Supreme Court of WA|2002-06-14|Before: Mr P, Templeman J

Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2002] WASC 150 (14 June 2002)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : EASTLAND TECHNOLOGY AUSTRALIA PTY LTD & ORS -v- WHISSON & ORS [2002] WASC 150

BETWEEN : EASTLAND TECHNOLOGY AUSTRALIA PTY LTD (ACN 059 479 391)

SILVERFERN NOMINEES PTY LTD (ACN 070 887 722) as Trustee for the PRESTIDGE FAMILY TRUST

Corporations Law - Whether shareholders are entitled to relief under s 1324 as persons whose interests are affected by conduct that contravenes the Corporations Law

Contract - Deed of Settlement - Whether release and bar clause may be relied on as a complete defence barring further action - Whether Deed of Settlement is rendered void by s 241 of the Corporations Law - Whether Deed of Settlement is voidable for fraud or misleading or deceptive conduct

Contract - Licence Agreement - Notice of default - Whether notice of default and termination of licence agreement can be pursued whilst arbitration under s 7 of the Commercial Arbitration Act 1985 (WA) is pending

First Applicant : Mr P I Jooste QC & Mr E J Picton-Warlow

Second Applicant : Mr P I Jooste QC & Mr E J Picton-Warlow

Third Applicant : Mr P I Jooste QC & Mr E J Picton-Warlow

First Respondent : Mr C G Colvin SC & Mr B W Ashdown

Second Respondent : Mr C G Colvin SC & Mr B W Ashdown

Third Respondent : Mr C G Colvin SC & Mr B W Ashdown

Abeles v PA (Holdings) Pty Ltd [2000] NSWSC 1008; (2000) 18 ACLC 867

Airpeak Pty Ltd & Ors v Jetstream Aircraft Ltd & Anor (1997) 15 ACLC 715

Australian Breeders Co-operative Society Ltd v Jones [1997] FCA 1405; (1997) 16 ACLC 100

Australian Competition & Consumer Commission v Real Estate Institute (WA) Inc [1999] ATPR 42,597 (41-673)

Australian Growth Resources Corporation Pty Ltd v Van Reesema (1988) 13 ACLC 100

Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46

Broken Hill Pty Co Ltd v Bell Resources Ltd (1984) 2 ACLC 157

Brunswick NL v Sam Graham Nominees Pty Ltd (1989) 2 WAR 207

Caltex Oil (Australia) Pty Ltd v Best [1990] HCA 53; (1990) 170 CLR 516

Campomar Sociedad, Limitada & Anor v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45

Capital Investments Corporation Pty Ltd v Classic Trading Pty Ltd [2001] FCA 1385

Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373

Cook v Deeks [1916] 1 AC 554

Daniels v Anderson (1995) 13 ACLC 614

Digital Pulse Pty Ltd v Harris [2002] NSWSC 33; (2002) 20 ACLC 365

Eastland Technology Australia Pty Ltd v Whisson [2000] WASC 134

Edwards v The Queen [1992] HCA 19; (1992) 173 CLR 653

Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811

Ferris v Plaister (1994) 34 NSWLR 474

Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583

Gemstone Corporation of Australia v Grasso [1993] SASC 3837; (1993) 11 ACLC 1161

Green v Bestobell Industries Pty Ltd [1982] WAR 1

Heller Financial Services Ltd v Thiess Contractors Pty Ltd [2000] FCA 802

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 55 ALR 417

Industrial Development Consultants v Cooley [1972] 1 WLR 443

Lawson v Mitchell [1975] VicRp 57; [1975] VR 579

Marchesi v Barnes [1970] VicRp 56; [1970] VR 434

Marson Pty Ltd v Pressbank Pty Ltd (1990) 7 ACLC 733

McDonald v Dennys Lascelles Ltd [1933] HCA 25; (1933) 48 CLR 457

Natural Extracts Pty Ltd v Stotter [1997] FCA 471; (1997) 24 ACSR 110

Pacifica Shipping Co Ltd v Anderson [1986] 2 NZLR 328

Papaki Pty Ltd v Scott (1984) 2 ACLC 253

Permanent Building Society (in liq) v Wheeler (1994) 12 ACLC 674

Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 180 ALR 249

Poliwka v Heven Holdings Pty Ltd (1992) 10 ACLC 1759

QIW Retailers Ltd v Davids Holdings Pty Ltd & Ors (No 2) (1992) 10 ACLC 1162

Queensland Mines Ltd v Hudson (1978) 18 ALR 1

Re Price Mitchell Pty Ltd (1984) 2 ACLC 524

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1; [1942] 1 All ER 378

Rosetex Co Pty Ltd v Licata (1994) 12 ACLC 269

Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378

SEA Food International Pty Ltd v Lam (1988) 16 ACLC 552

Sheahan (in liq) v Verco (2001) 19 ACLC 814

Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 13 ACSR 766

Thomas v Star Maid International Pty Ltd [1999] FCA 911

Timber Engineering Co Pty Ltd v Anderson [1980] 2 NSWLR 488

Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544

2 The applicant, Eastland Technology Australia Pty Ltd ("Eastland") was incorporated in March 1993 by members of a syndicate who wished to develop and exploit certain parenteral devices which had been invented and patented by Dr Maxwell Edmond Whisson, the first respondent. Dr Whisson, who was also a member of the syndicate, was appointed to Eastland's board in June 1993, and became its Chairman.

