Supreme Court of WA|2002-03-26

Gebauer Nominees Pty Ltd v Hotrox Charcoal Company [2002] WASC 55 (26 March 2002)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GEBAUER NOMINEES PTY LTD -v- HOTROX CHARCOAL COMPANY [2002] WASC 55

BETWEEN : GEBAUER NOMINEES PTY LTD (ACN 008 776 707)

Practice and procedure - Application for access to premises for inspection - Application for leve to administer interrogatories - Turns on own facts

Rules of the Supreme Court 1971, O 27 r 1, O 28 r 2

Hadid v Lenfest Communications Inc & Ors [1996] FCA 945

American Flange & Manufacturing Co Inc v Rheem (Aust) Pty Ltd (No 2) [1965] NSWR 193

Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VicRp 7; [1967] VR 37

Apache Northwest Pty Ltd & Ors v Western Power Corporation & Anor, unreported; FCt SCt of WA; Library No 980293; 13 May 1998

Cannon v Quality Egg Farms Ltd [1994] QICmr 9; (1994) 1 QAR 491

Centurion Roller Shutters Pty Ltd v Automatic Technology (Australia) Pty Ltd [1999] FCA 792

Commonwealth of Australia v Cockatoo Dockyard Pty Ltd (1995) 36 NSWLR 662

Decor Corporation Pty Ltd v Australian Housewares Pty Ltd & Ors [1998] FCA 1479

Ex parte Fielder Gillespie Ltd (1984) 2 Qd R 339

Indoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 63

John Holland Pty Ltd v Federal Building Industries Pty Ltd (In Liq) [2001] QSC 326

Macquarie Generation v Coal & Allied Industries Pty Ltd [2001] FCA 1638

Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd (1994) 10 BCL 179

Reading Australia Pty Ltd v Australian Mutual Provident Society & Anor [1997] FCA 995

Russell v Russell (1976) 134 CLR 495

SmithKline Beecham plc v Alphapharm Pty Ltd [2001] FCA 271

Telstra Corp v Australis Media Holdings, unreported; SCt of NSW; BC9606185; 6 December 1996

1 MASTER SANDERSON: This application is brought under s 47 of the Commercial Arbitration Act. Before dealing with the orders sought and the originating summons it is necessary to say something of the matters in dispute in the arbitration. During the course of the hearing I was provided with a document described as "Book of Pleadings". In the arbitration the respondent to this application, Hotrox Charcoal Company, is the claimant and Gebauer Nominees Pty Ltd is the respondent. Throughout these reasons I will adopt the description of the parties appearing on the court documents and refer to Gebauer Nominees Pty Ltd as the applicant and Hotrox Charcoal Company as the respondent. The book of pleadings contained the amended points of claim, the applicant's request for further and better particulars of those amended points of claim, the applicant's re-amended defence set-off and counterclaim and the respondent's amended reply and defence to counterclaim. There is no dispute between the parties as to the basic facts. The summary which follows is taken from the pleadings in the arbitration.

2 The applicant is the registered proprietor at premises situated at and known as units 4, 5 and 6, 4 Ladner Street, O'Connor. Erected on that property is premises described as a "factory". By written lease agreement made 1 May 1998 the respondent leased these premises from the applicant. The lease which was in standard written form was for a term of 24 months. There was an option for renewal for the same period. The respondent is a manufacturer of charcoal briquettes. These briquettes have a number of commercial and domestic applications. The uninitiated would be most familiar with them in a form which is used as fuel in covered barbeques. They do have more sophisticated uses, such as providing fuel for aluminium or silicone smelters. Although the technicalities of the manufacture of these briquettes are at the heart of this dispute between the parties, it is not, for the purposes of resolution of the dispute, necessary to say anything more about the composition of the briquettes themselves.

3 In its points of claim the respondent says that on or about 2 June 1999 rainwater entered the leased premises rendering the factory unfit for occupation. The defects that lead to the entry of water are pleaded in some detail but can be summarised by saying that it is alleged the factory was not in good repair. This aspect of the respondent's claim has been the subject of determination by an arbitrator. The learned arbitrator found in favour of the respondent and concluded that the applicant is liable to the respondent for damages to be assessed. The remaining question is as to the quantum of these damages.

