Fortron Automotive Treatments Pty Ltd v Jones

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

WESTERN AUSTRALIA DISTRICT REGISTRY WAD 380 OF 2005

REASONS FOR JUDGMENT ON MOTION FOR LEAVE TO SERVE OUT OF THE JURISDICTION Introduction 1 Fortron Automotive Treatments Pty Ltd (Fortron) carries on business in Australia as a manufacturer and supplier of automotive products, including anti-freeze, brake cleaner, carburettor cleaner, cooling system flush, degreasers and numerous other like products. Fortron says that, between 1993 and 2005, it had in place exclusive distribution agreements in relation to its product with a company in Thailand called Gammar Groups (Thailand) Co Ltd (Gammar). 2 Fortron alleges that, while its distributorship arrangements with Gammar were still in place, that company imported competing products supplied to it by another company, Treblex Automotive Products Pty Ltd (Treblex) controlled by a former executive of Fortron. Fortron alleges that Gammar has marketed Treblex products under Fortron labels in pursuit of a Substituted Product Scheme through its sub-distributors in Thailand. It has commenced proceedings against a variety of respondents in connection with the scheme and alleged breaches by Gammar of its distributorship obligations. 3 Fortron now seeks leave to serve these proceedings on Gammar in Thailand. For the reasons that follow, I am satisfied that leave should be granted. Factual Background 4 Fortron manufactures and supplies automotive treatment products and has done so for many years. The company markets its products under the name 'Fortron' in both Australia and internationally. One of the countries in which its products are marketed is Thailand. It has registered 'Fortron' as a trade mark in Australia and Thailand, among other countries. 5 Gammar is a company incorporated in Thailand. It was Fortron's sole distributor in that country for its automotive treatment products from 1993 until February 2005. Gammar operated under written distribution agreements with Fortron, the first of which was entered into on 20 August 1993 and the second, on 31 August 1998. The second agreement expired in August 2003. There has been no written distribution agreement in place since then. According to one of Fortron's directors, Breck Hoffman, who swore an affidavit in support of the application for leave to serve these proceedings on Gammar, the distribution agreement was continued on a month to month basis on the same terms and conditions as the written agreement that preceded it. 6 Phanu Changlor is a director and senior manager of Gammar. He is also a senior manager of the tenth respondent, Gold Leaf Products Co Ltd (Gold Leaf). 7 Kenneth Jones, who is the first respondent, was employed by Fortron from 1998 to 17 April 2003 in various senior sales and managerial capacities. He had full responsibility for the supply, marketing and distribution of Fortron's products in Thailand in the early part of 1993 until April 2003. From 18 April 2003 to January 2004 he was relegated to a lesser position in another company within the Fortron Group, namely Fortron Insurance Agency Limited. From 1 July 2000 to 29 January 2001 and from 2 January 2002 to 5 September 2002, Mr Jones was a director of Fortron. Since 17 October 2003 he has been a director and shareholder of Treblex, which is the second respondent. Trebex is the company which he set up with Mr Changlor and with another Fortron employee, Mr Tully, and which now supplies automotive products to Gammar. 8 In its operations within Australia, Fortron obtained certain products such as anti-freeze, anti-boil and solvent degreaser from a company formerly known as Gold Leaf Enterprises Pty Ltd (Gold Leaf Enterprises) and now known as Versalife Pty Ltd (Versalife) (the sixth respondent). This product was distributed by Fortron as Fortron product within Australia. However, it did not distribute any of the Gold Leaf Enterprises product in Thailand. The product it distributed in Thailand was manufactured by Fortron or by entities other than Gold Leaf Enterprises under Fortron's direction. 9 Until 18 February 2005 Gold Leaf Enterprises carried on business formulating and manufacturing specialty chemicals including a broad range of detergent concentrates, corrosion treatments and automotive maintenance products. It supplied chemicals to Fortron. Peter Matthews, who is the seventh respondent is a director and shareholder of Gold Leaf Enterprises. Donna Matthews, the eighth respondent, is also a director. 