3 In 1994, Eastland entered into a joint venture agreement with Kemayan Oil Berhad ("Kemayan"), a Malaysian corporation. This led to the formation of a joint venture company known as Kemayan Eastland Medical Sdn Bhd ("KEM"), to which Eastland licensed its rights in respect of Dr Whisson's inventions. It will be convenient to refer to the rights so licensed as "the Eastland technology".

4 In the course of its business, Eastland used design and drafting services provided by Dean Brian Prestidge, the second respondent. Mr Prestidge had worked closely with Dr Whisson before their respective involvements with Eastland. Mr Prestidge's family company is Silverfern Nominees Pty Ltd ("Silverfern"), the third respondent. On 26 January 1996, Silverfern entered into a contract with KEM for the provision of Mr Prestidge's design and drafting services.

5 On 23 September 1998, on a social occasion, Dr Whisson and Mr Prestidge invented a novel form of parenteral device. Shortly afterwards, they made five joint patent applications in relation to the invention and registered the name "Di-Med" as the business name relating to the informal partnership which arose from their joint invention. It will be convenient to refer to the invention of 23 September 1998 as "the Di-Med invention".

6 On 25 January 1999, Eastland entered into a licence agreement with Dr Whisson and Mr Prestidge, as the Di-Med partners, for the purpose of exploiting the Di-Med invention. In that agreement, Dr Whisson and Mr Prestidge warranted that they had full right and title to the Di-Med invention. However, the directors of Eastland became concerned that this might not be so: they suspected that in all the circumstances, Eastland might be entitled to claim the relevant intellectual property for its own. This suspicion was fuelled by the fact that Dr Whisson declined to allow the board of Eastland to examine the patent applications relating to the Di-Med invention.

7 On 31 March 1999, Eastland commenced an action in this Court against Dr Whisson, Mr Prestidge and Silverfern. Eastland sought relief which included declarations that the intellectual property subsisting in the Di-Med invention was its property which the defendants held on constructive trust for Eastland. The claim was based on alleged breaches of fiduciary duty and confidence by Dr Whisson and on breaches of confidence by Mr Prestidge, with the knowledge and approval of Silverfern.

8 The action was settled at a meeting between the parties and their legal representatives on 16 May 1999, when a handwritten deed of settlement was executed. The parties entered into a formal deed of settlement on 5 June 1999. The terms of settlement included amendments to the licence agreement of 25 January 1999 and a clause barring further action.

9 The parties entered into the deeds of settlement after Dr Whisson and Mr Prestidge had sworn affidavits on 6 May 1999 in opposition to interlocutory injunction applications. In their affidavits, Dr Whisson and Mr Prestidge said, in substance, that the Di-Med invention was entirely novel, that it embodied a process which was completely different from Dr Whisson's earlier inventions and that none of Eastland's confidential information had been used in developing the Di-Med invention.

10 Following the settlement, Eastland's directors and advisors inspected the patent applications relating to the Di-Med invention. They claim to have formed the view then, that the statements made by Dr Whisson and Mr Prestidge in their affidavits of 6 May were false: that they had been made fraudulently and that they constituted misleading and deceptive conduct.

11 On 3 December 1999 Eastland commenced the present proceedings, by which it seeks to set aside the deeds of settlement of May and June 1999 and, in effect, to pursue the previous claims. Later, Feezone Pty Ltd and Intercontinental Corporation Pty Ltd were joined as the second and third applicants. Those parties are shareholders in Eastland. They claim to be persons whose interests have been affected by conduct which constitutes contravention of the Corporations Law (which was then in force) so as to entitle them to relief pursuant to s 1324 of the law.

12 This application raises a number of issues, including:

• whether, in all the circumstances, the respondents may rely on the deeds of settlement or whether those deeds are (in part) void by reason of s 241(1A) of the law, or wholly voidable for fraud or misleading and deceptive conduct;

• whether, if the deeds of settlement do not bar the present proceedings, (or if the second and third applicants are not bound by the deeds) Dr Whisson and Mr Prestidge acted in breach of fiduciary duty and whether, if so Silverfern is fixed with sufficient knowledge of such breaches to warrant relief being granted against it also. The question whether Mr Prestidge was an officer of Eastland arises in that context.

13 There is also a counterclaim by Dr Whisson and Mr Prestidge. They served notice of default, followed by a notice of termination of the licence agreement, after the failure of Eastland to pay moneys due under that agreement. After the notice of default was served, Eastland served notice of appointment of an arbitrator pursuant to s 7 of the Commercial Arbitration Act 1985. Eastland now contends that the arbitration is pending and that Dr Whisson and Mr Prestidge should not be permitted to proceed with their counterclaim.

14 As is common in applications brought pursuant to the Corporations legislation, there is a plethora of affidavits, directed both to the substantive application and to various interlocutory skirmishes along the way. The affidavits disclose that there are many factual issues between the parties. Only some of these issues have been explored in cross-examination: others are not now relevant. At the end of the trial there were some outstanding objections to various passages in affidavits sworn on behalf of the applicants and to the inclusion of certain material in the trial bundle. I have set out my rulings in an appendix to these reasons.

15 The principal witnesses of fact for Eastland were three of its directors, Douglas Arthur Sims, Dr Martin Mann-Lok Ng and Charles Frederick Sharland.

16 Mr Sims was appointed a director of Eastland on 15 December 1997. He was a member of the original syndicate but was not a founding director because he was then bankrupt. Mr Sims has no medical qualification or experience, other than that acquired in the course of his association with Eastland and KEM. He does, however, have considerable experience as an inventor and of progressing inventions from concepts through to patenting, development and commercial production.

