse effect on attempts to sell the product because no other manufacturer in the world offered the product "… therefore [DTA] will be the sole source" of the product to surgeons in Australia;

• inconsistent with a statement by AMI in a facsimile of 23 September 1997 that its anxiety about a fall in purchases of stock of a certain product by DTA was "compounded by the recent announcement that you plan to represent a competing technology from Possis" ;

• inconsistent with the constant use of the description "distributor" or the phrase "distributor agreement" in negotiations in 1993 and 1994 in respect of the draft Distribution Agreement;

• inconsistent with the terms of the correspondence between the parties in November and December 1999 when AMI stated that it intended to remove general surgery products from distribution by DTA;

• inconsistent with AMI acknowledging on both 24 November 1999 and 29 February 2000 that it had to provide a period of notice to DTA for cessation of supply of general surgery products. 29 I cannot accept that the matters relied upon by Mr Wood, taken singly or collectively, evince a common intention of the parties that their business relationship be governed by a contract creating exclusive distribution rights, for the following reasons.

30 First, the only references between the parties to a distribution contract or to exclusive distributorship were in the context of discussions concerning formal written contracts in 1993 and in 1994. When DTA decided not to execute the Distribution Agreement proffered by AMI in August 1994, neither party thereafter expressly asserted to the other that there was any contract between them - not, at least, until the meeting between Mr Molloy and Messrs Ord and Ryan on 15 December 1999 when, according to Mr Molloy, Mr Ord waved a document at him and said: "We have a contract" . 31 Second, neither party had an actual belief after September 1994 that their relationship was governed by a distribution contract. Mr Ord denied that he told Mr Molloy on 15 December 1999 that DTA had a contract. He said in cross examination: " Q: Did you claim to have a contract with Applied Medical in your discussion?

A: There were no claims of contracts. There was a claim of continuing business." T101.41 32 These statements reflect and emphasise Mr Ord's evidence that as at September 1994 he did not want to enter into a Distribution Agreement proffered by AMI containing unacceptable terms because there had previously been a long relationship between the companies and "we didn't see the contract negotiations were going to alter that relationship" . He thought that, without DTA entering into the contract, AMI would probably continue to do "business as usual" : see para.20. In other words, DTA itself regarded the relationship with AMI after 1994 not as arising from or depending upon a contract but as arising from and depending upon a continuing good business relationship.

33 The evidence shows that AMI itself, like DTA, did not believe that there was a contract with DTA in existence after August 1994. Mr Molloy was not aware of any such contract when Mr Ord waved a document at him. Mr Hilal was not aware of any such contract when Mr Molloy reported the episode to him. No one else in AMI appeared to be aware of a contract with DTA. It was only after months of searching that the unexecuted 1994 Distribution Agreement was unearthed in AMI's archives. 34 Accordingly, this is not one of those cases where there is clear evidence that commercial parties shared a belief that a contract existed between them, so that the Court should be reluctant to hold that there was none: cf. F&G Sykes (Wessex) Ltd v Fine Fare Ltd (1967) Ll.L.R. 53, at 57; Multi-core Aerators Ltd v Multi-core Aerators Pty Ltd (1997) 40 IPR 462, at 475. On the contrary, this is a case where there is clear evidence that commercial parties shared a belief that no contract existed between them, so that a Court should be reluctant to hold that there was one.

35 Third, all of the matters to which Mr Wood has referred are entirely consistent with the relationship between the parties being simply that DTA would continue to be AMI's sole distributor in Australia as long as the arrangement suited both of them - nothing more. 36 The fact that AMI wrote on 24 November 1999 giving advance notice to DTA that general surgery products would be removed from its distributorship was simply a matter of business practicality, not a matter of contractual obligation: both sides needed to prepare for the transition, as the letter pointed out: see para.48. 37 For these reasons, I hold that as at 15 December 1999 there was no distribution contract in existence between AMI and DTA in relation to any of AMI's products sold by DTA. AMI was, as at that time, entitled to terminate DTA's distribution of its products without notice.

Principles applicable to finding an informal commercial contract

38 The primary claim by DTA in this case has been founded on its allegation that a three year distribution contract came into existence on 15 December 1999 in the course of a meeting between Mr Molloy and Messrs Ord and Ryan. The contract is said to be entirely oral; it is said to have been immediately binding on the parties although it was their common intention that a formal distribution contract containing many terms not yet discussed would be prepared by Mr Molloy when he returned to the United States. The oral contract was never documented, not even to the extent of "heads of agreement" or any other memorandum of its terms acknowledged by both parties.