10 The system whereby Fortron and Gammar implemented their distribution agreement was described by Mr Hoffman in his affidavit as follows: '(a) Changlor in Thailand, for and on behalf of Gammar, would telephone Jones in Perth, for and on behalf of the applicant, and place an order for Fortron Product. (b) Jones would arrange for: (i) the Fortron Product so ordered by Gammar to be sourced from existing stock and if there was no existing stock, then he would arrange for the ordered product to be manufactured by one of the Applicant's usual suppliers, which suppliers would manufacture the product according to the instructions given to them by the Applicant; (ii) the exportation of the Fortron Product to Thailand, including obtaining all necessary customs clearances and processing all requisite banking and shipping documentation; (iii) the Fortron Product to be shipped to Gammar in Thailand in bulk 200 litre drums; (c) on receipt of the bulk Fortron Product in Thailand, Changlor would arrange for: (i) the Fortron Product to be bottled in 250 ml plastic bottles; (ii) the appropriate descriptive "Fortron" labels to be affixed to each bottle, which labels included instructions and specifications in the Thai language; (iii) the distribution of the Fortron Product via the distribution network established by the Applicant and Gammar in Thailand and utilising the marketing strategies devised by the Applicant and in which Gammar and its employees had been trained by the Applicant.' According to Mr Hoffman, Mr Jones and Mr Changlor had a friendly relationship. Mr Jones, in the course of his duties as an employee of Fortron, visited Thailand at least once a year. 11 Mr Tully, who is named as the fourth respondent, was employed by Fortron from 17 April 1989 to 26 October 2004 as its senior accountant and company secretary. He was also during that period group accountant for the Fortron Group and between October 2003 and 31 May 2004 was a director and secretary of Treblex. 12 Mr Jones was said, by Mr Hoffman, to have had a close working relationship with Mr Tully, whose responsibilities with Fortron in 2000 included the development and management of a stock control system for the Fortron product, including product for export to Gammar under the distribution agreement, responsibility for quality assurance management of Fortron and for the preparation of monthly management reports, including profit and loss reports. Mr Jones was also said to have had a close business relationship with Gold Leaf Enterprises and with its manager, Mr Matthews, as a result of sourcing product for and on behalf of Fortron from Gold Leaf Enterprises for sale in Australia. 13 Mr Jones was dismissed from the employment of Fortron in April 2003. He was effectively demoted by being offered a position, which he accepted, with Fortron Insurance Agency. He resigned from that position by in 8 December 2003. 14 Mr Hoffman assumed some of Mr Jones' work duties in April 2003. According to his affidavit, the relationship with Gammar did not require him to play a particularly active role. Orders were made by either Mr Changlor or his wife, Srikijkul, by telephone to Jane Hyland at Fortron. Ms Hyland was the contact for Gammar. Mr Hoffman had met Mr Changlor two or three times in Thailand between 1994 and 2004 and two or three times in Perth. When Mr Hoffman visited Thailand in 2004 Mr Changlor told him he was not happy that Mr Jones was no longer employed with Fortron. Unlike previous occasions, Mr Changlor would not take him to visit sub-distributors or dealerships. 15 Mr Hoffman noticed that monthly sales of Fortron product to Gammar in Thailand dropped significantly in 2004. He discussed the drop off with Mr Changlor. Mr Changlor told him there were more competitors and that he had lost sub-distributors to other companies and that business was difficult for him. Mr Hoffman suggested various strategies. He said he subsequently came to learn that Mr Changlor's business was flourishing and that he and his wife had both bought themselves Mercedes motor vehicles at about that time. How he learned these things was not explained. 16 Mr Hoffman said he discovered in October 2004 that Treblex had been set up by Messrs Jones and Tully, while Mr Tully was still employed with Fortron as an accountant and company secretary. They were both directors and shareholders of Treblex. On discovering that they had established Treblex and following the termination of the Gammar distributorship, Mr Hoffman went to Thailand. He claimed to have found that Gammar sub-distributorships and dealerships in Thailand were selling Fortron products. He only located a Treblex product at one distributor. In March 2005 he purchased samples of Gammar's Fortron labelled products and shipped them back to Australia where they were tested. He said: 'When the Fortron