4 The respondent says in its points of claim that prior to entering into the lease it had secured a contract to sell briquettes in Korea. The relevant paragraphs are 4A and 4B of the respondent's points of claim. They are in the following terms:

"4A. On or about 3 May 1997 Gerhard Joseph Cole as trustee for the Larkent Trust trading as Hotrox ('Hotrox') and Worldzone International (Korea) Co Ltd ('Worldzone') entered into an agreement pursuant to which Worldzone agreed to purchase from Hotrox 'A' grade briquette charcoal to be manufactured by Hotrox ('the Agreement').

Particulars

(a) The Agreement was partly oral and was partly in writing.

(b) In so far as the Agreement was in writing, the Claimant refers to a document bearing the title 'Exclusive Agency Agreement' stated to be dated 3 May 1997, signed by Gerhard J Cole ('Mr Cole') on behalf of Hotrox and Zenova D J Lee ('Ms Lee') on behalf of Worldzone ('May 1997 Document').

(c) In so far as the Agreement was oral, the Claimant refers to conversations in or about April and May 1997 between Mr Cole on behalf of Hotrox and Ms Lee on behalf of Worldzone, in Seoul at the premises of Worldzone and at a hotel in Seoul and at various other locations at which burning tests of the charcoal briquettes were conducted before customers of Worldzone.

(a) Worldzone agreed to purchase from Hotrox 65 Full Container loads of briquette 'A' grade charcoal supplied by Hotrox to be delivered between October 1997 and September 1998 ('the Initial Delivery Dates') (clauses 2 and 4 of the May 1997 Document);

(b) each container was to contain between 3,000 and 3,150 cartons of briquettes, each carton containing 20 pieces of charcoal (clause 4 of the May 1997 Document);

(c) Worldzone was to pay to Hotrox a sum of US$3.85 per carton (inclusive of freight) for the first 15 container loads (clause 6 of the May 1997 Document);

(d) Worldzone was to pay to Hotrox a sum of US$4.00 per carton (inclusive of freight) for the other 50 container loads (clause 7 of the May 1997 Document);

(e) provided that the briquettes were of good quality, Worldzone agreed to renew the Agreement from year to year on the same terms and conditions save that Worldzone agreed to continue to purchase as many briquettes as Hotrox was able to produce.

Particulars

The Claimant refers to conversations between Mr Cole and Ms Lee in April and May 1997 the substance of which was to the effect pleaded in sub-paragraph (e) hereof. The said conversations took place at the locations referred to in paragraph (c) of the particulars to paragraph 4A hereof; and

(f) Hotrox agreed to directly supply charcoal briquettes to customers of Worldzone on the same terms and conditions of the Agreement, if Worldzone so requested (clause 14 of the May 1997 Document).

5 It is alleged by the respondent that as a consequence of the ingress of water, it was unable to produce the briquettes for export. That, it is said, has led to loss and damage. The loss of profit said to flow as a result of the respondent being unable to fulfil the Worldzone contract is particularised in par 13.2 in the following terms:

" PARTICULARS OF LOST PROFITS

(a) During the period between 1 July 1999 and December 1999 the Claimant would have sold 65 containers of briquettes to Worldzone at US$2.50 per carton, realising a profit in the sum of $328,466.00 at the end of December 1999.

(b) During the period between January 2000 and 30 April 2002, the Claimant would have sold 336 containers of briquettes to Worldzone at US$2.50 per carton, cumulatively realising profits in the following sums:

(i) to 30 June 2000 - $756,588.00;

(ii) to 31 August 2000 - $925,441.00;

(iii) to 31 December 2000 - $1,262,948.00;

(iv) to 30 June 2001 - $1,769,207.00; and

(v) to 30 April 2002 - $2,612,977.00.

In relation to sub-paragraphs (ii) to (v) hereof, from 1 July 2000 onwards the claimant would have continued to realise profits in a sum of $84,377.00 per month (on the sale of 12 containers per month) resulting in the accumulating profits referred to therein.

(c) The Claimant refers to and relies upon the expert report of Sheppard West Dwyer, chartered accountants, dated 5 September 2000.

(d) Further, had the respondent not breached the lease as alleged or at all, it is likely that the Claimant would have been provided with an additional lease for a further 24 month period commencing on 1 May 2002, with a further option to renew for a further period of 24 months commencing on 1 May 2004.

(e) During the period between 1 May 2002 and 30 April 2006, the Claimant would have continued to sell briquettes to Worldzone and/or its customers and would have continued to derive profits therefrom in at least the sums referred to in sub-paragraph (b) hereof, realising monthly profits in a sum of $84,377.00 per month, being an additional sum of $4,050,096.00.