39 The existence of the oral contract is said by DTA to be corroborated by a note made by Mr Ryan some time after the 15 December meeting. One version of the note reads: "Three (3) year contract to be issued - quotas for the three divisions to be listed separately."

The note was not sent to Mr Molloy by way of confirmation. 40 The contract is also said to be corroborated by inferences to be drawn from a number of e-mails passing between the parties over the weeks following the 15 December meeting. The e-mails are open to different constructions.

41 The alleged oral contract is one between trading corporations and is said to govern a substantial commercial transaction, namely, the granting of an exclusive distributorship Australia-wide for a period of three years. Clearly, the contract concerns millions of dollars of potential sales revenue to both parties. Those said to have concluded the contract are all highly experienced commercial people. 42 In these circumstances, how should the Court approach the question whether an oral contract was made and whether the parties evinced a common intention that it be immediately binding notwithstanding that they contemplated preparation of a formal contract containing terms not yet discussed?

43 In this respect, I can do no better than to repeat what I said in R.T. & Y.E. Falls Investments Pty Ltd v The State of New South Wales and Ors [2001] NSWSC 1027, at para.53: "As a general rule, when parties have been negotiating a substantial commercial transaction in the common expectation that, at some stage, a formal contract will be brought into existence, the Court should be reluctant indeed to find a common intention that a binding informal contract should come into existence at any time prior to the execution of the formal document. This is especially so when the terms of the alleged informal contract have to be pieced together or implied from various conversations, ill-recorded or not recorded at all, and from selective extracts from a concatenation of correspondence. Commonsense has a part to play in the Court's enquiry: it is inherently improbable that commercial people will intend to bind themselves to a substantial transaction in that haphazard and imprudent fashion, so potentially productive of subsequent dispute, when they have already recognised the need for a formal contract to record the terms of the transaction."

44 There can be no doubt that by 13 December 1999, when Mr Molloy commenced his series of meetings in Sydney with DTA, he had reached a firm view that AMI's general surgery products should be transferred from DTA's distributorship to another distributor and that distributorship for AMI's other product lines, i.e. urology and cardiovascular, should remain with DTA. Of particular concern to Mr Molloy was the fact that DTA operated through sub- distributors rather than having its own sales team. Mr Molloy's view was that the profit margins which both DTA and its sub-distributorship needed to generate for themselves required AMI to cut its own sales prices to DTA so that its products would remain competitive in the Australian market. 45 Another major concern of Mr Molloy was that DTA's sales of general surgery products had been, in his view, too low for some years and had declined significantly in 1999. He thought that AMI's general surgery products were lost amongst the products of many other suppliers which were being distributed by DTA and its sub-distributors. Mr Molloy had taken up this concern with Ms Jenny Stone of DTA and Mr Ord in October 1999. His criticisms to Mr Ord of DTA's performance in sales of general surgery products were direct and trenchant - "abysmal" is the word which he says he used. 46 Mr Molloy's decision to transfer the general surgery distributorship away from DTA was not made by him alone. He had previously discussed the decision with his staff and it had been approved by his superior, Mr Ted Stanley, Senior Vice President of Global Sales. 47 On 22 November 1999 Mr Molloy had a meeting with Mr Ryan. Mr Molloy told Mr Ryan that it was AMI's intention to separate the distribution rights for AMI's three lines of product, general surgery, urology and cardiovascular, and that AMI would be giving the general surgery distribution rights to another agent but would like DTA to keep the urology and cardiovascular lines. 48 By a facsimile letter of 24 November 1999, Mr Molloy confirmed to DTA the decision which he had discussed with Mr Ryan two days earlier. The letter stated: "I want to re-confirm, from our discussion, our intention to divide the Applied Medical Resources distribution in Australia into three distinct divisions, in line with our world-wide strategy …. … At the end of the month I will get in touch again to discuss the split with you, but I wanted to get the ball rolling here because I would like our decision to be professionally implemented, which will require some discussion. While I am sure you may not agree with all of our conclusions, please bear in mind that this is part of a broad-based approach to our divisional marketing across many countries. Australia is one of the last major markets where all of our eggs are in one basket, so to speak. My expectation is that we will transfer our General Surgery division products to another company in the New Year. This is decision that will make room for significant revenue growth in the other product areas, in light of my comments above. I look forward to talking to you further during my visit in mid-December."

