Court of Appeal (WA)|2002-10-25|Before: Mr J, Steytler J, Miller J

Hotrox Charcoal Company v Gebauer Nominees Pty Ltd [2002] WASCA 293 (25 October 2002)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : HOTROX CHARCOAL COMPANY -v- GEBAUER NOMINEES PTY LTD [2002] WASCA 293

Practice and procedure - Commercial arbitration - Interrogatories and inspection of premises by expert witness - Whether expert witness a trade rival or a potential trade rival - Whether contractual undertaking as to confidentiality sufficient to protect trade secrets - Whether alternative expert available - Discussion of particular facts and circumstances of case

Hadid v Lenfest Communications Inc (1996) 70 FCR 403

1 STEYTLER J: I have had the advantage of reading the reasons for judgment of Sheppard AUJ. I agree with them and with the proposed orders. There is nothing I wish to add.

2 MILLER J: I have had the opportunity of reading in draft the reasons for judgment of Sheppard AUJ. I agree that leave to appeal should be granted and the appeal allowed. I agree with the other orders proposed by his Honour.

3 I would only add that I particularly agree with his Honour's recommendations that the parties seek to reach an appropriate solution to the present differences between them.

4 SHEPPARD AUJ: To be dealt with is an application for leave to appeal against the decision of Master Sanderson given on 26 March 2002 in an application made to him for orders for the administration of interrogatories and inspection of property. The orders were granted over the opposition of the applicant, Hotrox. In the way that the matter proceeded, it was understood that if it were thought that leave should be granted, the Court would consider the appeal which, in those circumstances, would require to be heard. The proceedings in which the orders are sought are not proceedings in the Court but proceedings by way of an arbitration which are governed by the provisions of the Commercial Arbitration Act 1985. Section 47 of that Act provides that "[t]he Court shall have the same power of making interlocutory orders for the purposes of and in relation to arbitration proceedings as it has for the purposes of and in relation to proceedings in the Court". The Rules of the Supreme Court provide in O 27 for the administration of interrogatories and in O 28 for orders for the inspection of property.

5 For the purposes of the arbitration proceedings, the respondent has retained an expert witness, Dr Franklin. The root of Hotrox's objection to the orders which were sought lies not in the respondent's entitlement to such orders or the form in which the interrogatories were expressed, but in the fact that the orders made by the learned Master authorised Dr Franklin both to see the answers to interrogatories and to be present at the inspection which was provided for. The ground of Hotrox's objection is that Dr Franklin is a trade rival, or a potential trade rival, of Hotrox and that enabling him to see the answers to interrogatories and attend upon the inspection would be likely to put him in a position of advantage in relation to Hotrox's manufacturing process. Hotrox would have no objection to the orders which were made if the answers to interrogatories were to be

shown to an expert witness other than Dr Franklin or if the inspection were to be conducted in the presence of another expert.

6 Before I proceed to recount the facts of the matter, it is important to note two matters. The appeal, if leave to pursue it is granted, is from a discretionary judgment and the subject matter of the appeal involves a matter of practice and procedure. There are many authorities for the proposition that a discretionary judgment is not to be the subject of an appeal unless it is shown that the exercise of the discretion which is involved has miscarried. It is unnecessary to deal with the authorities in detail. For present purposes, it is enough to refer to the judgment of Kitto J in Australian Coal & Shale Employees' Federation v The Commonwealth [1953] HCA 25; (1953) 94 CLR 621. There, Kitto J said (at 627):

"I shall not repeat the references I made in Lovell v. Lovell [(1950) [1950] HCA 52; 81 CLR 513, at 532-534] to cases of the highest authority which appear to me to establish that the true principle limiting the manner in which appellate jurisdiction is exercised in respect of decisions involving discretionary judgment is that there is a strong presumption in favour of the correctness of the decision appealed from, and that that decision should therefore be affirmed unless the court of appeal is satisfied that it is clearly wrong. A degree of satisfaction sufficient to overcome the strength of the presumption may exist where there has been an error which consists in acting upon a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight or sufficient weight to relevant considerations, or making a mistake as to the facts. Again, the nature of the error may not be discoverable, but even so it is sufficient that the result is so unreasonable or plainly unjust that the appellate court may infer that there has been a failure properly to exercise the discretion which the law reposes in the court of first instance: House v. The King [(1936) [1936] HCA 40; 55 CLR 499, at 504, 505]."

7 Since the decision in Australian Coal & Shale Employees' Federation v The Commonwealth, there have been numerous authorities on the question of the nature and extent of the right of appeal from the exercise of a judicial discretion. The law is well settled and I see no need to refer to further authorities.

8 Then, there is the fact that this is an attempt to appeal on a matter involving a question of practice and procedure. The limitations on appeals brought upon such questions were discussed by four Judges of the High Court (Gibbs CJ, Aickin J, Wilson J and Brennan J) in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170. Amongst other things, the Judges said (at 177) that an appellate Court exercised particular caution in reviewing decisions pertaining to practice and procedure. Not only must there be error of principle, but the decision appealed from must work a substantial injustice to one of the parties. The Judges said that it would be unwise to lay down rigid and exhaustive criteria. They referred to what had been said by Jordan CJ in In Re the Will of F B Gilbert (Dec'd) (1946) 46 SR (NSW) 318 (at 323). The Chief Justice there said that there was a material difference between an exercise of discretion on a point of practice or procedure and an exercise of discretion which determined substantive rights. In the former class of case, if a tight reign were not kept on interference with the orders of Judges at first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed indefinitely and costs heaped up indefinitely if a litigant with a long purse or litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in chambers to a Court of appeal.