labelled products purchased by me in Thailand, were tested in Perth they were found not to contain genuine Fortron product, although to my knowledge they had been supplied by Gammar to the outlets from where I had purchased them and were in Fortron labelled bottles.' He did not state the source of his knowledge that the product had been supplied by Gammar to the outlets from which he had purchased them. Mr Hoffman exhibited to his affidavit a report from Geotechnical Services Pty Ltd of four samples of product which he had obtained from Thailand and two samples of Treblex products which he purchased there. The analysis was of the density of the products and of their elements by a form of spectrometry. It does not appear from the test results how he concluded that the Fortron labelled products he purchased in Thailand did not contain genuine Fortron product. 17 Following receipt of the test results Mr Hoffman caused investigations to be carried out into the activities of Messrs Jones, Tully, Changlor, Treblex, Gammar, Gold Leaf Enterprises and Matthews and their possible involvement in what he 'suspected was a Fortron product substitution scheme in Thailand'. He said that those investigations resulted in him ascertaining the following: (a) Fortron Treatment (Thailand) Ltd had changed its name to Gold Leaf Products Co Ltd. A copy of the incorporation and change of name record was exhibited. (b) In 1999, Mr Jones asked Peter Matthews of Gold Leaf Enterprises to supply him with a price list for Gold Leaf products. Mr Matthews sent him a facsimile setting out those prices. A copy of the facsimile was exhibited. (c) On 17 June 1999, Jane Hyland of Fortron, at Mr Jones' request, asked Mr Matthews to provide Gold Leaf's ISO certificate so that it could be passed to Changlor. A copy of the facsimile from Ms Hyland to Mr Matthews dated 17 June 1999 was exhibited to Mr Hoffman's affidavit. (d) Ms Hyland received the ISO certificate from Gold Leaf Enterprises and passed the document on to Mr Jones. The certificate was dated 17 January 1997. (e) Treblex was incorporated on 15 October 2003. (f) In March 2004 and within weeks of Mr Jones having resigned from Fortron Insurance Agency, he instructed Mr Changlor to purchase automotive treatment product from Gold Leaf Enterprises instead of from Fortron. He notified Mr Matthews of Gold Leaf Enterprises of that development. An email from Mr Jones to Mr Matthews dated 15 March 2004 was in the following terms: 'Dear Peter, As I may have told you we have had an interest from the same party who is looking at both India and Israel for all types of products including aerosols. I have explained to him and he understands the difficulty we have in shipping aerosols from here or Thailand. Peter what I would first of all like to get would be pricing on WD Lube, Carby Cleaner, Brake Cleaner, Degreaser and Throttle Body Cleaner all in 200lt containers. What I would also require is information requiring the types of valves, nozzles and pressures to allow these products to be filled overseas, can you help me with this information, I have told Parnu that he should also buy his aerosol product from Gold Leaf instead of Fortron.' (g) A copy of a memorandum prepared by Mr Tully in or about October 2004 relating to the circumstances of his dismissal from Fortron and his involvement with Treblex. The memorandum referred to Mr Tully's involvement as accountant and company secretary for the Fortron Group. It referred to the company's distributor in Thailand and how Parnu (evidently a reference to Phanu Changlor) had been buying product from the company for more than ten years and became a very close friend and confidante of Mr Jones. Mr Tully described in his memorandum the circumstances in which Mr Hoffman, a son of Ivan Hoffman, the owner of the Fortron Group, was initially introduced into the group as Mr Jones' apprentice and thereafter became his boss. According to Mr Tully's memorandum he turned out to be 'a tragically lazy and incompetent boss' and after a long period they came to more and more grief to the point where, as Fortron could not dismiss Mr Jones, they demoted him to another company in the Group where he was to have no contact with Mr Changlor or any other export clients. Mr Tully described Mr Changlor's adverse reaction to this development as he had a low opinion of Mr Hoffman. Although Mr Changlor had complained on a number of occasions about Mr Breck Hoffman to Mr Hoffman Snr, he was told that he would have to learn to take advice and deal with his son. Mr Tully found the situation intolerable and approached Mr Jones personally to see what could be done as he always needed help with his