The language of the letter is decisive, not tentative; it recognises that DTA will not agree with the decision but it gives clear notice that the decision is to be implemented. 49 At the same time as he sent the facsimile of 24 November to DTA, Mr Molloy sent an e-mail to Mr Stanley and other executives of AMI attaching the facsimile and stating: "We will transfer our [general surgery] to [Gembro] in the New Year, at current estimates, per February 01, 2000. While our deeper motivation lies in the lack of progress in entering the disposable trocar market in Australia (despite the wildest prices in the West!), I have worded the letter to reflect a general strategic approach to our business and a compelling logic to develop more depth and focus in our distribution. DTA is one of the last major countries where all three divisions reside under one roof.

[Mr Molloy then referred to the lack of satisfactory sales of general surgery products by DTA.]

…I will visit Australia in mid-December to construct an 'Action Plan' with our new distributor which will scrupulously outline our goals and activities in the transition period. …" 50 On the same day Mr Molloy sent an e-mail to Mr Mahoney, a director of Gembro. The e-mail stated: "I met with Kevin Ryan from Device Technologies last night and told him we were splitting our business into two, possibly three groups. Urology, vascular and [general surgery] . Of course, he did not agree with me on all the points but it was a constructive discussion! However from the perspective of [AMI] and [Gembro] we can start to get the ball rolling now. We would like to give [DTA] at least 60 days notice, starting December 01st. That means [Gembro] can start selling on February 01st, 2000. In the period between now and then we should discuss training, market communication, stocking up, TGA, etc., etc." 51 On 2 and 3 December 1999 Mr Ord and Mr Ryan sent facsimiles to Mr Molloy protesting at length at the decision to transfer the general surgery distributorship. They gave lengthy reasons as to why this should not occur. Mr Molloy responded in a detailed facsimile on 3 December 1999, in which he reiterated his concerns as to declining sales in general surgery products. The facsimile concludes: "Let's talk, by all means, during my visit. I would like to cover all of the critical areas: markets, distribution, pricing and competition. … However, I think it is fair to say that we have our mind firmly set on a development path for our business that must include all the products. It foresees real gains against our competitors, and above all it requires the depth and focus from our partners that I referred to in my letter [of 24 November] . If you have suggestions on how I can better prepare for the talks please let me know." 52 On 6 December 1999 Mr Ord and Mr Ryan sent a lengthy facsimile to Mr Molloy taking issue with most of the matters which had been raised by Mr Molloy in his previous facsimile. This facsimile concluded: "If you are coming in [to Sydney] to start on the Monday, we would like to meet with you before you decide to contact other parties. I think this would be an ethical and businesslike approach …" 53 Mr Molloy responded by facsimile on the same day. He repeated at length all of the concerns about general surgery product sales which he had expressed in his previous facsimiles. He disagreed with a number of the assertions which had been made by Mr Ryan and Mr Ord. In conclusion, he confirmed that he would be arriving in Sydney for discussions in the following week and confirmed that he would be meeting with DTA before anyone else. 54 It is clear from these communications that although Messrs Ord and Ryan had endeavoured to persuade Mr Molloy that his adverse views of DTA's performance in general surgery product sales were unfounded, they had not succeeded by the time that Mr Molloy arrived in Sydney on 13 December 1999. 55 Mr Molloy says that he regarded the meetings with DTA in December as an opportunity to explain face-to-face the reasons for his decision to remove general surgery products from DTA and as an opportunity to explain why he was keen that DTA continue to distribute the cardiovascular and urology products. He says that he regarded it only as a remote possibility that he would be persuaded by discussions at these meetings to reverse his decision to remove general surgery products from DTA. 56 Mr Molloy brought with him to the December meetings two documents which were the subject of much discussion with DTA representatives. The first was headed "Device Technologies Australia Forecast 2000". It set out in respect of each of the three product lines distributed by DTA the sales of each product within those product lines made by AMI to DTA for the years 1996 to 1999. The document also set out sales forecasts for 2000 in respect of each product in each of the product lines. The second document was headed "New Products Launches" and set out launch dates for six urology products, six cardiovascular products and four general surgery products. 57 DTA says that the fact that Mr Molloy came to the meetings with a document showing forecast sales figures for general surgery products in 2000 shows that Mr Molloy had no real intention of taking general surgery products away from it. Mr Molloy says that, on the contrary, he used the document to highlight to DTA its shortcomings since 1996 in sales of general surgery products and to demonstrate that AMI intended to be far more aggressive in the Australian market than DTA had been to date. In view of Mr Molloy's previous trenchant and repeated criticisms of DTA's performance in selling general surgery products, I accept that evidence. 58 For the same reason, I accept that Mr Molloy came to the December meetings with the attitude that there was only a remote possibility that he would be dissuaded from removing general surgery products from DTA's distributorship. I accept, however, that he wished to retain DTA as AMI's distributor for urology and cardiovascular products and that the documents would be useful for discussing target sales for those products.