17 Dr Ng was a member of the original syndicate and a founding director of Eastland. He is a medical practitioner (now retired, as I understand it) who practised as such for over 45 years, initially in Malaysia, but in Australia for the past 30 years.

18 Mr Sharland was secretary to the original syndicate and became Eastland's company secretary on its incorporation. He has continued in that role, since being appointed a director of Eastland, as he was, on 29 February 2000. Mr Sharland is, or was, an accountant by profession. He has no engineering or design qualifications although he has been involved in preparing or submitting patent applications. I infer those to have been related to the Eastland technology.

19 The final member of the original syndicate was Mr Pasquale (Pat) Luca. He was also a founding director, but ceased to hold office on 1 November 1999. Mr Luca has played no part in this application and has not given evidence.

20 The current directors and Dr Whisson and Mr Prestidge were cross-examined on their affidavits. In addition, patent attorneys Errol John Harwood and Kelvin Ernest Lord provided expert evidence for the applicants and the respondents respectively.

21 It is necessary to set out the history of this dispute in some detail, in order to understand the circumstances in which the original action was settled. However, not all of my findings of fact can be based on evidence which has been tested by cross-examination. (I do not regard myself as bound by a statement of Agreed Facts filed on 24 February 2000 by the solicitors who acted formerly for the respondents for the purposes of a then pending interlocutory application). I have placed considerable reliance on contemporaneous documents, including correspondence and file notes made by Mr Prestidge and various solicitors. There are many documents in evidence in respect of which legal-professional privilege has been waived.

22 Before dealing with the various issues arising in this application, I propose to set out my findings of fact, in broadly chronological order. Where appropriate, I shall refer to the trial bundle by way of volume and page numbers (eg 6/1863) and to the transcript (eg TS 457). I commence by explaining the technical background which gives this litigation its context.

23 A parenteral device enables fluid to be introduced into or withdrawn from the body other than through its natural passages. The most common form of parenteral device is a syringe embodying a needle. Associated with the use of such devices is the needlestick injury. That is, an injury caused by a needle which has been contaminated by its exposure to the tissue of one person, accidentally puncturing the skin of another person: typically, a health-care worker.

24 Disease transmission from needlestick injuries is now recognised as a major cause of occupational disease transmission to health care workers. Although not widely publicised, such injuries result in the transmission of fatal Aids infection to one in every two hundred health-care workers who are injured with Aids contaminated needles. Far more individuals are infected with hepatitis B, C and other viruses during the course of their work. Apart from accidental injury, diseases such as Aids and hepatitis are transmitted as a result of the deliberate re-use of needles by intravenous drug users.

25 There are three principal ways of avoiding needlestick injury. The first is by the improved education and training of health-care workers. The second, involves the provision of containers into which used needles may be placed safely for subsequent disposal. The third, is by way of parenteral devices which are designed to minimise or eliminate needlestick injury. Many devices of this kind have been invented by Dr Whisson. Mr Jooste QC, leading counsel for the applicants, put to Dr Whisson in cross-examination that in 1998 he was probably the foremost parenteral device inventor in the world: a proposition which Dr Whisson thought might well be true (TS 816).

26 As Mr Jooste said in his opening address, the prevention of needlestick injuries has become a Holy Grail in the medical profession. This reflects a statement made by Dr Whisson to his solicitors in February 1999, that interest in "safe needles ... exploded from near zero in 1992 to something perhaps approaching a billion dollar R & D effort in 1998" (4/1305).

27 Dr Whisson is a medical practitioner of some 46 years standing. He is a graduate of the University of Melbourne and the Royal Melbourne Hospital Medical School. During the course of a distinguished career in Australia and the United Kingdom, Dr Whisson has held a number of hospital, university and research appointments. He has published numerous papers. His parenteral device inventions have been patented in Australia and internationally. (5/1540-5)

28 Dr Whisson is a specialist haematologist. In that capacity, in 1980, he joined the Western Australian Red Cross Blood Transfusion Service. In 1990, he became its Director of Research and Development and occasionally, the Acting Director. He remained in full-time employment with the Service until July 1998.

29 During Dr Whisson's time with the Red Cross, the transmission of disease by needlestick injuries was a constant concern. Dr Whisson became aware that the transmission of hepatitis by needlestick injury was a real danger to medical staff dealing with hepatitis sufferers. He became interested in solving the problem. For that reason, he asked the Red Cross staff to report to him how needlestick injuries had occurred and the consequences of those injuries. That was information which Dr Whisson collected informally. The exercise was not related to the nature of his employment by the Red Cross.

30 In 1987, Dr Whisson invented a parenteral device embodying a syringe with a retractable needle. It became known as the Retralock.

31 Although Dr Whisson invented the Retralock device while he was employed by the Red Cross, the invention was not related to his position with the Red Cross.

32 It was Dr Whisson's evidence, which was not challenged, and which I accept, that the invention of the Retralock device gave him the personal satisfaction of meeting the mental challenge involved in problem solving. Further, Dr Whisson wished to be acknowledged for his inventions: and he wished to help clinical staff by reducing the transmission of disease through needlestick injuries.

33 I accept Dr Whisson's evidence that the possibility of his making money from commercialising the Retralock devices did not motivate him to invent it. It was, and is, Dr Whisson's belief (which has not been challenged) that he invented the first truly retractable needle syringe. Dr Whisson saw the invention as having the potential of enormous clinical benefit in preventing the transmission of diseases through needlestick injuries.

34 Before he invented the Retralock devices, Dr Whisson had never attempted to commercialise his inventions. I accept his evidence that this was for the following reasons:

• he is primarily an academic person interested in the acquisition and dissemination of knowledge. His curriculum vitae supports that statement (4/1475-1485).