TOTAL: $6,663,073.00"

6 The total damages claimed made by the respondent is for over $8 million. However, it is the claim in relation to the lost sales to Worldzone which was at the heart of this application.

7 Against that background the applicant applied by originating summons for the following orders:

"(1) A representative of the Applicant, its solicitors and Dr R Franklin be permitted to inspect units 4, 5 and 6, Ladner Street O'Connor and the production facility situate therein at a date and time to be fixed.

(2) The Respondent deliver up to the Applicant's solicitors within 7 days of the date of this order a sufficient quantity of samples of:

(a) wood logs;

(b) charcoal;

(c) charcoal briquettes

manufactured by the Respondent with the production facility situated at Ladner Street aforesaid.

(3) The Applicant have leave to serve notice requiring the Respondent to answer interrogatories setout in the schedule attached hereto."

8 Prior to the hearing the respondent indicated that it would consent to an order in terms of par 2 of the originating summons. Further, the respondent indicated it would consent to an order in terms of par (1), provided that the person to inspect the respondent's premises was not Dr Franklin. The respondent said it would agree to inspection by another suitably qualified expert nominated by the applicant. That then left two issues for determination. First, whether the respondent ought be compelled to answer the interrogatories and second, whether the applicant was entitled, in the circumstances, to engage Dr Franklin as its expert.

9 Before dealing with the specific points in issue it is as well to determine just what is at issue between the parties on the assessment of damages. The respondent says that it has a contract with Worldzone to provide a certain quantity of briquettes, those briquettes to meet certain specifications. In particular, the briquettes must be of "A" grade physical strength. They must also meet certain other specifications. The applicant requires the respondent in proving its damage to establish that it (the respondent) could have manufactured briquettes which met Worldzone specifications. For its part the respondent cannot point to any track record which shows the manufacture and sale of briquettes in commercial quantities such as would justify the conclusion that the terms of the Worldzone contract could be met.

10 It is true that there is some evidence to suggest that the briquettes produced would meet Worldzone's requirements. Appearing as annexure "RSH65" to the affidavit of Richard Simon Huston filed in support of the application, is a report of a firm of engineers, Sinclair Knight Merz, which was prepared for the Export Finance and Insurance Corporation. This report acknowledges that an analysis of a sample of briquettes satisfied the requirements of Worldzone as those requirements were stated in a letter of credit established by National Bank of Australia: see page 341. Further, the report also offers an opinion that the plant would be capable of producing the quantity of briquettes to satisfy the Worldzone contract. Appearing as annexure "RSH67" to Mr Huston's affidavit is a report prepared by CSIRO for the New South Wales Department of Urban Affairs. The report was commissioned to investigate whether any alternatives existed to the use of hardwood charcoal in the production of high purity silicone metal from a smelter proposed for the Lithgow region. The author of the report considers the use of the respondent's technology and provides a breakdown of the chemical properties of briquettes produced by the respondent. The report concludes that the technology may be suitable for large scale development: see pages 425 - 426.

11 But none of that establishes beyond question that the respondent would be able to fulfil the requirements of the Worldzone contract. The applicant says that the only way this proposition can be tested is to analyse the respondent's production techniques and obtain expert opinion as to whether or not they will result in a finished product which meets Worldzone specifications and whether it is possible to produce the briquettes in sufficient quantities to satisfy the contract. The application says that irrespective of what evidence the respondent may have to that effect it is entitled to instruct its own expert and have him deliver an opinion. Furthermore, the applicants say that an expert cannot possibly offer an opinion unless he knows the process by which the respondent produces the briquettes.

12 Against that background the applicant seeks to have the respondent answer the following interrogatories:

"1. Refer to paragraph 7 of the Respondent's Further Re-Amended Points of Claim undated but delivered 14 November 2001 and answer the following interrogatories:

(i) the approximate dimensions of the woodlogs,

(ii) the heating regime detailing times and temperatures for a typical batch of charcoal and charcoal briquettes,

(iii) the method of cooling charcoal and charcoal briquettes and the temperature profile during cooling,

(iv) the approximate composition of the atmosphere in the ovens that had been commissioned plant and equipment throughout the process with particular reference to oxygen levels.

(b) what are the process control parameters.

(c) what is the exhaust gas composition during the course of the process of producing charcoal or charcoal briquettes.