59 It is common ground that during the meetings of 13 and 14 December and in the morning of 15 December there was a great deal of discussion with Mr Molloy about growth in the sales quotas which he wanted to be achieved in Australia, particularly in general surgery products. Mr Molloy says that, on several occasions, Ms Jenny Stone expressed doubt about whether DTA could achieve Mr Molloy's sales target figures but Mr Ryan disagreed with her. This evidence is confirmed to a degree by Mr Ryan's notes of the discussions which show that DTA regarded Mr Molloy's targeted growth in sales of disposable trocars (a general surgery product) as "a big ask". 60 Mr Molloy's evidence is that in the afternoon of 15 December he, Mr Ord and Mr Ryan were alone in the meeting room. He told them that he did not see any reason for reversing AMI's decision to place general surgery products with another distributor. Mr Ord then waved a document at him and said: "You can't do that. We have a contract, you know" . He would not let Mr Molloy read the document. 61 Mr Molloy said that he was not aware that there was any written contract but that he would consider giving DTA a three-year contract for cardiovascular and urology products. At this point in the meeting Mr Ord broke down and wept. Mr Molloy felt very discomfited. When Mr Ord regained his composure he explained that his father was dying. 62 According to Mr Molloy, this episode eased the somewhat combative atmosphere of the meeting. Although Mr Molloy did not change his mind about transferring distributorship of the general surgery products away from DTA, he wanted to make the process a little easier for DTA. He says that he then said to Mr Ord and Mr Ryan: "Another thing we may be able to do is give you a bit of a soft landing in terms of the exit from the general surgery products. If you were interested we could we could continue to supply you with products from the convertible range of trocar products for some period of time beyond the transfer of the general surgery business to a new distributor. We might also consider providing you with our new clip applier in kit form for a short period of time after it comes on the market in 2000." 63 Mr Ord's evidence is that at a certain point in this meeting, after he had broken down and then regained his composure, he said to Mr Molloy: "So what is the decision. Are you going to stay with us?" This evidence implicitly acknowledges that Mr Molloy had not previously indicated that he had changed his attitude to taking the distribution of general surgery products away from DTA. Mr Ord was asking one last time whether Mr Molloy was going to change his mind. 64 Mr Ryan's evidence is that at this point in the discussion he or Mr Ord said: "Well, Paul, what's it going to be?" Mr Ryan says that the question was asked just after he himself had said that DTA would agree to all of AMI's targeted sales quotas. Mr Ryan's reason for that agreement was: "Given Mr Molloy's previous threats about segregation [that is, giving general surgery products to another distributor] , I felt that we were in a weak bargaining position." This evidence strongly confirms that up until that point in all of DTA's discussions with Mr Molloy, Mr Molloy had given no indication that he had changed his mind about taking general surgery products away from DTA. 65 Mr Ord says that after the critical question was asked of Mr Molloy, Mr Molloy said: 'Okay, okay. I'll go with the three year contract for the entire product range based on these numbers." Mr Ryan says that Mr Molloy hesitated and then said: "Well fellows, let's just let it run the way it is. When I get back to my office I'll issue a three year contract based on these discussions."