• he invents for the pleasure of doing so. He has always been an inventor and will continue to invent, even in circumstances where there is no likely financial reward.

• inventions such as those which Dr Whisson developed while at the Red Cross were commercialised by that organisation. Dr Whisson gained the recognition that he desired as the inventor. He also had the satisfaction of having his invention produced without having to commercialise them himself.

35 Although this had been Dr Whisson's attitude previously, he decided that he would attempt to commercialise the Retralock devices. His reasons for that decision, which I accept to be true, were as follows:

• he wanted to see his invention progress into a clinically usable product. That had occurred previously with an invention of his involving a means of separating blood. Dr Whisson called the invention the "Bagwrap". It was patented by the Red Cross and developed by the Red Cross to a clinical standard. Dr Whisson found that to be a very rewarding experience.

• Dr Whisson had a continuing desire to reduce the transmission of disease through needlestick injuries.

• Dr Whisson hoped that he would recoup some of the costs he had incurred in inventing, patenting and developing the Retralock devices.

Attempts to commercialise the Retralock devices

36 In 1987, Dr Whisson approached a lawyer, Mr Kerryn Smart, to find out how he might interest investors in commercialising the Retralock devices. As a result of his approach, a company known as Prometheus Pty Ltd was formed for that purpose. Dr Whisson's patent, which had been the subject of an application dated 22 April 1987, was assigned to Prometheus. Dr Whisson became a director of the company.

37 During his involvement with Prometheus, Dr Whisson was introduced to Mr Sims through another partner in Mr Smart's firm. Mr Sims was engaged to represent Prometheus in negotiations with the research and development department of an international company known as Becton Dickinson. Those negotiations were unsuccessful.

38 At the time, Dr Whisson was fully employed with the Red Cross. Although he helped with Prometheus in his spare time, he left its day to day management in the hands of others, such as Mr Sims.

39 Prometheus was unsuccessful and became dormant. It is Dr Whisson's view that it was undercapitalised because it exhausted its funds before the Retralock devices were developed to a clinical standard.

40 There is some conflict on the affidavit evidence about the detail of the circumstances in which Eastland was formed. It is not necessary to resolve these conflicts which were not explored in cross-examination of Dr Whisson and Dr Ng, the principal deponents in this area.

41 It is sufficient to record my finding that Dr Ng was introduced to Dr Whisson through Mr Sims. Dr Whisson told Dr Ng about his inventions and his ideas for safe parenteral devices.

42 As a result, Dr Ng became interested in investing in a project for commercialising Dr Whisson's inventions. Dr Ng introduced Mr Luca as another investor. The syndicate formed Eastland, which was incorporated on 17 March 1993.

43 On 27 February 1993, shortly before Eastland was incorporated, there was a meeting between the members of the syndicate: Dr Ng, Dr Whisson, Mr Sims and Mr Luca. Mr Sharland attended as secretary. The minutes of the meeting, which I accept as accurate (2/459) record that:

"Dr M Whisson had over a period of years developed medical syringes which were superior to the existing needles due to inbuilt safeguards which reduced the possibility of accidental injury to the user. He had commenced the patenting of the syringes and in return for the syndicate funding further research, patent and other costs agreed to transfer to the syndicate the rights to applications of the syringes. Details of the arrangements were contained in a memorandum dated 16.2.93.

Resolved that a company be formed to hold and market these rights the shareholding in which would be:

Dr Whisson 40 %

Mr D Sims 30%

Dr M Ng 15%

Mr P Luca 15%

Dr Ng and Mr Luca agreed that they would contribute $20,000 and $30,000 as their equity to found the costs involved."

44 The minutes were signed by all members of the syndicate. The memorandum of 16 February 1993 is not in evidence.

The licence agreements between Eastland and Dr Whisson

45 In March 1993, Dr Whisson licensed three of his inventions to Eastland. The licences were for:

• the Selecta syringe the subject of patent application PL1455 (1/328)

• the Autoinjecta the subject of patent application PCT/AU91/00297 (1/344)

• the Clip-on Retracta the subject of patent application PK9593 (1/360)

46 Each of the licence agreements granted Eastland an exclusive worldwide licence for the life of the product, to commercialise, manufacture, market and sell the product. Each agreement also gave Eastland the right to grant sub-licences and to enter into joint venture arrangements.

47 The consideration for the Selecta and Clip-on Retracta licence agreements was the payment of $10,000 to Dr Whisson. The consideration for the Autoinjecta agreement was the issue of 40 per cent of the issued shares in Eastland together with a seat on the board.

48 Each agreement made provision for the payment of a royalty to Dr Whisson, by way of 40 per cent of funds distributed by Eastland, as dividends or otherwise.

49 The agreements also contained provisions whereby any improvements to the product made by Eastland were granted back to Dr Whisson, free of royalty. Eastland agreed that if any such improvements were patentable, they would be patented at Eastland's cost, but in Dr Whisson's name, on the basis that he would then incorporate them into a similar licence to Eastland.

50 The parties agreed that all research and development undertaken by Eastland or any sub-licensee or assignee should be "freely communicated" between Dr Whisson and Eastland at no cost to the other, in an endeavour to improve the products and their uses and to ensure market penetration.