(d) are any quality control checks in the process of producing charcoal or charcoal briquettes and if yes to this interrogatory what are the control checks.

2. Refer to paragraph 4B(a) of the Respondent's Further Re-Amended Points of Claim and describe the test methods used to evaluate the physical strength of 'A grade' charcoal briquettes suitable for the Korean market.

3. Refer to paragraph 13.2 of the Respondents Further Re-Amended Points of Claim and provide details of the manufacturers specifications for the insulating material used in the construction of the ovens installed at the factory premises."

13 The respondent objects to answering these interrogatories because, it is said, it will be required to divulge trade secrets. The position adopted by the respondent can best be summarised by quoting from an affidavit of Gerhard Joseph Cole sworn 1 February 2002 and filed in opposition to this application. Mr Cole identifies himself as the trustee for the Hotrox Charcoal Unit Trust, trading as Hotrox Charcoal Company, the respondent in the proceedings. Mr Cole says:

"6. I state and verily believe I am the sole author of world unique technology which provides for the successful briquetting of sawdust wood briquettes and charcoal briquettes without the use of a synthetic binder or synthetic ignition aids so as to produce a product which has physical and chemical qualities which are acceptable to both the production of charcoal of suitable physical strength for use in the silicone industry, and the production of charcoal barbecue briquettes suitable for the domestic market.

33. ... The nature of the trade secrets is such that because the confidential information in the samples cannot be extracted through scientific analysis, the 'recipes' of how the sawdust is first processed into wood logs and how the charcoal is then manufactured remains secret even though the end products can be analysed and their physical and chemical composition can reveal (sic). The secret method in which the physical and chemical compositions are reached makes up the secret recipes. It is these recipes which form part of the trade secrets and unique technology that I submit must be protected."

14 Once the position is put that way I think it is clear that these interrogatories must be answered and leave ought be granted under O 27 r 1. Without the respondent providing detail as to how the briquettes are to be manufactured there is, on the respondent's own evidence, no way in which the plaintiff can investigate the manufacturing process. As Mr Cole says in his affidavit "reverse engineering" is not possible. Given the nature and extent of the respondent's claim for damages the applicant must have the opportunity to obtain an opinion of an expert as to whether or not the respondent would have been able to manufacture briquettes in such quantities and to the specifications required by Worldzone.

15 In making an order for answer of the interrogatories I am conscious of the respondent's concern about disclosing trade secrets. I would be prepared to make stringent orders limiting the disclosure of answers to the interrogatories. These orders would include a requirement that the answers be delivered to the Court in a sealed envelope which could only be opened by further order of the Court. I would be prepared to limit the access to the answers to the respondent's solicitors and a nominated expert. I will provide the parties with the opportunity to make submissions in relation to the protection of the answers provided by the respondent before making any orders on the originating summons.

16 That then leaves as an issue the position of Dr Franklin. The way the orders sought by the applicant are framed, two issues arise. First, whether Dr Franklin ought be permitted to inspect the respondent's premises and second, whether or not Dr Franklin ought be given access to the answers to interrogatories provided by the respondent. The first of these questions involves an application of O 28 r 2. That rule does not, by its terms, provide that the Court can limit who may inspect the property, although that power may be implicit in r 2(2). Order 36A does not allow the Court to limit who a party may engage as an expert witness. However, if an order is made either refusing Dr Franklin access to the respondent's premises, or limiting access to the answers to interrogatories so as to exclude him, then that will be the affect of the orders.

17 The respondent objects to Dr Franklin on the basis that he is a trade rival. Before detailing these objections I should say something of Dr Franklin's background and qualifications.

18 Dr Franklin has sworn two affidavits which have been filed in these proceedings. The first was sworn 28 November 2001 and the second was sworn 15 February 2002. Dr Franklin is the principal of R & A Consultants. Dr Franklin himself is a highly qualified chemist. His curriculum vitae appears as RWF5 to his first affidavit. He formed R & A Consultants in 1988 to exploit opportunities to provide consultancy services for a company engaged in the manufacture of firelighters for domestic barbecues: see par 12 of his first affidavit. He goes on to detail work subsequently undertaken by R & A Consultants in relation to charcoal briquettes. There is no doubt that he has undertaken a significant amount of work in the area for a diverse range of clients. It would appear that at present he is not undertaking any work for clients involved in the manufacture of briquettes and has not done so since 1993. Dr Franklin makes the point that R & A Consultants must, if it is to maintain its business, be able to assure clients of confidentiality. He makes the point that such assurances are central to the consultancy business. Quite clearly that is the case.