66 Ascertainment of what was said by Messrs Molloy, Ord and Ryan at the 15 December meeting depends not only upon inherent probabilities but also, to a significant degree, upon the credit of the only three persons who were present. No truly contemporaneous note of the discussion exists - a matter to which I will return. 67 In my opinion, an important indication of the credit-worthiness of the evidence as to whether Mr Molloy agreed to give DTA a three year contract is the competing evidence as to whether Mr Ord, during the discussion, waved a document at Mr Molloy and said: "We have a contract" : see para.60. Mr Ord denies that that ever happened. Mr Wood put to Mr Molloy in cross examination that he had fabricated this episode. 68 I accept that Mr Ord waved a document at Mr Molloy at the 15 December meeting and said: "We have a contract" . Mr Molloy's evidence in this respect is corroborated by other unimpeached evidence. He told Mr Smithers and Mr Mahoney, Gembro's directors, about the episode as soon as he arrived in Queensland, which caused them to query the existence of such a contract in a series of e-mails. He told Mr Hilal of the episode on his return to the United States, which caused AMI to undertake extensive searches in its records for any such contract, as Mr Hilal's unchallenged evidence reveals. 69 Mr Wood suggested to Mr Molloy that he had made up the story about Mr Ord waving a contract and had told that story to Messrs Smithers and Mahoney in order to give himself more time before committing himself either to DTA or Gembro. Mr Molloy emphatically denied the suggestion. In my view, the suggestion was fanciful. Mr Molloy had already committed himself to Gembro by the time he arrived in Queensland. Why would he wish to create possible difficulties for the relationship between AMI and Gembro even before that relationship had commenced? Why would he put Mr Hilal and other AMI employees to the trouble of searching extensively for a fictitious "DTA contract" when that would serve no useful purpose as far as AMI's internal deliberations were concerned? 70 I am entirely satisfied that Mr Ord's waving of a document at Mr Molloy during the meeting and saying: "We have a contract" , was pure bluff at the time, which Mr Ord has later tried to disavow. 71 The fact that Mr Ord was prepared to assert a contract to Mr Molloy and to attempt to corroborate that assertion by waving a document when he knew that there was no contract at all goes very materially and adversely to Mr Ord's credit on the issue of whether Mr Molloy said that he would issue a three year contract to DTA. In asserting to Mr Molloy the existence of a contract, Mr Ord was prepared not just to exaggerate the character of the relationship between AMI and DTA, he was prepared to misrepresent it completely and he was prepared to add colour to his misrepresentation by pretending that he was holding the very contract he was speaking of. This representation was not just a casual, half-hearted aside by Mr Ord. It was taken seriously enough by Mr Molloy to cause him to warn Gembro about the "contract" and to ask Mr Hilal whether it could be located. I infer that Mr Ord deliberately misrepresented that DTA had a contract with AMI because he thought it would be to DTA's advantage to indicate to Mr Molloy that attempting to withdraw general surgery products from DTA's distributorship could be more difficult than Mr Molloy had bargained for and that DTA was prepared to make trouble. 72 Mr Ord did not frankly admit this episode in his evidence; he did not concede that he had been "bluffing". He steadfastly denied that the episode had occurred at all. I cannot accept that this was simply an error of recollection on his part. 73 Mr Ryan was prepared to sit by at the 15 December meeting while, to his knowledge, Mr Ord falsely asserted to Mr Molloy the existence of a contract between AMI and DTA. That Mr Ryan did not attempt to correct that misrepresentation reflects adversely on the reliability of his evidence that Mr Molloy agreed to give DTA a three year contract. Mr Ryan was prepared to let DTA take advantage of the misrepresentation in any way it could in the negotiations with Mr Molloy. 74 It is difficult to resist the proposition that if Mr Ord and Mr Ryan were prepared to misrepresent the character of the relationship between DTA and AMI once, then they may well be prepared to do it again. 75 I must take into account another circumstance reflecting on the reliability of Mr Ryan's evidence. 76 Mr Ryan says that his meeting with Mr Molloy on 22 November 1999, in which segregation of AMI's product lines was discussed, ended inconclusively, with Mr Molloy not stating his position finally. On the other hand, Mr Molloy says that the meeting ended with a statement by him to the effect that AMI was going to pursue segregation and that he would follow this decision up with a letter of confirmation. Two days later Mr Molloy sent the facsimile of 24 November confirming AMI's intention to segregate AMI's product lines: see paras.47, 48. 77 I accept Mr Molloy's account of the conversation with Mr Ryan on 22 November. It is corroborated by the terms of Mr Molloy's facsimile of 24 November. It is corroborated also by the evidence as to Mr Molloy's dissatisfaction with DTA to which I have referred in paras.44 to 54. In my opinion, Mr Ryan's account of the conversation is not merely inaccurate; it reflects an unwillingness on his part to accept unwelcome decisions and a tendency to reinterpret and reconstruct events accordingly.