business and could not continue the current distribution arrangement under the new conditions. The agreement with Fortron had expired and had not been renewed. The Tully memorandum went on: 'In these discussions it was realized that there were a number of opportunities that could be followed up if Ken could make himself available on a full time basis. Opportunities he could not follow up while with Fortron. Parnu was determined to get another supplier no matter what!' Mr Tully then described the establishment of Treblex in which he was offered a third interest by Mr Jones and Mr Changlor. He was to carry out, in lieu of any payment for that interest, the compliance and accounting work, deal with Austrade, arrange export documentation and be available to assist where necessary. He was made a director in case anything needed to be arranged while the two of them were in Thailand. He said he agreed to this and justified it to himself on the basis that, although Treblex was dealing with a Fortron distributor, it was to create business that Fortron was not capable of servicing with a client who was severely disaffected. According to Mr Tully, the business that was already being done had continued as normal so Fortron had not suffered any loss. At the end of May 2004 Mr Tully resigned as a director of Treblex and transferred his shares to Mr Jones' wife as he had become increasingly uneasy about his association with it. He said that although he had been accused of being part of a company attempting to compete with Fortron in Australia, Treblex had never sold anything in competition with Fortron. Mr Tully said in his memorandum that he was dismissed by Mr Ivan Hoffman on 26 October 2004 following the discovery of his name on the Australian Securities and Investments Commission records of Treblex. (h) In October 2004 Treblex was exporting quantities of automotive treatment products to Gold Leaf Products. A copy of the relevant commercial invoice was exhibited. (i) In November 2004 Treblex was using the Gold Leaf Enterprises name and logo locally. (j) Documents obtained under subpoena from the Australian Customs Service showed that from December 2003 to February 2005 Treblex exported automotive treatment products to Gammar in Thailand to the value of $336,436. A copy of documents obtained from the Australian Customs Services was exhibited. (k) A customer of Gammar, one Thanandorn Wacharothayangkool, (known as Tony) informed Mr Hoffman that during 2004 he was purchasing on average 8,000 to 9,000 units of Fortron labelled products per month from Gammar. Based on his experience and knowledge of the sub-distributors of Gammar who distributed Fortron products, Tony said his business represented about 25% to 30% of all of Gammar's business. Tony told him that Gammar had about another 20 sub-distributors around Thailand selling Fortron products. At the same time, according to Mr Hoffman, Fortron was only supplying Gammar with 8,000 units per month. (l) Treblex was sourcing lubricant oil from United Oil in Singapore in March 2004 for delivery to Gold Leaf Products. This was evidenced by a Treblex order form exhibited to the affidavit. (m) In August 2004 Gammar had in place a proposal to move its customers away from Fortron products to Treblex product as evidenced by a draft letter located on Mr Tully's CD-Rom following the termination of his employment with Fortron in October 2004. (m) In February 2005 Treblex did not have any of its own labels for the product it was storing at Gammar's premises in Bangkok. This was said to appear from a report prepared by Mr Tully of a visit to Thailand between 22 January and 1 February 2005. The relevant rules 18 The application is brought under O 8 r 1(1) of the Federal Court Rules which provides, inter alia: '1. Subject to rule 2 and Divisions 2 and 3 of this Order, originating process may be served outside the Commonwealth in the following cases- (a) where the proceeding is founded on a cause of action arising in the Commonwealth; … (ab) where the proceeding: (i) is for the enforcement, rescission, dissolution, rectification or annulment of a contract; or (ii) otherwise affects a contract; or (iii) is for damages or other relief in respect of the breach of a contract; and the contract: (iv) is made in the Commonwealth; or (v) is made on behalf of the person to be served by through an agent carrying on business or residing in the Commonwealth; or (vi) is governed by the law of the Commonwealth or of a State or Territory. … (b) Where the proceeding is founded on a breach of an Act, where the breach is conducted in the Commonwealth.' 