9 But, towards the end of their discussion, the Judges emphasised that the question of an injustice flowing from the order appealed from would generally be a relevant and necessary consideration.

10 In the present case, I think it may be said that Hotrox will overcome the problems with which it is confronted by these various authorities if it can show that the decision of the Master has brought about an injustice. If that be the case, the exercise of discretion will have miscarried because the decision will be plainly wrong and the circumstances will warrant the grant of leave to appeal because, although the matter involves a question of practice and procedure, it will work an injustice against Hotrox if it is allowed to stand. Here, Hotrox has based its case on there being a significant injustice brought about by the Master's orders. That is the question which we need to address. A starting point for the exercise is a consideration of the Master's reasons for judgment. That account will sufficiently indicate the surrounding facts and circumstances of the matter as well as highlight the problem which exists. Nevertheless, it will be necessary to refer, in addition, to some of the detail of the evidence.

11 The respondent is the owner of property situated in Ladner Street, O'Connor. Erected on the property are premises described as a factory. The respondent leased the premises to Hotrox for a term of 24 months from 1 May 1998. There was an option for renewal for the same period. Hotrox manufactures wood logs made from sawdust and charcoal briquettes. The briquettes have a number of commercial and domestic applications. As the Master said, the uninitiated would be most familiar with them in a form which is used as fuel in barbecues. But they have more sophisticated uses, for example, the provision of fuel for aluminium or silicone smelters. The Master said that, although the technicalities of the manufacture of the briquettes were at the heart of the dispute between the parties, it was not, for the purposes of resolution of the dispute, necessary to say anything more about the composition of the briquettes themselves. I respectfully agree with that statement.

12 In its points of claim, Hotrox said that on or about 2 June 1999, rain water entered the leased premises, rendering the factory unfit for occupation. The defects that led to the entry of water were pleaded in some detail, but can be summarised by saying that it is alleged that the factory was not in good repair. The arbitrator has already determined that that was the case so that he has held that the respondent is liable to Hotrox for damages to be assessed. The outstanding question is the quantum of damages.

13 In par 4A of the points of claim, Hotrox said that on 3 May 1997, it entered into an agreement with a Korean company, WorldZone International (Korea) Co Limited, pursuant to which WorldZone agreed to purchase from Hotrox "A" grade briquette charcoal to be manufactured by it. Particulars of the agreement were given. Amongst other things, it was said that 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. Each container was to contain approximately 3,000 cartons of briquettes and each carton was to contain 20 pieces of charcoal. WorldZone was to pay to Hotrox the sum of $US3.85 per carton (inclusive of freight) for the first 15 container loads. WorldZone was to pay to Hotrox the sum of $US4.00 per carton inclusive of freight for the other 50 container loads. 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.

14 Hotrox alleged that, as a consequence of the ingress of water, it was unable to produce the briquettes for export. That has led, so it is claimed, to substantial loss and damage. The damage is particularised. The claim which Hotrox makes is of the order of $8 million.

15 It was in these circumstances that the respondent applied to the Master for the orders in relation to inspection and interrogatories. A further order sought was that Hotrox deliver up to the respondent's solicitors within seven days of the date of the order samples of wood logs, charcoal and charcoal briquettes manufactured by Hotrox with the production at its Ladner Street factory. There is no issue about that application. Hotrox is willing to make the various items which are sought available to the respondent. It has also indicated that it would consent to an order in terms of the other paragraphs provided that the person to inspect the premises was not Dr Franklin. The respondent said that it would agree to inspection by another suitably qualified expert nominated by the respondent. Originally, Hotrox objected to answering the interrogatories at all. But its present position is that it has no objection to them, provided the answers are not shown to Dr Franklin.

16 The Master remarked that the respondent required Hotrox in proving its damage to establish that it could have manufactured briquettes which met WorldZone's specifications in the quantities required by the contract. He said that Hotrox could not point to any "track record" which would justify the conclusion that the terms of the WorldZone contract could be met. But the Master also said that there was some evidence to suggest that the briquettes produced would meet WorldZone's requirements. In evidence is a report from a firm of well known consulting engineers, Sinclair Knight Merz. The report was prepared for the Export Finance and Insurance Corporation, a government agency asked to provide assistance to Hotrox in the venture upon which it intended to embark. The Master said that the report acknowledged that analysis of a sample of briquettes satisfied the requirements of WorldZone as those requirements were stated in a letter of credit established by the National Bank of Australia. The report also expressed the opinion that the plant would be capable of producing the quantities of briquettes necessary to satisfy the WorldZone contract. Also in evidence is a report prepared by the CSIRO for the New South Wales Department of Urban Affairs. The author of the report considered the use of Hotrox's technology and provided a breakdown of the clinical properties of briquettes produced by Hotrox. The report concluded that the technology "may" be suitable for large scale development.