51 The parties also agreed that Dr Whisson would, in good faith, promptly and regularly supply to Eastland and any of its sub-licensees, on request, such assistance as Eastland might reasonably require, including:

• advice on the technical characteristics of the product and the equipment and process used to manufacture it;

• full details of each step in the processing and manufacture of the product and the use of trade secrets;

• information relating to special tools, machinery and other equipment used in the manufacture of the product, to ensure full exploitation of the licences;

• all details of all of Dr Whisson's improvements and other developments in trade secrets which might thereafter become known to or owned by him.

52 It is to be noted that the licence agreements did not impose on Dr Whisson any obligation to undertake research, or development of the licensed product. Nor did the licences effect any assignment of the patents themselves.

53 It was Dr Whisson's unchallenged evidence, which I accept, that in entering into the licence agreements, he was not particularly motivated by the 40 per cent shareholding in Eastland. I accept that he had no idea what the shares were worth or what was likely to be the value of the royalties. He received no independent advice in relation to either of these matters.

54 It was Dr Whisson's evidence that he accepted a directorship of Eastland because he wanted to have some say in its management after his unfortunate experience with Prometheus, but that he was a somewhat reluctant chairman. However, Mr Sharland deposed that Dr Whisson insisted that he was entitled to be chairman of Eastland because he was the inventor of the technology it was developing (3/806). I do not think anything turns on this difference in the evidence. The fact is that Dr Whisson was the chairman of Eastland, and owed fiduciary duties to it in that capacity. Dr Whisson conceded (and I accept) that he had only a basic understanding of the obligations and powers of a company director, and of the way in which companies worked. However, he knew that there were to be two other directors so that he would not have control of Eastland.

55 In an affidavit sworn on 30 March 1999, Mr Sims stated that on its incorporation in March 1993, Eastland employed Dr Whisson for reward to carry out research and development for and on its behalf in relation to the inventions which were the subjects of the licences and assignments referred to above (1/78).

56 I find that statement gives a quite inaccurate picture of Dr Whisson's involvement with Eastland.

57 First, Eastland did not "employ" Dr Whisson: there was never any employment agreement between them, formal or informal. In any event, apart from the statement contained in the pre-incorporation minutes of 27 February 1993 to which I have referred above, and the licence agreements of March 1993, Dr Whisson's role was never defined.

58 Secondly, there was little in the way of "reward" to Dr Whisson, until the Kemayan joint venture came into existence. Mr Sharland extracted from Eastland's accounting records, details of payments made to Dr Whisson. These amounted to some $22,000 from 15 April 1993 to 9 February 1994. However, the payments related largely to patent fees (3/847) which Eastland was obliged to pay, pursuant to the licence agreements.

59 After the joint venture came into existence, Dr Whisson, Mr Sims and Dr Ng (or their prospective family companies) each received $1,000 per month, for a period of between some two years (TS 697). Mr Sharland said in his affidavit that these payments were not directors' fees, as Dr Whisson had stated, but were to offset expenses (3/809). However, in cross-examination, Mr Sharland seemed to accept that the payments might be regarded as directors' fees (TS 697). In any event, I am satisfied that the payments made to Dr Whisson were not a "reward" for carrying out research and development.

60 Mr Sims, in the course of cross-examination, contended that Dr Whisson controlled Eastland's research and development from the outset. However, Mr Sims then appeared to accept that Dr Whisson's role was, rather, to assist in the commercialisation of the devices which he had introduced to Eastland (TS585).

61 This is consistent with Dr Whisson's account of his role and responsibilities as set out in his affidavit of 21 July 2000 which was not challenged in cross-examination and which I accept (4/1454). Dr Whisson said that from the time of his appointment as a director of Eastland until it commenced negotiations with Kemayan, his role was limited to the following matters.

• He advised in relation to technical questions which arose in respect of the licensed technology. During that period, Mr Sims and Dr Ng were trying to interest investors to Eastland. Sometimes those investors would have technical questions. Dr Whisson was then working full-time for the Red Cross. He did not have the time or the expertise to become involved in negotiations with potential investors.

• He attended board and shareholder meetings. Those meetings allowed him to keep track of Eastland's progress. The meetings usually took less than one hour. Dr Whisson was usually able to attend to current laboratory and clinical problems by telephone from the meetings. These took place about every two to three weeks.

I do not regard this evidence as different, in substance, from that given by Mr Sharland in his affidavit of 20 February 2001 (3/807).

62 I find also that Dr Whisson gave advice and direction to Mr Prestidge so as to assist him in his role, to which I now refer.

63 Mr Prestidge has a trade certificate in Plastics Engineering from the New Zealand Trades Certification Board and a certificate in Engineering (Plastics) from the New Zealand Authority for Advanced Vocational Awards.

64 In November 1991, Mr Prestidge started a design and drafting business to supply his services, predominantly to the plastics manufacturing industry in which, by then, he had acquired considerable experience. Initially, Mr Prestidge traded under his own name. From February 1993, he traded under the name Tekdesign. From November 1995, he provided his services through Silverfern, as trustee for the Prestidge Family Trust which took over the name Tekdesign.

65 Mr Prestidge was introduced to Dr Whisson in about May 1992. He was engaged by Dr Whisson to carry out design work on a retractable needle which Dr Whisson was then developing on behalf of Prometheus. There was no formal contract between Mr Prestidge and Dr Whisson or Prometheus: Mr Prestidge simply charged for his work at an hourly rate.

66 In May 1993, Dr Whisson engaged Mr Prestidge on the same basis to provide design and drawing services in relation to another retractable needle device which is now known as the Reversyringe. Mr Prestidge rendered an invoice to Dr Whisson in June 1993. Dr Whisson then informed him that Eastland had been incorporated. He asked Mr Prestidge to alter his invoice to reflect this and to submit it to Eastland.