78 Mr Wood submits that I should find that Mr Molloy's account of his meeting with Messrs Ord and Ryan on the afternoon of 15 December 1999 was deliberately false. He submits that Mr Molloy was pursuing a strategy of calculated deception in his discussions with Messrs Ord and Ryan: he wished to lead them into thinking that DTA would continue to be AMI's exclusive Australian distributor for general surgery products until such time as Gembro was able to obtain registration under the Therapeutic Goods Act in respect of its distributorship of those products. As soon as that happened, Mr Wood submits, Mr Molloy intended to remove the general surgery products from DTA's distributorship and give them to Gembro under a distributorship contract with Gembro. Mr Wood says that Mr Molloy carried out his strategy of deception to the letter: he told Messrs Ryan and Ord on 15 December 1999 that DTA would be given a three year contract for all AMI products including general surgery products, he then flew to Queensland and told Gembro's directors that Gembro would have an exclusive distributorship for the general surgery products and he encouraged them to apply for the necessary registration under the Therapeutic Goods Act . As soon as that registration had been effected on 25 February 2000, Mr Molloy, having achieved his purpose, advised DTA by facsimile on 29 February 2000 that DTA no longer had an exclusive distributorship for general surgery products. 79 Mr Wood says that Mr Molloy has concocted his evidence that at the 15 December meeting, after Mr Ord broke down, he offered to give DTA a "soft landing" for the cessation of its distributorship of general surgery products by continuing to supply certain general surgery products for some time beyond the transfer of those products to the new distributor. Mr Wood says that this evidence is an invention designed by Mr Molloy to explain away e-mail communications between the parties in January and February 2000 which refer to general surgery products. Mr Wood says that Mr Molloy could not simply deny having made any agreement in December 1999 to extend DTA's distributorship of general surgery products in light of these communications so that he had to invent a story accommodating both those communications and an assertion that he had not agreed to a three year extension of the distributorship for general surgery products. Hence, says Mr Wood, Mr Molloy's evidence as to a "soft landing". 80 It will be seen that these submissions invite a finding that Mr Molloy has been guilty of serious dishonesty, not only in deliberately misleading DTA but also in giving his evidence to the Court. Such a finding would require that I be satisfied that Mr Molloy had determined, as at 15 December 1999, on a course of deceptive conduct which he must have foreseen would completely ruin AMI's future business relationship with DTA and which would very possibly give rise to litigation not only between AMI and DTA, but also embroiling AMI's new general surgery products distributor, Gembro, to the possible detriment of that business relationship as well. 81 The gravity of the accusations against Mr Molloy and of the consequences of his alleged conduct is such that before I make the findings which Mr Wood urges upon me I should be satisfied that the accusations are made out according to the considerations discussed in Briginshaw v Briginshaw (1938) 60 CLR 336, at 362.

82 I find the account of the 15 December meeting given by Messrs Ord and Ryan implausible in the extreme. Their evidence confirms Mr Molloy's intransigence on taking distribution of general surgery products away from DTA up until a point in the discussions when they asked him, in effect, "what's it going to be?" Yet they suggest that Mr Molloy suddenly and completely changed his position, not merely by giving DTA some probation period or short term extension of distribution for general surgery products but by actually giving DTA a contract far more generous than it had ever had offered it in 1994, namely, a fixed three year term. 83 It is, to my mind, inherently improbable that Mr Molloy would make such a decision when he had been so trenchant in his criticisms of DTA's performance in general surgery product sales, when he had maintained his criticisms throughout the December meetings, when his concerns about DTA selling through sub-distributors had not been resolved, when there had been doubt expressed by Ms Stone about DTA's ability to meet AMI's sales target figures despite Mr Ryan's agreement to those figures, when there had been no target sales figures for 2001 and 2002 discussed at all, let alone agreed, and when his decision to terminate DTA's distribution of general surgery products had already been approved by his superior, Mr Stanley. That he should commit AMI not only to reversing its decision but to giving DTA a three year distribution contract for general surgery products without agreeing upon sales target figures for the whole of the term and without then referring the matter back to Mr Stanley is even more improbable. 84 In my opinion, the account of the meeting given by Mr Molloy is far more inherently probable. There is no dispute that at a certain point in the meeting, about half an hour from its close, Mr Ord broke down and wept. It was, clearly, a moment of great distress for him and Mr Molloy says that he was affected. It is very understandable and very probable that Mr Molloy, in that circumstance, would wish to make some sort of limited concession to Mr Ord - as Mr Molloy says - to "ease his disappointment in losing the general surgery business". 85 Further, in view of the considerations which I have expressed in para.43 as to the inherent improbability that experienced commercial people negotiating a substantial commercial transaction on behalf of trading corporations would intend to enter an immediately binding oral contract, I find it inherently improbable that Mr Molloy would have said anything evidencing an intention that AMI be immediately bound by an oral contract the terms of which were to be whatever had been discussed and agreed in the last few minutes of the meeting in the afternoon of 15 December.