17 The Master said that neither of the reports established beyond question that Hotrox would be able to fulfil the requirements of the WorldZone contract. The respondent said that the only way this proposition could be tested was to analyse Hotrox's production techniques and obtain expert opinion as to whether or not they would result in a finished product which met WorldZone's specifications and whether it was possible to produce the briquettes in sufficient quantities to satisfy the contract. The application made to the Master said that, irrespective of what evidence Hotrox might have to that effect, it was entitled to instruct its own expert and have him deliver an opinion. The respondent also said that an expert could not possibly offer an opinion unless he knew the process by which the briquettes were produced. The Master then set out the terms of the interrogatories which were sought and the objections to answering them. He quoted par 6 and part of par 33 of an affidavit of Mr G J Cole sworn 1 February 2002 filed in opposition to the application. Mr Cole is the Trustee of the Hotrox Charcoal Unit Trust which trades as the Hotrox Charcoal Company.

18 In the two paragraphs of his affidavit quoted by the Master, Mr Cole said:

"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 be revealed. 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."

19 After quoting these paragraphs, the Master said that, once the position was put that way, he thought that it was clear that the interrogatories must be answered. Without Hotrox providing detail as to how the briquettes were to be manufactured, there was, on Hotrox's own evidence, no way in which the respondent could investigate the manufacturing process. "Reverse engineering" was not possible. The Master said that, given the nature and extent of Hotrox's claim for damages, the respondent must have the opportunity to obtain the opinion of an expert as to whether or not Hotrox would have been able to manufacture briquettes in such quantities and to the specifications required by WorldZone.

"In making an order for answer of the interrogatories I am conscious of the respondent's [Hotrox'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 [Hotrox'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 [Hotrox] before making any orders on the originating summons."

21 As mentioned, Hotrox's present position is that it does not object to answering the interrogatories so long as the answers are not shown to Dr Franklin. That was the matter to which the Master next addressed himself. He said that two issues arose, namely, whether Dr Franklin ought to be permitted to inspect Hotrox's premises and, secondly, whether or not Dr Franklin ought to be given access to the answers to the interrogatories provided by Hotrox. As mentioned, Hotrox objects to Dr Franklin on the basis that he is a trade rival.

22 The Master went on to deal with Dr Franklin's background and qualifications. He is the principal of a firm, R & A Consultants. Dr Franklin is a highly qualified chemist. 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. He gave an account of work subsequently undertaken by R & A Consultants in relation to charcoal briquettes. The Master said that there was no doubt that he had undertaken a significant amount of work in the area for a diverse range of clients. It would appear that, at present (that is at the time the Master dealt with the matter), he was not undertaking any work for clients involved in the manufacture of briquettes and had not done so since 1993. Dr Franklin made the point, so the Master said, that R & A Consultants must, if it is to maintain its business, be able to assure clients of confidentiality. He made the point that such assurances were central to the consultancy business. The Master added, "Quite clearly that is the case".

23 Mr Cole's objection to Dr Franklin is set out in his affidavit of 1 February 2002. The Master quoted part of this paragraph in his judgment. It was in the following terms:

"... 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 paragraphs 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."

24 Annexed 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. It lapsed in July 1993. The Master said that the patent was directed at producing a briquette of suitable hardness without the use of binding agents. It was submitted on behalf of Hotrox that the fact of this patent application showed that Dr Franklin had in mind commercial production of charcoal briquettes. It was further submitted to the Master that even if Dr Franklin was not presently a trade rival of Hotrox, if its manufacturing techniques were disclosed to him, there was a prospect that at some stage in the future, he might either personally or in conjunction with others, become a trade rival of Hotrox.

25 The Master said that counsel had failed to find any case which was directly in point. In support of its submissions, Hotrox relied on those cases where discovery of commercially sensitive documents was sought from a trade rival. Reference was made to the decision of Hayne JA (then a member of the Victorian Court of Appeal) in Mobil Oil Australia Ltd & McDonalds Australia Ltd v Guina Developments Pty Ltd [1996] VicRp 54; [1996] 2 VR 34 (at 38); [1996] VicRp 54; (1995) 33 IPR 82 where Hayne JA 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 of enforcement by the party whose secrets have been revealed."

26 The Master said that Dr Franklin was not "presently" a trade rival of Hotrox and there was no evidence that he would become a rival in the future. He had said as much in his affidavit. The Master said that there was no basis on which he could doubt his evidence. I interpose to say in that respect that there was no cross-examination of any of the witnesses, so it would have been impossible for the Master not to accept at face value, the evidence which appears in each of the relevant affidavits which were relied upon. I realise that courts discourage or even refuse to allow cross-examination in interlocutory applications. But, sometimes, at least limited cross-examination is necessary adequately to deal with a matter. This would appear to be such a case.

27 The Master said that Hotrox had submitted that even if Dr Franklin was not himself a trade rival, there was a prospect that at some stage in the future, he might be engaged by a company which was a trade rival of Hotrox. If he were then asked to advise in relation to charcoal briquettes, he would bring to bear on his assignment information that he had learned from Hotrox. The Master said, "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 Hotrox's business". He continued:

"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.

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."