67 In July 1993, Dr Whisson (on behalf of Eastland) asked Mr Prestidge to perform work on the parenteral devices which are now known as Autoinjecta and Safeline. Thereafter, Mr Prestidge assisted Eastland by providing his expertise in the development of plastic products for mass production. That was expertise which Mr Prestidge had acquired through his previous training and commercial experience. It was his unchallenged evidence, which I accept, that his work for Eastland did not contribute to his expertise.

68 On 4 March 1994, Eastland entered into the joint venture agreement with Kemayan. The agreement followed negotiations between officers of Kemayan and Mr Sims and Dr Ng. Although Mr Sims was not appointed as a director of Eastland until 15 December 1997, I find that he acted as a de facto director from Eastland's incorporation until his appointment.

69 It was Mr Sims' evidence that Eastland entered into negotiations with Kemayan in about January 1994. However, I prefer the evidence of Dr Whisson that negotiations were on foot much earlier. I accept Dr Whisson's evidence that in about September 1993 he met Dr Ng and Mr Michael Seet, a director of Kemayan, at the Hyatt Hotel in Perth. Dr Ng told Dr Whisson that he had brokered a deal which involved a joint venture between Kemayan and Eastland. The proposal interested Dr Whisson and he discussed it with Dr Ng. Later, Dr Whisson answered Kemayan's technical questions about the Eastland inventions. He also discussed with Mr Errol Harwood of Wray and Associates, the patent attorney, the effect of the proposed joint venture agreement on the Eastland technology.

70 One of the reasons for preferring Dr Whisson's evidence about the timing of the negotiations between Eastland and Kemayan is that in November 1993, Dr Whisson assigned to Eastland the inventions which were the subject of the licence agreements of March 1993. I accept that Dr Whisson did so because he was told by Mr Sims and Dr Ng that the joint venture would be prejudiced and would not proceed if the inventions were not assigned. I accept Dr Whisson's evidence that at the time, he did not understand why it was necessary for the inventions to be assigned and that he had not been offered an adequate explanation by Mr Sims or Dr Ng. I accept also that Dr Whisson did not receive any independent legal or other advice about the assignment of his inventions. Dr Whisson received no consideration for the assignment and did not know whether or not the joint venture would have proceeded had he declined to assign the patents.

71 Pursuant to the joint venture agreement, KEM was incorporated. Dr Whisson became its Chairman. Kemayan agreed to pay Eastland a sum equivalent to $1,850,000 as its contribution to the costs incurred by Eastland for research and development of the Whisson parenteral products. These products were defined to be:

(4) the Retracta group of needles comprising four variations

(5) the Autoinjecta group of needles comprising six variations

Of that contribution, $450,000 was to be paid on or before execution of the agreement (1/185).

72 I accept Dr Whisson's unchallenged evidence that he wanted the joint venture to succeed for the same reasons he had involved himself in Eastland. In addition, Dr Whisson was motivated by the fact that Kemayan was required to pay Eastland the sum of $450,000 and that he would earn royalties from that payment. Dr Whisson therefore hoped that the value of his holding in Eastland would increase. I accept Dr Whisson's evidence that for the first time, he believed that he would benefit financially from his inventions, as, in fact, he did. I accept also that Dr Whisson was not motivated by the offer of a directorship in the joint venture company.

Dr Whisson's role after the formation of KEM

73 On 5 March 1994, Eastland and Kemayan entered into a licence agreement whereby Eastland granted Kemayan an exclusive licence and authority to manufacture market and sell "the Whisson Parenteral Products". In substance, this was the Eastland technology. The licence agreement imposed on Eastland an obligation to supply to the joint venture company all information, data and know how relating to that technology (1/239).

74 Dr Whisson's role was set out in the minutes of a meeting of the Eastland board on 21 April 1994. He was to be jointly responsible with Mr Sims to:

"(i) supervise, oversee and attend to all matters in conjunction with the R & D Centre in Wangara

(ii) participate in, and advise on, the development, improvement and completion of the (Eastland technology) into commercial prototype." (3/832)

I accept Mr Sharland's evidence that the Wangara research and development centre did not proceed and that development work was carried out in Malaysia and Singapore. It was proposed that Dr Whisson take up a full time appointment in Malaysia, but that did not happen (3/802).

75 I accept the unchallenged evidence of Dr Whisson (4/1457-60) that in these circumstances, he contributed to the discussions about where the inventions might best be constructed and which products should be developed. Dr Whisson made recommendations based on his knowledge of clinical use and the time he estimated it would take to develop the products to a clinical standard. While the development work with respect to the Eastland technology was carried out in Malaysia (as it was until January 1996). Dr Whisson's role was to advise KEM in relation to any production difficulties. On average, Dr Whisson was engaged for no more than an hour each week. Often, he simply provided his opinion on a production issue during the course of a telephone conversation. Despite Eastland's obligation to KEM, if Dr Whisson did not know the answer to any question asked of him, he was not put under any pressure to find out the answer.

76 In addition to providing advice of this nature, Dr Whisson was flown to Malaysia in about the middle of 1994. There, he visited a manufacturing company in Penang and attended a meeting with the owner of that company, a Malaysian engineer. Dr Whisson discussed with the owner what he saw as some of the problems in manufacturing some of the devices. The problems included those likely to be encountered in the workshop. Dr Whisson offered his opinion on the solutions to those problems.