86 Do any of the matters occurring outside the 15 December meeting weigh against the inherent probabilities so as to tip the balance in favour of DTA's version of what was said at the meeting? 87 DTA relies upon a conversation said to have occurred between Ms Jarvis and Mr Molloy on 14 December 1999, when Ms Jarvis drove Mr Molloy back to his hotel at the conclusion of the day's discussions. Ms Jarvis was DTA's General Manager of Corporate Marketing. She had attended meetings with Mr Molloy and other DTA executives earlier that day. Ms Jarvis says that during the drive she said to Mr Molloy that it was: "… great that we could continue the partnership … normally we would be looking for a 3 to 5 year contract" . She says that Mr Molloy responded: "DTA will have a 3 year contract" . 88 Mr Molloy denies that he made that statement to Ms Jarvis. He says - and Messrs Ryan and Ord agree - that no contract for three years or any other term had been discussed in meetings with Mr Molloy on 14 December. Mr Molloy says, further, that it would have been quite premature and inappropriate for him to have discussed, in a casual conversation with Ms Jarvis, any firm commitment by AMI to DTA. 89 I accept Mr Molloy's evidence in this respect. First, it is inherently probable. Second, Ms Jarvis did not make a note of that conversation and her recollection of what occurred at the meetings which she attended on 14 December has been shown to be faulty. It is significant that she was wrong in her recollection that Mr Molloy had said on 14 December: " [AMI] will commit to continuing the partnership with [DTA] in all of [AMI's] areas" . All the evidence shows that Mr Molloy made no such statement on 14 December. I cannot accept Ms Jarvis' evidence as reliable. 90 DTA relies on a note of the 15 December meeting made by Mr Ryan. The first version of this note recorded: "Three (3) year contract to be issued - quotas for the three divisions listed separately" . The note was stored in DTA's word processing system. It was first typed on or shortly after 14 December and added to after the 15 December meeting. Just when the 15 December note additions were inserted is unclear. Mr Ryan amended the note in a number of respects at some later time - exactly when and how often is unclear. Another version of the note reads: "Immediate three (3) year contract to be issued by Paul Molloy - quotas for the divisions to be listed separately" . The note was not sent to Mr Molloy as confirmation of what was purportedly agreed at the 15 December meeting. Mr Ryan's account of the discussion with Mr Molloy at that meeting makes no mention of a statement by Mr Molloy that an "immediate" three year contract would be issued. Mr Ryan's insertion of the word "immediate" was a gloss, not a record of what was said. I cannot regard that note as a reliable contemporaneous record of what was actually said at the 15 December meeting. 91 DTA relies upon an e-mail sent to Mr Molloy on 24 December 1999. The e-mail refers to DTA hiring two more salespersons "to enable us to meet our Applied obligations" . It refers to Mr Molloy's "confidence in maintaining the Applied product with [DTA] " . It continues: "Shortly we will be placing our stocking order for all the new products … I would look forward to receiving the new three-year contract in due course." 92 The e-mail does not explicitly refer to a three year contract for distribution of general surgery products. Its terms are quite consistent with Mr Molloy's account of events, namely that he said that he wanted DTA to retain the urology and cardiovascular product lines, that he wanted to see increases in sales for those lines, that there would be new products in those lines, and that he would consider giving DTA a three year contract for the cardiovascular and urology lines if he thought that DTA could increase its sales in those products. In my opinion, DTA's case derives no support from this e-mail. 93 DTA relies on two e-mails from an AMI employee, Amy Baker, to a DTA employee, Jenny Stone, dated 12 January and 14 January 2000. The 12 January e-mail refers to availability of a general surgery product. The 14 January e-mail refers principally to a cardiovascular product but contains a reference to another general surgery product. DTA says that the references to the general surgery products are inconsistent with Mr Molloy having decided to take the general surgery products distribution away from DTA. I cannot accept that submission. The e-mails were passing between subordinate employees of the two companies. The exact context in which they were communicating is quite unclear. The terms of the e-mails are susceptible to different explanations, one of which being that Ms Baker was not fully aware of what Mr Molloy had decided to do as far as giving DTA a "soft landing" in its exit from general surgery product distribution was concerned. In my opinion, the support, if any, which DTA's case gets from these e--mails is negligible. 94 DTA relies on an e-mail from Ms Stone to Mr Molloy and an e-mail from Mr Molloy in response, sent on 3 February 2000. The e-mails are as follows: "Dear Paul,

Kevin has asked me to e-mail you in regards to the delay of the Sentry Clip Applier (please see the fax from Anil Bhalani to Debbie Heagney re this). At this stage we can't even begin the registration process, which as you know in Australia takes 6 weeks. Kevin is most concerned because your requested forecasts for the disposable trocars included the fact that we would be able to have the cartridge packed with the disposable trocars to enable us to really go after the US Surgical market. Paul, we need to know exactly what is happening so we can move ahead. We are today organising an order for a full range of the new disposable trocars. I will also fax this with a copy of Anil's fax.