28 At the conclusion of the hearing in this Court, counsel were asked to provide the Court with a list of the references to the evidence upon which they relied. An important matter relied upon by counsel for Hotrox in the appeal was the question whether or not it was practical to require the respondent, as a condition of answering interrogatories and permitting an inspection of its premises and processes, to retain another expert sufficiently qualified to give evidence about the matters with which the respondent was concerned. This is not a matter which is discussed in the Master's judgment. To me, it is a critical matter. In order to deal with it, I need to refer to the evidence about it. I also need to refer a little more fully to the evidence of Mr Cole and Dr Franklin. This I will do with the aid of some of the references provided by counsel.

29 In his affidavit, Mr Cole said that he was the author of the technology which he developed to produce a superior quality wood briquette without a synthetic binder, by a "secret process" which provides for the adjustment of the density of the wood briquette and the manipulation of the re-activity of the charcoal produced from that wood briquette. Mr Cole said that he believed that he was the author of the technology which he developed to produce a superior quality charcoal which could have its volatility, carbon content, specific energy, ash levels, moisture level and physical strength adjusted through the variation of the process control. Mr Cole also said that he believed that he was the sole author of "world unique technology" which he developed to produce charcoal in a processing time cycle of less than 12 hours, compared to the 14 day "traditional method". He said that the unique technology contained in the oven room at the factory premises was protected by the installation of security devices and general staff who he employed were prevented from entering the oven room to ensure strict confidentiality and secrecy. He said that the ovens in the oven room were presently idle or unassembled. He also said that, because the respondent had removed the security once offered by the oven room wall by demolishing the wall which enabled it to be protected, he believed that the unique technology in the control mechanisms of the ovens, the methods of operation of the ovens and the structural fabrication and design of the ovens, were all presently at risk of exposure to visitors. This posed a commercial risk of the unique technology being revealed and possibly exploited or disseminated deliberately or inadvertently by visitors such as Dr Franklin.

30 Mr Cole said that he believed that, since the development of his first inventions in the period 1984 to 1989, Dr Franklin had attempted to copy his technology and exploit opportunities in similar areas "but has consistently failed to do so". He said that he viewed the appointment of Dr Franklin as the respondent's expert with "scepticism and suspicion". Mr Cole also said:

"By virtue of the Applicant [respondent] seeking an order requiring the Respondent [Hotrox] to answer interrogatories which were designed by Dr Franklin, I verily believe that Dr Franklin has in essence asked me to provide to him secret information relating to the unique technology and the details of the secret processes and trade secrets of the technology, before Dr Franklin claims he can comment on the unique technology and its processes."

31 Mr Cole made a number of comments about Dr Franklin's affidavit. I shall refer, as necessary, to the detail of these after I have referred to that affidavit. But Mr Cole said that Dr Franklin was not an expert in the manufacture of wood briquettes or charcoal briquettes without the use of binders. He said that the outcome of Dr Franklin's "attempt" to manufacture charcoal briquettes suitable for the Korean restaurant market resulted in his development of a product, Quickglow Barbecue Briquettes, for manufacture by a company known as Auschar. Mr Cole said that Quickglow briquettes used synthetic binders and chemical additives and were not accepted by the Korean restaurant market. There are other statements in Mr Cole's affidavit which question Dr Franklin's expertise in this area. Amongst these statements is a statement that Mr Cole believes that, because Dr Franklin already has a "history" of being unable to develop charcoal briquettes without the use of synthetic binders and has in the past failed to develop products which Mr Cole has succeeded in developing, Dr Franklin is a competitor and trade rival. On this basis, Mr Cole said that it was unreasonable to allow Dr Franklin access to his trade secrets and unique technology. He believed that irreparable damage would be done to Hotrox if Dr Franklin were allowed access to the factory.

32 Mr Cole referred to the specification for the provisional patent, part of which is in evidence. It showed that the "Inventor/Applicant" of the claimed invention were Dr Franklin and a Mr Pekin. The abstract for the invention is for a briquette suitable for use in a silicon smelting process, the briquette being formed by a mixture of carbonaceous material and silica fume. The briquette could be made by combining the silica fume and carbonaceous material with water, forming the briquette in a conventional ring roll press or extrusion process and hardening the briquette so formed by drying. The invention is said to relate to briquettes and a method of forming such briquettes. The invention is said to relate particularly to briquettes that are suitable for use as a raw material in silicon smelting processes that utilise electric arc furnaces. More could be quoted from the specification, but it is enough to say that its relevance for present purposes is that it shows that in 1993, Dr Franklin claimed to be the inventor, or at least one of the inventors, of a process which had similar qualities to Hotrox's process. It is unnecessary to explore what difference there may be between the two; it would probably not be possible to do this on the present state of the evidence in any event. What is important is that the specification plainly shows Dr Franklin's longstanding interest in the process and the fact that at one stage, he was interested in himself obtaining a patent in respect of a process which he thought was patentable. Precisely why the application was not proceeded with does not appear from the evidence.