77 In about January 1996 KEM decided that its production should be moved from Malaysia to Perth. At about that time, Mr Prestidge was retained to undertake certain design and production work. Thereafter, Dr Whisson's role and responsibilities changed very little although he spent about two hours per week in advising on technical questions. The time was devoted to attempting to help Mr Prestidge overcome technical problems he encountered so that the products could be developed for commercial production as quickly as possible.

78 Dr Whisson ceased these activities after Kemayan stopped funding KEM.

79 Despite the formation of KEM in March 1994, Mr Prestidge continued to provide his services as before to Eastland. In about December 1995, Mr Prestidge met Mr Seet of Kemayan at Eastland's premises at Osborne Park. The purpose of the meeting was to discuss Tekdesign undertaking work for the joint venture company. As a result, on 26 January 1996, KEM and Silverfern (trading as Tekdesign) entered into an agreement for the provision of Tekdesign's services to KEM. The services were:

• the development of concept drawings for the relevant products, in conjunction with Dr Whisson as inventor;

• optimisation of the design of the products in consultation with Dr Whisson, KEM and such other contractors and subcontractors employed by KEM as appropriate;

• providing consultative services to manufacturers selected by KEM for the purpose of optimising production methods and preparing tool designs as required by KEM;

• preparing engineering design drawings of prototypes and products in consultation with the engineers and manufacturers as required by KEM;

• submitting all designs to KEM for approval and, where necessary and by consultative progress, to modify those designs where appropriate (3/835-6).

80 The agreement was for a period of one year commencing on 1 February 1996.

81 Despite the fact that Silverfern entered into the agreement with KEM, Mr Prestidge continued to render invoices to Eastland. There is a conflict in the evidence as to his reasons for so doing, but nothing turns on that.

82 During the course of Silverfern's engagement to KEM, Mr Prestidge was asked to try to put specific products into a plastic form suitable for mass production. It was not part of his or Silverfern's duties to invent new devices: nor was he asked to do so. However, in the course of developing the Eastland technology, Dr Whisson and Mr Prestidge did invent various devices which were improvements to that technology, and which were patented by Eastland as such.

83 For example, in late 1996, Mr Prestidge invented a new device which came to be known as Reversyringe D. It solved a problem known as "tracking". This is a problem associated with the withdrawal of a needle while an injection is being administered, with the result that the drug injection path moves away from the desired subcutaneous site, towards the surface of the skin. The Reversyringe D device was the subject of a patent application which was made by Eastland. That was accepted by Mr Prestidge, and rightly so, to be entirely appropriate because the development occurred while he was working under instructions from Eastland, which paid the fee for his services.

84 The tracking problem was solved in the Reversyringe D because the needle did not retract while the drug was being delivered to the patient. This fact was recorded in the minutes of a management meeting held at Eastland's offices on 20 March 1997, to which Mr Prestidge was invited, to inform the meeting about the stage of development of the various devices (6/1991).

85 The minutes record also that Mr Seet stated that patent costs for the Reversyringe D devices were excessive and that further variation should be avoided. I accept Mr Prestidge's unchallenged evidence that after the meeting had concluded and before he left the Eastland's offices, Dr Ng told him that Eastland did not want any more patents and that he would be required to concentrate on developing the existing patents. This was because Mr Seet was not happy about the costs (6/1899). Mr Sharland's evidence is to the same effect (3/807).

86 Although the agreement between Silverfern and KEM expired on 30 January 1997, Mr Prestidge continued to provide services to KEM on the same terms and conditions until January 1998, when Kemayan ceased funding KEM.

87 When Mr Prestidge was informed of that fact by Dr Ng, he ceased work for KEM. There is a conflict between him and Dr Ng as to the instructions then given to Mr Prestidge. Nothing turns on that for present purposes. Mr Prestidge did however assist Eastland in an audit conducted by the Therapeutic Goods Association ("TGA") in February 1998. Shortly before the audit was conducted, Mr Prestidge attended a meeting with Dr Ng, Mr Sharland and Mr David Wilson, a quality management consultant who is the managing director of a New Zealand company known as Corporate Quality International Ltd.

88 Mr Wilson had been asked by Dr Whisson to assist Eastland to obtain quality accreditation from TGA so that Eastland could conduct clinical trials of its medical devices. Mr Wilson was engaged subsequently to examine Eastland and to make recommendations for the implementation of a quality management system (TS 409; 2/1241). In the course of his engagement, Mr Wilson was introduced to Mr Prestidge as a design engineer who had been contracted to turn the design concept for parenteral devices into reality (TS 409). Mr Wilson produced a job description for a production manager with Mr Prestidge as the incumbent (Exhibit 1).

89 The job description showed that the production manager was responsible to the director; that he had functional relationships with the quality coordinator and the board of management and that his main objective was to assume responsibility for and perform the assembly of devices.

90 Mr Prestidge signed the job description document as the product manager. Dr Ng told Mr Prestidge that he was being asked to sign only for the purpose of the audit and because there was no one else who could do so. Dr Ng said it could be changed later. I accept Mr Prestidge's uncontested evidence that he agreed, reluctantly, to sign the document and that he did so only for the purpose of the audit (6/1901). I accept the evidence of Mr Wilson that by using the term "production manager" as applied to Mr Prestidge, he did not intend to indicate that Mr Prestidge had a role in the management of Eastland itself (TS 410).

91 The failure of Kemayan to meet its funding obligations to KEM resulted in financial difficulties for Eastland. There was a meeting of the Eastland board on 4 June 1998 attended by Dr Whisson as Chairman, Dr Ng, Mr Sims and Mr Sharland as Secretary. There was an apology from Mr Luca. Mr Sharland tabled a report in which he noted that recent contributions amounting to $4,250 from shareholders would allow him to pay outstanding accounts for rent, telephone, electricity, cleaning and wages and would leave a reserve of only $1,669.68.