"Dear Jenny, we are working as fast as we can. Obviously the [forecast] will alter based on the reality, don't worry. I want this out a.s.a.p. too. Good news is we are almost there. Just a couple of weeks to get started for yu [sic] now. Best rgds, Paul" 95 Trocars are part of AMI's general surgery product line; they are devices used to facilitate laparoscopic surgery and are comprised of a number of parts. Some trocars are manufactured so as to be entirely reusable, others so as to be entirely disposable, and others again are manufactured so that some parts are reusable and some parts are disposable. This latter category of trocars is called "resposable". 96 DTA says that Mr Molloy's reference in his e-mail to "forecasts" - clearly, forecasts for sales of disposable trocars - and the statement "just a couple of weeks to get started for you now" are impossible to reconcile with Mr Molloy's decision to take general surgery products, and in particular disposable trocars, away from DTA. 97 Mr Molloy frankly concedes that his e-mail is inconsistent with a decision on his part to remove general surgery products from DTA. He says that he did not read Ms Stone's e-mail carefully when he received it - he receives from four to five thousand e-mails a year, tens of them every day - and that he failed to focus properly on the reference to disposable trocars. The Clip Applier referred to in Ms Stone's e-mail was equally applicable to sales of disposable trocars, sales of reusable trocars, and to sales of resposable trocars. He says that he had expressly referred to the possibility of supplying DTA with the new Clip Applier as part of the "soft landing" proposal which he had offered on 15 December. 98 In my opinion, it is wrong to place the significance on these two e-mails which DTA does. They have to be assessed in the context in which they were sent and received at the time, not construed now with a rigour which was entirely absent from their composition. Mr Molloy's e-mail was doubtless sent in response to one of tens of e-mails which he had received that same day. His evidence that he did not give it proper attention and thought that it was concerned with the supply of trocars during the "soft landing" period is plausible and I accept it. 99 DTA relies upon a number of other actions on its own part in 2000 as consistent with and corroborating its version of the 15 December meeting: it arranged training sessions for staff and sub-distributors for AMI's general surgery products; it sent purchase orders to AMI for disposable trocars; it ordered four hundred brochures relating to general surgery products. 100 In my opinion, these matters have no weight. They are explicable by an unwillingness on DTA's part to accept AMI's decision and represent a continuing endeavour in February and March 2000 to persuade AMI to change its mind. This attitude on the part of DTA is clearly demonstrated by the fact that on 16 and 17 March 2000 it held a training session for its sales staff which dealt in part with AMI's general surgery products. By that time DTA knew AMI had already engaged Gembro as the distributor of its general surgery products. DTA had itself written to AMI on 6 March 2000 and had caused its solicitors to write to AMI and Gembro on 14 March 2000, threatening litigation. Mr Ryan said that although the training sessions for AMI's general surgery products on 16 and 17 March could have been cancelled, he did not do so because he was still hoping to persuade AMI, by words and conduct, to change its mind. 101 In short, none of the circumstantial evidence relied upon by DTA dispels the inherent probabilities as to what happened at the 15 December meeting, as I have found them to be.

102 I accept Mr Molloy's evidence that he said nothing at the 15 December meeting to the effect that AMI would grant a three year exclusive distribution contract to DTA in respect of all AMI product lines, including general surgery products. I reject the evidence of Mr Ryan and Mr Ord to the contrary. Their evidence is repugnant to the inherent probabilities of the circumstances in which the parties were negotiating, as appears from other reliable and contemporaneous evidence. Further, I find that I am unable to rely upon their creditworthiness. They have both previously demonstrated the capacity to misrepresent the true character of the relationship between AMI and DTA. They have demonstrated a strong tendency to refuse to accept AMI's position, both before and after the 15 December meeting. They are clearly the sort of people who 'don't take no for an answer'. This quality may be admirable in its place but not when it leads to "reinterpretation" of the facts. 103 On the other hand, the attacks on Mr Molloy's credit are not made out. His evidence is inherently probable and is supported by other corroborative evidence. I cannot accept that he would, as DTA suggests, have deliberately embarked upon a strategy to deceive both DTA and Gembro as to AMI's intentions when it would have been obvious that the deceit would very quickly be exposed, resulting in damage not only to AMI's relationship with both distributors but also to his own commercial reputation. 104 The result is that DTA's claims against AMI in contract and under the Trade Practices Act fail. There was no contract nor was there any misrepresentation as alleged. Because there was no exclusive distribution contract at any time between DTA and AMI, DTA's claim against Gembro for procuring breach of contract also fails. 105 There being no set-off available to DTA in respect of AMI's Cross Claim for debt, there must be judgment on that Cross Claim for the full amount. The parties have agreed that principal and interest due in respect of the invoices the subject of the Cross Claim amount to USD111,280.86.

(1) The Plaintiff's Summons is dismissed. (2) Judgment for the Cross Claimant on the Amended Cross Claim in the sum of USD111,280.86. (3) Order that the Plaintiff pay the Defendants' costs of the proceedings. (4) Exhibits may be returned. - oOo -

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