19 Order 8 r 2 sets out the conditions to be satisfied before leave can be granted to serve an originating process outside the Commonwealth. Relevantly it is in the following terms: '2(1) Service outside the Commonwealth of originating process is not valid under this Order unless - (a) the service is in accordance with the prior leave of the Court given under sub-rule (2); (b) the Court confirms the service under sub-rule (4); or (c) the person served waived objection by entering an appearance. 2(2) The Court may, by order, give leave to serve originating process outside the Commonwealth in accordance with Division 2 or 3 of this Order or, subject to subrule 2B, on such terms and conditions as it considers appropriate, if the Court is satisfied that: (a) the Court has jurisdiction in the proceeding; and (b) rule 1 applies to the proceeding; and (c) the party seeking leave has a prima facie case for the relief sought by the party in the proceeding.' The causes of action raised against Gammar 20 In its amended statement of claim Fortron pleads the exclusive dealership agreement with Gammar and their subsistence from 1993 to February 2005. It pleads also the fact that it is the registered proprietor of the trade mark 'Fortron' in both Australia and Thailand. The date of registration of the trade mark in Thailand was 7 October 1996. 21 Fortron alleges against Gammar that it breached conditions of the distributorship agreement under which: 1. Gammar was obliged not to sell, distribute, manufacture or market in any manner in Thailand on its own account or otherwise any products that could be used in substitution for, or in competition with, the Fortron product without prior knowledge and discussion. 2. Gammar was authorised to use Fortron's trade mark solely in connection with the sale of products in Thailand during the term of the agreement. 3. Gammar would not alter or substitute anything for the Fortron products furnished under the agreement or labels fixed to them or modify the trade marks in any way or do anything that would infringe, impeach or lessen the value or integrity of the trade marks or the goodwill associated with them. 4. Gammar would undertake to use its best endeavours to maximise the sales of the product in Thailand from time to time. 22 The amended statement of claim then alleges, at par 23: 'From some time in 1999 or 2000 and continuing up until approximately February 2005, Gammar sourced automotive treatment products from Goldleaf (sic) Australia a pleading reference to Gold Leaf Enterprises, and marketed and distributed for sale in Thailand the Substituted Products using the Applicant's name, goodwill, trade marks, get up and design to misrepresent to customers in Thailand that the Substituted Products were Fortron Product.' Particulars of the alleged product substitution are then provided. 23 Gammar's conduct is said to be have been in breach of the terms of the distribution agreement already referred to, found in cl 3.1, 10.1, 10.2 and 11.3. Fortron says that as a result of the breach of the distribution agreement it has suffered loss and damage. 24 Fortron claims against Gammar: 'a. Damages for breach of contract. b. Interest thereon pursuant to s 51A of the Federal Court Act for such period as this Honourable Court deems just. c. Costs. d. Further or alternative relief.' As appears from the preceding the cause of action in relation to Gammar relates entirely to its alleged breaches of the extended distribution agreement. Whether the Court has jurisdiction in the proceeding 25 In its submissions in support of the application for leave to serve out of the jurisdiction, Fortron pointed out that it seeks relief within the original jurisdiction of the Federal Court for contraventions of provisions of the Trade Practices Act 1974 (Cth) (the Act) against: (a) Treblex - being a claim for damages for misleading or deceptive conduct as pleaded at pars 46 to 49 of the amended statement of claim; (b) Kenneth Jones - based on Mr Jones' accessorial liability for Treblex's misleading or deceptive conduct. In so doing Fortron relies upon the provisions of s 75B of the Act as pleaded at pars 49A to 49C; (c) Gold Leaf Enterprises - a claim for damages for misleading or deceptive conduct in contravention of s 52 of the Act as pleaded at pars 56 to 58 of the statement of claim. (d) Peter Matthews - a claim for damages based on Mr Matthews' alleged accessorial liability for Gold Leaf Enterprises misleading or deceptive conduct; (e) Donna Matthews - a claim for damages based on her alleged accessorial liability for Gold Leaf Enterprises misleading or deceptive conduct. 