33 Mr Cole said that he had knowledge of R & A Consultants being engaged by a company known as Simcoa to investigate the feasibility of recycling charcoal fines and the feasibility of forming sawdust briquettes into charcoal. He said that the study resulted in the conclusion that sawdust briquettes could not be manufactured from jarrah sawdust and then carbonised to give a product with sufficient physical strength to be viable feed stock for the silicone smelter. Mr Cole said that, at the heart of his "unique technology" was a secret process whereby jarrah sawdust was successfully formed into charcoal briquettes with sufficient physical strength for the silicone smelter. This was the realisation of the process that, so Mr Cole said, Dr Franklin had stated in his affidavit, was the subject of a study that had concluded that it was technically possible to form charcoal briquettes with required physical properties which study also concluded that sawdust briquettes could not be manufactured from jarrah sawdust and then carbonised to give a product with sufficient physical strength to be a viable feed stock for the silicone smelter. Mr Cole said that, at the heart of the secret process protected by his trade secrets, was the forming of sawdust briquettes into charcoal briquettes which had the requisite physical strength to be viable feedstock for a silicone smelter. He said that he believed that he had succeeded where Dr Franklin had failed. He said that, given the history of his success "over Dr Franklin's failures", it would be unreasonable to allow Dr Franklin access to the factory and to his trade secrets and unique technology.

34 Mr Cole said that he believed that the signing of a confidentiality agreement by Dr Franklin to keep the information confidential might still not prevent the eventual dissemination of the confidential information to a competitor by virtue of circumstances where Dr Franklin might be employed in the future by a competitor and Dr Franklin might inadvertently disseminate his confidential information. He said that once the information disseminated, even in part, it was impossible to stem the flow or to retrieve it. His remedy for breach of confidentiality was against Dr Franklin alone. This would not prevent the use of the information by third parties who had come upon it through or by or from Dr Franklin or subsequent to the dissemination into the public domain.

35 Later, Mr Cole said that he did not object to providing samples of wood logs and charcoal briquettes to Dr Franklin in order for him to create and provide a comprehensive report to the respondent in relation to the other arbitration matter. He said that he believed that Dr Franklin would be able to provide a comprehensive report on the quality, use and commercial viability of the wood logs and charcoal briquettes by an analysis of them without having to access the factory or unique technology. He said that he believed that if Dr Franklin were given access to the factory for the purpose of creating his expert report, irreparable damage would be done to Hotrox by reason of Dr Franklin's access to the "claimant's unique technology".

36 There is much of Mr Cole's affidavit to which I have not referred, but, in substance, it is along the same lines. Parts of the affidavit which I have omitted from this account do not assist in the resolution of the problem at hand. No doubt they will ultimately be important for the arbitrator to consider when he comes to make his decision.

37 I should next refer to Dr Franklin's affidavit. I should say that his affidavit was filed first in support of the application which was made by the respondent. The reason that I refer to it secondly is simply that, this being an appeal, it was necessary to consider evidence which might persuade the Court that the Master's decision was erroneous. I now need to deal with Dr Franklin's evidence. Dr Franklin referred to his letter of instructions from the solicitors for the respondent. Under a heading "Scope of your Services", Dr Franklin was told that the respondent wished to engage him to provide advice and a written report dealing with a number of issues. These were stated to be as follows:

"(a) Can Hotrox Charcoal Company production process at the factory premises produce charcoal briquettes;

(b) Would charcoal briquettes produced at the factory premises be of suitable quality to satisfy the requirements of the Worldzone Agreements;

(c) If the production process can produce charcoal briquettes could the charcoal briquettes be produced in sufficient quantity to meet the requirements of the Worldzone Agreements;

(d) Were the woodlogs produced at the factory premises of commercial quality?"

38 The solicitors said that they would expect that in the course of providing the advice, Dr Franklin would consider and deal with the various methods of producing charcoal briquettes in commercial quantities, the difficulties in producing charcoal briquettes from sawdust wood logs and the likelihood that the charcoal briquette produced from the process would be fragile and crumbly, the difficulties associated with the use of jarrah sawdust to produce wood logs and/or charcoal briquettes, whether the plant and equipment installed at the factory were adequate to convert wood logs to charcoal and some other matters to the detail of which it is unnecessary to refer.

39 Dr Franklin said that, after he had read the letter and some other documents, he considered that further information was necessary to enable him to complete a report. He set out the further information that he required. The information included a site visit to Hotrox's factory, samples of jarrah sawdust logs and charcoal briquettes which it was alleged had been produced from the jarrah sawdust logs, a detailed description of the process, a description of the test methods used to evaluate the physical strength of "A" grade charcoal briquettes suitable for the Korean market and the manufacturer's specifications for the insulating material used in the construction of the ovens installed at the factory.

40 Dr Franklin said that he had indicated that he would execute a confidentiality undertaking in respect of any confidential matters disclosed by Hotrox. To this end, he received a letter from the solicitors enclosing a draft deed of confidentiality which he was advised had been forwarded by Hotrox's lawyers. He said that he read the deed and wrote to the solicitors, advising that he did not require any amendments to be made to the deed other than some which had been suggested to him by the solicitor. The deed is in evidence, but I do not find it necessary to go the detail of it.

41 Dr Franklin gave detailed evidence of his experience in this area. He referred to a number of instances in which he had been retained by a variety of companies to advise, if not on a similar process to the one in question here, then to processes which may be said to be, broadly speaking, in the same area. He said that currently, R & A Consultants had no clients involved in the manufacture of any briquettes for use as domestic or industrial fuels. He further said that since 1993, all the work on briquetting carried out by the firm had been in relation to industrial processes. Dr Franklin referred to suggestions made by the solicitors for Hotrox that there were a number of independent consulting engineers that would have the expertise to provide the respondent with the required expert advice. He said that he did not consider that that was the case. He said that since a company, Nufarm Energy, and another company, AusChar, were the only commercially successfully manufacturers of charcoal briquettes in Western Australia, there were few opportunities for others to gain the experience and knowledge which he held. He said that whilst employed by Nufarm Energy, he was involved in the manufacture of jarrah sawdust briquettes by a number of methods and had been involved in extensive work on carbonisation of jarrah sawdust. He said that he was aware that there was at least one other manufacturer of sawdust logs in Western Australia, but did not consider those logs to be of suitable quality for manufacture of charcoal.