92 Mr Sharland noted that funds were needed urgently to pay other accounts, including $9,487.82 which was due to Wray and Associates. Payment had been promised at a recent meeting between Dr Whisson, Dr Ng and Mr Harwood. Rent, wages, group tax and arrears of wages amounting to some $6,000 were also payable. Mr Sharland noted that Mr Wilson and Mr Prestidge were "constantly contacting" him (2/489).

93 It is Dr Whisson's evidence, which I accept, that he believed Eastland to be insolvent. The fact of insolvency was denied by Mr Sharland, who claimed that Eastland had available to it "a number of sources of capital" (3/822). Although the sources were not specified, I understand that Mr Sharland was referring to shareholders, who have since contributed to Eastland's resources.

94 Mr Sharland went on in his report to refer to a number of potential investors in Eastland. These included Becton Dickinson.

95 Mr Sharland's report was discussed at the directors' meeting on 4 June. The minutes record that (as was the case) Dr Whisson had been in contact with Mr David Capes of Becton Dickinson in Singapore. Mr Capes had told Dr Whisson that Becton Dickinson was interested in viewing Eastland's products and had requested further information (2/488).

96 Mr Sharland said in his report that the interest in Eastland "confirms that we have a marketable commodity from which all parties will derive commercial benefit provided we can keep the ship afloat in the interim".

97 On 5 June 1998, Dr Whisson, as Chairman of Eastland, wrote to Mr Capes to inform him that his interest had been noted at the board meeting of the previous day. He requested Mr Capes to transmit a request for information to Mr Sharland at Eastland's office. Mr Capes did so on the same day. He sent a facsimile to Mr Sharland in which he said he had been aware of Dr Whisson's activities for some time and that he had contacted Dr Whisson to enquire whether he had any interest in opening discussions with Becton Dickinson about any products, patents, etc that he might have which would be of interest. Mr Capes went on to say that his company would be interested in discussing possible arrangements to their mutual benefit, such as the sale of patent rights, licensing, partnering, distributorship and joint venturing. He proposed a further exchange of information (2/577).

98 On 3 July, Dr Whisson, again, as Chairman of Eastland, wrote to Dr Graeme Howie of Delta West Pty Ltd. This is another company carrying on business in the medical products industry, apparently, under the name "Upjohn". Dr Whisson referred to the fact that he was no longer the research and development director of the Australian Red Cross Blood Service and that, apart from being Chairman of Eastland and having "diverse other intellectual interests", he was unemployed. Dr Whisson went on to say that Eastland was keen to talk to possible partners or even a group interested in buying the company. He said the capital required to develop and bring a large number of products to the market was formidable and that Eastland was having "tentative discussions with a number of well known names". Dr Whisson said that a great deal had happened in the six years since he had attempted to interest Dr Howie in his original Retracta syringe and that to the best of his knowledge he now had patents "on all practical ways of constructing retractable needle injection devices". He said that although many different models could be made from those concepts, Eastland had focussed on developing those which were most easily manufactured and marketed (2/570-1).

99 As a result of that approach, Dr Howie visited Eastland's premises at Wangara. This was a meeting arranged by Dr Whisson to interest Dr Howie in the Autoinjecta as a delivery device for drugs being developed by his company. According to the notes of the meeting made by Mr Sharland, Dr Howie was interested in the Autoinjecta. However, he wanted to know whether the device could be altered to accept a capsule and to accept either a spring-loaded or gas cartridge as a means of extending the needle. Dr Howie felt that if those factors could be incorporated and the device priced below $US 1.00, his company would be interested (2/572).

100 On 12 August 1998, Dr Whisson wrote to Dr Howie to thank him for taking the time to visit Eastland's premises. He said that an automatic version of Autoinjecta could be produced for less than $US 1.00. Although the copy of Dr Whisson's letter contained in the trial bundle is incomplete, it appeared to assure Dr Howie that with research funds either from his company or an investor, the Autoinjecta device could be altered as required (2/573).

101 As I have noted above, the essence of Dr Whisson's inventions, to which I have referred as the Eastland technology, is the complete retraction of the needle into the body of the syringe, thereby rendering the device safe.

102 The Di-Med invention is quite different. It involves a composite needle. The sharp steel needle is encased in a plastic sleeve for all but 2-3 mm of its length. The sleeve is the term used by Dr Whisson to identify what is also described as a catheter or cannula. On injection, the sharp tip of the needle and the end of the plastic sleeve enter the patient's tissue. The sharp tip can then be retracted some 2-3 mm inside the sleeve, which remains in place. In that position, the needle is protected. The possibility of needlestick injury is therefore eliminated.

Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2002] WASC 150

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (899 paragraphs)

Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2002] WASC 150 (14 June 2002)

Attempts to commercialise the Retralock devices

The licence agreements between Eastland and Dr Whisson

Dr Whisson's role after the formation of KEM

Disclosure of the Di-Med invention to Eastland

The meeting with Mr Capes of Becton Dickinson

Meeting of Eastland shareholders - 26 February 1999

A presentation by Dr Whisson - 3 March 1999.

Affidavits are sworn by Dr Whisson and Mr Prestidge.

1. Does the formal Deed of Settlement bar the present proceedings?

Does s 241 of the Corporations Law render the Deeds of Settlement void?

Are the Deeds of Settlement voidable for fraud?

Parties

Legislation Cited (4)

Cases Cited (32)