19 The objection taken to Dr Franklin is set out by Mr Cole in his affidavit of 1 February 2002. He says (at par 32):

"... I strenuously object to Dr Franklin having access to the factory on the basis that R & A Consultants and Dr Franklin personally have or have had, a relationship with Auschar, Simcoa, Iluka, Nufarm, Foremost Firelighters and Western Mining which relationships are admitted by Dr Franklin in paragraph 13, 14, 15, 16, 17 and 18 respectively of Dr Franklin's affidavit. These relationships related to Dr Franklin's unsuccessful attempts to produce charcoal briquettes and products without the use of synthetic or chemical binders for commercial exploitation. I admit that I have engaged in litigation with Auschar in the past in relation to trademarks but do not believe this prejudices Dr Franklin from being an expert. My concern involves the possibility that Dr Franklin may disseminate deliberately or inadvertently confidential information to Auschar which was originally approached to also be engaged as a technical consultant for the Respondent to work in conjunction with Dr Franklin, similarly to Dr Franklin and Auschar having previously worked together in their joint failed attempts to duplicate or copy other technologies I have previously developed."

20 Appearing as annexure "GJC1" to Mr Cole's affidavit is a patent application made by Dr Franklin in relation to charcoal briquettes. The application appears to have been made in 1991 and lapsed in July 1993. The patent was directed at producing a briquette of suitable hardness without the use of binding agents. It is submitted on behalf of the respondent that the fact of this patent application shows that Dr Franklin has in mind commercial production of charcoal briquettes. It is further submitted that even if Dr Franklin is not presently a trade rival of the respondent, if the respondent's manufacturing techniques are disclosed to him there is a prospect that at some stage in the future he may either personally or in conjunction with others become a trade rival of the respondent.

21 Researchers of counsel have failed to find any case which is directly on point. In support of its submissions the respondent relied on those cases where discovery of commercially sensitive documents was sought from a trade rival. In particular, emphasis was placed on what was said by Hayne JA in Mobil Oil Australia Ltd & McDonalds Australia Ltd v Guina Developments Pty Ltd [1996] VicRp 54; (1995) 33 IPR 82, where his Honour said (at 87):

"Once the documents are inspected by the principals of the trade rivals the information which is revealed is known to the trade rival and cannot be forgotten. Confidentiality is destroyed once and for all (at least so far as the particular trade rival is concerned). To say that the trade rival is bound not to use the documents except for the purposes of the action concerned is, in a case such as this, to impose upon that trade rival an obligation that is impossible of performance by him and impossible enforcement by the party whose secrets have been revealed."

22 Of course, Dr Franklin is not presently a trade rival of the respondent and there is no evidence that he will become a rival in the future. He says as much in his affidavit and there is no basis upon which I could doubt his evidence. But the respondent submits that even if Dr Franklin is not himself a trade rival, there is a prospect that at some stage in the future he may be engaged by a company which is a trade rival of the respondent. If he is then asked to advise in relation to charcoal briquettes he will bring to bear on his assignment information that he has learned from the respondent. As Hayne JA says, the information learned cannot be forgotten. In those circumstances there is a potential for a trade rival to obtain information via Dr Franklin which might undermine the respondent's business.

23 I would accept that there is some slight risk of that occurring. However, Dr Franklin has given undertakings as to confidentiality and there is nothing to suggest that those undertakings will not be honoured. Furthermore, Dr Franklin, through his consultancy business, often acts for different companies who may be competitors. That is apparent from his evidence. He must therefore be accustomed to protecting the confidentiality of a client's information. This situation is really no different.

24 In all the circumstances I am satisfied that Dr Franklin should be permitted access to the respondent's premises and should be entitled to see the answers to interrogatories. As I have indicated above, I would be prepared to make orders which preserve the confidentiality of any information disclosed by the respondents. I will provide the parties with the opportunity to address on this question and in relation to costs.

Gebauer Nominees Pty Ltd v Hotrox Charcoal Company [2002] WASC 55

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Judgment (63 paragraphs)

Gebauer Nominees Pty Ltd v Hotrox Charcoal Company [2002] WASC 55 (26 March 2002)

Parties

Cases Cited (4)