26 It is acknowledged that there are several non-federal claims against other parties, namely: (a) the claim for damages for breach of contract against Gammar; (b) the claim against Mr Jones for damages for inducing Gammar's breach of contract; (c) the claim against Mr Jones for misleading or deceptive conduct in contravention of the Fair Trading Act 1987 (WA); (d) the claims against Mrs Jones, Mr and Mrs Tully, Gold Leaf Enterprises, Peter Matthews, Gold Leaf Products, Phatchara Srikijkul and Phanu Changlor for damages based on their alleged accessorial liability in relation to Mr Jones' conduct in contravention of the Fair Trading Act. (e) the claim for damages for passing off against Gold Leaf Enterprises. 27 Fortron submitted that its claims, other than Fair Trading Act claims against Gold Leaf Products, Srikijkul and Changlor, fall within the accrued jurisdiction of the Court as they are part of the 'matter' in respect of which the Court has original jurisdiction. Fortron submitted that its claims constitute a single justiciable controversy as they arise out of a common substratum of facts: (a) the operation by Fortron of the business pleaded and its ownership of the relevant trade marks; (b) the existence of the distributorship agreements between Fortron and Gammar and their terms as pleaded, in particular, the term pleaded in sub-paragraph 19(e) under which the agreements were to be governed by the law of Western Australia; (c) the system adopted by Fortron and Gammar in the implementation of administration of the distributorship agreement; (d) Gammar's breach of the agreement with the resulting loss suffered by Fortron; (e) the conduct of Mr Jones in Thailand in devising and implementing a Substituted Product Scheme pleaded in the statement of claim; (f) the involvement of all the other respondents in the implementation of the Substituted Product Scheme. 28 It was submitted that the claim against Gammar is that it breached the distribution agreement by involving itself in the implementation of the Substituted Product Scheme. The implementation of the scheme was said to be at the heart of the justiciable controversy over which this Court has original jurisdiction, namely the claims for relief under the provisions of the Act against Treblex, Mr Jones, Gold Leaf Enterprises and Peter and Donna Matthews. 29 I am satisfied, on the basis of Fortron's submissions, that the claim for relief against Gammar falls within the accrued jurisdiction of the Court and that the Court therefore has jurisdiction to deal with it. Whether the proceeding is one to which Order 8 rule 1 applies 30 On the face of it the proceeding as against Gammar is one that is for damages in respect of the alleged breach of a contract, a contract which was governed by the law of the State of Western Australia. I am satisfied therefore that O 8 r 1 applies to the proceeding. Whether Fortron has a prima facie case for the relief sought against Gammar 31 It is well established that the test of a prima facie case for the purposes of O 8 r 2 is whether there is material before the Court from which inferences are open that, if translated into findings of fact, would support the relief claimed - State of Western Australia v Vetter Trittler Pty Ltd (In liq) (Receiver and Manager Appointed) (1991) 30 FCR 102; Bannerton Holdings Pty Ltd v Sydbank Soenderjylland A/S (unreported, Fed Ct, 9 February 1996, RD Nicholson J) affirmed on appeal in Sydbank Soenderjylland A/S v Bannerton Holdings Pty Ltd (1996) 68 FCR 539. See also Bray v F Hoffmann-La Roche Ltd (2003) 130 CR 317. 32 In relation to the claims for breach of contract against Gammar I am satisfied that a prima facie case has been made out at least in respect of alleged breaches of the exclusivity clause (3.1) and the best endeavours clause (11.3). It is not clear that the evidence set out in Mr Hoffman's affidavit demonstrates that the material being sold under the Fortron label was in fact a substituted product although there is some indirect support for that inference based upon the volume of apparent Fortron products being sold as against that being supplied. 33 It is sufficient however that one or more of the causes of action be supported by a prima facie case. It is not necessary that all should be so supported. Discretion 34 In my opinion the connection between Australia and the proceedings, in so far as they are brought against Gammar, is sufficiently close that it is appropriate to grant leave to serve the application out of the jurisdiction on Gammar. Conclusion 35 For the preceding reasons I will accede to the motion for leave to serve Gammar Groups (Thailand) Co Ltd out of the jurisdiction. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.

Associate: Dated: 14 September 2006 Counsel for the Applicant: Mr Rabe