42 Dr Franklin then gave reasons why he required the site visit to the factory to inspect the physical layout of the premises, the construction of the charcoal ovens and the equipment used to produce the sawdust logs. He said that one of the reasons why a site visit was essential was that the manufacture of sawdust logs and subsequent conversion to charcoal produced large volumes of "off-gases". None of the documents received to date addressed the issue and a site visit would enable him to form an opinion as to the adequacy of the emission controls in place. Dr Franklin also said that he required a detailed description of the process used to convert the jarrah sawdust logs to charcoal. He listed a number of matters which he desired be covered by the description. He said that in general terms, the method of manufacture of charcoal was well known. Wood is heated to a temperature of between 500 and 700 degrees Centigrade in an oxygen deficient atmosphere for a controlled amount of time. The yield and properties of the charcoal were determined by varying the time, temperature and atmosphere in which the charcoal was formed. He said that Hotrox's process claimed a greatly enhanced yield over these conventional methods. Without some detailed indication of the conditions under which this was accomplished, it was impossible to form an opinion as to the validity of the claim. Another matter raised by Dr Franklin was doubts which he had as to whether the water damage suffered could have put the plant out of action. He said that, normally, when refractory material was wet, it could be dried out via a controlled heating of the oven in a matter of a few hours or, at most, days, depending on the material and the thickness of the material. He required details of the insulating material for this purpose.

43 Dr Franklin then referred to the Sinclair Knight Merz report. He dealt with the question whether or not its disclosure to him was a breach of confidentiality by the respondent. In his affidavit he suggests that it was not, saying that it did not refer to what he considered to be any information of commercial confidentiality or in the nature of a trade secret. Significantly, for present purposes, he does not suggest that the Sinclair Knight Merz report is sufficient for the purposes of the respondent in the litigation which is in progress. In this regard, it may be noted also that that is the view expressed by counsel for Hotrox. So the parties are at one in regarding the Sinclair Knight Merz report as not providing evidence sufficient to establish their cases.

44 Dr Franklin concluded his affidavit by saying that, if he was not able to have access to the factory, obtain samples of wood logs and charcoal briquettes and be provided with the other information which he had requested, he would not be able to provide a comprehensive report to the respondent on the matters raised by Hotrox.

45 Dr Franklin made a further affidavit in which he repeated his statement that there was not a large market for charcoal briquettes in Western Australia and that there were few suitably qualified persons available. He said that a responsible employee of Auschar or Simcoa might have the required level of expertise to do so, but he did not know that to be the case. He added that the only other independent consulting engineer that he was aware of who might be suitably qualified was a Dr Paul Fung who was the principal research scientist in the Division of Forestry and Forest Products at the CSIRO in Victoria. So far as the evidence discloses, Dr Fung has not been consulted about the matter. In any event, the respondent objects to having to obtain an expert from Victoria when, in its submission, there is a perfectly well qualified one in Western Australia, namely, Dr Franklin. The respondent complained of the additional expense to which it would be put if it had to bring an expert from Victoria.

46 Hotrox itself has suggested a number of consulting engineers who, according to Mr Cole, all stated that they were willing to provide qualified independent engineers to review the Hotrox technology and provide a technical expert report for use in the arbitration. The list is annexed to Mr Cole's affidavit and contains the names of seven consulting engineers. As I understand it, each of these engineers is resident in Perth. One of the firms is known as Worley. Annexed to Mr Cole's affidavit is a copy of a letter dated 14 December 2001 written by Worley to him. The letter encloses a resume of an expert, Mr John Browne, who is said to have had substantial mechanical/process experience "to assist in your litigation". Mr Cole said that Worley was named in par 179(3) and par 180 of the affidavit of Mr R S Huston as not having the necessary qualifications to carry out an assessment of the engineering capabilities of the production facilities. Mr Huston is the solicitor for the respondent. Mr Huston, in his affidavit, referred to the list of consulting engineers provided to the respondent and to which I have referred. He said that he had telephoned each of the firms referred to in the list and had spoken to four of them. These are named. Mr Huston said that, in each instance, the representatives of the firms of consulting engineers expressed the view that, provided the necessary information was provided to them, an assessment of the engineering capabilities of the production facility could be undertaken. But they also said that in the assessment of the chemical properties, durability, carbonising methods and burning characteristics of the wood logs and charcoal briquettes, the expertise of an industrial chemist would be required. This was not a service provided by consulting engineers.

47 So far as I have been able to discover from the voluminous material which comprises the record in this case, no further step was taken to explore whether or not a suitable industrial chemist could be found or whether it might be possible to have a consulting engineer in relation to the mechanical side of things and an industrial chemist in relation to the other aspect of it. The matter was left, so far as I can tell, as the evidence to which I have referred indicates, except that on 27 November 2001, Mr Huston wrote to the solicitors for Hotrox. He said that he did not intend to debate the issue of an expert witness in correspondence. He added that if Hotrox's solicitors did not agree to Dr Franklin being admitted to the Hotrox premises and provided with the information and product samples that had been requested, an application would be filed in the Supreme Court. The originating summons making the application for the orders pursuant to s 47 of the Commercial Arbitration Act was filed on 28 November 2001.

48 The initial question to be determined is whether the Master's discretion miscarried and, if so, whether the matter being one dealing with practice and procedure, leave to appeal should be granted. A critical sentence in one of the Master's decisive paragraphs is that in which he says that there is a "slight risk" of the information not being kept confidential. That was his assessment as to the extent of the risk and, because of his judgment in that regard, he was led to the conclusion that he should make the orders for inspection and the answers to interrogatories which he did.

49 In the light of the whole facts and circumstances of the case, I am of the opinion that the risk ought to have been assessed as significantly more substantial than slight. I think the evaluation of it as a slight risk did not give enough weight to the very real concerns of Hotrox. After all, Dr Franklin himself had, some 10 years ago, been one of the applicants for a patent in relation to an invention, in the very area of the process which Hotrox claims to undertake. I realise that 10 years is a lengthy period and that Dr Franklin's interests and activities may have changed. But he is, from a professional point of view, interested in the process - I do not mean financially - and he claims to be one of only two people in Australia who have sufficient expertise in the field to give evidence of the kind that is required of him in this case. Although the project upon which he embarked when the application for the provisional patent was lodged came to nothing, he would be less than human if he did not wish to take advantage of an opportunity to inspect a process which might show him a way of doing something which he was unable to do.

50 Of course, it may be that what will be demonstrated by any inspection which he has, is that Hotrox's process was no more successful than his own. That, indeed, is the reason why his evidence is required by the respondent. But, in an area such as this, it is difficult to escape the compelling statement made in the dictum of Hayne JA in the Mobil case earlier cited. Because of his professional interest, Dr Franklin would be most unlikely ever to forget, or put aside, what he learns on the inspection. It will stay forever as part of his professional know-how.

51 I recognise that Dr Franklin is not a trade rival of Hotrox. That distinguishes this case from the Mobil case. But each case must be dealt with on its own facts and circumstances. The fact that Dr Franklin was at one time an applicant for a patent in this very area is something which has to be given very substantial weight. That is what gives Mr Cole the very genuine concern which the evidence establishes that he has. A further factor is that the correspondence annexed to Mr Huston's affidavit establishes that, at one stage, it was proposed by the respondent that, not only Dr Franklin, but also Mr Pekin, should be allowed to inspect the Hotrox factory. Mr Pekin was the other applicant for the patent which has been referred to. The suggestion that Mr Pekin, as well as Dr Franklin, be allowed to inspect the premises would not have been likely to have increased Mr Cole's or Hotrox's confidence in the value of Dr Franklin's assurances that matters would be kept confidential. The fact that the suggestion that Mr Pekin inspect the premises along with Dr Franklin was eventually withdrawn, does not overcome the problem.

52 Nothing that I have said is intended to attribute any dishonest motive or intention to Dr Franklin. What has been said simply states the reality of the matter. I accept that Dr Franklin is now mainly engaged as a consultant and that he is not presently intending to embark upon any enterprise which would involve him in manufacturing charcoal by this or any other method. He is a professional adviser in this field and he appears to be retained by a number of large undertakings in the industry. But one can well imagine a situation in the future - and this was postulated in argument - in which Dr Franklin is asked about the possibility of doing something along the lines which Hotrox claims to do and, having gained the information he would gain on the inspection which he desires to carry out, would be in quandary as to whether, directly or indirectly, to make use of that information in advising his client. And there would be the danger that he may subconsciously disclose something which was covered by his agreement to keep matters learnt on the inspection confidential. It would seem to me that unless he declined to advise any client interested in pursuing a process similar to that of the respondent, there would always be the danger that he would, however unwittingly, make a disclosure which would imperil the confidentiality which he has agreed to preserve.

53 It is for all those reasons that I consider that the Master's conclusion that the risk of disclosure was slight was a clear error and indicates a miscarriage of the exercise of his discretion. It follows that leave to appeal should be granted and that the appeal should be allowed.

54 What then should follow from that conclusion? Normally, the discretion below having miscarried, this Court would exercise the discretion itself on the material which was before the Master. But that is easier said than done. As earlier mentioned, there was no cross-examination of any witness before the Master. The parties left it to be decided on the basis of the affidavit evidence and upon letters and documents which were part of the material placed before him. One of the disputes between the parties to which I have referred arises from the statements made by or on behalf of Hotrox to the effect that there are numerous qualified engineers in practice, both in Perth and elsewhere in Australia, who would be competent to give expert evidence for the respondent in this case. That view of things is strongly resisted by the respondent because, it claims, that there is really only one expert, Dr Franklin, apart, perhaps, from Dr Fung in Victoria.

55 A desirable outcome in this case is to refuse an order permitting Dr Franklin to inspect the premises and to see the answers to interrogatories, and requiring Hotrox to substitute for him another expert. But, as the evidence stands at the moment, one would be reluctant to take such a course because, it may be, after all, that Hotrox is right and that the number of experts in this area in this country is very limited. Furthermore, the respondent says that it has retained Dr Franklin and already incurred a not insubstantial amount for fees payable to him. But I think that this aspect of the argument is answered by the fact that, from the very beginning, Hotrox made strong objection to Dr Franklin being the respondent's expert. I would, therefore, be inclined to discount that matter.

56 In the end, what has to be done as best one can, is justice, in all the circumstances, as between these parties. If the desirable outcome of the obtaining of a new and different expert from Dr Franklin cannot be achieved, justice may demand that he be allowed to make the inspection on Hotrox's behalf. But that, I think, is a course which should be avoided if possible. The only way to find out whether or not it is possible to avoid it is to have more detailed evidence called on the qualifications and experience of others who may be able to do what Hotrox requires sufficiently well to ensure that there is no injustice in Dr Franklin not being able to inspect the premises. At the moment, the evidence does not permit one to say with any confidence whether there are other, and independent, experts who would be able to perform the task. All that there really is in the evidence are assertions, the respondent asserting that there are such experts and Hotrox asserting that there are not. Regrettably, I think there has to be a further hearing of the matter so that this area can be explored properly. It was not explored to any extent at the hearing before the Master. That is not due to any neglect or omission on the part of the Master; it is due to the failure of the parties sufficiently to lead evidence and to cross-examine witnesses in order to aid the process that was being undertaken. The way the case was conducted was not in the Master's hands, but in those of the parties. They chose to slide over this issue and therein lies the problem.

57 There were two other matters discussed before us which may have some force and which need further consideration. The respondent has no objection to producing the finished product and also the product as it appears before the charcoal making process is undertaken. It is difficult to understand why a competent expert cannot take the finished product and say whether it meets the specifications provided for in the Korean contract. If it did, that would be one thing; if it did not, Hotrox's case would fail. It is true that the finished product may not tell one very much about the quantities of the logs and the charcoal which could be manufactured in the Hotrox plant. It may be that for the purpose of assessing the efficiency of the plant and the extent of the throughput that one does need to inspect it. In saying what I have, I am speculating and the matter is one for expert evidence.

58 The other matter concerns the Sinclair Knight Merz report. Is it really correct to assume, as those who have appeared in the case so far appear to have done, that that report is of no help? May not a suitable engineer from Sinclair Knight Merz be able to help, perhaps by making further inspections and considering the matter in more detail. In his evidence, Mr Cole seemed to regard the report as confidential to Hotrox, but he has to come to terms with the realities of litigation. If he wishes to pursue a claim for $8 million, he must expect it to be tested. If he is not prepared to expose Hotrox to the risks that that process may involve, Hotrox is unlikely to discharge the onus of proof which lies on it to prove its case.

59 In the circumstances then, although the course is most unusual in a case of this kind, I am afraid that the appeal will need to be allowed, the decision of the Master set aside and the matter remitted to him to be heard and determined again on such additional evidence as the parties may choose to lead. If it turns out that the only appropriate order to be made results in the retention of Dr Franklin, thought should be given to the question whether Dr Franklin should be required to give to the Court an undertaking to keep matters confidential. That would be in addition to the contractual undertaking he has already offered. The giving of an undertaking to the Court may give Mr Cole more confidence in the process because breach of the undertaking would be a contempt of this Court. A possible consequence of such a breach might be imprisonment. I am not sure, however whether an undertaking to the Court may be required when the proceedings are by way of arbitration and not in the Court itself. This was something counsel were uncertain about and I have not reached a conclusion on the matter. I make it clear that, in my opinion, the preferable alternative is for the appointment of an expert other than Dr Franklin if this can be done without injustice to Hotrox. But if this cannot be achieved, an undertaking to the Court may be a possible, although less desirable, alternative.

60 Before I conclude, I wish to say this. It seems a great pity to me that there cannot be more co-operation and agreement between the parties on this matter than I detect on the face of the material which is before us. There needs to be on the part of each of the respondent and Hotrox an understanding that the other party has difficulties. The claim is a large one. Hotrox cannot expect the respondent to accept what it says at face value. We were told that neither party is particularly well off financially. Obviously, the costs of the arbitration will be considerable, as will the costs of this application. A sensible discussion between the parties, each being prepared to endeavour to understand the other's point of view, perhaps aided by the appointment of a suitable mediator, may have the result of an appropriate solution being reached by agreement which would be far better than having to continue the process in the way that will be necessary if the orders I have proposed take effect and a further hearing before the Master has to take place. To put the matter differently, I think that some of the heat should go out of it and reason and common sense should prevail. If it does not, the process will become endless and extremely expensive.

61 In summary then, I would make the following orders:

3. The matter be remitted to the Master to be heard and determined again on such further evidence as each of the parties may decide to lead.

4. The costs of the application for leave to appeal and of the appeal are to be paid by the respondent.

5. The costs of the hearing before the Master and of the further hearing which is to take place should abide the outcome of the arbitration.

Arbitration Act 1985

Hotrox Charcoal Company v Gebauer Nominees Pty Ltd [2002] WASCA 293

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (78 paragraphs)

Hotrox Charcoal Company v Gebauer Nominees Pty Ltd [2002] WASCA 293 (25 October 2002)

Parties

Legislation Cited (1)

Cases Cited (4)